The ONRR defines unbundling as the process of taking gas transportation and/or processing fees in an “arm’s length” situation and determining the allowed and disallowed costs for Royalty Reporting and Payment. This process involves determining the point at which your gas satisfies the marketable mondition rule. Along with providing the ONRR with a methodology as proof, you have properly distinguished allowed versus disallowed costs. The ONRR demands that the industry properly report and pay royalties and to correctly calculate transportation and processing allowances.
Here at Creel, we have educated ourselves on the complicated process that is called “unbundling”. We rely not only on our internal knowledge of the subject, but also on third-party experts and relationships with the ONRR. We focus on developing alternative methodologies for unbundling disallowed costs. Our methodologies focus on your specific gas stream to ensure that we are maximizing your allowed deductions. We begin with an in-depth review of your gas from the well head to the tail gate of the plant. Once we determine the interstate pipelines for which your gas has the ability to enter, we prepare a process flow diagram that details the movement of your gas into the plant. At this point, we segregate the unbundling process into two parts: 1) transportation costs and 2) processing costs.
Examples of disallowed costs:
- CO2 Removal
- Buried Marketing Fees
Upon collecting all the necessary data for the transportation system and processing plant, we begin to develop an alternative unbundling methodology and UCA (Unbundled Cost Allocation). This methodology is submitted to the ONRR’s unbundling team for review. Once approved, we apply the UCAs to your royalty calculations.
Gas is not in marketable condition until it is of the quality and pressure acceptable to the primary market within which it is sold. This typically refers to the quality and pressure specs of the interstate pipelines where your gas is delivered. The Burlington decision (court case) outlined what is required of producers if they decide to take transportation and processing allowances and is detailed below:
- You must show any costs you deduct were incurred only to transport and process the gas and were not necessary to place your gas in marketable condition.
- Lessees have the burden of establishing that gas is in marketable condition and where that occurs.
The marketable condition rule applies to POP contracts.
The marketable condition regulation was originally promulgated in 1942. It is defined as lease products that 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. This means lessees are required to put the gas into marketable condition and pay royalties on the gross value of the gas without deduction for the costs of treatment. (30 C.F.R 1206.153(i))