ROYALTY VALUATION AND MANAGEMENT 101: A PRIMER (PART B)FEDERAL AND INDIAN OIL AND GAS ROYALTY AND PRODUCTION REPORTING WHERE WE ARE AND WHERE WE WANT TO BE

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Book 1
(Feb 2004)
CHAPTER 2B
ROYALTY VALUATION AND MANAGEMENT 101: A PRIMER (PART B)FEDERAL AND INDIAN OIL AND GAS ROYALTY AND PRODUCTION REPORTING WHERE WE ARE AND WHERE WE WANT TO BE
Mary A. Williams ¹
Minerals Management Service
Denver, Colorado

I. Background

The most significant changes to the Minerals Management Service Federal and Indian Oil and Gas royalty and production reporting occurred in October 2001, with the implementation of a revised Report of Sales and Royalty Remittance, Form MMS-2014, and the conversion of all operators to a revised Oil and Gas Operations Report (OGOR), Form MMS-4054. ² These changes resulted from the recommendations of the Royalty Policy Committee's Royalty Reporting and Production Accounting Subcommittee, ³ various industry suggestions, and the Department of Interior's effort to simplify reporting and still meet regulatory requirements.

Prior to October 2001, significant changes to the Form MMS-2014 or the OGOR were limited. MMS addressed Form MMS-2014 reporting modifications by primarily using either revenue sources or selling arrangements established by the Payor Information Form MMS-4025 (eliminated in April 2001) ⁴ or adding new codes (transaction, adjustment reason, etc.). Most onshore operators reported using the Monthly Report of Operations, Form MMS-3160, which MMS eliminated in October 2001 when all operators were converted to the OGOR. ⁵ MMS implemented these changes after the multi-year reengineering of the financial and compliance processes and systems. MMS established a goal of assuring compliance within 3 years of the royalty payment, decreasing the length of the audit and compliance reviews from the typical 6-year period. DOI is dependent on accurate reporting by industry to assure royalties are paid timely and are accurately distributed to Tribes, Individual Indian Owners, the States and the Federal Treasury. Accurate reporting is also necessary to meet the 3-year compliance goal and to carry out inspection and enforcement programs. Information reported to MMS is critical to our nation's energy programs.

The principles of royalty and production reporting remain basically unchanged. The royalty equation consists of the sales volume, value, allowances, and the royalty rate to determine the royalty due. Production reporting supports not only the verification of the royalty due but also supports the inspection and enforcement programs within DOI.

This paper addresses key areas of oil and gas reporting that continue to result in problems for DOI and industry, present unique challenges, and affect downstream processes. The paper also addresses where reporting needs to be in the future. It by no means encompasses all of the reporting requirements but is intended to be a guide for industry and DOI employees in preparing and reviewing reports and in identifying how some of the reported data is used. Complete reporting instructions are found at www.mrm.mms.gov/ReportingServices/Handbooks/Handbks.htm. MMS' goal is to achieve accurate reporting the first time.

II. Volumes

Form MMS-2014

Agreement Numbers on the Form MMS-2014 indicate which leases participate in an agreement to determine the total sales volume subject to royalty. The elimination of the Payor Information Form requires industry to report the agreement number for each lease that is part of a unit participating area or communitization agreement. If a lessee does not report the proper agreement number, audits or compliance reviews will indicate underpaid volumes, resulting in the lessee having to modify its Form MMS-2014 reporting. MMS provides the agreement numbers for applicable leases and the proper conversion to report on the Form MMS-2014 at www.mrm.mms.gov/ReportingServices/CrossRef.htm.

Sales Volume is the volume of product sold or removed from the Federal or Indian interest only, and is critical in the calculation of correct unit price values, royalty rates and royalty due. MMS also utilizes sales volume in gas major portion price calculations and in determining index zone gas liabilities on Indian leases. The volume is that portion attributable to the lease or the lease-agreement combination, sales type code, product and sales month. Reporting the entire agreement volume for a participating lease versus just the Federal or Indian portion overstates the sales volume and will result in lower unit price values and/or royalty rates. For example:

Lease 050-555555-0 receives a 50 percent allocation of the sales in a communitization agreement, with a fee lease receiving the remaining 50 percent allocation. The sales volume for the lease for May is 100 bbls. The Form MMS-2014 sales volume is 50 bbls. If the sales price is $25 the resulting sales value is $1,250.00; however, if you report 100 bbls with the same $1,250.00 sales value, the computed unit price is $12.50. Likewise, if industry overstates the sales volume and value but correctly reports the royalty amount, the computed royalty rates will be understated.

Lessees must report gas volumes in Mcf at a standard pressure base of 14.73 psia, the standard temperature of 60° F, and the same degree of water saturation used to report the Btu on the OGOR. MMS provides conversion examples in the Minerals Revenue Reporter Handbook. ⁶

Gas MMBtu is the MMBtu contained in the gas stream when sold or removed from the property. Lessees must report gas MMBtu in addition to the sales volume in Mcf. This is a new requirement on the Form MMS-2014 as of October 2001. The MMBtu is critical to overall gas valuation and the compliance process on Federal and Indian leases, especially for Indian gas major portion price calculations and index zone gas liabilities. The reporting standards addressed under sales volume are the same for MMBtu. MMS provides conversion examples...