1. PASO Federal/Indian Royalty Compliance Workshop February 8 & 9, 2017
Gas Processing Unbundling and Compliance Update Linda Shishido-Sheahan, Audit and Compliance Management and Karl Wunderlich, Royalty Valuation
PASO Federal/Indian Royalty Compliance Workshop
February 8 & 9, 2017

2. Disclaimer
The statements or opinions expressed in all ONRR presentations and panel discussions at the 2017 PASO-Tulsa Federal/Indian Royalty Compliance Workshop do not necessarily represent the views of ONRR or the Department of the Interior.

3. Learning Objective
Upon completion of this course, the attendee will be aware of ONRR’s gas plant unbundling and compliance programs as well as their responses to industry-provided questions.

4. Topics Royalty Valuation, Team C (aka Unbundling)
Unbundling Review
Unbundling Resources
What’s New
Next Steps
Audit and Compliance Management
Expectation from Industry
Compliance Review Process
Audit Process
Issues Identified during Compliance Process
Industry Questions

5. What is Unbundling?
Unbundling: Separating the allowed and disallowed costs of gas transportation and/or processing for royalty reporting and payment.
Who Has to Unbundle? Gas producers who reduce their royalty value by costs of transportation and/or processing.
What Must I Do to Unbundle?
Determine marketable condition – mainline pipeline specifications
Separate equipment (or percent of equipment) used to meet marketable condition from that in excess of marketable condition
Calculate annual capital costs and O&M expenses and allocate between below and above marketable condition
The ratio is your Unbundling Cost Allocation (UCA)
OR Use an ONRR-calculated UCA (plant-specific or standardized)

6. Resources for Unbundling Include (but not limited to)
Engineering data
Marketable conditions for gas (mainline pipelines)
Case law and Federal regulations
Basic specifications of gas transportation and processing
Public or private data sources (e.g., EPA, FERC)
Engineering software
Literature on gas transportation and processing cost estimation
Scholarly articles and papers within the gas industry

7. Resources for Unbundling, cont’d

8. Resources for Unbundling, cont’d
Unbundling Mailbox:

9. Since Last PASO Completed 3-Year Review of the Unbundling Program
Hired to full staffing levels
Completed and published 14 UCAs for Processing and/or Transportation Systems
Reviewed over 30 unbundling methods
Provided internal training courses on gas plant processing
Published first Standardized UCAs
Simplified processing plant data request to expedite UCA calculations

10. Team C Staffing
New name: Royalty Valuation Team C (no longer Unbundling)
New Supervisor
Fully staffed – 4 Petroleum/Chemical Engineers + additional assistance from Royalty Valuation Teams A & B

11. Team C: What We Do (and Don’t Do)
Provide valuation guidance (still subject to audit)
Review unbundling efforts for industry
Review industry unbundling for State and ONRR auditors
Publish UCAs
We Don’t:
Approve unbundling efforts or new methods

12. FY2017 Initiatives Simplified plant data requests
Expedited UCA calculations
Standardized UCAs for onshore areas/basins
Continue to publish UCAs
Update the Unbundling Webpage
Continue offering guidance and support to industry, ONRR, states, Tribes and other agencies

13. Standardized UCAs
A Standardized UCA will be unique to an area or basin and technology
e.g., offshore, lean-oil
For arm’s-length processing only
You may use a Standardized UCA if the processing plant with whom you contract does not have a published plant-specific UCA
You may only use a Standardized UCA if the produced gas comes from leases within the specified area or basin
Benefits: Certainty and ease of reporting

14. Standardized UCA Webpage

15. Compliance Process

16. What Does ONRR Expect from Industry?
Properly Report and Pay Royalties
Correctly calculate transportation and processing allowances – which means UNBUNDLING
Calculate your own UCAs using a reasonable method
Alternative 1 – Use Plant Specific UCAs if available
Alternative 2 – Use Standardized UCAs if available
Alternative 3 – Take no allowance

17. Unbundling Compliance Process
Unbundled fees may be subject to review and audit
If you are claiming a bundled fee that includes costs to place gas into Marketable Condition, you must:
Unbundle – submit methodology and documentation
Correct and pay on all properties flowing to that plant for all sales months where you claimed a bundled fee

18. Unbundling Compliance Process
Alternative Method 1:
Use ONRR-published plant-specific UCAs if available, to correct and pay:
Sample property and months
All properties flowing to that plant for all sales months where you claimed a bundled fee

19. Unbundling Compliance Process
Alternative Method 2:
Use ONRR-published Standardized UCAs if available and appropriate, to correct and pay:
Sample property and months
All properties flowing to that plant for all sales months where you claimed a bundled fee

20. Unbundling Compliance Process
Alternative Method 3:
Take no allowance to correct and pay:
Sample property for review period
All properties flowing to that plant for all sales months where you claimed a bundled fee

21. Unbundling Compliance Process
If not resolved at the Preliminary Determination Notice stage, ONRR will issue an Order
You must comply with the Order OR
You must file a Notice of Appeal within 30 days of receiving the Order

22. Unbundling Compliance Process
Perform Transportation and Processing Audits (Non-Arm’s Length)
Verify allowed processing rate per unit cost
Verify allowed transportation rate per unit cost
Calculate UCAs based on reasonable actual costs
Perform Company Audit
Verify allowed processing costs
Verify allowed transportation costs

23. Unbundling Compliance Process
Issues Identified During Compliance Reviews and Audits:
Producers are including unrelated adjustments with their unbundling corrections
When plant thermal reduction fees are taken as part of processing costs, ONRR will review for compliance
When electricity fees are taken as part of processing costs, ONRR will review for compliance

24. Industry Questions
What is the status of Standardized UCAs for Onshore Plants?
We will begin publishing them in FY2017 and FY2018
Will there be different Standardized UCAs for onshore and offshore?
Yes
Will there be different Standardized UCAs for cryogenic vs. lean oil plants?
Will ONRR provide standard deductions (e.g., $0.15/mmbtu) or percentages like current UCAs?
Percentages

25. Industry Questions
How do you use the posted UCA for a plant in which the producer has ownership?
In non-arm’s-length situations, the producer may not use the published UCA (plant-specific or standardized) to unbundle but rather must use the reasonable actual costs. (See 30 CFR §§ (b) and (b) (Federal) and 30 CFR §§ (b) and (b) (Indian).)
When is ONRR going to publish UCAs for other major plants?
Working on Standardized UCAs
Working on expedited data requests and UCA calculations
Need to ensure a base of UCAs for a given area to calculate the Standardized UCA

26. Industry Questions
Please clarify why the compression used to extract NGLs, and exceeds the compression services necessary to place the residue gas into marketable condition is not deductible.
Residue boosting is not allowed.
The UCAs are constantly changing, resulting in prior period adjustments. Why?
There are not many, if any, changes that have occurred in the recent past.

27. Industry Questions
If you are a lessee and plant owner, but not the plant operator, can you use ONRR’s UCAs?
This is very situation-specific. It depends on if you qualify as arm’s-length. You should contact Team C for further assistance.
Recently ONRR posted the UCA for the Opal plant. Will a UCA for the field transportation system be posted in the near future?
There are no plans to unbundle that transportation system at this time.
Is ONRR going to unbundle fractionation plants?
There are no plans to unbundle fractionation plants.

28. Industry Questions
When ONRR posts its UCAs, could ONRR include an explanation of what types of costs are being disallowed (e.g., field compressor, field or plant glycol dehydrator, residue compressor)?
No. ONRR has a legal obligation to not release any proprietary information gathered during our UCA calculations.
Do ONRR’s UCAs allow any compression that is used in transporting or processing the gas that exceeds the compression services needed to place the gas into marketable condition?
Yes, with the exception of boosting. ONRR allows compression once it has reached marketable condition (again, with the exception of boosting.)

29. Contact Information
Linda Shishido-Sheahan (Audit and Compliance Management) Karl Wunderlich (Royalty Valuation, Team C)