Okla. Admin. Code § 385:15-1-24

Current through Vol. 42, No. 4, November 1, 2024

Section 385:15-1-24 - Oil and gas royalty price computation

(a)Marketable condition and sale. Lessee shall place oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas in a marketable condition. Lessee shall pay all direct and indirect costs incurred to place the oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas in a marketable condition. Lessee shall market and sell such oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas products at no cost to the Land Office.

(1) Oil recovered by mechanical separators shall be deemed to be in a marketable condition only after the oil products are separated, treated, dehydrated and placed into a storage tank or other facility for delivery to a purchaser or refinery and without cost to the Land Office.

(2) Gas delivered to a gas plant for processing shall be deemed to be in a marketable condition only after the gas products meet the location, quality, and pressure specifications for transmission by an interstate pipeline for sale to an independent, non-affiliated, third-party purchaser.

(3) Gas sold at the wellhead or gas that is not delivered to a gas plant for processing shall be deemed to be in a marketable condition only after the gas products meet the location, quality, and pressure specifications for transmission into an interstate pipeline for sale to an independent, non-affiliated, third-party purchaser.

(4) Natural gas liquids shall be deemed to be in a marketable condition only after the natural gas liquid products have been either:

(A) recovered at a processing plant and separated and fractionated into discrete products (e.g., ethane, propane, butane, and natural gasoline) and placed into a storage tank or other facility for delivery to a purchaser, or

(B) recovered at a processing plant and sold at the tailgate of the plant to an independent, non-affiliated, third-party purchaser without further separation and fractionation into discrete products, provided the royalties due and payable thereon to the Land Office shall be based upon the gross proceeds received for such product, including any credit or payments received by lessee based on any further downstream processing.

(5) In the event the gas stream contains commercial quantities of non-hydrocarbon gas, such non-hydrocarbon gas shall be deemed to be in a marketable condition only after the non-hydrocarbon gas products have been recovered, separated, treated, purified and otherwise placed in a form and condition suitable for commercial sale, exchange, and use.

(b)Royalty. Lessee shall pay the Land Office a royalty consisting of a fractional share (defined by the lease) of proceeds for any and all substances, including, but not limited to oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas products; as follows:

(1)Deductions.

(A) Royalties shall be computed free and clear of all deductions for production costs, post-wellhead costs, marketing costs, and other direct or indirect costs, including without limitation, all costs, charges, expenditures, or fees incurred for gathering, compressing, pressurizing, treating, dehydrating, separating, processing, fractionating, storing, transporting, marketing, and other costs incurred to convert oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas into a marketable condition.

(B) Any and all reductions to the sales price received by lessee for any post-production services provided by the purchaser or any other party prior to the oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas products being placed into a marketable condition shall be added back to the sales price to determine the gross proceeds for royalty payment purposes.

(2)Royalty computation for oil.

(A) Non-affiliate sales: Royalties for oil shall be computed on the greater of:

(i) the price received by the lessee for oil sold or disposed of through an arm's length transaction from an independent, non-affiliated, third-party purchaser for the product in marketable condition, including all bonuses, premiums, allowances or other consideration of any nature received by lessee;

(ii) the highest posted field price; or

(iii) the average published spot price.

(B) Affiliate Sales: Royalties for oil shall be computed on the index price for West Texas Intermediate at Cushing, Oklahoma prevailing on the dates the oil is sold or disposed of through any transaction other than by an arm's length transaction, including any oil sold or transferred by lessee to itself or an affiliate of lessee.

(C) Lack of Records: Royalties for oil shall be computed on the index price for West Texas Intermediate at Cushing, Oklahoma prevailing on the dates the oil is sold or disposed of through any transaction in which the lessee cannot produce records of an arm's length transaction, including, but not limited to monthly production reports and third-party purchase statements.

(3)Royalty computation for gas.

(A) Non-affiliate sales: Royalties for gas shall be computed on the greater of:

(i) the total value received by the lessee through an arm's length transaction from an independent, non-affiliated, third-party purchaser for the product in marketable condition, including all bonuses, premiums, allowances, alternate performance payments, or other consideration of any nature received by lessee for gas;

(ii) the highest price any lessee enforces under a similar sales contract in the wellbore; or

(iii) the gross proceeds that would be received if the gas had sold at the average published spot price without deduction for taxes, compression, treatment, dehydration, metering, gathering, or other charges necessary or desirable for the delivery of gas into interstate pipelines.

(B) Affiliate sales: Royalties for gas shall be computed on the highest price paid in the State of Oklahoma by any purchaser for like kind and quality gas for any gas that is sold or disposed of other than by an arm's length transaction, including, any gas sold or transferred by lessee to itself or an affiliate of lessee.

(C) Lack of Records: Royalties for gas shall be computed on the highest price paid in the State of Oklahoma by any purchaser for like kind and quality gas for any gas that is sold or disposed of and the lessee cannot produce records of the arm's length transaction, including, any gas sold or transferred by lessee to itself or an affiliate of lessee.

(4)Royalty computation for natural gas liquids and non-hydrocarbon gas.

(A) Non-affiliate sales: Royalties for natural gas liquids or non-hydrocarbon gas shall be computed on the price received by the lessee through an arm's length transaction from an independent, non-affiliated, third-party purchaser for the product in marketable condition, including all bonuses, premiums, allowances or other consideration of any nature received by lessee for natural gas liquids or non-hydrocarbon gas.

(B) Affiliate sales: Royalties for natural gas liquids or non-hydrocarbon gas shall be computed on the highest market price, including any premium associated therewith, then prevailing on the dates the natural gas liquids or non-hydrocarbon gas are sold or disposed of, in the same processing plant for production of similar chemistry and quality (or if there is no such price then prevailing in the same processing plant, then in the nearest processing plant in which there is such a prevailing price) for any natural gas liquids or non-hydrocarbon gas sold or disposed of other than by an arm's length transaction, including any natural gas liquids or non-hydrocarbon gas sold or transferred by lessee to itself or an affiliate of lessee.

(C) Lack of records: Royalties for natural gas liquids or non-hydrocarbon gas shall be computed on the highest market price, including any premium associated therewith, then prevailing on the dates the natural gas liquids or non-hydrocarbon gas are sold or disposed of, in the same processing plant for production of similar chemistry and quality (or if there is no such price then prevailing in the same processing plant, then in the nearest processing plant in which there is such a prevailing price) for any natural gas liquids or non-hydrocarbon gas sold or disposed of and the lessee cannot produce records of the arm's length transaction, including, but not limited to monthly production reports and third-party purchase statements.

(c)Percentage of proceeds sales. When any processing plant, gas purchaser, or other party retains a percentage of the sales proceeds, or a volumetric share of oil, gas, recoverable natural gas liquids, and non-hydrocarbon gas as compensation for services and returns a percentage of the sales proceeds to the lessee, the lessee shall pay royalties on the sales proceeds returned to lessee and shall also pay royalties on the full value of the sales proceeds or volumetric share retained by the processing plant, gas purchaser, or other party. The royalty due to Land Office shall be based upon one hundred percent (100%) of gas at the total value received for delivery into interstate pipelines.

Okla. Admin. Code § 385:15-1-24

Amended at 14 Ok Reg 3171, eff 7-25-97

Amended by Oklahoma Register, Volume 38, Issue 24, September 1, 2021, eff. 9/11/2021