New ONRR initiative sets presumptive costs of making gas marketable and will require lessees to affirmatively demonstrate costs that differ from ONRR assumptions.

The Department of Interior, Office of Natural Resources Revenue (ONRR), is responsible for collecting royalties on gas produced from Federal and Indian lands. In calculating the value of the production on which royalties are assessed, ONRR allows lessees producing gas from Federal and Indian lands (Lessees) to deduct the cost of processing or transporting gas from the value of production, but does not allow Lessees to deduct the cost of placing residue gas and plant products in marketable condition. Until now, Lessees have differentiated between the costs of processing and transporting gas from the costs of making gas or residue gas and plant products marketable (Marketable Condition Costs) on their own. In a new enforcement initiative, ONRR is now promulgating its own calculations for how to “unbundle” these costs, including a much broader and more aggressive definition of the relevant Marketable Condition Costs. ONRR’s enforcement initiative may sharply reduce the amount of fees and expenses that were previously deductible as processing or transportation allowances by reclassifying certain costs as Marketable Condition Costs. In light of ONRR’s new enforcement initiative, Lessees must affirmatively take steps to ensure that they are not required to pay unwarranted additional royalties.