CFR > Title 30 - Mineral Resources > CHAPTER VII—OFFICE OF SURFACE MINING RECLAMATION AND ENFORCEMENT, DEPARTMENT OF THE INTERIOR > SUBCHAPTER A—GENERAL (parts 700 to 707) > PART 1206—PRODUCT VALUATION > SUBPART B—Indian Oil (§1206.50 to §1206.62) > 1206.53—How do I determine value for oil that I or my affiliate do(es) not sell under an arm's-length contract?

1206.53—How do I determine value for oil that I or my affiliate do(es) not sell under an arm's-length contract?

(a) The unit value of your oil not sold under an arm's-length contract is the volume-weighted average of the gross proceeds paid or received by you or your affiliate, including your refining affiliate, for purchases or sales under arm's-length contracts.
(1) When calculating that unit value, use only purchases or sales of other like-quality oil produced from the field (or the same area if you do not have sufficient arm's-length purchases or sales of oil produced from the field) during the production month.
(2) You may adjust the gross proceeds determined under paragraph (a) of this section for transportation costs under paragraph (c) of this section and §§ 1206.56 and 1206.57 before including those proceeds in the volume-weighted average calculation.
(3) If you have purchases away from the field(s) and cannot calculate a price in the field because you cannot determine the seller's cost of transportation that would be allowed under paragraph (c) of this section and §§ 1206.56 and 1206.57, you must not include those purchases in your weighted-average calculation.
(b) Before calculating the volume-weighted average, you must normalize the quality of the oil in your or your affiliate's arm's-length purchases or sales to the same gravity as that of the oil produced from the lease. Use applicable gravity adjustment tables for the field (or the same general area for like-quality oil if you do not have gravity adjustment tables for the specific field) to normalize for gravity.

Code of Federal Regulations

Example to paragraph (b): 1. Assume that a lessee, who owns a refinery and refines the oil produced from the lease at that refinery, purchases like-quality oil from other producers in the same field at arm's length for use as feedstock in its refinery. Further assume that the oil produced from the lease that is being valued under this section is Wyoming general sour with an API gravity of 23.5°. Assume that the refinery purchases at arm's length oil (all of which must be Wyoming general sour) in the following volumes of the API gravities stated at the prices and locations indicated:
10,000 bbl 24.5° $34.70/bbl Purchased in the field.
8,000 bbl 24.0° 34.00/bbl Purchased at the refinery after the third-party producer transported it to the refinery, and the lessee does not know the transportation costs.
9,000 bbl 23.0° 33.25/bbl Purchased in the field.
4,000 bbl 22.0° 33.00/bbl Purchased in the field.
Code of Federal Regulations 741
2. Because the lessee does not know the costs that the seller of the 8,000 bbl incurred to transport that volume to the refinery, that volume will not be included in the volume-weighted average price calculation. Further assume that the gravity adjustment scale provides for a deduction of $0.02 per 1/10 degree API gravity below 34°. Normalized to 23.5° (the gravity of the oil being valued under this section), the prices of each of the volumes that the refiner purchased that are included in the volume-weighted average calculation are as follows:
10,000 bbl 24.5° $34.50 (1.0° difference over 23.5° = $0.20 deducted).
9,000 bbl 23.0° 33.35 (0.5° difference under 23.5° = $0.10 added).
4,000 bbl 22.0° 33.30 (1.5° difference under 23.5° = $0.30 added).
3. The volume-weighted average price is ((10,000 bbl × $34.50/bbl) (9,000 bbl × $33.35/bbl) (4,000 bbl × $33.30/bbl)) / 23,000 bbl = $33.84/bbl. That price will be the value of the oil produced from the lease and refined prior to an arm's-length sale, under this section.
(c) If you value oil under this section, ONNR will allow a deduction, under §§ 1206.56 and 1206.57, for the reasonable, actual costs:
(1) That you incur to transport oil that you or your affiliate sell(s), which is included in the weighted-average price calculation, from the lease to the point where the oil is sold; and
(2) That the seller incurs to transport oil that you or your affiliate purchase(s), which is included in the weighted-average cost calculation, from the property where it is produced to the point where you or your affiliate purchase(s) it. You may not deduct any costs of gathering as part of a transportation deduction or allowance.
(d) If paragraphs (a) and (b) of this section result in an unreasonable value for your production as a result of circumstances regarding that production, the ONNR Director may establish an alternative valuation method.
(e) You must also comply with § 1206.54.

Code of Federal Regulations

[72 FR 71241, Dec. 17, 2007]