POP Contracts Payor Training Denver FINAL 20180906...= 162 MMBtu x $3.14/MMBtu x (1 - 0.00) = $509...

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Industry Compliance Accurate Revenues & Data Professionalism & Integrity

POP CONTRACT TRAINING

ONRR Royalty ValuationDenver, CO – September 2018


Disclaimer

The statements or opinions expressed in this presentation

and in any discussions do not necessarily represent the

views of the Office of Natural Resources Revenue or the

Department of the Interior.

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Test your Clickers!

How long have you been doing work related to oil and gas royalties?

A. Less than 2 yearsB. 2 ‐ 5 yearsC. 5 ‐ 10 yearsD. 10 ‐ 20 yearsE. More than 20 years!

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FEDERAL POP CONTRACTS

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Test your Clickers!

What is your level of familiarity with POP contracts?

A. I’m an expert!B. Some experience, but still lots of questionsC. Very little experience, but I know what a POP

contract isD. What is a POP contract?

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Where we’re going…

o Federal gas valuation overview

o What is a POP contract, and why does it matter?

o Marketable condition

o Arm’s‐length POP

reporting exercise

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Important Notice!

This course is only for Federal gas!

Indian gas sold under a POP contract is valued and reported differently.

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Federal Gas Valuation

Federal Gas Valuation Decision Tree

Gas

Processed (30 CFR 1206.153)

Unprocessed (30 CFR 1206.152)

Arm’s‐Length

Non‐Arm’s‐Length

Arm’s‐Length

Non‐Arm’s‐Length

Gross Proceeds

Deductions

Benchmarks

Deductions

Gross Proceeds

Deductions

Benchmarks

Deductions


Federal Processed vs. Unprocessed

Is the gas ever

processed?

No

Unprocessed Gas Valuation1206.152

YesWhere

does title transfer?

Prior to the plant inlet

After the plant outlet

Does the lessee retain rights to any residue or

gas plant products?

Does the lessee exercise those rights?

Yes

No

Yes

Is the gas sold at arm’s length?

Yes

No

No

Processed Gas Valuation1206.153


What is a POP Contract?

For ONRR, a POP contract is a contract:

1. For the sale of gas,

2. Prior to processing, and

3. Value is based on a percentage of the purchaser’s proceeds resulting from processing

Value is determined

Gas producing lease

NGLs to Sale

Residue Gas to Sale

Condensate to Sale

HereGas sold – title transferred here

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APOP Contract?

Is the value paid to the lessee for any of the residue or the gas plant products

based on the purchaser’s proceeds resulting from the

sale of those products?

No

PC 04, APOP Sales Type Code, Pay on

the higher of gross proceeds (including disallowed costs added back) or the value of 100% of the residue gas.

Yes Yes

Is your gas valued under

1206.152?

PC 04, ARMS or NARM Sales Type Code, Pay on gross proceeds plus any disallowed costs that must be added back.

Use §1206.153

Does the purchaser process the

gas?

No

Yes

No


Why Does It Matter?

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30 CFR 1206.152(b)(1)(i) The value of gas sold under an arm's‐length contract is the gross proceeds accruing to the lessee … Also, where the lessee's arm's‐length contract for the sale of gas prior to processing provides for the value to be determined based upon a percentage of the purchaser's proceeds resulting from processing the gas, the value of production, for royalty purposes, shall never be less than a value equivalent to 100 percent of the value of the residue gas attributable to the processing of the lessee's gas.


Clicker Question!

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The processor keeps 20% of your residue gas and NGLs. You sell the remaining 80% at arm’s length to a purchaser at the tailgate of the plant. Is this an arm’s‐length percentage of proceeds contract?

A. Yes

B. No

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Clicker Question!

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You sell your gas at arm’s length, prior to processing, and the purchaser pays you 84% of the value of your residue gas and NGLs. Is this an arm’s‐length percentage of proceeds contract?

A. Yes

B. No

C. Maybe


Clicker Question!

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You sell your gas at arm’s length, with a delivery point in the field, and the purchaser pays you 88% of the proceeds from his sale of your residue gas and NGLs. The residue MMBtus to which the 88% applies is net of any residue gas returned to the lease for fuel. Is this an arm’s‐length percentage of proceeds contract?

A. Yes

B. No


WHAT IS NOT A POP CONTRACT?

Sale after processing

Value of ALL products based on a percentage of index

Residue gas returned to the lease

Any other situations that do not meet the criteria for an arm’s‐length POP contract

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Regulations ‐ APOP Contracts

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30 CFR 1202.150(b)(1) ‐ Royalty is due on all gas removed or sold.*

30 CFR 1206.152(b)(1)(i) The value of an arm's‐length, unprocessed gas sale is the gross proceeds accruing to the lessee. Under a POP contract, the value may never be less than 100 percent of the value of the residue gas.*

30 CFR 1206.152(i) – Marketable condition costs must be added back to gross proceeds.*

*This language is a paraphrase of the regulations and not actually regulatory text.


What the Text Means

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VR = GP + MC ≥ VrWhere:VR = Value for royalty purposes GP = Gross proceedsMC = Costs of placing gas into marketable conditionVr = 100% residue gas value


APOP vs NPOP

NPOP 18

1. Processed gas regulations2. Value based on

benchmarks3. Sales type code NPOP4. PC 03,07,155. Unbundle6. Allowances

1. Unprocessed gas regulations2. Value based on gross proceeds or

100% residue value3. Sales type code APOP4. PC 045. Unbundle6. Add back disallowed costs

APOP

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Finding Marketable Condition Costs

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1 2

3

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1



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2

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Gathering

Dehydration

Compression

Treating

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EXERCISE

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INSERT PLANT STATEMENT


Exercise: Complete the Form ONRR‐2014

Assumptions for this example:1. This is an arm’s‐length percentage‐of‐proceeds (POP) contract.2. The percentages retained by the processor are for services

provided within the gas plant.3. Transportation UCA, including fuel = 0% (allowed %)4. Processing UCA, including fuel = 40% (allowed %)5. The royalty rate is 12.5%.


The process

Determine what you were paid

Add back all disallowed costs:– Disallowed pipeline fuel

– Disallowed plant fuel

– Disallowed NGL retainage

– Disallowed residue retainage

– Disallowed fees

Compare to the 100% of the residue gas value27

Dehydration, Compression, Sweetening Fees

NGL % + RES %

% Plant Fuel

% Pipeline Fuel

What You Were Paid

GROSS P

ROCEED

S

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Exercise Calculations

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What you were paid:

= NGL net value + residue net value

= $4,999 + $5,129

= $10,128

Disallowed pipeline fuel:

= pipeline fuel MMBtu x price x (1 – UCA)

= 162 MMBtu x $3.14/MMBtu x (1 - 0.00)

= $509



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Disallowed NGL retainage:

= (NGL net value) / (producer %) x (plant retainage %) x (1 – UCA)

= $4,999 / .85 x .15 x (1 - .40)

= $529

Disallowed residue retainage:

= (residue net value) / (producer %) x (plant retainage %) x (1 – UCA)

= $5,129 / .85 x .15 x (1 - .40)

= $543



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Disallowed plant fuel:

= plant fuel MMBtu x price x (1 – UCA)

= 122 MMBtu x $3.14/MMBtu x (1 - 0.40)

= $230

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Gross Proceeds:

= payment + disallowed costs

= $10,128

+ $509 (pipeline fuel)

+ $529 (NGL retainage)

+ $543 (residue retainage)

+ $230 (plant fuel)

= $11,939

Minimum Value:

= 100% residue MMBtu x price

= 1,922 x $3.14/MMBtu

= $6,035

Gross Proceeds is higher than the minimum value


Exercise: Complete the Form ONRR‐2014

04 2,458 3,013 $11,939 $1,492 $0.00 $0.00 $1,492

2014 Royalty Value:

= sales value x royalty rate

= $11,939 x .125

= $1,492

*Use APOP Sales Type Code


Key Points

The value on which you pay royalty is not usually your payment on the statement.

If you have not unbundled, and there is not a UCA available, you should add back all potentially disallowed costs – including the retained percentage.

Don’t forget to check your gross proceeds against the 100% of the residue gas value.

You cannot use the minimum value provision in lieu of unbundling and determining actual gross proceeds.

You can’t tell if you have a POP Contract by looking at only the statements – you need the contract.

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GOT [email protected]


Course Feedback

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Was the content of this course:

A. Way too easy?

B. A little too easy?

C. Just right?

D. A little too challenging?

E. Way too challenging?


POP Exercise Handout: Complete the Form ONRR‐2014

Assumptions for this example:1. This is an arm’s‐length percentage‐of‐proceeds (POP) contract.2. The percentages retained by the processor are for services

provided within the gas plant.3. Transportation UCA, including fuel = 0% (allowed %)4. Processing UCA, including fuel = 40% (allowed %)5. The royalty rate is 12.5%.

POP Contracts Payor Training Denver FINAL 20180906...= 162 MMBtu x $3.14/MMBtu x (1 - 0.00) = $509...

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Transcript of POP Contracts Payor Training Denver FINAL 20180906...= 162 MMBtu x $3.14/MMBtu x (1 - 0.00) = $509...