PASO FEDERAL & INDIAN ROYALTY

COMPLIANCE WORKSHOP

COPAS Spring MeetingShreveport 2017

Bob Wilkinson

April 27, 2017

DISCLAIMER

This presentation only reflects the views of

the author/presenter and is not intended as

legal, tax or accounting advice.

Each recipient should solicit their own legal,

tax or accounting counsel with respect to

any of these issues.

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PURPOSEAt the end of this presentation, the attendee

will be aware of the royalty compliance

information that was presented at the PASO

Federal & Indian Royalty Compliance

Workshop on February 8 & 9, 2017.

Link to presentations:

http://paso-tulsa.org/royalty-auditcompliance-workshop-2/

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USEITI reporting via “Mainstreaming”

No formal reconciliation expected for the

2017 report (2016 Revenues)

ONRR/BLM will use their data to report the

2017 revenue information

Companies may want to check what ONRR

reports for “reasonableness”

USEITI – Greg Gould

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ONRR creating an “Indian Energy Service

Center” with the BIA being the lead

ONRR Enforcement staffing reorganized,

splitting the Appeals & Regulations from the

Enforcement efforts

ONRR Update – Jim Steward

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Companies cannot fulfill their dual

accounting requirement until after the major

portion prices are published

Indian gas major portion pricing will continue

to be published in the summer, but it may

take even longer with new administration

Indian Compliance – John Barder

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Training – the royalty and production training will

no longer be in the same week

Will be in the fall, and will be more interactive

ONRR looking to extend the hours you can

access their system, trying to go from 5pm to 7pm

Their system does not handle cross lease netting.

You need to be proactive and let them know

ahead of time. Your reporting must be on the

same report

Financial Management – Lorraine Corona

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ONRR did not take into account COPAS’s (or

rest of industry) comments on the rule

Eliminates some actual transportation and

processing costs (were previously allowed)

impacting the profitability of those properties

Default provision gives ONRR a lot of latitude

in assessing additional royalties, eliminating

certainty for industry

Federal Valuation Rule – Bob Wilkinson

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Sales type code changes for field fuel and ngls –

need to match how they are being valued

S&P BBB bond rate now available for free

No more netting of transportation factors – you

can no longer net purchaser incurred

transportation costs, but new regulation does not

provide the ability for you to include these costs

in your transportation & processing allowances

Federal Valuation Rule – Bob Wilkinson

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ONRR does not value all non-sold products

the same way (field fuel, keepwhole,

vent/flare)

Index pricing should be available for arms-

length sales (they have the same tracing &

unbundling issues)

Index price used and standard deducts need

to be more current and revenue neutral

Federal Valuation Rule – Bob Wilkinson

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You had to unbundle POP contracts prior to

the new valuation rule

Low volume fees – They do not allow

measurement costs or any type of penalty,

but they do allow “firm demand” and “capacity

reservation” fees

ONRR guidance not as stringent as Valuation

Determinations

Must/should you revert back for everything?

Federal Valuation Rule – Amy Lunt

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Data Mining does not use thresholds

Indians are first priority

ONRR cannot accept royalties on an

unapproved agreement

BLM has backlog on approving CAs

ONRR does not look at dual accounting until

after major portions

Data Mining – Lorraine Corona

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In new rule, maintenance is not as broadly applied

as the proposed rule provided

Removed virtually all of industry’s concern

Distinguishes maintenance of incorrect information

from simple failure to correct misreporting

They do not use the max penalty rates very often

Penalties in the past year were a record low

Knowing or Willful will most likely be used in

situations where there is failure to pay, failure to

permit an audit, and false reporting

Civil Penalties – Geary Keeton

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API filed lawsuit on ONRR’s Federal Valuation Rule

o Default provision gives broad authority to

retroactively increase royalty owed

o Lack of transparency

o Eliminates certainty

o Requires all contracts to be in writing

o Doesn’t allow all transportation/processing costs

o Index pricing has flaws

There has been a ton of regulations the past two

years, and a reduction to holding lease sales

Legal Challenges – Schaumberg/Sgamma

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Congressional Review Act

o Allows Congress to disapprove rules subject to

Presidential signature or veto.

o Only used once before successfully

o There are timing limits

o Only majority vote needed during first 60 days of session

o Disapproved rule never takes effect

o Agency may not issue a rule that is substantially the same

o CRA prohibits judicial review

o All the recent ONRR & BLM rules can be addressed via

the CRA, Senate priorities are likely to dictate which rules

are ultimately considered for disapproval

Legal Challenges – Matt Haynie

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Unrealistic deadlines

o Standard deadline is 30 days

o Extensions may be granted

o Contacts were given in situations where there are

overlapping work assignments

Preliminary Determinations are still a preliminary

document prior to an Order being issued

Common Audit Issues – Panel

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Training – you only have to walk through 1 month,

you don’t have to go through every month

You don’t have to officially sign your documents

Common Problems for Federal Auditors

Simply paying on statement values (not

unbundling);

Hidden fees being deducted;

Failure to maintain contract amendment information

Common Audit Issues – Panel

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Marketable condition application has evolved from

wellhead/entrance into field transportation system

to the interstate pipeline, and may be downstream

of the point of sale

Applies to fixed fee, keepwhole, POP contracts (?)

ONRR’s unbundling is a one-size fits all approach

and may not fairly represent your gas, fees or

contract

Unbundling – Judy Matlock

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Accounting department does not have all the

information, it requires a team to unbundle with reps

from operations, marketing and legal, and strong

support from management

Largest components of disallowed costs are for

compression and associated fuel

If you owe a lot of money for applying unbundling

historically, ONRR has an installment plan although

interest keeps running

Unbundling – Judy Matlock

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Largest components of disallowed costs are

for compression and associated fuel

It is hard to get the 3rd party service providers

to unbundle or to negotiate unbundled

contracts because you have no leverage.

You may be able to get some pieces

unbundled.

Unbundling – Judy Matlock

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ONRR does not make public the

assumptions, plant data, and operating

condition utilized to generate their UCA’s

Condition of the producer’s production at the

point of delivery may not match the

assumptions utilized by ONRR

Unbundling – Mark Lambert

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The lessee is responsible for unbundling

If you do not own the plant/system, you have the option

to use their UCA to unbundle

ONRR provides valuation guidance, reviews industry’s

and state/ONRR auditor unbundling efforts, and

publishes UCA’s but they do not approve unbundling

efforts or new methods

ONRR close to completing 1 or 2 standard onshore

UCAs (can use for arms-length situations where no

UCA exists)

ONRR is looking into adding 1-2 hour unbundling

training in their Reporter training

Unbundling – ONRR

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ONRR’s UCA guidance documents say there are other

methods to unbundle

Carve out methodology most consistent with the regulations,

case law, is the easiest and least costly to calculate

Only disallows costs to place the gas into marketable

condition once (allows all transportation & processing costs)

Carve out methodology reduces the amount of information

needed from the 3rd party service providers

Carve out methodology cannot be used on company

operated systems and may not work on systems where the

rates are based upon a cost of service or POP contracts

Unbundling – Bob Wilkinson

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ONRR recognizes that the pressure

differential is the correct denominator and

have updated their “How to calculate a

Processing UCA” guidance document but

they are not willing to go back and correct

their UCAs

ONRR says it is optional to use their UCAs

Marketable Condition Discussion

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Marketable Condition Discussion

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https://www.youtube.com/watch?v=t8XMeocLflc

ONRR’s UCA’s include several incorrect

mathematical and engineeringly incorrect

assumptions (tailgate boosting is never allowed;

you must place gas in marketable condition both

before and after processing; compressor discharge

vs pressure differential).

If you have used ONRR’s UCAs and want to file for

refunds, there is a 6 year statute of limitation

Marketable Condition Discussion

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ONRR’s marketable condition application is inconsistent with

the regulations & recent court cases

ONRR recognizes their current unbundling method used in

the published UCAs is not supported by Devon (but their

guidance documents say their UCAs follow Devon)

ONRR says they can be challenged on their position that

boosting is never allowed

ONRR says they have some court cases that will address

whether gas has to be placed in marketable condition first is

correct or not

Marketable Condition Discussion

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You will be required to report the new FMP

numbers on the OGOR as a result of

implementing Onshore Orders 3, 4 & 5, and

there will be edits

FMP numbers are specific to each product

For the First month you split an oil ending

inventory to many FMP numbers, ONRR

plans to override the error messages

Production Reporting – LeeAnn Martin

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You will not have to report non-royalty

bearing vented or flared volumes on the

ONRR 2014

6 new Disposition Codes to be used on the

OGOR for reporting vented & flared volumes,

although it is unknown when they will be

required

Vented & Flared Reporting – LeeAnn Martin

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Many changes made to the proposed rule

(longer phase-in, compliance over county or

state wide, more exemptions, some

additional equipment dropped), although still

too costly or restrictive for industry

Identified when royalty free use does not

require BLM approval, and when it does

Commingling/off-lease measurement/royalty

free use off-lease, require separate approvals

BLM Venting & Flaring Rule – Tim Spisak

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Must have separate FMPs for royalty free

use of gas downstream of FMP

Until new Disposition codes are created

(ONRR says it may be a while since their rule

may be disapproved) use DC 20

Operator may choose to comply with capture

requirement on a lease-by-lease, county-

wide, or state-wide basis (BLM expects most

operators to choose state-wide basis)

BLM Venting & Flaring Rule – Tim Spisak

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Obtaining FMP numbers delayed 4 months

as their system is not in place

Operator only obligated to apply for the FMP

number within the required timeframe.

BLM will send the operator a listing of their

properties and when they must file for FMP

number

Gas and oil facilities must have their own

FMP number

BLM Onshore Orders 3, 4, 5 – Rich Estabrook

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BLM can access penalties to any person

(purchasers, transporters, processors), not

just the operators

All measurement must not be commingled

with gas originating from other sources

unless approved by the authorized officer

BLM has provided training on the new

Onshore Orders in MT, NM, OK, WY and

have one scheduled for ND on May 10

BLM Onshore Orders 3, 4, 5 – Rich Estabrook

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