Reporter Online Training Housekeeping - PowerPoint Presentation

1. Reporter Online Training HousekeepingAll participants will be muted upon joining the training due to the large class size.Please use the chat feature to ask any questions. If you require closed captioning, you can turn it on by clicking on the three dots (more), scroll down to CC. Once you click on CC the closed captioning will be on. Some of our presenters will be using closed captioning for their presentations.1

2. DisclaimerThese training materials are offered in a training scenario to serve as guidance for Federal and Indian oil, gas, and coal lease/agreement operators (onshore and offshore) to assist in determining value for royalties. Because reporting and valuation circumstances vary from lessee to lessee, be advised that these training materials may not precisely reflect your valuation scenario. Accordingly, these general materials should not be construed as setting binding or enforceable policy.Reliance on this guidance does not prohibit ONRR from future compliance activities or auditing of your reporting based on your use of the information contained within or from directing you to report and pay in a different manner based on an application of federal law to your unique factual circumstances. These training materials do not constitute an appealable decision or order under 30 C.F.R. 1290, Subpart B. If you have any questions, please contact April Lockler – April.Locker@onrr.gov.2

3. Reporter TrainingAugust 2022:Basic Leases & Agreements

4. AgendaWhat Does Reference Data Do?Federal Lease and Agreement BasicsLease TermsAgreement Rule of CaptureIndian Lease and Agreement Basics 4

5. Reference & Reporting Management (RRM)Royalty Form 2014 (royalties - payors)ProductionOGOR (production - operators)Reference DataMaster Lease Data5

6. Reference DataEstablish and maintain lease and agreement information within ONRR’s financial databaseIdentify and resolve reporting and database inconsistencies Ensure information is accurateReporters (Industry)BLM/BIA/BOEM/BSEEONRR6

7. Areas of Reference7Areas of Reference include:Federal OnshoreFederal OffshoreIndian OnshoreSolid Minerals (includes both federal and Indian)Geothermal (includes both federal and Indian)Today we will be talking about:Onshore federal and Indian oil & gas leases and agreements

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9. Onshore Federal Leases

10. Life of a Lease10 Lease IssuedBonus & 1st Year RentCollectedSubsequent Rent Collected1st Production Notice IssuedProducing LeaseRoyalty ReportingLease ExpirationFederal Onshore BLM BLM ONRRBLMONRRBLM Federal Offshore BOEM ONRR ONRRBSEEONRRBOEM Indian BIA BIA BIABLMONRRBIA

11. Lease Number ConversionsONRR converts the alpha-numeric agency assigned lease number into a 10-digit ONRR lease number BLM/BIA/BOEM ONRR Number Converted Number WYW0308789 = 0483087890 (Onshore) WYW96584 = 0490965840 (Onshore) OCS-G27591 = 0540275910 (Offshore) 14-20-H62-6510 = 5090065100 (Indian)11

12. Cross Reference Listings http://www.onrr.gov/ReportPay/CrossRef.htm

13. Payor (Customer)The company that remits the rental payments or the royalty payments/reportingPayors may include:LesseesOperatorsPurchasersInterest Owners13

14. LR2000 – Serial Register Page

15. ….

16. Payor Code Contacts16

17. Lease Level Reporting and PaymentsPredetermined by the terms of the leaseIncludes:RentMinimum RoyaltyRoyalty RateWell FeesGas Storage Agreement FeesExpiration Terms17

18. RentAmount per acreMay be recoupableDue on or before anniversary date of leaseEx. 11/01/2020 – due 11/01/2020Pay online using e-Commerce or pay.gov18

19. Minimum RoyaltyAmount per acreLease is producingRoyalties count toward fulfilling obligationDue by the last day of the lease yearEx. 11/01/2020 – due 10/31/202119

20. Terminable vs Non-TerminableTerminableNot held by actual or allocated productionNot located within a producing agreementAutomatically terminates if rental not paid timelyNon-TerminableHeld by actual or allocated productionIs located within a producing agreementWill not automatically terminate for non-payment of rental*These notes are for federal onshore leases (Indian, Offshore, Geothermal, and Solid Minerals follow slightly different rules)20

21. Actual ProductionActual: Lease-basis productionHas a producing well located on the leaseFederal LeaseNMNM34930521

22. Allocated ProductionAllocated production used for AgreementsCommunitization AgreementsUnit Participating AreasSecondary and Tertiary Recovery UnitsCA NMNM135435Federal LeaseNMNM34930522

23. Payments 23

24. Payments (2)24

25. Payments (3)25

26. Industry RemindersCheck the SRP If the BLM has issued a decision, it should be notated on there. If it’s not, chances are that we have not received anything yetDouble-check your number conversionsMake sure you’re asking the right teamLog into eCommerce a month before your payment is due26

27. Commonly Asked QuestionsI just received a FIN bill, but we don’t own this lease. Who do I contact?My lease is suspended, do I still need to pay rent/MR?Why is my lease showing as terminated in your system?My lease is producing, why isn’t your system reflecting this?27

28. ..

29. Onshore Federal Agreements

30. Federal AgreementsCommunitization Agreements (CA)Exploratory AgreementsUnit Participating Areas (PA)Secondary Recovery Units (rare)Resource Development Units (rare)30

31. Rule of Capture & Correlative Rights DoctrineConsider a section of land (a square mile) with the following allottee mineral owners31

32. Rule of Capture & Correlative Rights Doctrine (2)Say this is from before communitization agreements existed32

33. Rule of Capture & Correlative Rights Doctrine (3)The Blackhawks are approached by Wildcat Drilling Company who wants to drill on their land…33

34. Rule of Capture & Correlative Rights Doctrine (4)Blackhawks and Company A enter into a lease and drill a well that hits oil34

35. Rule of Capture & Correlative Rights Doctrine (5)Blackhawks and Company A enter into a lease and drill a well that hits oil. Result = $$$$35

36. Rule of Capture & Correlative Rights Doctrine (6)Others see the income that Blackhawk has gained and figuring that adjacent tracts may also have oil…36

37. Rule of Capture & Correlative Rights Doctrine (7)Now all lands are leased, the oil pool is being developed. All are content, until profit motives arise 37

38. Rule of Capture & Correlative Rights Doctrine (8)Oil pool development is ruled by “Rule of Capture.” Means that if you can capture it, it’s yours38

39. Rule of Capture & Correlative Rights Doctrine (9)So to protect their own oil and to develop that of their neighbors, everyone installs several lease line wells39

40. Rule of Capture & Correlative Rights Doctrine (10)In real life it looked like this:40

41. Rule of Capture & Correlative Rights Doctrine (11)This oil development scheme is very inefficient. Engineering requires way fewer wells to develop an oil pool41

42. Rule of Capture & Correlative Rights Doctrine (12)Not only are the wells expensive to drill, but this dense drilling pattern also results in something called “hydraulic discontinuity”….42

43. Rule of Capture & Correlative Rights Doctrine (13)Hydraulic discontinuity is when pumping the pool too hard causes a reduction in the recovery percentage 43

44. Rule of Capture & Correlative Rights Doctrine (14)The powers of the day sought a more efficient development scheme and so came correlative rights and communitization 44

45. Rule of Capture & Correlative Rights Doctrine (15)Correlative rights and communitization start here, before all the crazy wells are drilled45

46. Rule of Capture & Correlative Rights Doctrine (16)Correlative rights recognizes that an oil pool underlies the community’s land, and that all owners have rights to share in the profit thereof46

47. Rule of Capture & Correlative Rights Doctrine (17)A communitization agreement is established that ties all the individual leases together and defines how revenues will be shared among them 47

48. Rule of Capture & Correlative Rights Doctrine (18)Now we don’t need all the protective, rule-of-capture wells because the CA dictates terms of revenue sharing48

49. Rule of Capture & Correlative Rights Doctrine (19)The cost of development drops dramatically (order of magnitude), recovery percentage are maximized, and…49

50. Rule of Capture & Correlative Rights Doctrine (20)Environmental effects are minimized, as seen in this single modern pump jack with subdued paint, noise control, erosion mitigation…50

51. Rule of Capture & Correlative Rights Doctrine (21)State spacing orders...51

52. Rule of Capture & Correlative Rights Doctrine (22)The communitization agreement typically defines individual revenue share as an acreage-based pro rata calculation 52

53. Communitization AgreementsThree parts to a communitization agreement Approval LetterExhibits, which include an allocation scheduleFirst Production Memo (FPM)Companies cannot report on an agreement until all documentation is received from the BLMReporting on a lease basis while waitingReporting must be adjusted back to the effective date of the CA, PA, or PA revision53

54. Communitization Agreement Number ConversionsONRR converts the alpha-numeric agency assigned agreement number into a 9-digit agreement number for new CAs. Older CAs will have a 10-digit agreement number. OKNM75212 = NM_ _ 75212 WYW157376 = W_ _ 157376 MTM69248 = 691000144054

55. Fun FactThe deepest well drilled in Wyoming to date was drilled in the Madden Deep Unit between Casper and ShoshoniDeepest well in the Rocky Mountain Region25,764 ft. deep (4.9 miles)1 ½ years to drillCost $30 millionWas a dry hole55

56. Unit Agreement Number ConversionsONRR converts the alpha-numeric agency assigned agreement number into a 10-digit agreement number56Bull Frog Exploratory Unit - Sundance PA WYW109444A = 8910160390 Sun Dog Unit PA “A” WYW152954A = W_ _152954A Packsaddle Secondary Recovery Unit WYW153461X = W_ _ 153461X

57. Split Rent/Minimum RoyaltyLeases will be in a split rent/minimum royalty status when:Part of the acres are within a PA and the acreage outside of the PA has no production from any other sourceMR is calculated based on the portion of the lease that is committed to the PARent is calculated based on the portion of the lease that is not committed to the PA57

58. Split Rent/Minimum Royalty(2)Minimum Royalty240 acresFederal LeaseNMNM349305640 acresRental400 acresMarvin Ranch Participating AreaNMNM564615A58

59. Full Minimum Royalty59Marvin Ranch Participating AreaNMNM564615AFederal LeaseNMNM349305

60. AFS NumbersAFS number are only on older agreements60

61. ONRR Website61onrr.gov

62. Indian Leases & Agreements

63. Agenda(2)63It doesn’t….

64. Indian Leases & AgreementsWhat are they?What’s different?What can ONRR do to help us?64

65. Indian Leases & Agreements(2)Indian leases are those leases owned by any individual Indian or Alaska Native, Indian tribe, band, nation, pueblo, community, rancheria, colony, or other tribal group.These persons or individuals own lands or interest in the minerals, and title to these rights is either held in trust or subject to restriction against alienation by the United States.65

66. ONRR Trust Responsibility66

67. The BASIC ProcessThe main three agencies involved: BIA, BLM, and ONRR BIA creates the lease and collects paymentsBLM makes production determination and helps with the CAsONRR receives production memo, enters lease, and takes over paymentsSimple enough, right…………?67

68. Where FED/IND DifferONRR currently loading only “producing”Tribal vs. Allotted, standard vs. non‐standard‐ payment types, disbursements, rulesTAAMS must be correct/producingMNOP ‐ rare in FED, not in INDRental and royalties vary greatly throughoutEVERYTHING IS ARCHIVED….. FOREVER68

69. Converting a Lease Old Style69

70. New Style ConversionsTAAMS update, all BIA agencies following new random lease number format: 420001234Make sure you know which BIA agency/office you are working with (lease document)Refer back to the conversion sheetConcho Agency= 518Same steps from there: 518001234070

71. Indian Conversion List on www.onrr.govhttps://www.onrr.gov/reportpay/payments.htm71

72. Indian Conversion List Location on www.onrr.gov72

73. Indian Lease Conversion List73

74. Indian Lease Conversion List(2)74

75. Multi-Unit WellsOne well crosses through multiple CAsAllocations to each CA determined by BLM in three approval stages: Approved, 50/50, actualInstructions on how to report included with each BLM approvalHorizontal drilling making this more and more common, be prepared75

76. Example76

77. Before Contacting UsMake sure you have approval AND first production memo: sundries/well completion reports will not suffice (#1 question).Do your research: if you look it up and it’s not there, we haven’t gotten to it, but keep checking!Double check your conversions are correct. Contact us for the cheat sheet and numbers. Make sure you’re asking the right team.77