Indian Oil Negotiated Rulemaking Committee Update

Kevin BarnesPetroleum Accountants Society of OklahomaFebruary 12, 2015 Indian Oil Negotiated Rulemaking CommitteeFirst notice of intent to form the committee printed in Federal Register January, 31, 2011

Second notice published August 22, 2011

Notice of establishment of the committee published in the Federal Register December 8, 2011

Appointed COPAS committee representative December 23, 2011Charter: The Committee will advise the Office of Natural Resources Revenue (ONRR) on a rulemaking to address Indian oil valuation, as it relates to the major portion requirement in Indian oil and gas leases

Scope of the Committee limited to the major portion calculation for oil produced from Indian leases. Committee is to Act Solely in an advisory capacity to ONRR

Committee members (excluding alternates):1 Designated Federal Officer (ONRR)2 Facilitators (CDR Associates)4 Federal Government (3 ONRR & 1 BIA)7 Indian (Tribal & Allottee Associations) 6 Industry (Trade Associations and Companies)

Total of nine Committee meetings held from May 2012 through September 2013.

First meeting May 1 & 2, 2012

History of Indian oil valuation rule

Overview of Indian oil production

Indian sales statistics

Indian oil administrative process

Second meeting June 18 & 19, 2012

Overview of Federal government trust responsibility to maximize revenues for royalties from Indian leases

Overview of crude oil flows, prices and market differentialsPervis & Gertz Argus Platts

Overview of sample major potion analysis and correlation to other initial proposals

Third meeting August 1 & 2, 2012

Presentation of major portion analysis normalized for quality (API gravity)

Overview of previously proposed Indian oil valuation rules

Methods of calculating a major portion price discussed

Fourth meeting September 5 & 6, 2012

Presentation of three potential approaches to major portions price calculationONRR calculated major portion methodologyHigher of gross proceeds or an index price methodology based on NYMEXIndex priced methodology based on NYMEX

Fifth meeting October 24 & 25, 2012

Presentation of sample major portion analysis at the reservation level and field level at 50% +1 barrel and 75% for two reservations

Key issues discussed Could economic factors be analyzed to determine if certain fields could be combined?If a field has < 3 payors ONRR constrained from publishing a major portion price because it basically results in sharing a companys proprietary financial informationAdministrative factors involved in capturing field level information and performing calculations at that levelCrude type, can this be subjective? Is quality all that must be considered?Ad Hoc Subcommittee formed and tasked to

Identify field names on Indian reservationsOklahoma not included due to number of fields

Obtain information on the number of leases and payors per field. Identify instances of < 3 payors

Provide initial recommendations on where fields may be combinedSixth meeting April 17 & 18, 2013

Presentation on action items from prior meetingIdentify field names on Indian reservationsInformation on the number of leases and payors per field Identifying instances of < 3 payorsInitial recommendations on where fields may be combined

ONRR provided rationale for requiring at least 3 payorsTrade Secrets ActMust perform a major portion calculation

ONRR provided rationale for use of designated areasPrecedent for use of designated areas to provide reasonable sample of arms length contracts

Formed Ad Hoc Subcommittees to look at

Designated AreasOklahomaFt. BertholdUinta/OurayWind River

Crude type / API gravity reporting

Sub-committees gathered information and discussed issues, however full committee made final deliberations

Designated area considerationsMarkets servedSimilar GeographyNumber of payorsCrude type

Crude type / API gravity reporting considerationsDifferent crude typesSystem requirementsFrequency (one-time / monthly)Utilizing OGOR reported API gravityFMP / sales point gravityReporting by non-operatorsSeventh meeting June 4 - 5, 2013

Review of Tribes/Allottees/ONRR straw man proposal

Reviewed recommendations from the Ad Hoc Subcommittees.

Prepared a revised straw man proposal to consider for the next meeting

Eighth meeting August 6 - 7, 2013

Reviewed proposal from prior meeting and further discussedTransportation/Location DifferentialPremium applied to Index-Based Price formula Tribal/Allottee opt-out option

Created proposal to present to constituencies

Bob Wilkinson sent out to COPAS members 9/3/2013

Major Portion 75% from the top

Designated area reservation boundary exceptFort Berthold 2 Areas North and South of Little Missouri RiverUintah & Ouray 2 areas Uintah and Grand Counties / Duschesne County

Value reported on the higher ofIndex Based Formula PriceGross proceeds

Crude type reported monthly on Form ONRR-2014No reporting of API gravityNinth meeting September 16, 2013

Last meeting of the CommitteeAfter discussion each Committee Member was asked if they could support the ruleAll members affirmed but one member, whos objection was added to the Final Committee Report

Agreement to the final proposal by the committee based on

Filing simplicity - only one value is reported Must include crude type on Form ONRR-2014 but not API gravity

Filing certainty - major portion not calculated over a year after the close of year, resulting in significant adjusted filings

Assurances in the calculation of the index that Tribes/Allottees receive major portion

Final Report of the Indian Oil Valuation Negotiated Rulemaking Committee Published on September 30, 2013

ONRR began the process of drafting the proposed rule

Proposed rule published in the Federal Register June 19, 2014

Comments due byAugust 18, 2014COPAS provided comments on the proposed rule on August 11, 2014

COPAS provided comments on the proposed rule on August 11, 2014

In the proposed rule, ONRR reserved the ability to eliminate or redefine how the roll is calculated. This change would be published in the Federal Register.

COPAS provided comments on the proposed rule on August 11, 2014

In the proposed rule, ONRR reserved the ability to eliminate or redefine how the roll is calculated. This change would be published in the Federal Register.

COPAS commented that in this case Industry should also be given the opportunity to comment on the proposed change.COPAS provided comments on the proposed rule on August 11, 2014

In the proposed rule, ONRR reserved the ability to eliminate or redefine how the roll is calculated. This change would be published in the Federal Register.

COPAS commented that in this case Industry should also be given the opportunity to comment on the proposed change.

Additional COPAS comments on items that were not a part of the Negotiated Rulemaking Committee.

COPAS provided comments on the proposed rule on August 11, 2014

Rather than filing Form ONRR-4410, Oil Transportation Allowance Report, lessee would submit copies of armslength transportation contracts and any amendments within 2 months after the lessee reported a transportation allowance on its Form ONRR-2014. For non-arms length transportation, lessee must submit Form ONRR-4410, with actual cost information, within 3 months after the end of the 12 month period to which the allowance applies. These changes would mirror the Indian Gas rule.COPAS provided comments on the proposed rule on August 11, 2014

COPAS supports this change but requested further guidance 1 What is the required format in which contracts must be provided? (hardcopy, email, flash drive)2 What needs to be provided for FERC tariffs / transportation factors for which there are no transportation contracts?3 Does this apply to mainline transportation which could have hundreds of contracts when it is tied to a price pool?COPAS provided comments on the proposed rule on August 11, 2014

The proposed rule eliminates the ability to net an arms-length transportation fee with gross proceeds, requiring lessees to report as a transportation allowance.

COPAS provided comments on the proposed rule on August 11, 2014

The proposed rule eliminates the ability to net an arms-length transportation fee with gross proceeds, requiring lessees to report as a transportation allowance.

COPAS does not support eliminating transportation factors as that would not be consistent with Indian Gas regulations which state that ONRR will not consider the transportation factor to be a transportation allowance. This would also be a major recording change as the pricing adjustment is typically accounted for as part of the base price within our accounting systems.COPAS provided comments on the proposed rule on August 11, 2014

The proposed rule would eliminate any language around requesting approval to exceed the 50% transportation allowance. ONRR states that no one has ever made this request.

COPAS provided comments on the proposed rule on August 11, 2014

The proposed rule would eliminate any language around requesting approval to exceed the 50% transportation allowance. ONRR states that no one has ever made this request.

COPAS does not support the elimination of the capability to request to exceed the 50% as it would not be consistent with the Indian Gas regulations. Also, although no one has requested to do so previously, a situation could develop where it would exceed the 50% limit. If this would happen, the lessee should be allowed to request approval to exceed the 50% limit.COPAS provided comments on the proposed rule on August 11, 2014.

The final rule has not been published. At this time we do not know if or how COPAS comments will be addressed in the final rule.Indian Oil Valuation Negotiated Rulemaking Committee Meeting AnnouncementsMembersDocumentsMeeting MaterialsProposed Rule

http://www.onrr.gov/Laws_R_D/IONR/