CMM Revenue Distribution & Accounting 2 — Questions and Answers
Question 1: Under the ONRR (Office of Natural Resources Revenue) royalty reporting system, what is the primary document operators use to report and pay federal royalties?
- Form ONRR-2014 (Correct answer)
- Form MMS-4430
- Form ONRR-3160
- Schedule of Values (SOV)
Correct answer: Form ONRR-2014
Form ONRR-2014 is the Production and Royalty Report used by operators to report federal oil, gas, and other mineral production and pay royalties to the federal government.
Question 2: When a gas well produces both residue gas and natural gas liquids (NGLs) after processing, royalties are typically calculated on:
- Residue gas value only
- NGLs value only
- The combined value of residue gas plus NGLs (Correct answer)
- The raw wellhead volume before processing
Correct answer: The combined value of residue gas plus NGLs
Royalties are generally owed on the total value of all marketable products — both residue gas and NGLs — extracted from the raw gas stream after processing.
Question 3: A mineral owner receives a division order that incorrectly states their decimal interest. What is the legal effect if the mineral owner signs and returns the division order?
- It permanently replaces the lease royalty provisions
- It may estop the owner from claiming a higher interest for payments made in reliance on it (Correct answer)
- It has no legal effect whatsoever
- It automatically triggers an audit by the operator
Correct answer: It may estop the owner from claiming a higher interest for payments made in reliance on it
Signing an incorrect division order can estop the mineral owner from claiming additional amounts for payments already made in reliance on the stated decimal interest, though many states limit this effect.
Question 4: In a gas processing agreement, the 'keep-whole' provision protects the producer by requiring the processor to:
- Pay royalties directly to mineral owners on behalf of the producer
- Return an equivalent energy value in residue gas if NGL extraction reduces the gas BTU content (Correct answer)
- Hold back a percentage of proceeds as a processing fee reserve
- Maintain all wellhead equipment at no cost to the producer
Correct answer: Return an equivalent energy value in residue gas if NGL extraction reduces the gas BTU content
A keep-whole agreement requires the gas processor to return enough residue gas to make the producer 'whole' for any energy (BTU value) lost when NGLs are extracted.
Question 5: Which accounting method allocates revenue to the period in which production actually occurs, regardless of when payment is received?
- Cash basis accounting
- Accrual basis accounting (Correct answer)
- Modified cash basis accounting
- Percentage depletion accounting
Correct answer: Accrual basis accounting
Accrual basis accounting recognizes revenue when production occurs (the earnings event), not when cash is actually received from the purchaser.
Question 6: The 'net proceeds' royalty clause in an oil and gas lease typically means royalties are calculated after deducting:
- Only severance taxes
- Production, transportation, and marketing costs (Correct answer)
- Only gathering costs
- Federal income taxes
Correct answer: Production, transportation, and marketing costs
A net proceeds royalty clause allows the lessee to deduct costs of production, transportation, and marketing before calculating the royalty owed to the lessor.
Question 7: When a mineral owner's interest is subject to a non-participating royalty interest (NPRI), how does the NPRI affect the working interest owner's revenue?
- The NPRI is paid from the lessor's royalty only, with no effect on working interest
- The NPRI burdens the working interest and reduces the net revenue interest (Correct answer)
- The NPRI is shared equally between the lessor's royalty and the working interest
- The NPRI only applies when production exceeds a defined threshold
Correct answer: The NPRI burdens the working interest and reduces the net revenue interest
A non-participating royalty interest is carved from and burdens the working interest, reducing the net revenue interest available to the working interest owner.
CMM Revenue Distribution & Accounting 2
Under the ONRR (Office of Natural Resources Revenue) royalty reporting system, what is the primary document operators use to report and pay federal royalties?