This excerpt taken from the MMR 10-K filed Feb 27, 2009.
Revenue Recognition and Gas Balancing. McMoRan generally sells crude oil and natural gas under short-term agreements at prevailing market prices. Revenue for the sale of crude oil and natural gas is
recognized when title passes to the customer, when prices are fixed or determinable and collection is reasonably assured. Natural gas revenues involving partners in natural gas wells are recognized when the natural gas is sold using the entitlements method of accounting and are based on McMoRan’s net working interests. When McMoRan receives a volume in excess of its net working interests, it records a liability and under deliveries are recorded as receivables. At December 31, 2008, McMoRan had natural gas imbalance receivables of $9.2 million and a liability of $12.6 million for over deliveries. At December 31, 2007, McMoRan had natural gas imbalance receivables of $3.3 million, including $3.2 million associated with the 2007 oil and gas property acquisition (Note 2). At December 31, 2007, the liability associated with over deliveries totaled $3.2 million, including $2.5 million for the acquired properties. McMoRan recorded a liability of $2.6 million for the values associated with the estimated net overdelivered position for the acquired properties at August 6, 2007, which is reflected as a component of the net purchase price (Note 2).
McMoRan has a number of producing fields that have been awarded royalty relief under the “Deep Gas Royalty Relief” program instituted by the Minerals Management Service (MMS). Under this program, the leases in which McMoRan has obtained relief are eligible for suspensions of the obligation to pay federal royalties on up to 25 Bcf of production, with each field’s eligible amount of relief determined by specific MMS criteria and subject to their final approval. During the three year period ended December 31, 2008, McMoRan recognized $17.7 million in 2008, $3.7 million in 2007 and $1.9 million in 2006 of additional oil and natural gas revenues associated with its awarded royalty relief. The royalty relief granted under this program is subject to certain annually adjusted price thresholds established by the MMS. If the annual NYMEX market price for natural gas exceeds the MMS’s annual price threshold, then relief is suspended under the program for that year and royalties would be due to the MMS with interest. McMoRan recognizes oil and gas revenues from production on properties eligible for royalty relief as the amounts are earned. If the price threshold is exceeded or estimated to be exceeded based on forward pricing at the end of a reporting period, McMoRan defers all such revenues until the threshold price is no longer exceeded. The price threshold was not exceeded for the years ending December 31, 2008, 2007 or 2006.