The Basics of Regulatory Compliance
Presented by:
Leanna Howell
Denver, Colorado March 18, 2013
Overview
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What is Regulatory Compliance?
Annual Tax Reports
Allowable Deductions for Tax Purposes
Federal & State Royalties
Audits
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Regulatory Compliance v. Regulatory Reporting
• Regulatory Compliance reports production valuation
• Regulatory Reporting reports production volumes
- Volumes reported to State and Federal Agencies from the
Regulatory Reporting Group; must be the same volumes used
for valuation on the Regulatory Compliance side
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Regulatory Compliance Team
• Responsible for the reporting and payment of state taxes along
with Federal and State Royalties
• Work with Revenue Groups for booking accuracy based on
Federal and State Regulations
• Responsible for Federal and State Royalty and Tax Audits by
working with Marketing, Midstream, and Revenue
• Responsible for processing and providing annual reports:
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Print, mail and file 1099-MISC from the Revenue and Land
system
Report 1042’s – Foreign owner equivalent to a 1099
Report the 945 – Federal Backup Withholding
Provide requests made by the Community/Public Relations
Group
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Annual Reports
• 1099-MISC
• Tax ID Numbers
• Void Rental Checks
• 1042 Foreign Owner Withholding
• Withhold 30% of Gross Value
• 945 Federal Backup Withholding
• Owners with no Tax ID number; withhold 28% of Net Value
• DR21W - Colorado Properties Only
• An annual DR21W form is mailed to all owners that have an interest in
wells located in Colorado. This form must report the amount of
Severance tax paid to the State on their behalf. This form must show
both a cash basis and an accrual basis.
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Inputs for Tax & Federal/State Compliance
• Revenue allocation details
• Well detail
• Pricing Spreadsheets, including
deductions
Business
Development
Revenue
Accounting
• Marketing Agreements
• TIK Owners
• Volume Reports
• Meter Points
Regulatory Compliance
Contracts
• Underlying contracts
• Contract Interpretation
Land
Administration
Regulatory
Reporting
• Ownership Details
• Joint Operating
Agreements
Operations
Marketing
Accounting
• Maps/Physical Flow
• Operational Details
Filing Process
Data
Gathering
Tax Due on
$ & Vol.
received
• Market Pricing
• Marketing Value &
Volume Allocation
• Downstream
Transportation
Unprocessed
Gas =
Wellhead
Processed
Gas =
Residue/NGL
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Allowable
Deductions
Prepare
Reports
& Pymt
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Tax Type by State
• Colorado – Severance, Conservation, Ad Valorem
• Wyoming – Severance, Tribal Severance, Conservation, Ad Valorem
• Michigan - Severance
• Utah – Severance and Conservation
• Texas – Severance, Regulatory Fee and Ad Valorem(based on equipment
and reserves)
• Louisiana – Severance, Oilfield Restoration Fee and Ad Valorem(based on
property and equipment)
• Mississippi – Severance and Maintenance Fee and Ad Valorem(based on
property and equipment)
• Kansas – Severance, Conservation Fee, Oil & Gas Resources Fund and Ad
Valorem(based on property, equipment and reserves)
• Oklahoma – Gross Production Tax, Marginal Producing Oil and Gas Wells,
Energy Resources Revolving Fund, Petroleum Oil and Gas Tax and Ad
Valorem Tax(based on property and equipment only)
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Allowable Deductions for Tax Purposes
The determination of the allowable deductions are made by each
state and county through the statutes and regulations.
Transportation and Processing deductions are defined differently in
each state.
• Colorado – Transportation & Processing
• Wyoming – Transportation & Processing
• Michigan – Transportation & Processing
• Utah – Transportation & Processing
• Texas – Marketing Costs
(All costs from wellhead to the sales point, including Lease Use gas)
• Louisiana, Mississippi and Kansas – No deductions are allowed
• Oklahoma – Marketing Costs
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Tribal Severance Tax
• The Tribal Severance tax requires a Dual Accounting method for
processed gas, to determine what price will be used for tax
purposes
– Dual Accounting determines the higher of:
All residue gas and liquid products x residue & liquids pricing,
respectively
OR
Wellhead MMBTU x Published Indian Index price
–There are no deductions allowed for Tribal Tax purposes
• Dual Accounting is also used to determine how Indian Royalties are
paid
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Federal and State
Royalties
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Royalties
• Various types of royalty owners. We focus on Federal and State
• Federal and State have complex components regarding the
payment and reporting of royalties
• Due to the Federal and State complexities, the Regulatory
Compliance Group handles the reporting for these entities
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Federal Regulations & Leases
• Federal regulations are found in the “Code of Federal Regulation” 30 CFR
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At minimum, royalty is owed on “gross proceeds,” less applicable allowances.
[1206.152(h), .153(h)]
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Cost of placing gas into “marketable condition” is not deductible.
[1206.152(i), .153(i)]
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Two allowances: transportation and processing.
[1206.153, .156]
• The Mineral Leasing Act of 1920:
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Competitive leases shall require royalty “at a rate of not less than 12.5 percent
in amount or value of the production removed or sold from the lease.”
[30 U.S.C. § 226(b).]
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Federal leases do not define how royalty is calculated, royalty is based on the
marketing sales contract
Leases incorporate regulations, including regulations adopted later “when not
inconsistent with lease rights granted or specific provisions of this lease”.
[BLM
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Form 3110-11 (July 2006).
Settlement agreements, valuation agreements, and express lease terms
supersede regulations.
[1206.150(b)]
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Considerations for Deductions
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The Marketable Condition Rule
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Lessee must bear all costs to place gas into “marketable condition”
Gas is in marketable condition when “sufficiently free from impurities
and otherwise in a condition that [it] will be accepted by a purchaser
under a sales contract typical for the field or area.”
[1206.151]
Marketable condition is dependent on a variety of factors and open to
interpretation
• Gathering
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“Gathering” is not transportation
“Gathering” is the movement of gas “to a central accumulation and/or
treatment point on the lease, unit, or communitized area”
[1206.151]
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Allowable Deductions
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Transportation Allowance
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Where value is determined at point off lease (including a plant), transportation allowance
may apply
Generally limited to 50% of gross value
[1206.156(c)]
Arms Length Contract or agreement between independent , “nonaffiliated persons with
opposing economic interests”
Example: Company ABC contracts with a third party processing plant that is owned by Company
123
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Non-Arms Length contract or agreement with affiliated companies:
Example: Company ABC has Ownership of the Processing Plant Facilities
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Processing Allowance
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Processing means “any process designed to remove elements or compounds from gas.”
Royalty generally due on 100% of residue gas. Processing allowance applies to the
NGL’s (general limited of 2/3 of NGL gross value less transportation)
[1206.158(c)]
A Percentage of Proceeds Contract (POP) is for the sale of gas prior to processing, where
the value of the gas is based on a percentage of the purchaser’s proceeds resulting from
processing
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Dual Accounting
• Required on federal leases where (i) lessee or affiliate processes
the gas and (ii) after processing, residue gas not sold arm’slength
• Dual Accounting determines the higher of:
Residue gas and liquid products x residue and liquids pricing,
respectively
OR
Wellhead MMBTU x Index price
•
Where required, royalty paid on higher of processed or unprocessed
gas value
[1206.155]
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Volume on Which Royalty is Due
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For unprocessed gas, use volume measured at BLM royalty settlement
point
[1206.154(a)]
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For processed gas, use net output of plant
[1206.154(b)]
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No royalty due on gas used on or for benefit of lease or unit, or
unavoidably lost
[1202.150(b), .151(b)]
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Federal & State Filing Inputs
• Federal & State Lease Numbers (Drillsite Lease)
• Participating Agreement Numbers & Leases involved with the
allocation (Exhibit B)
• Communitization Agreement Numbers & Leases involved with the
allocation (Exhibit B)
• Royalty Rates for the Leases
• Sliding Scale Royalty Leases
• TIK Parties and their Leases
• Terminated or segregated Leases and Dates
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Monthly Report - ONRR-2014
• The Form ONRR-2014 is the “Report of Sales and Royalty
Remittance” and is used to report and document royalties
(revenues) and other obligations due on Federal and Indian oil and
gas leases, as well as on geothermal leases
• When filing the ONRR-2014 the details of royalty payments and
sales of minerals are documented. The report is filled out by the
“payor” (the oil and gas company that operates the lease) and is
sent to ONRR
• To report all details accurately, each product of the monthly
production volume must be broken out and reported separately.
For example when reporting gas; the Residue Gas, Natural Gas
Liquids (NGL’s) and Wellhead volumes and values must be
reported and paid on an individual basis
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Audit
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Audit Types
• Production Tax
• Examination of financial records to ensure production taxes have been
collected, remitted or paid as required
• Federal and State Royalty
• Examines how oil and gas royalties were computed and paid on for a
specific time period and largely focuses on deductions
• The statue of limitations varies depending on the entity conducting
the audit and the scope of the audit
• For example ONRR has a 7 year statute of limitations. While a State
has a 3 year statute of limitations
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Generally Required Audit Documents
• Division of interest documents and non-operator agreements
• Pricing documents, processed gas purchase and sales contracts,
transportation contracts, invoices and meter statements
• Site schematics to show where and how production and sales are
measured
• Processing plant statements, processing operations, including the
plant name, location, sales, and transportation of production from
the leases
• Source documents such as internal audit worksheets, purchaser or
settlement statements, revenue spread sheets, etc. that support
the submitted Form ONRR-2014
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Data Requested for Tax and Royalty Compliance Audits
• Contracts, Business
Development and
Operations – are pulled into
audit discussion when
needed, but do play a
significant role in the
payment of royalties
• Land Administration –
Provides ownership details
as it pertains to Federal and
State Royalty payments
• Marketing Accounting –
provides the market price
received and the downstream
transportation costs to get
the product to market
• Regulatory Reporting –
provides wellhead volumes
as reported to Federal and
State Agencies
• Revenue Accounting –
compiles and provides well
detail information used in the
distribution process
• Revenue allocation details
• Well detail
• Pricing Spreadsheets, including
deductions
Business
Development
Revenue
Accounting
• Marketing Agreements
• TIK Owners
• Volume Reports
• Meter Points
Regulatory Compliance
Contracts
• Underlying contracts
• Contract Interpretation
Land
Administration
Regulatory
Reporting
• Ownership Details
• Joint Operating
Agreements
Operations
Marketing
Accounting
• Maps/Physical Flow
• Operational Details
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• Market Pricing
• Marketing Value &
Volume Allocation
• Downstream
Transportation
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Questions?
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