Presentation on theme: "Revenue Accounting Issues For Royalty Owners"— Presentation transcript:
1 Revenue Accounting Issues For Royalty Owners Donald A. Phend, CPAPhend & Company, LLC8500 W. Bowles Ave., Suite 301Littleton, CO(303) Phone(303) Fax
2 ObjectivesGain a basic understanding of how oil and gas is valued for royalty payment calculations.Basic tips royalty owners can use to determine if deductions are being taken from their royalty payment.Current issues affecting Colorado Royalty Owners
3 Accounting Terms – Oil BBL Barrel – 42 US Gallons BS&W Basic Sediment and Water, an analysis of contaminants in oilGravity Viscosity of oil – higher gravity is thinner and usually more valuable
4 Accounting Terms - GasMCF Measurement of Volume (1,000 cubic feet at standard temperature and pressure)MMBTU Measure of heating content of gasChromatograph Theoretical content of various liquids (Gallons per MCF)
5 Accounting Terms – Gas Pooled Accounting All wells in pool receive same valuation for gas and liquidsPool can be various definitions,FieldGeographic AreaAll wells going to a specific plant, etc.
6 Accounting Terms - Gas Netback Method Deductions reduce stated value of gas, rather than being shown as a separate deductionExampleSales Price $3.15 MMBTUDeductions (0.15) MMBTUNetback Price $3.00 MMBTUTypically the Netback Price will be shown on royalty check detail
7 Oil Valuation First step: measure the oil sold Run Ticket Method High and low tank measurements manually recorded when oil is run (sold) into tank truckLACT Meter (Lease Automatic Custody Transfer)Automatically records volume transferred (sold) to pipeline connection
18 Gas Valuation Second Step: Determine quality of gas: Sample taken for analysis:BTU Content – Heating content of gas sampleContent Analysis (Chromatograph) – Content of various potential liquids contained in gas sample
19 Gas Analysis ReportHeating ContentMMBTU / MCF 1.267
26 Gas Processing Agreement Agreement between Producer (Well Operator) and Processor (Gas Plant)Defines terms and fees for processing gasVarious types includePercentage of Proceeds (POP)Keep WholeFixed Fee
27 Example of POP Contract Producer receives 80% of sales proceeds for processed gasProducer receives 60% of sales proceeds for NGLsProducer pays “gathering fee” of 10 cents MCFProcessor may use “without cost” 3% of producer’s gas for compressor and plant fuelProducer pays 5 cents/gallon “frac fee”
28 POP Fees Liquids 40% Processed Gas 20% WellsEndUserMarketPipelineGas PlantUnprocessedGasProcessedGasGatheringSystemFieldCompressorLiquids
29 Gathering Fees Wells End User Market Pipeline Gas Plant Unprocessed SystemFieldCompressorLiquids
30 Fuel (3% of Volume) Wells End User Market Pipeline Gas Plant UnprocessedGasProcessedGasGatheringSystemFieldCompressorLiquids
32 Effect of Netback Method You can’t see all of the deductions being taken by looking at your revenue check detail.Some of the deductions may be buried in the “artificial” lower price.
33 Why is Netback Important? Producers often use the Netback price they receive from the processors as a starting point to pay royalty.Note, these deductions may or may not be appropriate to charge to royalty owners.This is a legal issue, not an accounting issue.
34 Calculate Theoretical Gallons Ethane x 1000 = 3382Propane x 1000 = 1383Isobutane x 1000 = 256Normal Butane x 1000 = 486Isopentane x 1000 = 194Normal Pentane x 1000 = 170Hexane x 1000 = 342
35 Why are Theoretical Gallons Important It is used to allocate the total “Actual Gallons” produced at the plant to each well, to determine payment to producerTheoretical Gal Actual plant gal X Your WellTheoretical Gal All Wells in Plant
36 Allocation to WellIn other words, if the your well has 5% of the total theoretical plant production of Ethane, it will get credit for 5% of the actual sales of ethane.Note that this sales value will be net of the 40% POP fee.
37 Valuation of Ethane Actual Gallons of Ethane Allocated to your well 3,111.44Price of Ethane (Gal) $Gross Value of Ethane to Well $1,343.36Less POP (40%) (537.34)Net Paid Producer
40 Valuation on Check Net Value After Deduction $5,586.76 MCF at Wellhead ,000Calculated Price Per MCF $5.59
41 Other Issues Volumetric Loss Often known as “Fuel Lost and Unaccounted” or “FL&U)Processor only pays on net volume sold at tailgate of plantCan be easily calculated
42 Volumetric Loss MMBTU at Wellhead Less MMBTU in All Products Equals FL&UNote that liquids are stated in gallons, but there are conversion factors to determine MMBTU content
43 Volumetric LossIn this example FL&U was calculated as approximately MMBTUExpressed in terms of residue gas this is22.85 MMBTU X $5.59/MMBTU = $127.72
44 Summary Gross Value Sold at Plant $8,284.06 Plus Value of FL&U 127.72 Value At Wellhead 8,411.78LessPOP (2,401.34)Gathering (100.00)Frac (195.96)FL&U (127.72)Net $5,586.76Percentage of Net to Gross 66%
45 Summary 10% Royalty Owner Effect Gross value of 10% $841.18 Net Actually ReceivedRoyalty Owner’sshare of deducts $273.51
46 “Keep Whole” ContractGas Processor pays Producer for the total MMBTU produced at the wellheadPrice is based on the sales price of residue gas onlyGas Processor keeps the enhanced value of the MMBTU that was converted to liquids
47 “Keep Whole” ContractThese contracts may also have an allowance for fuel, (for example, 3%) in which case the Gas Processor only pays on a net percentage of the wellhead volumeOther fees may also be charged by Gas Processor
48 “Keep Whole” ContractTypically the Producer will begin with the “Keep Whole” amount they receive from the Gas Processor, when beginning to calculate royalty paymentsProducer may also add other charges when calculating royalty payment
49 “Keep Whole” Contract Effect on royalty owner payments Royalty owner does not receive benefit for higher value of liquid productsRoyalty owner may be receiving payment on a volume net of fuel allowancesRoyalty owner may be charged other deductions by the operatorNote that the above items may, or may not, be evidenced on the royalty check detail
50 Fixed Fee ContractGas Processor charges a per unit of volume fee to the producer for providing processing servicesProducers may calculate royalty payments net of this fee
51 Other Issues Arms-Length Pricing It is possible for a processing company to sell to a marketing affiliate at a lower than market price, and settle with producer on this basis.Strategy - request documentation for first arms-length sale
52 Strategies for Royalty Owners Look for slight variations of price for different wells (if you have more than one well)This is indicative that various products are being allocated differently based on well’s theoretical content.While this isn’t proof that netback pricing is occurring, it is at least a place to start .
53 Strategies for Royalty Owners If well was involved in a class action settlement, the calculation methodology for “future deductions” may be available in the settlement agreement.This might be interesting for informational purposes, but you may be bound by the settlement agreement (not intended as legal advice!)
54 Strategies for Royalty Owners Request copies of any Gas Processing Agreements and Plant Statements for some sample monthsThe Plant Statements show basically the same calculations as in the prior example, and if you are good with numbers, you can probably figure it out, or at least make an estimateDown side is I have found most companies are reluctant to provide this type of info absent legal pressure
55 Strategies for Royalty Owners If you know your gas is being processed, andYou have access to index prices in your area for pipeline standard gasThen you should expect that the blended value you receive should be higher than the pipeline standard gas, due to the enhanced value of the liquids (assuming no deductions)
56 Strategies for Royalty Owners Some royalty checks are becoming more descriptiveIf they display a column of “Deducts”, ask Royalty Relations Department for an explanationAlso ask them if they use “Netback Pricing” and see if they give you an answer
57 Strategies for Royalty Owners Compare notes with friends and neighbors who may have royalties with other companies in the same geographic areaSignificant variances in stated prices may merit further investigation