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2016 Valuation Rule Federal Processed Gas Reporting Example

For production after January 1, 2017

Valuation of Processed Gas using Gross Proceeds

This example applies when you meet all of the following circumstances:

  • You are valuing gas produced from a federal oil and gas lease on or after January 1, 2017.
  • You are valuing your gas for royalty purposes based on the gross proceeds accruing to you or to your affiliate under an arm’s-length contract under 30 CFR §1206.142.
  • Your contract provides for payment based on the value of residue gas, NGLs, or other gas plant products (e.g. sulfur, carbon dioxide, etc.), regardless of where title transfers.

Valuation Determinations

Email requests for valuation determinations or guidance to royaltyvaluation@onrr.gov

The following is based on a sample statement.  Plant statements may vary.  Be sure to read carefully and contact royaltyvaluation@onrr.gov if you need further assistance!For time periods after January 1, 2017, when your arm’s-length contract provides for payment to you based on the value of processed products, ONRR’s regulations at 30 CFR §1206.142 direct you to value the production as processed. The value of processed gas for royalty purposes is your or your affiliate’s gross proceeds under the first arm’s-length sale, unless you transfer or sell gas to an affiliate and elect to use the index-based valuation option. This example illustrates how you should calculate gross proceeds.

If you have any questions regarding whether this example applies to your situation, please contact royaltyvaluation@onrr.gov.

This example addresses reporting and calculations for the following product codes. The BLUE letters refer to fields on the sample statement.

Product: Location in Statement:
PC 03 Residue Gas “Net Residue Mcf” (G) and “Net Residue MMbtu” (H) in the statement’s “Residue Settlement” section
PC 07 NGLs “Allocated” NGLs (L) in the statement’s “Component Settlement” section
PC 15 Pipeline Fuel “Contractual Field Deducts Mcf” (C) and “Contractual Field Deducts MMBtu” (D) in the statement’s “Wellhead Information” section

Assumptions for this example:

  1. This gas is sold under an arm’s-length contract.In this example, UCAs always represent the allowed percentage.
  2. A transportation Unbundling Cost Allocation (UCA) of 20%, which means that 20% of the transportation costs can be taken as part of a transportation allowance. In this example, the only transportation cost is the value of the pipeline fuel.
  3. The percentages retained by the processor are for services provided within the gas plant.
  4. A processing UCA of 40%, which means that 40% of the processing costs are allowable, including plant fuel.
  5. For the sake of simplicity, we assume that no condensate is recovered along the pipeline or in the gas plant.
  6. The royalty rate is 12.5%.

You can find more information about product codes and reporting in the ONRR Reporter and Payor Handbooks.

This example walks you through the royalty calculation and reporting for each product code and completes relevant fields on a sample Form ONRR-2014 after each step. This example only covers valuation-related fields on the Form ONRR-2014. For further assistance in filling out your Form ONRR-2014, please see the ONRR-2014 training videos.

The example will get you to this final royalty reporting:

Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15 ($8.95) $822.20
07 6,903.59 $5,880.60 ARMS $735.07 ($2.54) ($89.36) $643.17
15 129.75 162.20 $509.15 ARMS $63.64 ($0.68) $62.96

Product Code 03 - Residue Gas

Royalty is due on residue gas resulting from processing, including any disallowed plant fuel.

Step 1:
Identify the residue gas volume (Mcf):
  • The plant statement shows a residue total of 1,697.81 Mcf (G)
Step 2:
Calculate the disallowed plant fuel:
  • Identify the total plant fuel reported on the plant statement
    • In this example, the plant fuel is called Contractual Allocated Fuel and is 326.40 MMBtu (F)
  • In order to determine the plant fuel volume in Mcf, you need to calculate a residue Btu factor
    • The Btu factor is the heating value of the residue gas, calculated by dividing the net residue gas (1,922.39 MMBtu) (H) by the volume of the net residue gas (1,697.81 Mcf) (G)
    • The Btu factor is 1.1323
  • Determine the total plant fuel (Mcf)
    • Divide the Contractual Allocated Fuel (326.40 MMBtu (F)) by the BTU Factor (1.1323 MMBtu/Mcf)
    • The total plant fuel is 288.26 Mcf
    In this example, UCAs always represent the allowed percentage.
  • Obtain the UCA for processing
    • In this example, because the UCA is 40%, 60% of the plant fuel is disallowed (1 minus the 40 % UCA)
  • Multiply the disallowed rate (60%) by the total plant fuel (288.26 Mcf)
  • The disallowed plant fuel is 172.96 Mcf

Step 3:
Calculate the total residue gas sales volume:
  • Add the volume calculated under Step 1 (1,697.81 Mcf) (G) to the volume from Step 2 (172.96 Mcf)
  • The total residue gas sales volume is 1,870.77 Mcf

Mathematical visual of the above Steps 1 to 3.

Step 4:
Identify the residue gas sales MMBtu:
  • The total residue gas sales MMBtu is 1,922.39 MMBtu (H)
Step 5:
Calculate the disallowed plant fuel:
  • Identify the total plant fuel reported on the plant statement
    • In this example, the plant fuel is called Contractual Allocated Fuel and is 326.40 MMBtu (F)
  • Obtain the UCA for processing
    • In this example, 60% of the plant fuel is disallowed (1 minus the 40% UCA)
  • Multiply the disallowed rate (60%) by the total plant fuel reported on the plant statement (326.40 MMBtu) (F)
  • The disallowed plant fuel is 195.84 MMBtu
Step 6:
Calculate the total residue gas sales MMBtu:
  • Add the heat content from Step 4 (1,922.39 MMBtu) (H) to the heat content from Step 5 (195.84 MMBtu)
  • The total residue gas sales heat content is 2,118.23 MMBtu

Mathematical visual of the above Steps 4 to 6.

Step 7:
Calculate the residue gas sales value:MMBtu is a measure of heat content, not a volume.
  • Multiply the residue gas sales MMBtu determined under Steps 4-6 (2,118.23 MMBtu) by the Residue Unit Price ($3.13905/MMBtu) (J)
  • The total residue gas sales value is $6,649.23

Mathematical visual of the above Step 7.

Step 8:Please refer to your gas sales contracts to help determine if you have an arm’s-length or non-arm’s-length contract.
Determine which sales type code you should use:
  • In this example, we assume that your first sale is arm’s-length. Therefore, the correct sales type code is ARMS. If you are using your affiliate’s gross proceeds under the affiliate’s arm’s-length contract, the sales type code would be NARM.

Mathematical visual of the above Step 8.

Step 9:
Calculate the Royalty Value Prior to Allowances (RVPA):
  • Multiply the residue gas sales value calculated under Step 8 ($6,649.23) by the royalty rate (12.5%)
  • The total RVPA is $831.15

Mathematical visual of the above Step 9.

We will wait until the end of the example to calculate the allowances. Here is what the royalty reporting looks like so far:
Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15

Product Code 07 - Natural Gas Liquids

Royalty is due on any natural gas liquids (NGLs) resulting from processing.

Step 1:
Determine the NGLs Sales Volume (gallons): Royalty is due on the NGLs actually recovered, not on the theoretical NGLs or the NGLs on which the lessee is actually paid.
  • Locate the NGLs actually recovered by the plant on the plant statement under the Component Settlement section showing the “Allocated” amount. This amount should always be 100% of the gallons recovered.
  • The total allocated NGLs are 6,903.59 gallons (L)

Mathematical visual of the above Step 1.

Step 2:
Calculate the volume-weighted-average price:
  • Locate the total value on the plant statement under the Component Settlement section ($4,998.51) (N) and divide by the settlement NGL gallons (5,868.05 gallons) (M) to the volume from Step 2 (172.96 Mcf)
  • The volume-weighted-average price is $0.85182/gallon
Determine the NGL Sales Value:
  • Multiply the Step 1 NGL Sales Volume (6,903.59 gal) (L) by the volume-weighted-average price ($0.8518179/gal)
  • The NGL Sales Value is $5,880.60

Mathematical visual of the above Step 2.

Step 3:
Determine which sales type code you should use:
  • In this example, we assume that your first sale is arm’s-length. Therefore, the correct sales type code is ARMS. If you are using your affiliate’s gross proceeds under the affiliate’s arm’s-length contract, the sales type code would be NARM.

Mathematical visual of the above Step 3.

Step 4:
Determine the Royalty Value Prior to Allowances (RVPA):
  • Multiply the sales value from Step 2 ($5,880.60) by the royalty rate (12.5%)
  • The RVPA is $735.07

Mathematical visual of the above Step 4.

We will wait until the end of the example to calculate the allowances. Here is what the royalty reporting looks like so far:
Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15
07 6,903.59 $5,880.60 ARMS $735.07

Product Code 15 - Pipeline Fuel

Report gas used or lost along a pipeline using PC 15. The reporter letter dated December 18, 2014, addresses this topic in detail.

Step 1:There may be other types of pipeline fuel.  For this example, our statement lists Contractual Field Deducts.
Determine the Pipeline Fuel Sales Volume (Mcf):
  • Locate the Contractual Field Deducts amount on the plant statement and report it as a positive number
  • The Pipeline Fuel Sales Volume is 129.75 Mcf (C)

Mathematical visual of the above Step 1.

Step 2:
Determine the Pipeline Fuel Sales (MMBtu):MMBtu is a measure of heat content, not a volume.
  • Locate the Contractual Field Deducts amount on the plant statement and report as a positive number
  • The Pipeline Fuel Sales heat content is 162.20 MMBtu (D)

Mathematical visual of the above Step 2.

Step 3:
Determine the Pipeline Fuel Sales Value:
  • Multiply the Pipeline Fuel Sales MMBtu from Step 2 (162.20 MMBtu) (D) by the residue gas unit price ($3.13905/MMBtu) (J)
    • Under 30 CFR §1206.141(d), If some of your gas is used, lost, unaccounted for, or retained as a fee under the terms of a sales or service agreement, that gas will be valued for royalty purposes using the same royalty valuation method for valuing the rest of the gas that you do sell.
  • The Pipeline Fuel Sales Value is $509.15

Mathematical visual of the above Step 3.

Step 4:
Determine the Sales Type Code:
  • In this example, as discussed above, the pipeline fuel is valued under 30 CFR §1206.141(d)
  • In this example, you value your residue gas using its first disposition, which is an arm’s-length contract. As discussed above, you can value the pipeline fuel using the same as the method for valuing the residue gas. In this case, you should use Sales Type Code ARMS, which describes the value you are reporting, even though you never sell the pipeline fuel.

Mathematical visual of the above Step 4.

Step 5:
Determine the Royalty Value Prior to Allowances (RVPA):
  • Multiply the Pipeline Fuel Sales Value from Step 4 ($509.15) by the royalty rate (12.5%)
  • The RVPA is $63.64

Mathematical visual of the above Step 5.

We will wait until the end of the example to calculate the allowances. Here is what the royalty reporting looks like so far:
Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15
07 6,903.59 $5,880.60 ARMS $735.07
15 129.75 162.20 $509.15 ARMS $63.64

Transportation Allowance

The allocation decimals will not add up to 1 because a portion of the transportation allowance is allocated to the allowed plant fuel. Because the allowed plant fuel is not royalty-bearing, you may not take a transportation allowance for the cost of moving it.

The only cost of transportation in this example is the value of the pipeline fuel. The transportation allowance (TA) will be the allowed portion of the pipeline fuel value.

Step 1:
Calculate the amount and value of allowed pipeline fuel:
    In this example, UCAs always represent the allowed percentage.
  • Locate the Contractual Field Deducts on the plant statement: 162.20 MMBtu (D)
  • In this example, we are assuming a transportation UCA of 20%, so the value of 20% of the pipeline fuel can be included in your transportation allowance
  • Locate the sales price of the other gas sold from the lease: $3.13905/MMBtu (J)
  • Multiply the Contractual Field Deducts (162.20 MMBtu) by the sales price of the residue gas ($3.13905/MMBtu), then by the allowable UCA (20%), and then by the royalty rate (12.5%)
  • The total transportation allowance is $12.73

Mathematical visual of the above Step 1.

Step 2:
Allocate the total transportation across all the products transported.
Calculate the residue allocation:
  • Locate the Residue Gas Sales MMBtu from PC 03 Steps 4-6: 2,118.23 MMBtu
  • Locate the Gross Wellhead MMBtu: 3,013.00 MMBtu (B)
  • Divide the Residue Gas Sales MMBtu by the Gross Wellhead MMBtu (2,118.23 MMBtu/3,013.00 MMBtu (B))
  • The residue allocation is 0.7030
  • Multiply by the residue allocation by the total transportation allowance from Step 1 ($12.73)
  • The portion applied to PC 03 is $8.95

Mathematical visual of the above Step 2.

Step 3:
Allocate the total transportation across all the products transported.
Calculate the NGL allocation:
  • Locate the NGL Shrink: 602.01 MMBtu (R)
    • We use the NGL Shrink rather than the NGLs gallons in order to keep our units consistent across all products
  • Locate the Gross Wellhead MMBtu: 3,013.00 MMBtu (B)
  • Divide the NGL Shrink by the Gross Wellhead MMBtu (602.01 MMBtu (R)/3,013.00 MMBtu (B))
  • The NGL allocation is 0.1998
  • Multiply by the NGL allocation by the total transportation allowance from Step 1 ($12.73)
  • The portion applied to PC 07 is $2.54

Mathematical visual of the above Step 3.

Step 4:
Allocate the total transportation across all the products being transported.
Calculate the pipeline fuel allocation:
  • Locate the Contractual Field Deducts: 162.20 MMBtu (D)
  • Locate the Gross Wellhead MMBtu: 3,013.00 MMBtu (B)
  • Divide the Contractual Field Deducts by the Gross Wellhead MMBtu (162.20 MMBtu (D)/3,013.00 MMBtu (B))
  • The pipeline fuel allocation is 0.0538
  • Multiply by the pipeline fuel allocation by the total transportation allowance from Step 1 ($12.73)
  • The portion applied to PC 15 is $0.68

Mathematical visual of the above Step 4.

Please note, the allocation decimals will not add up to 1 because a portion of the transportation allowance is allocated to the allowed plant fuel. Because the allowed plant fuel is not royalty-bearing, you may not take a transportation allowance for the cost of moving it.

Here is what the royalty reporting looks like at this point:

Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15 ($8.95)
07 6,903.59 $5,880.60 ARMS $735.07 ($2.54)
15 129.75 162.20 $509.15 ARMS $63.64 ($0.68)

Processing Allowance

You may only take a processing allowance against PC 07 – NGLs or other gas plant products, if recovered and sold. In this example, the total processing allowance is based on the 15% of the value of the NGLs and residue retained by the plant. In this example, we assume a UCA of 40%, which will be used to calculate the allowed portion of the 15% of value retained by the plant. In some cases, there may be additional processing charges in your contract.

Step 1:
Calculate the value of the retained NGLs:
    In this example, UCAs always represent the allowed percentage.
  • Locate the allocated gallons: 6,903.59 gal (L)
  • To find the percent retained, subtract the contract percentage from 1: 1 – 0.85
  • Use the volume weighted average price from Step 2 for PC 07: $0.85182/gal
  • Multiply the allocated gallons (6,903.59 gal) (L) by the contract percentage (0.15) and then by the volume-weighted-average price ($0.85182/gal) to arrive at the value of the retained NGLs: $882.09

Mathematical visual of the above Step 1.

Step 2:
Calculate the value of the retained residue gas:
  • Locate the net residue MMBtu: 1,922.39 MMBtu (H)
  • To find the percent retained, subtract the contract percentage from 1: 1 – 0.85
  • Locate the residue unit price: $3.13905/MMBtu (J)
  • Multiply the net residue MMBtu (1,922.39 MMBtu) (H) by the contract percentage (0.15) and then by the residue unit price ($3.13905/MMBtu) (J) to arrive at the value of the retained residue gas: $905.17

Mathematical visual of the above Step 2.

Step 3:
Calculate the processing allowance:
  • Find the value of the retained NGLs from Step 1: $882.09
  • Find the value of the retained residue gas from Step 2: $905.17
  • Add the value of the NGLs from Step 1 ($882.09) to the value of the retained residue gas from Step 2 ($905.17)
  • The value of the retained products is $1,787.26
  • Multiple the value of the products ($1,787.26) by the UCA (40%) and then by the royalty rate (12.5%)
  • The processing allowance is $89.36

Mathematical visual of the above Step 3.

Step 4:
Calculate the Royalty Value Less Allowances (RVLA) for each product code:

PC 03 - Residue Gas

  • Find the RVPA for Product Code 03: $831.15
  • Subtract the transportation allowance allocated to PC 03: $8.95
  • The RVLA for Product Code 03 is $822.20

PC 07 - NGLs

  • Find the RVPA for Product Code 07: $735.07
  • First, subtract the transportation allowance allocated to PC 07: $2.54
  • Then, subtract the processing allowance calculated in Step 3: $89.36
  • The RVLA for Product Code 07 is $643.17

PC 15 - Pipeline Fuel

  • Find the RVPA for Product Code 15: $63.64
  • Subtract the transportation allowance allocated to PC 15: $0.68
  • The RVLA for Product Code 15 is $62.96

Mathematical visual of the above Step 4.

Here is what the final royalty reporting looks like:

Form ONRR-2014 Royalty Report
Product Code Sales Volume Sales MMBtu Sales Value Sales Type Code Royalty Value Prior to Allowances Transportation Allowance Processing Allowance Royalty Value Less Allowances
03 1,870.77 2,118.23 $6,649.23 ARMS $831.15 ($8.95) $822.20
07 6,903.59 $5,880.60 ARMS $735.07 ($2.54) ($89.36) $643.17
15 129.75 162.20 $509.15 ARMS $63.64 ($0.68) $62.96