FEDERAL OIL VALUATION FINAL RULE — PRACTICAL PROBLEMS TO IMPLEMENTATION

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management III
(2000)
CHAPTER 14B
FEDERAL OIL VALUATION FINAL RULE — PRACTICAL PROBLEMS TO IMPLEMENTATION
Michael E. Coney, Senior Counsel
Shell Oil Company
New Orleans, Louisiana

[Page 14B-1]

Scope of Application of New Rule 206.100

(c)(2) MMS clearly granted the right to enter into valuation settlements

(c)(4) Express provisions of lease apply

• order 636 litigation

• any impacts?

(e) MMS retains rights to audit and adjust

Effective Date: June 1, 2000

— Is this for May's production reported in June or June's production reported in July?

— Presume for production on or after June 1, 2000

Definitions

Affiliate

— 10% to 50% MMS now must consider factors-facts

— caution MMS may focus on one factor as controlling

— interface with requirement of "opposing economic interests in arm's length definition

— proceed at own risk

— no answer to affiliate of affiliate

Arm's Length Contract

— not with affiliate

— opposing economic interests tests

— interface with affiliate definition

Exchange Agreement

— transportation exchanges are included

— upstream lessee now review each segment to see if exchange present with classifications of great importance

— must set up system to continuously capture — deep water problems

— vital to both value and transport calculation

Gross Proceeds

— includes marketing

— not limited by definition to the lessee proceeds like 1988

— based on concept of disposition of oil and gas

— buy downs included

[Page 14B-2]

Index Pricing

— no adjustment tables for gravity/sulphur contents like old postings

— does your production actually pass thru must consider and continue to consider

— when will they come out

— will Mars type crude at Loop index be included

Location Differential

— by definition limited to exchange agreements

— what happens to tarifflines with quality banks

Person

— in LLC a person

Sale

— may depend on corporate makeup

— does it occur if have affiliates

Tendering Program

— oil actually sold under a tender program appears to be at arm's length

— use weighted average value or what for oil sold at tender?

— real question is does tender establish value for crude not sold under tender program

Trading Month

— for month of May

— April 26 to May 25

— for June actual production

— contango will you owe more

— backwardation did you over pay

— does lease term prevail?

Transportation Allowance

— non arm's length exchange don't get...