Editorial Note on Part 1206
Editorial Note: Nomenclature changes to part 1206 (formerly part 206) appear at 67 FR 19111, Apr. 18, 2002.

§ 1206.142 How do I calculate royalty value for processed gas that I or my affiliate sell(s) under an arm's-length or non-arm's-length contract? ( a ) This section applies to the valuation of processed gas, including but not limited to: ( 1 ) Gas that you or your affiliate do not sell, or otherwise dispose of, under an arm's-length contract prior to processing.
( 2 ) Gas where your or your affiliate's arm's-length contract for the sale of gas prior to processing provides for payment to be determined on the basis of the value of any products resulting from processing, including residue gas or natural gas liquids.
( 3 ) Gas that you or your affiliate process under an arm's-length keepwhole contract.
( 4 ) Gas where your or your affiliate's arm's-length contract includes a reservation of the right to process the gas, and you or your affiliate exercise(s) that right.
( b ) The value of gas subject to this section, for royalty purposes, is the combined value of the residue gas and all gas plant products that you determine under this section plus the value of any condensate recovered downstream of the point of royalty settlement without resorting to processing that you determine under subpart C of this part less applicable transportation and processing allowances that you determine under this subpart, unless you exercise the option provided in paragraph (d) of this section.
( c ) The value of residue gas or any gas plant product under this section for royalty purposes is the gross proceeds accruing to you or your affiliate under the first arm's-length contract. This value does not apply if you exercise the option provided in paragraph (d) of this section, or if ONRR decides to value your residue gas or any gas plant product under § 1206.144. You must use this paragraph (c) to value residue gas or any gas plant product when: ( 1 ) You sell under an arm's-length contract;
( 2 ) You sell or transfer to your affiliate or another person under a non-arm's-length contract, and that affiliate or person, or another affiliate of either of them, then sells the residue gas or any gas plant product under an arm's-length contract, unless you exercise the option provided in paragraph (d) of this section;
( 3 ) You, your affiliate, or another person sell(s), under multiple arm's-length contracts, residue gas or any gas plant products recovered from gas produced from a lease that you value under this paragraph. In that case, unless you exercise the option provided in paragraph (d) of this section, because you sold non-arm's-length to your affiliate or another person, the value of the residue gas or any gas plant product is the volume-weighted average of the gross proceeds established under this paragraph for each arm's-length contract for the sale of residue gas or any gas plant products recovered from gas produced from that lease; or
( 4 ) You or your affiliate sell(s) under a pipeline cash-out program. In that case, for over-delivered volumes within the tolerance under a pipeline cash-out program, the value is the price that the pipeline must pay to you or your affiliate under the transportation contract. You must use the same value for volumes that exceed the over-delivery tolerances, even if those volumes are subject to a lower price under the transportation contract.
( d ) If you do not sell under an arm's-length contract, you may elect to value your residue gas and NGLs under this paragraph (d). You may not change your election more often than once every two years. ( 1 ) ( i ) If you can only transport residue gas to one index pricing point published in an ONRR-approved publication available at *www.onrr.gov*, your value, for royalty purposes, is the highest reported monthly bidweek price for that index pricing point for the production month.
( ii ) If you can transport residue gas to more than one index pricing point published in an ONRR-approved publication available at *www.onrr.gov*, your value, for royalty purposes, is the highest reported monthly bidweek price for the index pricing points to which your gas could be transported for the production month, whether or not there are constraints, for the production month.
( iii ) If there are sequential index pricing points on a pipeline, you must use the first index pricing point at or after your residue gas enters the pipeline.
( iv ) You must reduce the number calculated under paragraphs (d)(1)(i) and (ii) of this section by 5 percent for sales from the OCS Gulf of Mexico and by 10 percent for sales from all other areas, but not by less than 10 cents per MMBtu or more than 30 cents per MMBtu.
( v ) After you select an ONRR-approved publication available at *www.onrr.gov*, you may not select a different publication more often than once every two years.
( vi ) ONRR may exclude an individual index pricing point found in an ONRR-approved publication if ONRR determines that the index pricing point does not accurately reflect the values of production. ONRR will publish a list of excluded index pricing points on *www.onrr.gov*.
( 2 ) ( i ) If you sell NGLs in an area with one or more ONRR-approved commercial price bulletins available at *www.onrr.gov*, you must choose one bulletin, and your value, for royalty purposes, is the monthly average price for that bulletin for the production month.
( ii ) You must reduce the number calculated under paragraph (d)(2)(i) of this section by the amounts that ONRR posts at *www.onrr.gov* for the geographic location of your lease. The methodology that ONRR will use to calculate the amounts is set forth in the preamble to this regulation. This methodology is binding on you and ONRR. ONRR will update the amounts periodically using this methodology.
( iii ) After you select an ONRR-approved commercial price bulletin available at *www.onrr.gov*, you may not select a different commercial price bulletin more often than once every two years.
( 3 ) You may not take any other deductions from the value calculated under this paragraph (d).
( 4 ) ONRR will post changes to any of the rates in this paragraph (d) on its website.
( e ) If some of your gas or gas plant products are used, lost, unaccounted for, or retained as a fee under the terms of a sales or service agreement, that gas will be valued for royalty purposes using the same royalty valuation method for valuing the rest of the gas or gas plant products that you do sell.
( f ) If you have no written contract for the sale of gas or no sale of gas subject to this section and: ( 1 ) There is an index pricing point or commercial price bulletin for the gas, then you must value your gas under paragraph (d) of this section.
( 2 ) There is not an index pricing point or commercial price bulletin for the gas, then ONRR will determine the value under § 1206.144. ( i ) You must propose to ONRR a method to determine the value using the procedures in § 1206.148(a).
( ii ) You may use that method to determine value, for royalty purposes, until ONRR issues our decision.
( iii ) After ONRR issues our determination, you must make the adjustments under § 1206.143(a)(2).