1. Office of Natural Resources Revenue Office of Natural Resources Revenue (ONRR) U.S. Department of Interior Indian Oil Valuation Proposed Rule and Other Indian Valuation Issues Presented by: John Barder, Program Manager Central Audit and Compliance Management Petroleum Accountants Society of Oklahoma February 11 & 12, 2015 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

2. Office of Natural Resources Revenue o Current Indian Oil Valuation rule was published in December 2007, and made effective February 1, 2008 o Left the major portion provision unchanged from the March 1, 1988 rule o Eliminated reliance on oil posted prices for non-arm’s- length sales by eliminating non-arm’s-length benchmarks o Proposed to convene a negotiated rulemaking to address the major portion provision of the rule 2 Current Indian Oil Valuation Rule

3. Office of Natural Resources Revenue o Established under the Federal Advisory Committee Act of 1973 (FACA) to advise ONRR on the calculation of major portion o Membership included members from oil producing tribes, Indian mineral owner associations, industry, BIA, and ONRR o Charter signed by Secretary Salazar on December 1, 2011 o Committee concluded its work on September 17, 2013 3 Indian Oil Valuation Negotiated Rulemaking Committee

4. Office of Natural Resources Revenue The proposed rule adopts the Committee’s agreement to satisfy the Indian lease major portion provision as follows: For each designated area, the value of oil for royalty purposes would be the higher of: 1) Index-Based Major Portion (IBMP) value NYMEX CMA adjusted for a designated area-specific Location and Crude Type Differential (LCTD) Plus/minus roll (for Oklahoma only) – The roll is defined at 30 CFR 1206.101 2) Gross proceeds ONRR is targeting May 1, 2015 as a publication date which would trigger an effective date of June 30, 2015 (60 days after publication) 4 Committee Agreement

5. Office of Natural Resources Revenue o ONRR will calculate the IBMP value using the NYMEX Calendar Month Average (CMA) (excluding weekends and holidays) for each designated area - adjusted for a Location and Crude Type Differential (LCTD) (NYMEX CMA Price) X (1 – LCTD) Oklahoma only = (NYMEX CMA Price +/- Roll) X (1 – LCTD) o On a monthly basis, ONRR will publish on the ONRR website, the IBMP value for each designated area and crude oil type o ONRR will publish the IBMP prices by the middle of the month for reporting at the end of the month o Estimates can be used to gain an additional 30 days to report your Indian oil royalties. Contact your “Reporter Contact” person for help setting up an estimate 5 Index-Based Major Portion (IBMP)

6. Office of Natural Resources Revenue o A breakdown of the new Indian oil product codes reported for the month of October 2014 for all Indian oil producing areas is listed below; (61) - Sweet Crude – 86.86% (62) - Sour Crude – 2.16% (63) – Asphaltic – 0.12% (64) - Black Wax – 6.87% (65) - Yellow Wax – 3.77% *(02) – Condensate – 0.22% o Based on October 2014 report month, there is a potential of 28 different pricing formulas for Indian oil across all designated areas * Condensate is not a new product code, however a formula price will be calculated per each designated area where condensate is reported 6 New Indian Oil Product Codes

7. Office of Natural Resources Revenue o Difference in value between the average of the monthly NYMEX Calendar Monthly Averages (CMA) for the previous 12 months and the average of the monthly Major Portion Prices for the previous 12 months for a designated area (for each crude oil type) o Captures the difference in value due to location and quality differences between Light Sweet Crude (WTI) at Cushing, Oklahoma (NYMEX) and crude oil types in each designated area o Ensures that the IBMP price closely reflects a 25 th percentile (from the top) major portion value of a particular crude type within the applicable designated area o ONRR will monitor the LCTD for each designated area on a monthly basis to ensure tribes continue to receive approximately a 25 th percentile (from the top) major portion value 7 Initial Location and Crude Type Differential (LCTD)

8. Office of Natural Resources Revenue o ONRR determined Designated Areas based on the following factors: Markets served (where) Access to market (how) Access to similar infrastructure (e.g., refineries, pipelines, rail lines) Similar geography (e.g., no challenging geographical divides such as large rivers) o The Committee agreed and in the proposed rule, the Designated Area is the reservation boundary except for Fort Berthold and Uintah & Ouray Reservations: Fort Berthold – 2 Areas: North and South of the Little Missouri River Uintah & Ouray – 2 Areas: Uintah and Grand Counties; Duchesne County 8 Determining a Designated Area

9. Office of Natural Resources Revenue Calculating MP for any given month, designated area, and crude type Lease NumberPayor/LesseeSales VolumeCumulative VolumePercent of VolumeSales Price LEASE 1Company A3,900 7.80%$86.26 LEASE 2Company B3,7007,60015.20%$85.23 LEASE 3Company C4,30011,90023.80%$84.31 LEASE 4Company D3,20015,10030.20%$83.10 LEASE 5Company E1,66016,76033.52%$82.90 LEASE 6Company F3,00019,76039.52%$81.00 LEASE 7Company G4,20023,96047.92%$80.25 LEASE 8Company H3,20027,16054.32%$79.80 LEASE 9Company I6,50033,66067.32%$79.10 LEASE 10Company J3,94037,60075.20%$78.05 LEASE 11Company K7,00044,60089.20%$78.00 LEASE 12Company L5,40050,000100.00%$77.50 Total50,000 9 How ONRR Calculates a Major Portion Price

10. Office of Natural Resources Revenue 10 LCTD = ($13.60/$95.12) = 0.1430 or 14.30% How ONRR will Calculate the Initial LCTD for a Designated Area and Crude Type

11. Office of Natural Resources Revenue 11 Assuming July 2015 is the first month the rule is in effect: How ONRR will Calculate the IBMP value with the Initial LCTD o If the lessee’s gross proceeds less transportation for July 2015 is $86.50/bbl The lessee would report and pay royalties on $86.50/bbl – their gross proceeds o If the lessee’s gross proceeds less transportation for July 2015 is $85.50/bbl The lessee would report and pay royalties on $85.97/bbl – the IBMP value for July 2015

12. Office of Natural Resources Revenue o If monthly oil sales volumes not reported under STC OINX by designated area and crude type fall below 22%, we will increase the LCTD by 10% every month until volumes are back between 22% - 28% o In the table on the following slide, the percent of volume, not reported as OINX, is less than 22%, which triggers a modification to the LCTD o We will adjust the LCTD upward by 10% (14.30% x 1.10) o The next month’s LCTD will by 15.73% o The next month’s IBMP value will equal the month’s NYMEX CMA multiplied by (1 minus 0.1571) or 84.29% 12 Adjustment of the LCTD Going Forward

13. Office of Natural Resources Revenue LeaseSales VolumeUnit PriceSales Type Code Cumulative Volume Percent of Volume 122086.50ARMS2209.02% 227586.25ARMS49520.29% 340085.97OINX89536.68% 442585.97OINX1,32054.10% 537085.97OINX1,69069.26% 640085.97OINX2,09085.66% 735085.97OINX2,440100.00% 2,440 13 o Differential adjustment when ARMS sales volume for the current month falls below 22% of the total monthly sales volume Adjustment of the LCTD Going Forward

14. Office of Natural Resources Revenue o If monthly oil sales volumes not reported under STC OINX by designated area and crude type is above 28%, we will decrease the LCTD by 10% every month until volumes are back between 22% - 28% o In the table on the following slide, the percent of volume not reported as OINX is greater than 28%, which triggers a modification to the LCTD o We will adjust the LCTD downward by 10% (14.30% x 0.9) o The next month’s LCTD will by 12.87% o The next month’s IBMP value will equal the month’s NYMEX CMA multiplied by (1 minus 0.1285) or 87.15% 14 Adjustment of the LCTD Going Forward

15. Office of Natural Resources Revenue LeaseSales VolumeUnit PriceSales Type Code Cumulative Volume Percent of Volume 123086.50ARMS23011.06% 227586.25ARMS50524.28% 317586.00ARMS68032.69% 425085.97OINX93044.71% 542585.97OINX1,35565.14% 632585.97OINX1,68080.77% 740085.97OINX2,080100.00% 2,080 15 o Differential adjustment when ARMS sales volume for the current month is above 28% of total monthly sales volume Adjustment of the LCTD Going Forward

16. Office of Natural Resources Revenue o Major portion prices calculated under the current Indian Oil rule’s major portion provision o Current major portion provision for Indian oil has not changed since March 1, 1988 o Calculated for each month on a field or area basis by: Arraying all oil sales from highest price to lowest price Sum the sales volumes starting from the bottom The unit price, associated with the royalty line that exceeds 50% plus 1 Barrel by volume, is the major portion price 16 Indian Oil Major Portion Initiative 2002-2015

17. Office of Natural Resources Revenue How ONRR Calculated the Major Portion Prices for Each Month, for Each Field or Area 17

18. Office of Natural Resources Revenue o Unlike the Indian Gas Valuation rule that has a provision to delay interest calculation until 60 days after the publication date of the major portion prices, for Indian oil major portion, under the current rule there is no such provision o Late payment interest for additional royalty due to Indian oil major portion will be assessed under 30 CFR 1218.54 back to the date the additional royalty was due 18 Indian Oil Major Portion Initiative 2002-2015

19. Office of Natural Resources Revenue 1)Are Form ONRR-4410 filings reviewed when they are filed by industry? 2)For the Form ONRR-4110 – Indian oil transportation, how do you get the S&P BBB bond rate and is it the 5, 10, or 15 year bond rate? 3)Is ONRR going to correct its Alternative Dual Accounting program logic to calculate a non-product specific weighted average Btu by lease? Regulations call for lease level not product level calculations 19 Other Indian Oil and Gas Royalty Reporting Issues

20. Office of Natural Resources Revenue 4)For Indian gas transportation, industry is required to provide copies of their arms-length transportation contracts, what is the required format? (i.e. hardcopy, email, flash drive) 5)What needs to be provided for FERC tariffs and/or other transportation factors for which there are no “transportation contracts”? 6)Does this requirement also apply for mainline transportation which could have hundreds of contracts when it is tied to a pool price? 7)Does ONRR review Form ONRR-4110 regulatory filings when they are submitted and notify the filer of any requirement for corrections or omissions? 20 Other Indian Oil and Gas Royalty Reporting Issues

21. Office of Natural Resources Revenue Office of Natural Resources Revenue (ONRR) U.S. Department of Interior 21 Industry Compliance Accurate Revenues & Data Professionalism & Integrity Contact Us: John Barder Program Manager Central Audit and Compliance Management John.Barder@onrr.gov (303) 231-3702