UNITED STATES DEPARTMENT OF THE INTERIOR
MINERALS MANAGEMENT SERVICE

Guidance for Extraordinary Processing Cost Allowance Applications

Introduction

The guidelines that follow are designed to assist industry in preparing extraordinary processing cost allowance applications and MMS in reviewing those applications. It is the intent of the MMS to streamline and provide certainty in the extraordinary processing cost allowance application process for Federal and Indian leases. Each application should contain all relevant and supporting documentation (as described below) necessary for MMS to make a determination.

Background

The current gas valuation regulations at 30 CFR 206.158 (d)(2)(i) allow a lessee to apply for an extraordinary processing cost allowance if the lessee can demonstrate that the costs are, by reference to standard industry conditions and practice, extraordinary, unusual, or unconventional. Processing is defined at 30 CFR 206.151 as any process designed to remove elements or compounds (hydrocarbons and nonhydrocarbons) from gas, including absorption, adsorption, or refrigeration. Field processes which normally take place on or near the lease, such as natural pressure reduction, mechanical separation, heating, cooling, dehydration, and compression are not considered processing.

Starting in 1988, MMS attempted to develop criteria for the standard conditions and practices in the gas processing industry and for technologies that are unusual, extraordinary, or unconventional. However, after careful analysis of

1. comments received during the 1988 rulemaking process and
   
2. comments received in response to a Federal Register Notice dated November 28, 1988, (Vol. 53, No. 228), soliciting comments on what factors would comprise criteria for standard practices and conditions,

MMS concluded that it would determine on a case-by-case basis whether an operation meets the requirements of the regulations. The MMS published this decision in a Federal Register Notice dated April 13, 1994 (Vol. 59, No.71). However, MMS never provided any guidance on what considerations would be weighed in evaluating whether an extraordinary processing cost allowance is appropriate.

How MMS Evaluates Extraordinary Cost Allowance Applications

In evaluating an extraordinary processing cost allowance application, MMS considers one or more of the following factors:

• The composition of the gas stream being processed.
• The complexity of the gas plant design compared to conventional or typical gas processing plants, as well as the methods (e.g., absorption, adsorption, refrigeration, cryogenic, etc.) used to process the gas to remove elements or compounds (hydrocarbon or nonhydrocarbon) from the gas.
• The unit costs incurred to recover the principal product, usually methane.

The MMS will evaluate the data submitted with each application to determine if the composition of the gas stream, plant design, and costs (on a per unit basis) are clearly extraordinary in relation to other gas plants.

Procedures for Applying for an Extraordinary Cost Application

Submit your application for an extraordinary processing cost allowance to the Valuation and Standards Division (VSD), Royalty Management Program at the address provided below and include the following information.

Include in your application a specific statement or provide specific rationale as to why an extraordinary processing cost allowance is warranted in your case. Include information that identifies how your case compares to other gas plants for each of the three factors provided above.

General Information

• Lessee name and address
• Lease number(s) and identification of whether the lease(s) are within a unit (include unit name)
• Plant name and location
• Plant operator and ownership
• Plant products recovered. Indicate if any of those products are sold
• Plant throughput and design capacity
• Time period for which an extraordinary processing cost allowance is being requested
• Copies of relevant sales contracts

Gas Composition

• Give the composition in mole percent of the gas stream processed by the plant including methane, ethane plus, hydrogen sulfide, carbon dioxide, nitrogen and other inert gases, etc.

Plant Processes

• Provide a detailed description of the processes used to remove natural gas liquids, carbon dioxide, hydrogen sulfide, etc. Include a description of any secondary processes used in the plant -- for example, the processes used to recover sulfur from processing of hydrogen sulfide.
• Include a detailed schematic of the plant illustrating the processes used from the inlet to the tailgate of the plant.
• Include also a detailed schematic of the pipeline system from your leases to the plant inlet.

Cost Information

Non-Arm's-Length

• Provide the operating and maintenance costs (including overhead costs) to recover any gas plant products -- for example, natural gas liquids, carbon dioxide, sulfur etc. Include historical costs as well as projected costs.
• Provide the total capital costs (back to construction) for the plant. Include any projected capital costs.
• Provide an allocation of the total capital costs and the operating and maintenance costs to each recovered gas plant product. Include a rationale for that allocation.
• Provide historical and projected revenues to the plant.

Arm's-Length

If detailed cost information is not available to you because you have no ownership in the gas plant, submit the actual costs incurred under your arm's-length processing agreement with the plant or under the sales contract with your purchaser. These costs represent your actual costs of processing or in some cases transportation. The VSD will then obtain the detailed cost information from the plant in order to determine if your application qualifies for an extraordinary cost allowance and to determine an allocation of your actual costs.

Procedures for Reviewing and Approving an Extraordinary Cost Allowance Application

The VSD will review the extraordinary cost allowance application for completeness, verify that the information submitted is reasonable, and consider the three factors listed above. The VSD may ask the lessee to submit additional information and/or may request a face-to-face meeting to gain more information. The VSD will consult with the affected State or Indian tribe in reviewing the application.

The extraordinary processing cost allowance is determined by allocating the plant's operating and maintenance and capital costs to each gas plant product and identifying those costs unrecovered through the normal processing allowance, including the exception to the 66 2/3 percent limitation. If there are no sales of gas plant products, this check to determine if the costs exceed the 66 2/3 limit is not applicable. The MMS will allow an extraordinary processing allowance to be claimed against the value of the methane for those unrecovered costs (exceeding 99 percent of the gas plant products' values), but generally not to exceed 50 percent of the methane value. Unrecovered costs would include the costs of recovering gas plant products that are not sold.

The lessee will receive an appealable valuation determination containing VSD's rationale for its decision within 90 days of receipt of all relevant data. The data upon which the determination is based is subject to future audit. Any approvals may be modified depending on the outcome of an audit or on changing market or technical circumstances.

Address for Submitting Applications

Mailing Address

Valuation and Standards Division
P.O. Box 25165, MS 3150
Denver, CO 80225

Street Address

Valuation and Standards Division
Golden Hill, Suite C-100
12600 W. Colfax Ave.
Lakewood, CO 80215-3735