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Indian Payor Handbook Chapter 3

Chapter 3 - Indian Oil Valuation
Last Updated: March 18, 2020

This chapter describes Indian oil valuation in greater detail than covered in Chapter 2, “Valuation Basics” and provides example scenarios. The guidance in this chapter applies to all Indian leases that either: (1) contain a major portion provision or (2) provide that the Secretary of the Interior may establish value; (with the exception of leases in Osage County, Oklahoma). Osage leases are governed 
by 25 CFR Part 226.  
ALWAYS refer to your lease document for information on valuing production.

In those cases where the valuation regulations are inconsistent with the valuation provisions in the lease, the lease terms, including those that have been modified by subsequent agreements, govern the valuation to the extent of the inconsistency under 30 CFR §§1202.100(b)(3) and 1202.555(c).

Many Indian leases include a provision whereby the Indian lessor has the option of taking production in kind. If you need help reporting production taken in kind, please contact royaltyvaluation@onrr.gov, for assistance.

Throughout this handbook, the term you will be used to refer to a lessee, operator, or other person legally responsible for paying royalties under 30 CFR Chapter XII Subchapter A

The timing of your production determines how to value oil produced from Indian lands. You must value all oil produced after July 1, 2015, using the rule published May 1, 2015 in 80 FR 24794. ONRR refers to this current oil valuation rule as the “Index-Based Major Portion (IBMP) Price.”

You must value Indian oil produced prior to July 1, 2015, using the 1988 regulations, as amended on December 17, 2007 in 72 FR 71231. ONRR refers to this older oil valuation method as “Oil Major Portion (MP).” This chapter will address both the 2015 rule and the regulations in effect prior to 2015.

  • 3.1 Valuation of Oil Produced After July 1, 2015
  • 3.2 Examples for Oil Produced After July 1, 2015
  • 3.3 Valuation of Oil Produced Before July 1, 2015
  • 3.4 Special Oil Valuation Situations
  • 3.5 Terms

3.1 Valuation of Oil Produced After July 1, 2015

As stated above, you must value all oil produced after July 1, 2015, using 30 CFR 1206 Subpart B. For a given month, the value of oil for royalty purposes is the higher of:

Under audit, you will be required to show that  you: 1) compared your gross proceeds, less allowable transportation, to the IBMP price, and 2) that you reported and paid on the higher of the two.
  1. Gross Proceeds (less allowable transportation)
  2. OR
  3. Index-Based Major Portion (IBMP) Price (no transportation allowance).

Each month, ONRR publishes an IBMP price for the previous month’s production. The prices are posted at www.onrr.gov. Click on the “Valuation” drop-down menu, then select “Indian Oil Major Portion” for Indian Oil Major Portion Prices.

The prices are posted at www.onrr.gov.  Click on the “Valuation” drop-down menu, then select “Indian Oil Major Portion” for Indian Oil Major Portion Prices.

3.1.1 Comparing Gross Proceeds and IBMP Prices

In order to calculate your gross proceeds, you first need to determine whether or not you are selling your oil under an arm’s-length or non-arm’s-length contract. If you sell your oil under an arm's-length contract, under 30 CFR §1206.52, the value of your Indian oil is the gross proceeds accruing to you under that arm's­-length contract, less allowable transportation costs. If you sell your oil under a non-arm's-length contract, under 30 CFR §1206.53, the value of your oil is the volume-weighted average of the gross proceeds paid or received by you or your affiliate, including your refining affiliate, for purchases or sales under arm's-length contracts, less applicable allowances.

The general order of determining royalties will be:
1) Determine the designated area2) Determine the crude type3) Calculate your gross proceeds4) Find the IBMP price on onrr.gov5) Report and pay on the higher of steps 3 and 4

Once you calculate your gross proceeds under the regulations above, you will compare those values with the IBMP price for the same crude type and designated area that ONRR published on its website for the same production month.

If your per barrel gross proceeds price, net of allowable transportation, is higher than the IBMP price, report and pay royalties on your gross proceeds. If the IBMP price is higher than your per barrel gross proceeds price, report and pay royalties on the IBMP price, even if you did not (or could not) sell oil for that price.

You may deduct your actual transportation costs when you pay on gross proceeds.  The IBMP price is adjusted for transportation.

For example, assume that your gross proceeds calculations, net of allowable transportation, resulted in a value of $85 per barrel for July, 2015. For the July, 2015 production month, the ONRR-published IBMP price for your crude type and designated area was $83 per barrel. Because the IBMP price was lower than your calculated gross proceeds, you would report and pay royalties on $85 per barrel. In this case, you should report allowable transportation costs that you incur separately as a transportation allowance. The table below summarizes the information.

Month/Year Gross Proceeds IBMP Higher of Gross Process and IBMP Report separate transportation allowance?
July 2015 $85 $83 $85 Yes

Alternatively, assume that your gross proceeds, net of allowable transportation, resulted in a value of $81 per barrel for July 2015. For the July 2015 production month, the ONRR-published IBMP price for your crude type and designated area was $83 per barrel. Because the IBMP price, net of transportation, was higher than your calculated gross proceeds, you would report and pay royalties on $83 per barrel. The table below summarizes the information.

Month/Year Gross Proceeds IBMP Higher of Gross Process and IBMP Report separate transportation allowance?
July 2015 $81 $83 $83 No

3.1.1.1 Designated Areas

The price you use to value your oil produced from Indian lands depends on the top hole location of your well, i.e. where your production surfaced. Generally, designated areas are identified by reservation boundaries, including any off-reservation allotments or dependent Indian communities, where location and crude types are similar to each other.

Index zone locations in the Central United States

There are 16 designated areas ONRR identifies as unique in the table below. If you have questions concerning which designated area your lease is in, please contact royaltyvaluation@onrr.gov.

Designated Area Description
Alabama/Coushatta The reservation boundary, including any off-reservation allotments or dependent Indian communities.
Blackfeet The reservation boundary, including any off-reservation allotments or dependent Indian communities.
Crow The reservation boundary, including any off-reservation allotments or dependent Indian communities.
Fort Peck The reservation boundary, including any off-reservation allotments or dependent Indian communities, including all lands within the Fort Peck Reservation boundary and the Turtle Mountain public domain lease lands administered by the Fort Peck Agency of the BIA.
Jicarilla Apache The reservation boundary, including any off-reservation allotments or dependent Indian communities.
North Fort Berthold All lands within the Fort Berthold Reservation boundary north of the Missouri River, including the Turtle Mountain public domain lease lands north of the Missouri River that the Fort Berthold Agency of the Bureau of Indian Affairs (BIA) administers, with the dividing line of the Missouri River being the county lines that follow the Missouri River.
Oklahoma* One statewide area encompassing all oil production on trust lands, excluding Osage County. *For Oklahoma IBMP price only, account for a plus/minus roll. The roll is defined under 30 CFR §1206.51.
Isabella (Saginaw Chippewa) The reservation boundary, including any off-reservation allotments or dependent Indian communities.
South Fort Berthold All lands within the Fort Berthold Reservation boundary south of the Missouri River, including the Turtle Mountain public domain lease lands south of the Missouri River that the Fort Berthold Agency of the BIA administers, with the dividing line of the Missouri River being the county lines that follow the Missouri River.
Southern Ute The reservation boundary, including any off-reservation allotments or dependent Indian communities.
The Navajo Nation The reservation boundary, including any off-reservation allotments or dependent Indian communities.
Turtle Mountain The reservation boundary, including any off-reservation allotments or dependent Indian communities, including all lands within the Turtle Mountain Reservation and the Turtle Mountain public domain lease lands administered by the Turtle Mountain Agency of the BIA.
Uintah & Ouray
(Uintah & Grand)
The reservation boundary, including any off-reservation allotments or dependent Indian communities located within Emery, Uintah and Grand Counties, Utah.
Uintah & Ouray
(Duschesne)
The reservation boundary, including any off-reservation allotments or dependent Indian communities located within Duchesne, Wasatch and Carbon Counties, Utah.
Ute Mountain Ute The reservation boundary, including any off-reservation allotments or dependent Indian communities.
Wind River The reservation boundary, including any off-reservation allotments or dependent Indian communities.

3.1.1.2 Crude Type

To accurately calculate the IBMP price, ONRR must use like quality oil. ONRR relies on lessees to report the type of oil produced from their Indian leases. The crude type is based on, among other things, API gravity and sulfur content. There are six crude types, each with a unique product code, captured in the table below.

Product Code Crude Type
02 Condensate
61 Sweet Crude
62 Sour Crude
63 Asphaltic
64 Black Wax
65 Yellow Wax

3.1.2 Sales Type Codes

If your gross proceeds, less allowable transportation, are higher than the IBMP price, select either the ARMS or NARM sales type code based on your transaction.

If the IBMP price is higher than your gross proceeds, less allowable transportation, use OINX as your sales type code.

Sales Type Code Description
ARMS Arm’s-length transactions
NARM Non-arm’s-length transactions
RIKD Royalty-in-kind deliveries
OINX Oil valued using an index price

3.2 Examples for Oil Produced After July 1, 2015

Intro – basic example for an arm’s-length sale of Indian oil. Assume that the lessee sells 1,000 barrels of oil in the sample month, which is also the volume measured for royalty-purposes. Also consider the following set of facts:

Designated Area Product Codes
02 61 62 63 64 65
South Fort Berthold $36.82 $43.56 $37.88 $ $ $
Uintah & Ouray - Duchesne County $35.82 $41.36 $ $40.93 $40.27 $41.04

We will walk through the royalty calculation and reporting, completing the sample form ONRR-2014 Royalty Report fields shown below. While there are other required fields on the form ONRR-2014, these are the ones related to valuation

Form ONRR-2014 Royalty Report

Product Code Sales Volume Sales Value Sales Type Code Royalty Value prior to Allowances Transportation Allowance Royalty Value less Allowances

3.2.1 Example

Product Code
The product code is based on the type of oil being sold. In this example, we know that the crude is a light, sweet crude. Based on our list of product codes, we should use PC 61.
Sales Volume
In this example, we noted that the lessee is selling 1,000 bbls, which was what was measured for royalty. So, our sales volume is 1,000 bbls.
Sales Value
The sales value is the higher of 1) the lessee’s gross proceeds less transportation, or 2) the value using the IBMP price.
Gross Proceeds = Sales Volume x Arm’s-Length Sales Price – Transportation Costs
Gross Proceeds = (1,000 Bbls x $42.50) – (1,000 x $5)
This price is pulled from the ONRR.gov website, based on the location and type of crude.  Gross Proceeds = $37,500
IBMP Value = Sales Volume x IBMP Price
IBMP Value = 1,000 Bbls x $43.56
IBMP Value = $43,560
In this case, the IBMP value is higher, so the lessee must pay royalty on the IBMP value.
Sales Type Code
Because the sales value reported and paid by the lessee is based on the IBMP price, the lessee should use sales type code OINX.
Royalty Value Prior to Allowances (RVPA)
RVPA = Sales Value x Royalty Rate
RVPA = $43,560 x 16 2/3 %
RVPA = $7,257
Transportation Allowance
In this example, the lessee is paying using the IBMP price. The IBMP price is already adjusted for transportation costs, so the lessee should not take a transportation allowance.

Form ONRR-2014 Royalty Report

Product Code Sales Volume Sales Value Sales Type Code Royalty Value prior to Allowances Transportation Allowance Royalty Value less Allowances
61 1,000 $43,560 OINX $7,257 - $7,257

3.2.2 Example

Assuming the same set of pricing facts in Example 3.2.1:

Product Code
The product code is based on the type of oil being sold. In this example, we know that the crude is a black wax. Based on our list of product codes, we should use PC 64.
Sales Volume
In this example, we noted that the lessee is selling 1,000 bbls, which was what was measured for royalty. So, our sales volume is 1,000 bbls.
Sales Value
The sales value is the higher of 1) the lessee’s gross proceeds less transportation, or 2) the value using the IBMP price.
Gross Proceeds = Sales Volume x Arm’s-Length Sales Price – Transportation Costs
Gross Proceeds = (1,000 Bbls x $46.00) – (1,000 x $5)
This price is pulled from the ONRR.gov website, based on the location and type of crude.  Gross Proceeds = $41,000
IBMP Value = Sales Volume x IBMP Price
IBMP Value = 1,000 Bbls x $40.27
IBMP Value = $40,270
In this case, the gross proceeds value is higher, so the lessee must pay royalty on the gross proceeds value.
Sales Type Code
Because the sales value reported and paid by the lessee is based on the IBMP price, the lessee should use sales type code ARMS.
Royalty Value with Allowances (RVA)
RVA = Sales Value x Royalty Rate – (Transportation Allowance x Royalty Rate)
RVA = $46,000 x 16 2/3% - ($5,000 x 16 2/3%)
RVA = $7,664 - $833
RVA = $6,831
Transportation Allowance (TA)
In this example, the lessee is paying using the gross proceeds, so transportation is allowed.
TA = 1000 bbl x $5/bbl x 16 2/3%
TA = $5000 x 16 2/3%
TA = $833

Form ONRR-2014 Royalty Report

Product Code Sales Volume Sales Value Sales Type Code Royalty Value prior to Allowances Transportation Allowance Royalty Value less Allowances
64 1,000 $46,000 ARMS $7,664 $833 $6,831

3.2.3 Example

Assume that a lessee produces 50,000 bbls of oil, which it then refines at a refinery it owns. The lessee also purchases like-quality oil from other producers in the same field at arm's length for use as feedstock in its refinery. The oil produced from the lease that is being valued under this section is Wyoming general sour with an API gravity of 23.5°. In this example, assume that the refinery purchases at arm's-length oil (all of which must be Wyoming general sour) in the following volumes of the API gravities stated at the prices and locations indicated:

Volume API gravity Price Location
10,000 bbl 24.5° $34.70/bbl Purchased in the field.
8,000 bbl 24.0° $34.00/bbl Purchased at the refinery after the third-party producer
transported it to the refinery, and the lessee does not
know the transportation costs.
9,000 bbl 23.0° $33.25/bbl Purchased in the field.
4,000 bbl 22.0° $33.00/bbl Purchased in the field.
Product Code
The product code is based on the type of oil being sold. The Product Code for Sour Crude is 62.
Sales Volume
The refiner will pay on all 50,000 barrels produced from its leases.
Sales Value

Because the lessee does not know the costs that the seller of the 8,000 bbl incurred to transport that volume to the refinery, that volume will not be included in the volume-weighted average price calculation. Further assume that the gravity adjustment scale provides for a deduction of $0.02 per 1⁄10 degree API gravity below 34°. Normalized to 23.5° (the gravity of the oil being valued in this example), the prices of each of the volumes that the refiner purchased that are included in the volume-weighted average calculation are as follows:

Volume API gravity Price Calc
10,000 bbl 24.5° $34.70/bbl (1.0° difference over 23.5° = $0.20 deducted).
9,000 bbl 23.0° $33.25/bbl (0.5° difference under 23.5° = $0.10 added).
4,000 bbl 22.0° $33.00/bbl (1.5° difference under 23.5° = $0.30 added).
The volume-weighted average price is:
(10,000 bbl × $34.50/bbl) + (9,000 bbl × $33.35/bbl) + (4,000 bbl × $33.30/bbl)) / 23,000 bbl = $33.84/bbl.
That price will be the value of the 50,000 bbls of oil produced from the lease and refined prior to an arm's-length sale under this section.
Sales Type Code
Because this is a non-arm’s-length transaction, the sales type code will be NARM.
Royalty Value (RV)
RV = Sales Value x Royalty Rate
RV = 50,000 x $33.84 x 16 2/3%
RV = $1,692,000 x 16 2/3%
RV = $281,887.20
Transportation Allowance
When the value of your oil is based on the volume-weighted average of your arm's-length sales and/or purchases, the transportation allowance is determined under 30 CFR 1206.53(c): If you value oil under this section, ONRR will allow a deduction, under §§1206.56 and 1206.57 or §1206.58, for the reasonable, actual costs:
  1. That you incur to transport oil that you or your affiliate sell(s), which is included in the volume-weighted average price calculation, from the lease to the point where the oil is sold.
  2. That the seller incurs to transport oil that you or your affiliate purchase(s), which is included in the volume-weighted average cost calculation, from the property where it is produced to the point where you or your affiliate purchase(s) it. You may not deduct any costs of gathering as part of a transportation deduction or allowance.

Form ONRR-2014 Royalty Report

Product Code Sales Volume Sales Value Sales Type Code Royalty Value prior to Allowances Transportation Allowance Royalty Value less Allowances
62 50,000 $1,692,000 NARM $281,887.20 - $281,887.20

3.3 Valuation of Oil Produced Before July 1, 2015

If you or your affiliate sell your oil under an arm's-length contract prior to refining, under 30 CFR §1206.52, the value of your oil is the gross proceeds accruing to you (or your affiliate) under that arm's­-length contract, less applicable allowances. Report your actual gross proceeds and allowable transportation costs separately. For all arm’s-length sales, including your affiliate’s arm’s-length sales, use sales type code ARMS. If you or your affiliate do not sell your oil prior to refining, use the volume-weighted average of the gross proceeds paid or received for arm’s-length purchases and sales of other like-quality oil produced from the same field or area to determine the value for royalty purposes as described under 30 CFR §1206.53. If you or your affiliate do not sell the oil at arm’s length prior to refining and you determine value under 30 CFR §1206.53, use sales type code NARM.

3.4 Special Oil Valuation Situations

For case-specific guidance on unique Indian oil valuation situations, including reporting and valuation of slop oil, reclaimed oil, oil blending, or injecting load oil downhole for well maintenance, please contact royaltyvaluation@onrr.gov.

3.5 Terms

Term Definition
Designated Area An area that ONRR identifies as unique based on both its location and crude type differential. Note that a location with two
IBMP Price The Index-Based Major Portion (IBMP) Price is the NYMEX Calendar Month Average (CMA), adjusted by the LCTD for each designated area. This represents approximately the 75% major portion price for a designated area.
LCTD Location and Crude Type Differentials (LCTD) adjust NYMEX prices to account for transportation costs and crude types for each designated area.
MP Major Portion
NYMEX CMA The New York Mercantile Exchange (NYMEX) Calendar Month Average (CMA) reflects the average price of West Texas Intermediate (WTI) crude for all trade days within a calendar month.
Roll For Oklahoma IBMP price only, account for a plus/minus roll
(NYMEX CMA Price +/‐ Roll) x (1 - LCTD)
The roll is defined under 30 CFR §1206.51.

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