Transcript Document

U.S. Department of Interior
Office
Revenue
(ONRR)
OfficeofofNatural
NaturalResources
Resources
Revenue
The Marketable Condition Rule
Carrie Wallace, Esq.
Appeals Analyst, Office of Enforcement and Appeals
PASO Federal/Indian Royalty Compliance Workshop
February 12, 2015
Industry Compliance
Accurate Revenues & Data
Professionalism & Integrity
U.S. Department of Interior
Marketable
Condition
–Revenue
The
Regulation
Office
ofofNatural
Resources
(ONRR)
Office
Natural
Resources
Revenue
The lessee must place gas in marketable condition at
no cost to the Federal Government. 30 C.F.R. §
1206.152(i) (federal gas), § 1206.174(h) (Indian gas)
o If a lessee sells “unmarketable” gas at a lower cost,
the lessee must increase the gross proceeds for
purposes of royalty calculation “to the extent that
the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain
services” to place the gas in marketable condition.
30 C.F.R. § 1206.152(i) (federal gas), § 1206.174(h)
(Indian gas)
o
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U.S. Department of Interior
Marketable
– The
Definition
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o
Marketable condition means “lease
products which are sufficiently free from
impurities and otherwise in a condition
that they will be accepted by a
purchaser under a sales contract typical
for the field or area.” 30 C.F.R. §
1206.151 (federal gas), § 1206.171
(Indian gas)
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U.S. Department of Interior
What
Processes
are
Covered?
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Treating gas to put it into marketable condition involves:
o Gathering - the movement of lease production to a central
accumulation and/or treatment point on the lease, unit, or
communitized area, or to a central accumulation or treatment
point off the lease, unit, or communitized area as approved by
BLM or BSEE operations personnel for onshore and OCS leases,
respectively.” 30 C.F.R. § 1206.151 (federal gas), § 1206.171
(Indian gas)
o Compression – means the process of raising the pressure of the
gas. 30 C.F.R. § 1206.151(federal gas), § 1206.171 (Indian gas)
o Dehydration – the removal of water vapor
o Removal of acid gases – usually the removal of hydrogen sulfide
or carbon dioxide (“sweetening”)
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U.S. Department of Interior
Principles
from
MCR (ONRR)
Cases
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Lessees must compress, gather, and dehydrate gas at no cost
to the lessor. The Texas Co., 64 I.D. 76 (1957); California Co. v.
Udall, 296 F.2d 384 (D.C. Cir. 1961); Devon Energy Corporation v.
Kempthorne, 551 F.3d 1030 (D.C. Cir. 2008), cert. denied,130 S. Ct.
86 (2009)
o
Lessees must remove (sweeten) sulphur and carbon dioxide
(CO2) at no cost to the lessor. Apache Corp.,127 IBLA 125
(1993); Texaco, Inc. v. Quarterman, No. 96-CV-008J (D. Wyo. Aug.
20, 1996); Amoco Prod. Co. v. Watson, 410 F.3d 722, 725 (D.C. Cir.
2005), aff'd sub nom., BP Amoco Prod. Co. v. Burton, 549 U.S. 84
(2006)
o
The lessee cannot deduct what it pays another entity to
perform the processes necessary to place the gas into
marketable condition. Placid Oil Co., 70 I.D. 438 (1963); Exxon
Co. USA, 121 IBLA 234 (1991)
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U.S. Department of Interior
Principles
from
MCR (ONRR)
Cases
Office
ofofNatural
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OfficeMajor
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If a purchaser agrees to accept untreated gas it does not
mean the gas was marketable in its natural state. In other
words, if you sell or transfer title at the wellhead it does not
mean the gas is in marketable condition at the wellhead.
California Co., Amoco, and Devon
o The fact that a marketable condition cost may also be a
part of processing does not make it a deductible processing
cost. Shoshone & Arapaho Tribes v. Hodel, 903 F.3d 784
(10th Cir. 1990)
o
•
o
The same principle applies to a marketable condition cost that
also facilitates transportation
There is no “geographic limitation” to the marketable
condition rule, except for gathering. Amoco and Devon
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U.S. Department of Interior
Principles
from
MCR (ONRR)
Cases
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o
o
o
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If a lessee sells some gas that meets the definition of marketable
condition for a particular market, that does not mean all gas sold is sold in
marketable condition. One must look to the market into which the gas at
issue is sold to determine what marketable condition is for that gas.
Amoco, Devon, and Beartooth Oil and Gas Co. v. Lujan, No. CV 92-99-BLG
(D. Mont. Sept. 22, (1993)
Marketable condition means gas treated so that it is marketable for
delivery to the pipeline. Amoco, Devon, R.E. Yarbrough Co., 122 IBLA 217,
221 (1993), Shoshone, The Texas Co., J-W Operating Co.,159 IBLA 1 (2003)
You only have to reach marketable condition once. Devon. However, you
can never deduct boosting. Devon
Gas may be in marketable condition at the wellhead if there is a market at
the wellhead evidenced by competing offers from multiple purchasers, the
sales price is the same as that for gas that is compressed, and the pressure
of the gas at the wellhead is adequate to gain access to the pipeline
market. Xeno, Inc., 134 IBLA 172 (1995)
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U.S. Department of Interior
Principles
from
MCR (ONRR)
Cases
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ofofNatural
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Revenue
OfficeMajor
Natural
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Because one must look to the market into which the gas is sold, one must
look at the contracts that are “typical” for gas sold to that market
o
o
Amoco – the regulations do not require ONRR to define typical sales
contracts – and thus marketable condition – as relating to transactions at
the leasehold or immediately nearby
Devon – the court rejected Devon’s argument that ONRR did not look at
contracts “typical for the field or area” because it only looked at Devon’s
contracts for the particular gas sold. Like the lessees in Amoco, Devon
asserted that ONRR defines marketable condition as meaning gas
conditioned for the market it serves. That is true because the “typical”
contracts for the area in Devon were for treated gas, i.e. the market was
for treated gas. In Devon, like California Co., “there is no evidence of a
market for the gas in the condition it comes from the wells. The only
market this record shows was for this gas at certain pressure and certain
minimum water and hydrocarbon content.”
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U.S. Department of Interior
Principles
from
MCR (ONRR)
Cases
Office
ofofNatural
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Revenue
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Lessees must offer affirmative evidence to support an assertion
the costs of compression, dehydration, and treatment are not
necessary to place the gas in marketable condition or that the gas
was already marketable prior to compression, dehydration, and
treatment
Burlington Res. Oil & Gas Co. Lp v. United States DOI, No. 13-CV-0678-CVETLW, 2014 U.S. Dist. LEXIS 100900 (N.D. Okla. July 24, 2014) (affirming
decision in 183 IBLA 333 (2014) – in Burlington, Burlington claimed that its
gas was in marketable condition at the wellhead and it was entitled to deduct
100 percent of the costs of acid gas removal, compression, and dehydration a
third party performed. The IBLA held the “burden rests properly on the
lessee to demonstrate that these costs [of compression, dehydration, and
sweetening] were not necessary to place the unprocessed gas in marketable
condition and incurred only to transport and process its gas.”
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QuestionsRevenue
Office of Natural Resources
1. Can you explain the unbundling compliance
reviews that are going to start in FY 2015?
What is the anticipated timeframe from
companies to research and respond to these
reviews? If a company is not able to
unbundle before the deadline, what are the
next steps?
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Office of Natural Resources
2. How are “sales contracts typical for the field
or area” being applied in determining
marketable condition? Is it the lessee’s sales
contracts or other producer’s contracts in the
field or area of both?
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QuestionsRevenue
Office of Natural Resources
3. As reflected in ONRR’s example on “How to calculate
a Transportation UCA,” is the lessee required to place
the gas into marketable condition prior to being able
to deduct any compression charges for transportation
and/or processing, or can they determine where and
how they place the gas into marketable condition
based upon the actual function of the compressor?
By requiring the lessee to place the gas into
marketable condition prior to allowing any deductions
for compression results in ONRR disallowing
compression actually used for transportation and
processing purposes?
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QuestionsRevenue
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4. If the processed gas regulations require the
lessee to place the residue and gas plant
products in to marketable condition, why in
the ONRR unbundling examples, are they
also being required to place the gas into main
pipeline specs before it is processed when
the unprocessed gas is not being sold and the
processed gas contracts do not require it?
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QuestionsRevenue
Office of Natural Resources
5. If a lessee sells their unprocessed gas at the
well under a POP contract, why does ONRR
require them to place the unprocessed gas
into the same marketable condition as
residue gas when they are not selling residue
gas?
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QuestionsRevenue
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6. If residue is marketable at the tailgate of the
plant, aren’t the NGLs also marketable at the
at tailgate?
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U.S. Department of Interior
Office
Revenue
(ONRR)
OfficeofofNatural
NaturalResources
Resources
Revenue
Contact:
Carrie Wallace
303-231-3658
[email protected]
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Industry Compliance
Accurate Revenues & Data
Professionalism & Integrity