DEALING WITH THE NEW MARKETABLE CONDITION RULE John Shepherd Dennis Cameron Holland & Hart GableGotwals
DISCUSSION POINTS 1. The Administrative Record Does Not Support The Conclusion Reached By The Order 2. The Gas Is Marketable At The Well 3. What Is The Purpose For The Service 4. Coalbed Methane Gas vs. Conventional Gas 5. Transportation / Processing Cost Unbundling
DISCUSSION POINT ONE 1. The Administrative Record Does Not Support The Conclusion Reached By The Order The Issue: Conclusory Statements That Gas Is Not Marketable at the well or Gas Is Only Marketable At The Interstate Pipeline The Argument: Press The Point In Response To Issue Letters, FOIA requests, etc. To See The Support For The Conclusion
DISCUSSION POINT TWO Gas Is Marketable A The Well Historical Gas Sales/Marketing Sales to interstate Pipelines Currently - Wellhead Sales Third Party Sales/Purchases At The Well Review Agreements for Fees Develop Magnitude of Volumes Sold
DISCUSSION POINT THREE What is The Purpose For The Service? Compression - No Per Se Rule - Beneficial Lease Use - On or Off Lease Transportation Dealing With Capacity Constraints Line Looping and Associated Compression Treating Preservation of Pipeline Assets
Statutory Background The Mineral Leasing Act of 1920 Requires royalty on a percentage of the amount or value of the production removed or sold from the lease. [30 U.S.C. 226(b) and (c)] From 1920-1974, DOI allowed royaltyfree, beneficial use of gas consumed on the lease.
1974 Attempt to Rescind Beneficial Use USGS issues NTL-4 in 1974, reversing longstanding practice. Attempts to impose royalty on gas used on the lease or unit. NTL-4 challenged in several cases.
NTL-4A Reinstitutes Longstanding Practice No royalty obligation shall accrue on any produced gas which is used on the same lease, same communitized tract, or same unitized participating area for beneficial purposes [44 Fed. Reg. 76,600, Section I (Dec. 27, 1979)]
NTL-4A Defines Beneficial Use Beneficial purposes means that oil or gas which is used on or for the benefit of that same lease, same communitized tract, or same unitized participating area for operating or producing purposes [44 Fed. Reg. 76,600, Section II.B] Examples include: Fuel for compressors to place gas in marketable condition. Fuel for drilling rig engines. Fuel to operate gas processing plants.
Prior Approval of Beneficial Use Certain beneficial uses require prior approval Gas used as circulation medium during drilling operations; Gas reinjected into wells/formations for enhanced recovery operations. Otherwise, prior approval is not required.
Standard Unit Agreement Allows Beneficial Use Section 12 requires that unitized substances allocated back to each lease exclude any part thereof used in conformity with good operating practices within the unitized area for drilling, operating, and other production or development purposes [43 C.F.R. 3186.1]
BLM s Renewed Attempt to Deny Beneficial Use In 2007, BLM again attempted to deny or limit the royalty-free, beneficial use of gas. Relying on an instruction memo, BLM claimed that gas consumed on a unit, downstream of the wellhead, could not qualify for beneficial use.
The Wexpro Decision Wexpro Co., 174 IBLA 57 (2008) IBLA rejects BLM s attempt to deny beneficial use of gas on the unit. Gas was used as fuel for compressors and a JT processing plant within the unit.
The Wexpro Decision When the gas is consumed as fuel within the unit, BLM cannot effectively amend the unit agreement or NTL-4A or the MMS regulations through an internal instruction memorandum to limit beneficial use only to gas consumed as fuel upstream of the POM, particularly where the POMs are at the respective wellheads.
The Plains Decision Plains Expl. & Prod. Co., 178 IBLA 327 (2010) Case involved use of gas off lease; there was no unit. IBLA gives narrow view to for the benefit of language in NTL-4A. Therefore, without BLM permission for off-lease measurement, beneficial use does not apply off lease.
ONRR s Processed Gas Regulations For residue gas and gas plant products, the quantity basis for computing royalties due is the monthly net output of the plant even though residue gas and/or gas plant products may be in temporary storage. [30 C.F.R. 1206.154(b)(1)]
Relationship between Beneficial Use & Marketable Condition Lessees may not deduct costs to make gas marketable. But gas used on the lease or unit to put gas in marketable condition is royalty-free.
DISCUSSION POINT THREE What is The Purpose For The Service? Compression - No Per Se Rule - Beneficial Lease Use - On or Off Lease Transportation Dealing With Capacity Constraints Line Looping and Associated Compression Treating Preservation of Pipeline Assets
DISCUSSION POINT FOUR Conventional Gas Is Not The Same As Coalbed Methane The Issue: Trying To Apply A CBM Marketable Condition Analysis To Conventional Gas The Argument: The Presence Of Valuable NGLs In Conventional Gas And The Additional Deductible Costs To Extract Them Preparing The Gas For Modern Cryo-Genic Process Boosting vs. Processing
DISCUSSION POINT FIVE Transportation / Processing Cost Unbundling The Issue: Unknown / Unsupported Unbundling Of Arm s Length Deductible Charges To Transport And Process Gas The Arguments: Inconsistent With Agency Decisions Unknown Agency Will Not Share The Support Technically Unsupported Numerous Errors In The Analysis, e.g., Inlet Gas Dehydrating / Compression New Topic Arm s Length POP Contracts