An Introduction to the New Federal Royalty Valuation Regulations: Gas Processing Allowances

This paper begins with a review of the new gas processing regulations to determine when and how a gas processing allowance is to be computed. The second part of the paper discusses several issues of major economic impact relating to “gas processing allowances” that are likely to be litigated in the federal courts notwithstanding the new regulations.



II. SUMMARY OF NEW GAS PROCESSING REGULATIONS

A. Definitions

The term “processing allowance” is defined in § 206.1513 as “an allowance for the reasonable, actual costs incurred by the lessee for processing gas, or an approved or MMS-initially accepted deduction for costs of such processing determined pursuant to [the new regulations].” The term “processing” is in turn defined as “any process designed to remove elements or compounds (hydrocarbon and nonhydrocarbon) from gas, including absorption, adsorption or refrigeration”, but excluding field processes normally taking place on or near the lease “such as natural pressure reduction, mechanical separation, heating, cooling, dehydration and compression.” According to the MMS comments accompanying the final rulemaking, “processing” also includes fractionation.4

It would be error to conclude from these definitions that the allowance for the lessee's “reasonable and actual” processing costs as determined under the regulations will always be