FEDERAL OIL VALUATION FINAL RULE

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management III
(2000)
CHAPTER 14A
FEDERAL OIL VALUATION FINAL RULE
Deborah Gibbs Tschudy
Royalty Valuation Division Minerals Management Service
Denver, Colorado

[Page 14A-1]

• Background

• General Principles and New Definitions

• Oil Sold At Arm's Length

• Oil Not Sold At Arm's Length

• Transportation and Location/quality differentials

• Other Provisions

• Implementation

[Page 14A-2]

Background

• Published final rule on March 15, 2000

• Effective June 1, 2000

• Provides a 3-month interest-free grace period for reporting adjustments if the adjustment results from necessary system changes

• May adjust royalties reported and paid for production months June-August 2000 without late-payment interest liability

[Page 14A-3]

General Principles of Rule

• Oil sold at arm's length before refining generally will be valued at seller's gross proceeds

• This principal applies regardless of whether oil is sold or transferred to one or more affiliates before the arm's-length sale and regardless of the number of transactions

[Page 14A-4]

• Provides option to apply index prices or benchmark values in lieu of "tracing" production subject to exchanges or affiliate resales

• If oil refined without being sold at arm's length, then value based on index prices or benchmarks

[Page 14A-5]

• Final rule specifies separate valuation procedures for three regions of the country

• Provides for a written agreement between the lessee and the Director in limited and unusual circumstances. Any agreement must at least approximate the value that would apply under the regulations.

[Page 14A-6]

New Definitions

• New definitions:

Exchange Agreement, Index Pricing, Location and Quality Differential, Market Center, MMS-Approved Publication, Rocky Mountain Region, Tendering Program, Trading Month

[Page 14A-7]

• Separate definitions for Arm's-length Contract and Affiliate

• Affiliate

— No presumption of control for ownership between 10 and 50 percent¹

[Page 14A-8]

— Various factors to determine control

• Common officers and directors

• Absolute and relative ownership percentages

• Whether a person is greatest single owner or whether a larger opposing voting block exists

[Page 14A-9]

• Operation of lease plant or other facility

• Extent of participation by other owners in operations and day-to-day management

• Other evidence of power to exercise control

— Regardless of ownership percentages, relatives are affiliates

[Page 14A-10]

• Trading Month

— Definition added to clarify changes in final rule regarding timing and application of spot prices under § 206.103

— Trading Month means span of time when crude oil trading occurs and spot prices are determined, generally for deliveries for corresponding production in the following month

[Page 14A-11]

• Trading Month Example

• Assume an MMS-approved publication publishes prices from April 26 through May 25 for delivery in June (May Trading Month)

• Assume production month of May 2000

• You would apply May Trading Month prices to May production month

• Effect is to make price determination period concurrent with production month

[Page 14A-12]

Oil Sold at Arm's Length

• Value is gross proceeds accruing to you or your affiliate under an arm's-length contract less applicable allowances

• If you sell or transfer oil to an...