Royalty Audit

  • Royalty Audit

    Royalty Audit

    The Division's Audit Section is tasked with making sure the state receives the full value associated with royalty payments. This section conducts audits under a number of different authoritative rules including Royalty Settlement Agreements, Lease Agreements, Statutes and the Alaska Administrative Code. Audits examine volumes, values, Net Profit Share Leases and costs claimed as deductions such as marine tanker and tariffs.

    The Royalty Audit section also does federal audits through a contract with the U.S. Minerals Management Service. These audits are conducted under the authoritative guidelines and standards for federal leases such as, Government Auditing Standards and the Code of Federal Regulations. This program ensures that lessees correctly pay the royalties due from oil and gas development on federal leases where the state has a revenue share.

    "Higher-of" Value Audits

    Royalty Audit

    To value production that is not covered by a Royalty Settlement Agreement, the royalty audit section uses "higher-of" value audits to determine on what value of the oil and gas produced the computation of the state's royalty share should be based. This is a brief summary of how most "higher-of" values are determined.

    There are several different lease agreement forms. Most have four measures of value. The state is entitled to using the highest of these four values as a basis for determine the royalty value. The primary valuation provisions are as follows:

    DL-1 Leases

    (usually under a Royalty Settlement Agreement)

    To determine the "highest-of" value for these leases, the Division compares three different measures of value. (Of the four in the lease agreement, one is currently not relevant). DL-1 Leases are usually under a Royalty Settlement Agreement, but if they are not, the language in the lease agreement determines the valuation method.

    New Form Leases

    (usually not under a Royalty Settlement Agreement)

    For these leases, two of the four measures of value determined in the lease agreement involve "posted prices" and can be disregarded as posted prices are not currently used in Alaska. The other two measures are: