Consolidated Federal Oil & Gas Valuation Reform -

Proposed Rule

Bob WilkinsonFebruary 11, 2015

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.

DISCLAIMER

Proposed Rule – Oil & Gas Valuation Published January 6, 2015

Comments due March 9, 2015 (extensions for additional 60-90 days was requested)

ONRR estimates it will cost industry $80MM/year.

Proposed Rule – Oil & Gas Valuation Things to consider:

Legal Concerns; Elimination of Deductions that are due to

operational or production uniqueness; ONRR’s Default Provision – too broad; No netting of “Transportation Factors”; Index Pricing Option - specifics need to be

adjusted and be available for AL sales; PC15 Field Fuel Handling – Unclear; Accounting for Comparison/Keepwhole

Proposed Rule – Oil & Gas Valuation Legal Concerns

Industry should be specific & comprehensive in their comments in order to protect their rights to challenge any part of the final regulations. 

 

Administrative law provides the government must provide an adequate basis/explanation for the changes to the regulations that they are making.

Proposed Rule – Oil & Gas Valuation Elimination of Deductions:

Transportation allowance for OCS leases for movement to the first platform;

Option to use of FERC/State approved transportation rate for gas;

Ability to request to exceed the 50% transportation or 66.7% processing caps and terminates all prior approvals;

Ability to request extraordinary processing allowances, and terminates all prior approvals.

Proposed Rule – Oil & Gas Valuation Default Provision:

1. Value is less than 10% of lowest reasonable market value;

2. Transportation/processing may be deemed “unreasonable” if 10% higher than highest reasonable measure;

3. “Misconduct” by or between contracting parties;

4. Unable to ascertain correct value (unbundling);

5. Lessee not able to provide documents;

Proposed Rule – Oil & Gas Valuation

Default Provision: Creates uncertainty on when/how ONRR

will value; Too much discretion, no limitation or

restraint – could be raised by analyst, auditor, or data miner;

Does not identify any rights or how to challenge the default valuation calculations.

Proposed Rule – Oil & Gas Valuation No Netting of “Transportation Factors”

Term not defined (does it include fractionation, location and/or quality differentials?).

Identified factors need to be included in the applicable transportation and/or processing allowance regulations;

Unbundling of factor issues? Major accounting/reporting issue.

Proposed Rule – Oil & Gas Valuation Transportation Deductions

Disallows transportation costs for transportation when the production did not incur those costs (how literal is this to be taken?).

Should not apply to situation below. “Incur” is not defined. Transportation factors often

represent deductions not directly “incurred.”

Proposed Rule – Oil & Gas Valuation Index Pricing Option – Pricing

Highest reported monthly bid week price (can be $.50 or more above average, history shows it could be above a $1.00);

If gas “can” flow to multiple index points, you must use the highest index even if your gas did not flow due to pipeline constraints;

Resulting Index price usually higher than the price in the Indian Gas Valuation regs;

Proposed Rule – Oil & Gas Valuation Index Pricing Option – Standard Deductions

Gas transportation deduction (outdated): 5% OCS GOM; 10% other Floor of $0.10; ceiling of $0.30/mmbtu. 

Gas Processing deduction – based on minimum monthly rate (2007-11- too long/old). Many plants have processing rates > 25%.

Proposed Rule – Oil & Gas Valuation Index Pricing Option – Standard Deductions

Standard NGL deduction (based on average) Lower than actual T&F deduction (old?); Does not include theoretical transportation

allowance to get NGLS to the plant. When/how will these get updated?

Proposed Rule – Oil & Gas Valuation Index Pricing Option

Index pricing option does provide legal, accounting, auditing, and administrative savings (unbundling);

Needs to be available to arms-length transactions (they have same tracing & unbundling issues);

Pricing & standard deductions need to be altered/updated to provide more current and/or reasonable amounts, otherwise option will not be selected.

Proposed Rule – Oil & Gas Valuation Field Fuel (PC15) Reporting Unclear

Proposed rule silent on how or if PC15 is to be handled under the Index Option;

Proposed rule says royalty quantity/quality for processed gas is only due upon the net output of plant.

If industry is to also pay royalties on field fuel/lost or unaccounted for volumes, this will effectively add $.10-$.30/mmbtu to the royalty value under the Index Option.

Proposed Rule – Oil & Gas Valuation Miscellaneous Issues

Retains accounting for comparison (dual accounting).  Too much manpower/effort for little or no additional dollars;

Retains keepwhole accounting/reporting as processed gas.  Index option needs to do away with this requirement;   Lessee usually does not have information

to value in manner instructed by ONRR; Lessee only paid on mmbtu basis (no

value received for liquids).