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Consolidated Federal Oil & Gas Valuation Reform - Proposed Rule Bob Wilkinson February 11, 2015.

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Presentation on theme: "Consolidated Federal Oil & Gas Valuation Reform - Proposed Rule Bob Wilkinson February 11, 2015."— Presentation transcript:

1 Consolidated Federal Oil & Gas Valuation Reform - Proposed Rule Bob Wilkinson February 11, 2015

2 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

3  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.

4 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

5 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.

6 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.

7 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;

8 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.

9 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.

10 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.”

11 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;

12 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%.

13 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?

14 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.

15 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.

16 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).

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