# Onshore Oil and Gas Operations; Federal and Indian Oil and Gas Leases; Site Security

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-16737

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 13, 2015
- **Citation:** 80 FR 40768

## Text

DEPARTMENT OF THE INTERIOR
Bureau of Land Management
43 CFR Parts 3160 and 3170
[15X.LLWO300000.L13100000.NB0000]
RIN 1004-AE15
Onshore Oil and Gas Operations; Federal and Indian Oil and Gas Leases; Site Security

AGENCY:

Bureau of Land Management, Interior.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would replace Onshore Oil and Gas Order No. 3, Site Security (Order 3), with new regulations that would be codified in the Code of Federal Regulations (CFR). Order 3 establishes minimum standards for oil and gas facility site security. It includes provisions intended to ensure that oil and gas produced from Federal and Indian (except Osage Tribe) oil and gas leases are properly and securely handled, so as to ensure accurate measurement, production accountability, and royalty payments, and to prevent theft and loss. Order 3 was issued in 1989.

The changes proposed as part of this proposed rule would allow the BLM to strengthen its policies governing production verification and accountability by updating Order 3's requirements to address changes in technology and industry practices that have occurred in the 25 years since Order 3 was issued, and to respond to recommendations made by the Government Accountability Office (GAO) with respect to the BLM's production verification efforts. The proposed rule addresses Facility Measurement Points (FMPs), site facility diagrams, the use of seals, bypasses around meters, documentation, recordkeeping, commingling, off-lease measurement, and the reporting of incidents of unauthorized removal or mishandling of oil and condensate. The proposed rule also identifies certain acts of noncompliance that would result in an immediate assessment. Finally, it sets forth a process for the BLM to consider variances from the requirements of this proposed regulation.

The BLM believes these proposed changes will enhance its overall production verification and accountability efforts. As part of those efforts, the BLM also anticipates that it will separately propose new regulations to update and replace Onshore Oil and Gas Orders Nos. 4 (Order 4) and 5 (Order 5) related to measurement of oil and gas, respectively.

DATES:

Send your comments on this proposed rule to the BLM on or before September 11, 2015. The BLM is not obligated to consider any comments received after the above date in making its decision on the final rule.

As explained later, the changes that follow would establish proposed new information collection requirements that must be approved by OMB. If you wish to comment on the information collection requirements in this proposed rule, please note that the OMB is required to make a decision concerning the collection of information contained in this proposed rule between 30 and 60 days after publication of this proposed rule in the
Federal Register
. Therefore, a comment to OMB on the proposed information collection requirements is best assured of being considered if OMB receives it by August 12, 2015.

ADDRESSES:

Mail:
U.S. Department of the Interior, Director (630), Bureau of Land Management, Mail Stop 2134 LM, 1849 C St., NW., Washington, DC 20240, Attention: 1004-AE15.
Personal or messenger delivery:
20 M Street SE., Room 2134LM, Washington, DC 20003.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions at this Web site.

Comments on the information collection burdens:
Fax:
Office of Management and Budget (OMB), Office of Information and Regulatory Affairs, Desk Officer for the Department of the Interior, fax (202) 395-5806.
Electronic mail: oira_docket@omb.eop.gov.
Please indicate “Attention: OMB Control Number 1004-XXXX,” regardless of the method used to submit comments on the information collection burdens. If you submit comments on the information collection burdens, you should also provide the BLM with a copy of those comments, at one of the addresses shown above, so that we can summarize all written comments and address them in the final rule.

FOR FURTHER INFORMATION CONTACT:

Michael Wade, BLM Colorado State Office, at 303-239-3737. For questions relating to regulatory process issues, please contact Faith Bremner, BLM Washington Office, at 202-912-7441. Persons who use a telecommunications device for the deaf (TDD) may call the Federal Information Relay Service (FIRS) at 1-800-877-8339 to contact the above individuals during normal business hours. FIRS is available 24 hours a day, 7 days a week to leave a message or question with the above individual. You will receive a reply during normal business hours.

SUPPLEMENTARY INFORMATION:

I. Public Comment Procedures

II. Background

III. Discussion of the Proposed Rule

IV. Procedural Matters

I. Public Comment Procedures

If you wish to comment on the proposed rule, you may submit your comments by any one of several methods specified (see
ADDRESSES
above). If you wish to comment on the information collection requirements, you should send those comments directly to the OMB as outlined (see
ADDRESSES
); however, we ask that you also provide a copy of those comments to the BLM.

Please make your comments as specific as possible by confining them to issues for which comments are sought in this notice, and explain the basis for your comments. The comments and recommendations that will be most useful and likely to influence agency decisions are:

1. Those supported by quantitative information or studies; and

2. Those that include citations to, and analyses of, the applicable laws and regulations.

The BLM is not obligated to consider or include in the Administrative Record for the rule comments received after the close of the comment period (see
DATES
) or comments delivered to an address other than those listed above (see
ADDRESSES
).

Comments, including names and street addresses of respondents, will be available for public review at the address listed under
ADDRESSES
during regular hours (7:45 a.m. to 4:15 p.m.), Monday through Friday, except holidays.

Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.

II. Background

Under applicable law, royalties are owed on all production removed or sold from Federal and Indian oil and gas leases. The basis for those royalty payments is the measured production from those leases. In fiscal year (FY) 2014, onshore Federal oil and gas leases produced about 148 million barrels of oil, 2.48 trillion cubic feet of natural gas, and 2.9 billion gallons of natural gas

liquids, with a market value of more than $27 billion and generating royalties of almost $3.1 billion. Nearly half of these revenues were distributed to the States in which the leases are located. Leases on tribal and Indian lands produced 56 million barrels of oil, 240 billion cubic feet of natural gas, 182 million gallons of natural gas liquids, with a market value of over $6 billion and generating royalties of over $1 billion that were all distributed to the applicable tribes and individual allottee owners.

Given the magnitude of this production and the BLM's statutory and management obligations, it is critically important that the BLM ensure that operators accurately measure, properly report, and account for that production. The BLM is proposing updates to Order 3's requirements because they are necessary to reflect changes in oil measurement practices and technology since Order 3 was first promulgated.
1

Specifically, this proposed rule is designed to ensure the proper and secure handling of production from Federal and Indian (except Osage) oil and gas leases. The proper handling of production is essential to the accurate measurement, proper reporting, and accountability that are necessary to ensure that the American public, as well as Indian tribes and allottees, receive the royalties to which they are entitled on oil and gas produced from Federal and Indian leases, respectively.

1
This proposed rule would replace Order 3, which was published in the
Federal Register
on February 24, 1989 (54 FR 8056), and which has been in effect since March 27, 1989.

Order 3 is one of seven Onshore Oil and Gas Orders that the BLM issued under its regulations at 43 CFR part 3160.
2

Order 3 primarily supplements the regulations at 43 CFR 3162.4 (records and reports), 3162.5 (environmental safety), 3162.7 (disposition and measurement of oil and gas production and site security on Federal and Indian (except Osage Tribe) oil and gas leases), subpart 3163 (non-compliance, assessments, and civil penalties), and subpart 3165 (relief, conflicts, and appeals). To date, the BLM's Onshore Orders have been published in the
Federal Register
, both for public comment and in final form, but they have not been codified in the CFR. With this rule, the BLM is now proposing to replace Order 3 and update and codify the requirements regarding site security, as explained below.

2
These regulations provide for the issuance of Onshore Oil and Gas Orders to “implement and supplement” the regulations found in part 3160. 43 CFR 3164.1(a). The Onshore Orders apply nationwide to all Federal onshore and Indian (except Osage Tribe) oil and gas leases.

In 2007, the Secretary appointed an independent panel—the Subcommittee on Royalty Management (Subcommittee)—to review the Department's procedures and processes related to the management of mineral revenues and to provide advice to the Department based on that review.
3

In a report dated December 17, 2007, the Subcommittee determined that the BLM's guidance regarding production accountability is “unconsolidated, outdated, and sometimes insufficient” (Subcommittee report, p. 30). The Subcommittee report found that this results in inconsistent and outmoded approaches to production accountability tasks and potential reductions in royalty revenue.

3
The Subcommittee was commissioned to report to the Royalty Policy Committee, which is chartered under the Federal Advisory Committee Act to provide advice to the Secretary and other departmental officials responsible for managing mineral leasing activities and to provide a forum for the public to voice concerns about mineral leasing activities.

The Subcommittee report expressed concern that the applicable “BLM policy and guidance is outdated” and “some policy memoranda have expired” (Subcommittee report, p. 31). For example, the BLM issued Order 3 in 1989 and has not updated it since, even though BLM and industry practices and technologies have changed significantly in the intervening 25 years. The Subcommittee also expressed concern that “BLM policy and guidance have not been consolidated in a single document or publication”, which has led to the “BLM's 31 oil and gas field offices using varying policy and guidance” (id.). For example, “some BLM State Offices have issued their own `Notices to Lessees' for oil and gas operations” (id.). While the Subcommittee recognized that such Notices to Lessees may have a positive effect on some oil and gas field operations, it also observed that they necessarily “lack a national perspective and may introduce inconsistencies among State [Offices]” (id.).

The Subcommittee specifically recommended that the BLM re-evaluate its regulations and update its policy and guidance on production accountability, including requiring that requests to commingle production from multiple leases, unit participating areas (PAs), or communitization agreements identify allocation among zones (Subcommittee report, p. 32). The Subcommittee also recommended that the BLM re-evaluate its policies and guidance for royalty-free use of gas in lease operations. It also specifically recommended that the BLM establish a workgroup to evaluate Order 3. In response, the Department formed a fluid minerals team, comprised of Departmental employees who are oil and gas experts. Based on its review, the team determined that Order 3 should be updated.

In addition to the Subcommittee report, the GAO issued findings and recommendations addressing similar issues in 2010 (Report to Congressional Requesters,
Oil and Gas Management, Interior's Oil and Gas Production Verification Efforts Do Not Provide Reasonable Assurance of Accurate Measurement of Production Volumes
GAO-10-313 (GAO Report 10-313)).

The GAO found that Interior's measurement regulations and policies do not provide reasonable assurance that oil and gas are accurately measured. Regarding matters relevant to Order 3, the report found that the BLM lacks regulatory or policy requirements for operators to clearly identify measurement points, creating challenges for the BLM in verifying production (GAO Report 10-313, p. 34). It also found that the BLM does not have sufficient national policies and a consistent process for approving arrangements that allow operators to commingle production from multiple Federal, Indian, State, and private leases, which also makes it difficult for the agency to verify production (GAO Report 10-313, p. 36). The GAO specifically recommended that: (1) The BLM develop guidance clarifying when Federal oil and gas may be commingled and establish standardized measurement methods for such circumstances so that production can be adequately measured and verified; (2) BLM staff confirm that commingling agreements are consistent with Interior guidance before they are approved, and that the agreements facilitate key production verification activities; and (3) The BLM track all onshore meters, including information about meter location, identification number, and owner to help ensure that Interior is consistently tracking where and how oil and gas are measured.

The GAO reiterated some of these concerns in 2015 (Report to Congressional Requesters,
Oil and Gas Resources, Interior's Production Verification Efforts and Royalty Data Have Improved, But Further Actions Needed
GAO-15-39 (GAO Report 15-39)). In the 2015 report, the GAO acknowledged the improvements BLM had made in its processes and policies (
e.g.,
issuing additional guidance regarding commingling approvals in 2013), but reiterated its view of the importance of the BLM undertaking an

update of its regulations related to measurement and site security (GAO Report 15-39, pp. 31-32).

Based in part on its concerns that the BLM's production verification efforts do “. . . not provide reasonable assurance that operators are accurately measuring and reporting” the volumes of oil and gas produced from Federal and Indian leases, the GAO included the BLM's onshore oil and gas program on its High Risk List in 2011 (Report to Congressional Committees,
High Risk Series, An Update,
GAO-11-278 (GAO Report 11-278), p. 15). Because the GAO's recommendations have not yet been fully implemented, the onshore oil and gas program has remained on the High Risk List in subsequent updates in 2013 (Report to Congressional Committees,
High Risk Series, An Update,
GAO-13-283) and 2015 (Report to Congressional Committees,
High Risk Series, An Update,
GAO-15-290).

In addition to concerns expressed by other parties, the BLM also recognizes, based on its own field experience, that its site security requirements need to be strengthened. For example, on the issue of the point of royalty measurement, it is not uncommon for a BLM inspector, a lease operator, and field employees to all have different understandings of where that point is on a given lease because Order 3 does not require operators to formally identify and obtain BLM approval for a specific measurement point. One result of this confusion is that BLM inspectors sometimes drive out to remote locations to witness calibrations on meters that they believed were measuring production for purposes of determining royalty when, in fact, they were not. The inspectors may not discover the discrepancies until months or even years later, during audits when operators submit their production accountability paperwork and the meter information does not match. This can create needless uncertainties in production accounting and verification and can increase the time spent on individual inspections and audits by both operators and the BLM, which strains the BLM's limited resources, while also requiring additional response and resources on the part of operators.

Similarly, with respect to existing commingling approvals, the BLM recognizes that in the absence of uniform national guidance, some of the existing BLM-approved commingling agreements may not provide the production data that the BLM needs to independently verify production that is attributable to the Federal or Indian leases covered by those agreements. The absence of this data limits the BLM's ability to fulfill its obligation to ensure that all production from Federal and Indian (except Osage Tribe) oil and gas leases is properly accounted for and that royalties are properly calculated.

Many of the provisions in this proposed rule were developed in response to the BLM's experience and the recommendations made by the Subcommittee and the GAO. Others were developed by the BLM to enhance and clarify some of Order 3 requirements in response to changes in technology and industry practice, and changes to applicable statutory requirements. The provisions discussed below also respond to comments received during a series of public meetings held by the BLM on April 24 and 25, 2013, to discuss proposed revisions to Orders 3, 4, and 5. In aggregate, these provisions will help ensure that the production of Federal and Indian (except Osage Tribe) oil and gas is adequately accounted for. By replacing the patchwork of guidance developed by BLM state and field offices, the provisions of this proposed rule would also provide operators with a level of consistency as to the requirements applicable to their operations on Federal and Indian (except Osage Tribe) lands nationwide.

III. Discussion of the Proposed Rule

A. General Overview

The following table provides an overview of the changes contemplated as part of this proposed rule and identifies the substantive proposed changes relative to Order 3.

BILLING CODE 4310-84-C

EP13JY15.110

EP13JY15.111

EP13JY15.112

EP13JY15.113

EP13JY15.114

EP13JY15.115

EP13JY15.116

BILLING CODE 4310-84-P
B. Section-by-Section Analysis

This proposed rule would be codified primarily in a new 43 CFR subpart 3173 within a new part 3170. The BLM is also concurrently preparing and anticipates issuing separate proposed rules to update and replace Onshore Oil and Gas Order 4 (oil measurement) and Onshore Oil and Gas Order 5 (gas measurement). Those proposed rules are anticipated to be codified at new 43 CFR subparts 3174 and 3175, respectively. As a result, the proposed rule also includes a new subpart 3170 that would contain definitions of certain terms and common provisions,
i.e.,
provisions prohibiting by-pass of and tampering with meters; procedures for obtaining variances from the requirements of a particular rule; requirements for recordkeeping, records retention, and submission; and administrative appeal procedures.

In addition, the proposed rule would also make several changes to various provisions in 43 CFR part 3160. Proposed changes to 43 CFR 3162.3-2, 3162.4-1, 3162.6, 3162.7-1, 3163.2, and 3163.5 are discussed in connection with the proposed new subpart 3170 or 3173 provision to which the particular change relates. Other changes to provisions in part 3160 are discussed at the end of this section-by-section analysis.

Subpart 3170—Onshore Oil and Gas Operations; General and Related Provisions

Section 3170.1 Authority

Proposed § 3170.1 would identify the various grants of rulemaking authority in the Federal and Indian mineral leasing statutes and related statutes that give the Secretary authority to promulgate this rule.

Section 3170.2 Scope

Proposed § 3170.2 would explain that the regulations in part 3170 would apply to all Federal onshore and Indian oil and gas leases (except those of the Osage Tribe), and, with certain exceptions, to agreements for oil and gas under the Indian Mineral Development Act and agreements under a Tribal Energy Resource Agreement entered into with the Secretary. In addition, State or private tracts committed to a federally approved unit or communitization agreement as defined by or established under 43 CFR subpart 3105 or 43 CFR part 3180 also would be subject to the rule.

Section 3170.3 Definitions and Acronyms

This proposed section would define terms and acronyms used in more than one of the subparts of part 3170 that the BLM has proposed here (subpart 3173) or anticipates proposing (subparts 3174 (oil measurement) and 3175 (gas measurement)).

Of these new terms, the proposed definition of “facility measurement point (FMP)” merits discussion here; other terms are discussed below. Under the proposed rule, an FMP is a “BLM-approved point where oil or gas produced from a Federal or Indian lease, unit, or CA is measured and the measurement affects the calculation of the volume or quality of production on which royalty is owed.” As explained below, the proposed rule sets forth a process for an operator of a new or an existing facility to apply for approval of an FMP and issuance of an FMP number in proposed § 3173.12. Because proposed § 3173.12 would require operators of existing facilities to apply for an FMP in stages over a 27-month period, it will require 3 years from the effective date of the final rule for the BLM to receive, evaluate, and act on FMP applications for existing facilities. Therefore, for purposes of compliance with other provisions of this proposed rule, during this interim period, the proposed definition of an FMP makes clear that an FMP “also includes a meter or measurement facility used in the determination of the volume or quality of royalty-bearing oil or gas produced before BLM approval of an FMP under § 3173.12 of this part.”

While meters used in determining the volume or quality of production include allocation meters,
4

the proposed

definition of FMP does not include allocation facilities that are part of a commingling and allocation approval issued pursuant to proposed § 3173.15 below or that were approved after July 9, 2013. Since July 9, 2013, under BLM Instruction Memorandum (IM) 2013-152, issued on that date, BLM authorized officers may approve only those commingling requests that: (1) Have no royalty impacts (
e.g.,
commingled properties have the same mineral ownership, royalty rate, and revenue distribution); (2) Involve “low-volume properties”
5

; or (3) Involve circumstances where overriding considerations of continued production outweigh the potential inaccuracies of the allocation method. As explained below, proposed § 3173.15 carries forward the requirements of IM 2013-152 related to the approval of commingling requests. For commingling requests that meet these requirements, it is not necessary for the allocation facilities to meet the applicable oil measurement or gas measurement standard. Thus, it is not necessaryfor these facilities (
i.e.,
those approved after July 9, 2013 or pursuant to proposed 3173.15) to be regarded as FMPs. Allocation meters or facilities approved before July 9, 2013, must meet the standards of the applicable current Order and would have to meet the standards of the proposed rules according to the prescribed timeframes for compliance; therefore, they will continue to be FMPs.

4
An allocation meter is a meter that measures production from a particular lease, unit, unit PA, or CA that is commingled with production from

other leases, units, unit PAs, or CAs before the point of royalty measurement,
i.e.,
the meter that measures the production for purposes of determining royalty. The production measured at the point of royalty measurement is then allocated back to the respective contributing properties on the basis of each allocation meter's proportion of the total production measured by all allocation meters.

5
As explained below, “low-volume properties” include leases, unit PAs, or CAs that do not produce sufficient volumes for the operator to realize from continued production a sufficient rate of return on the investment required to achieve non-commingled measurement, such that a prudent operator would opt to plug a well or shut in the lease, unit PA, or CA if the commingling request were not approved. In these situations, the economic considerations of continued production outweigh the inaccuracies of the allocation method.

Section 3170.4 Prohibitions Against By-Pass and Tampering

Proposed § 3170.4 would strengthen the existing prohibition against meter by-passes in section III.D. of Order 3 by adding language that would prohibit tampering with any measurement device, component of a measurement device, or measurement process. Tampering would include any adjustment or alteration to the meter or measurement device or measurement process that could introduce bias into the measurement or affect the BLM's ability to independently verify volumes or qualities reported. Examples of tampering include installing an orifice plate in a gas meter with the bevel upstream, adjusting a transducer to read higher or lower than a certified test device, entering incorrect information into the configuration log of an electronic gas measurement system, submitting derived integral values on a volume statement in lieu of raw data, or making analogous adjustments or alterations to an oil measurement system.

Section 3170.5 Industry Standards Incorporated by Reference

§ 3170.5
would be reserved for potential future incorporation by reference of standards that would apply to more than one of the subparts of part 3170.
Section 3170.6 Variances

Proposed § 3170.6 would make the BLM's existing process and regulations for granting variances from the minimum standards of this rule more clear and uniform.

Proposed § 3170.6(a)(1) through (3) would prescribe the requirements for submitting a request for a variance from a requirement in the regulations in part 3170. Importantly, paragraph (a)(2) would require that a request for a variance be submitted as a separate document from any plans or applications. A request for a variance “buried” in another document, such as a request submitted as part of a master development plan, application for permit to drill, right-of-way application, or other applications for approval rather than submitted separately would not be considered. Approval of a plan or application that contains a request for a variance would not constitute approval of the variance.

Proposed § 3170.6(a)(4) would strengthen and standardize the criteria the BLM uses for granting variances. Under Order 3, the AO is required to make only one determination—whether or not the variance request meets or exceeds the objectives of the applicable minimum standard. Under this proposed paragraph, the AO still would have to make that determination before granting a variance. Additionally, the proposed change would require the AO to make two more determinations before granting a variance—that issuing a variance would not adversely affect royalty income or production accountability and is consistent with maximum ultimate economic recovery.

Proposed § 3170.6(a)(5) and (6) would specify that granting or denying a variance is entirely within the BLM's discretion, and that a variance from a requirement in a regulation does not constitute a variance to any other regulations, including Onshore Oil and Gas Orders.

Proposed § 3170.6(b) would make clear that the BLM has the right to rescind a variance or modify any condition of approval of a variance due to changes in Federal law, technology, regulation, BLM policy, field operations, noncompliance, or other reasons.

Section 3170.7 Required Recordkeeping, Records Retention and Records Submission

Proposed § 3170.7 would update BLM regulations to reflect the records retention requirement for Federal oil and gas leases that Congress established in 1996 amendments to the Federal Oil and Gas Royalty Management Act (FOGRMA).

Paragraphs (a) and (b) would establish the coverage of the records-retention requirement relative to both persons covered and the time period in which records are generated. Purchasers and transporters would be held to the same minimum standards as operators for recordkeeping, records retention, and records submission—
i.e.
, to maintain all records that are relevant to determining the quality, quantity, disposition, and verification of production from Federal and Indian leases. Section 103(a) of FOGRMA, 30 U.S.C. 1713(a), requires persons involved in transporting and purchasing oil or gas through the point of first sale or the point of royalty computation, whichever is later (along with persons involved in producing or selling), to “establish and maintain any records, make any reports, and provide any information that the Secretary may, by rule, reasonably require.” Order 3, however, does not expressly require transporters and purchasers to establish and maintain any records (except for the requirement in section III.C.2.c. that truck drivers transporting production have information about the load in their possession (see 30 U.S.C. 1712(c)(1)).

Under proposed § 3170.7(c), records pertaining to Federal leases, units, or CAs would have to be maintained for at least 7 years, subject to applicable statutory requirements for further retention under certain circumstances (see 30 U.S.C. 1724(f)), as required under the 1996 amendments to FOGRMA. Under proposed § 3170.7(d), records pertaining to Indian leases, units, or CAs would have to be maintained for at least 6 years, subject to applicable statutory requirements for

further retention under certain circumstances (see 30 U.S.C. 1713(b)). The records-retention requirement on Indian leases would be unchanged because the 1996 amendments, by their express terms, applied only to Federal leases and not to Indian leases.

Proposed § 3170.7(e) would address the relationship of these two requirements for units and CAs that contain both Federal and Indian leases.

Proposed § 3170.7(f) would require the record holders to maintain an audit trail.

Under proposed § 3170.7(g) and (h), purchasers and transporters also would be required to place the new FMP numbers on all records associated with Federal and Indian leases, units, or CAs, after the BLM has assigned them, and to provide these records to the BLM upon request.

These changes are proposed to ensure that all records—whether they are created by lessees, operators, transporters, or purchasers—are clear, accurate, and readily available to the BLM. Under existing requirements, if BLM staff, in the course of auditing and verifying production, needs to review transporter or purchaser records, staff typically must ask the operator or lessee to provide the documents. Many transporters and purchasers have their own internal systems for identifying sales measurement points, with which operators may not be familiar. Sometimes operators do not maintain their own records properly, preferring instead to rely on the transporters' and purchasers' records. This has the potential to create long delays when transporters and purchasers fail to respond quickly to operators' document requests. Sometimes operators go out of business or are acquired by other companies and their records are destroyed, making it impossible for BLM staff to verify production. The BLM believes that it is important for everyone involved in the production and sale of oil and gas produced from Federal and Indian leases to be responsible for maintaining and providing their own records.

If a purchaser or transporter fails to maintain and submit records as required under this proposed rule, the purchaser or transporter would be subject to civil penalties under Section 109 of FOGRMA, 30 U.S.C. 1719. Consequently, the BLM is proposing to amend its civil penalty rules at 43 CFR 3163.2 to designate the first sentence of paragraph (a) of the existing § 3163.2 as paragraph (a)(1), and to add a new paragraph (a)(2). The second sentence of the existing paragraph (a) (pertaining to the maximum amount of the penalty if the violation is not corrected within 20 days of the date of notice) would be redesignated as paragraph (b)(1). The existing paragraph (b) (pertaining to the maximum amount of the penalty if the violation is not corrected within 40 days of the date of notice) would be redesignated as paragraph (b)(2). References to purchasers and transporters would be added to the penalty amount provisions in paragraph (b).

Similarly, the BLM proposes to add to the notice requirements of existing regulations at 43 CFR 3165.3 a provision regarding notice to a purchaser or transporter (who is not an operating rights owner or operator) of failure to comply with records maintenance or production requirements. The BLM proposes to divide the several sentences of the existing paragraph (a) into numbered subparagraphs. After the first sentence, which would be redesignated as paragraph (a)(1) (and rephrased into active voice), the BLM proposes to add a new paragraph (a)(2). Enforcement of recordkeeping violations taken against an entity other than the lessee or operator under these proposed provisions also would be addressed in the proposed inspection and enforcement handbook being developed. These enforcement actions would include the issuance of Incidents of Noncompliance (INCs) and the assessment of civil penalties.

In 43 CFR 3162.4-1, the BLM is proposing to revise paragraph (a) to reflect that the new recordkeeping requirements also would apply to “source records” that are relevant to “determining and verifying the quality, quantity, and disposition of production from or allocable to Federal or Indian leases.” Paragraph (d) would be revised to establish the new records retention period, and would mirror for part 3160 the provisions in paragraphs (c) through (e) of proposed § 3170.7. A new paragraph (e) would be added that would list the “record holders” who would be subject to the new recordkeeping requirements. Additionally, the BLM is proposing to remove paragraph (f) from 43 CFR 3162.7-1, Disposition of production, which refers to the 6-year retention period, since the initial statutory retention period is now 7 years, as would be prescribed in the proposed amendment to § 3162.4-1 and in proposed § 3170.7.

Section 3170.8 Appeal Procedures

Proposed § 3170.8 would provide that BLM decisions, orders, assessments, or other actions under the proposed part 3170 are administratively appealable (first to the BLM State Director and then to the Interior Board of Land Appeals) under 43 CFR 3165.3(b), 3165.4, and part 4.

Section 3170.9 Enforcement

Proposed § 3170.9 would provide that noncompliance with any requirements of part 3170 or any order issued thereunder may result in enforcement actions under 43 CFR subpart 3163 or any other remedy available under applicable law or regulation.

Subpart 3173—Requirements for Site Security and Production Handling and Related Provisions

Section 3173.1 Definitions and Acronyms

Section 3173.1 of the proposed rule would define the terms and acronyms that are unique to proposed subpart 3173. The section would adopt the same definitions of some of the terms defined in Order 3, with some minor revisions to either simplify or clarify those definitions. Several of the terms defined in Order 3 would be defined in proposed § 3170.3.

The proposed rule adds a definition of “low-volume property,” which is intended to define one category of circumstances under which commingled measurement of production from a lease, unit PA, or CA may be justified, even though it would not meet the conditions of proposed § 3173.14(a)(1) regarding mineral interest ownership of commingled production. The proposed rule also provides a definition for “land description.”

Section 3173.2 Storage and Sales Facilities—Seals

Paragraphs (a) and (b) of proposed § 3173.2 would require any lines entering or leaving any oil storage tank or storage facility to have valves capable of being effectively sealed. These paragraphs would prescribe which valves must be effectively sealed during which operational phases (production, sales, water draining, or hot oiling). Paragraph (c) identifies the specific types of valves that are not considered “appropriate valves” (
i.e.
, valves that must be sealed during the production phase or the sales phase) for purposes of this requirement. The requirements of paragraphs (a) through (c) would largely correspond to the existing requirements in Order 3, with some refinements.

Paragraph (d) would prohibit tampering with an “appropriate valve,” and would provide that tampering may result in assessment of a civil penalty for knowingly or willfully preparing, maintaining, or submitting false,

inaccurate, or misleading information under Section 109(d)(1) of FOGRMA, 30 U.S.C. 1719(d)(1), and 43 CFR 3163.2(f)(1), or for knowingly or willfully taking, removing, or diverting oil or gas from a lease without valid legal authority under Section 109(d)(2) of FOGRMA, 30 U.S.C. 1719(d)(2), and 43 CFR 3163.2(f)(2).

Section 3173.3 Oil Measurement System Components—Seals

Proposed § 3173.3 would identify a nonexclusive list of the components used in LACT meters or Coriolis oil measurement systems that must be effectively sealed to indicate tampering.

Section 3173.4 Federal Seals

Paragraph (a) of proposed § 3173.4 would codify the authority in section IV of Order 3 for the BLM to place a Federal seal on any appropriate valve, sealing device, or oil meter system component that does not comply with the requirements of proposed § 3713.2 or § 3173.3. Paragraph (b) clarifies that the placement of a Federal seal does not relieve the operator of the requirement to comply with § 3713.2 or § 3173.3. Paragraph (c) would prohibit the removal of a Federal seal without BLM approval.

Section 3173.5 Removing Production From Tanks for Sale and Transportation by Truck

Consistent with the existing requirements of section III.C.1.c. of Order 3, paragraphs (a) and (b) of proposed § 3173.5 would identify who must possess the information that would be required by § 3174.12 of this part (which the BLM intends to propose separately) when production is removed from storage tanks for transportation by truck. Paragraph (c) would make the purchaser or transporter responsible for the entire contents of a tank until it is resealed.

Section 3173.6 Water-Draining Operations

Proposed § 3173.6 would require that specific information be recorded when water is drained from tanks that hold hydrocarbons. Under existing regulations, the operator is required to record only the date, seal number removed, new seal number installed, and the reason for draining. The operator currently is not required to record the volume of hydrocarbons that are in the tank before and after water is drained. This could lead to hydrocarbons being drained with the water and removed without proper measurement and accounting, and without royalties being paid. This proposed rule would require operators to record the volume of hydrocarbons that are in the tank both before and after water is drained.

Section 3173.7 Hot Oiling, Clean-up, and Completion Operations

Proposed § 3173.7 would require that specific information be recorded when hydrocarbons are removed from storage and used on the lease, unit, or CA for hot oiling, clean-up, and completion operations, including the volume of hydrocarbons removed from storage and expected to be returned to storage.

Under existing requirements, the operator is required to record only the date, seal number removed, new seal number installed, and reason for removing oil for hot-oiling, clean-up, or completion operations. The operator currently is not required to record the volume of hydrocarbons that is removed from storage and is expected to be returned. This could lead to the volume of produced hydrocarbons being counted twice; first when it was initially produced then later after it is returned to storage.

Section 3173.8 Report of Theft or Mishandling of Production

Paragraph (a) of proposed § 3173.8 would require transporters and purchasers, along with operators, to report incidents of theft and mishandling of production to the BLM whenever they or their employees discover it. Such reports may be made orally or through a “written incident report.” In the proposed rule any oral reports must be followed by a written report within 10 business days. This reporting requirement is important because sometimes transporters and purchasers are the first ones to discover theft and mishandling of production or to recognize suspicious activity. Proposed paragraph (b) would specify the information that must be included in a written incident report.

Section 3173.9 Required Recordkeeping for Inventory and Seal Records

Paragraph (a) of proposed § 3173.9 would require operators to measure and record the total observed volume in storage at the end of each calendar month. Proposed paragraph (b) would specify the records that an operator must maintain for each seal.

Section 3173.10 Form 3160-5, Sundry Notices and Reports on Wells

Proposed § 3173.10 would require all parties involved in Federal and Indian oil and gas production to submit a Form 3160-5 electronically to the BLM for their site facility diagrams, requests for FMP designations, requests for CAAs, requests for off-lease measurement, and any amendments to the diagrams or requests. This would, in the long run, increase efficiencies throughout BLM field offices for both the BLM and operators by making the diagrams easier to track and more accessible to inspectors in the field. This new requirement would also make it easier for the BLM to keep track of equipment and operational changes at a given facility and ensure that the parties are complying with Federal laws, rules, and regulations, while at the same time reducing the need for operators to respond to requests for information and making what information is needed easier to submit. Operators who are small businesses that do not have access to the Internet would be exempt from this requirement. BLM notes that the Office of Natural Resources Revenue (ONRR) already requires operators producing oil and gas from onshore Federal and Indian leases onshore to file their monthly Oil and Gas Operations Reports (OGORs) electronically, and thus this requirement is expected to be relatively easy to implement.

This proposed rule would increase the number of companies and company representatives using the e-filing capabilities of the BLM's Automated Fluid Minerals Support System (AFMSS). Currently, filing parties inconsistently use this e-filing system because it is not required. Preliminary estimates are that the BLM would see a tenfold increase in e-filings, from 500 to 5,000.

Section 3173.11 Site Facility Diagrams

Paragraphs (a) through (c) of proposed § 3171.11 would set forth the requirements for the content and format of site facility diagrams. These requirements are important because inspection and verification of company-submitted site facility diagrams is one of the BLM's primary mechanisms for ensuring operators are complying with measurement regulations and policy. The requirements in the proposed section would update and replace Order 3's Site Security Plan. Currently, the BLM requires operators to provide generalized diagrams showing each piece of equipment being used at a facility, including connections between each piece of equipment, valve positions on production storage tanks (sales valves, drain valves, equalizers, and overflow valves), and their relative positions to each other. Tank valve positions (open or closed) are dependent upon whether the tank is in

the production, sales, or drain phase of operations.

Under proposed § 3173.11, new site facility diagrams would, in addition to the drawings, include important and specific information such as the FMP number; land description; Federal or Indian lease, unit, or CA number; site equipment with any corresponding serial identification numbers and manufacturer's consumption ratings; a reasonable royalty-free use determination; and a signature block. This more detailed information would provide the BLM with a more useful tool to achieve improved production accountability.

In addition to the requirements above, proposed § 3173.11(c) would also allow the BLM, for the first time, to verify royalty-free-use volumes reported by the operator on OGORs. Under the applicable statutes and lease terms, the portion of the oil and gas produced that is used to power operations on the lease, CA, or unit, such as using natural gas to power drilling and pumping equipment, is not royalty-bearing. This use of oil and gas is referred to as “royalty-free use.”

Currently, operators provide estimates of their royalty-free-use volumes to ONRR each month, but the BLM lacks an ability to verify those estimates. Proposed § 3173.1(c)(11) would require operators to report to the BLM on their site facility diagrams what equipment is being used on the lease and how they determine the volume of oil or gas used royalty free by that equipment (based on equipment manufacturers' fuel-use ratings), if the volume is not measured. This new requirement would provide greater consistency in how the volume of oil and gas used royalty free is determined and enable the BLM to more easily verify those volumes. This requirement enhances production accountability and responds to key recommendations made by the GAO (Report 10-313). Requiring this information to be reported on the more detailed facility diagram would ultimately save time because it would eliminate the need for the BLM to obtain the information in connection with a production accountability review.

Proposed 3173.11(d) would require the operator of an existing facility (
i.e.,
one in service before the effective date of the final rule) to submit a new site facility diagram that complies with the requirements of this proposed section within 30 days of obtaining an FMP number under proposed § 3173.12 below. Under proposed § 3173.11(e), operators of existing facilities that do not require an FMP number, but for which a diagram would be required under the proposed rule (for example, facilities that dispose of produced water), would have 60 days after the effective date of the final rule to submit compliant diagrams.

Section 3173.12 Applying for a Facility Measurement Point

Section 3173.12 of the proposed rule would, for the first time, establish a formal nationwide process for designating and approving the point at which oil or gas must be measured for the purpose of determining royalty. Currently, the BLM does not have a formal, written process for designating measurement points on the leases it manages. (Some Field Offices have their own internal policies for establishing these points.) This lack of uniform guidance across Field Offices has resulted in instances of confusion about the location of royalty measurement points, which interferes with the production verification process. This proposed section would require operators to obtain BLM approval of FMPs for all measurement points used to determine royalties. The BLM would approve an FMP that meets the requirements of this proposed rule (the most important elements of which would be identification of the wells associated with the FMP, the measurement method, and component information). The BLM would assign each FMP a unique identifying number, which the operator, transporter, or purchaser would then use when reporting production results to ONRR.

The Bureau of Safety and Environmental Enforcement (BSEE) already assigns a similar FMP number for offshore oil and gas leases, which the operator, transporter, or purchaser must then use when reporting production results to ONRR. The changes in this proposed rule would make BLM practices consistent with existing BSEE and ONRR practices, for production reporting without having to create an entirely new numbering system.

Paragraph (a)(1) of this proposed section would provide that the FMP(s) for a lease, unit PA, or CA would have to be located within the boundaries of the lease, unit, or CA from which the oil or gas is produced, and must measure only production from that lease, unit PA, or CA, unless otherwise approved. Proposed paragraph (a)(2) would provide that off-lease measurement, commingling, or allocation of production requires prior approval under 43 CFR 3162.7-2 and 3162.7-3 and proposed §§ 3173.15, 3173.16, 3173.24, and 3173.25 of this proposed rule.

Proposed paragraph (b) would provide that the BLM will not approve a meter at the tailgate of a gas processing plant located off the lease, unit, or CA as an FMP. This continues existing uniform practice.

Proposed paragraph (c) would provide that the operator must apply for approval of separate FMP numbers for an FMP that measures oil produced from a particular lease, unit PA, CA, or CAA and an FMP that measures gas produced from the same lease, unit PA, CA, or CAA, even if the measurement equipment or facilities are at the same location. In the numbering system for FMPs in use by both ONRR and BSEE (for offshore leases), the first pair of numbers in the FMP number specifies whether the FMP measures oil or measures gas. The BLM would not approve the same FMP number for a facility that measures oil and a facility that measures gas.

Proposed paragraph (d) would require the operator to obtain approval for the FMP for a new measurement facility (
i.e.
, one coming into service after the effective date of the final rule) before any production leaves the facility.

Proposed paragraph (e) would provide that for existing production measurement facilities, an operator would have 9 months, 18 months or 27 months from the effective date of the final rule within which to apply for BLM approval of its FMP, depending on the production level of the lease, unit PA, CA, or CAA that the measurement facility serves. The prescribed application deadline would apply to both oil and gas measurement facilities measuring production from that lease, unit PA, CA, or CAA. The BLM proposes to require applications for FMPs for existing measurement facilities that serve operations with the highest production volumes first. For stand-alone leases, unit PAs, CAs, and CAAs that produce 6,000 Mcf or more of gas per month, or 40 barrels or more of oil per month, the BLM is proposing that the operator would have to apply for approval of the FMP(s) within 9 months after the effective date of the final rule. For stand-alone leases, unit PAs, CAs, or CAAs that produce 3,000 Mcf or more but less than 6,000 Mcf of gas per month, or 20 barrels or more but less than 40 barrels of oil per month, the operator would have to apply for approval of the FMP(s) within 18 months after the effective date of the final rule. For stand-alone leases, unit PAs, CAs, or CAAs that produce less than 3,000 Mcf of gas per month and less than 20 barrels of oil per month, the operator would have to apply for approval of the FMP(s) within 27

months after the effective date of the final rule. These thresholds would be calculated as an average over the 12 months preceding the effective date of the final rule or the period the lease, unit, CA, or CAA has been in production, whichever is shorter.

If the operator applies for an FMP approval by the required date, the operator could continue to use the existing measurement points until the BLM acts on the application. If the operator fails to apply for an FMP approval by the required date, the operator would be subject to an incident of noncompliance and assessment of civil penalty under 43 CFR subpart 3163, together with any other remedy available under applicable law or regulation.

The BLM specifically solicits comments regarding its proposed threshold volumes and required periods for submitting applications for FMP approvals. Should the BLM consider alternative application periods or volume thresholds? If so, what periods of time would be appropriate for what production volume levels and on what basis? Based on comments received and further review, the BLM may prescribe different application periods in the final rule.

Proposed paragraph (f) would prescribe the information that a request for FMP approval would have to include. Proposed paragraph (g) would allow concurrent requests for FMP approval and requests for approval of off-lease measurement or commingling. Under proposed paragraph (h), the BLM will assign a number to the FMP if it approves a request.

This proposed section would implement one of the GAO's recommendations that the Interior Department consistently track where and how oil and gas are measured, including information about meter location, identification number, and owner. Operators would be required to obtain approval from the BLM for the location of the FMP at which oil or gas is measured. The BLM would then tie the FMP numbers to other appropriate approvals, such as site facility diagrams, off- lease measurement, commingling, and royalty-free use (if volumes used royalty free are measured).

Operators, purchasers, and transporters would be required to label each FMP with the assigned number, to use the FMP number on related documents or records, and to use the number for production reporting to ONRR. Related documents or records would include, but would not be limited to, calibration reports, gas analysis, sales statements, manifests, seal records, and approvals.

The BLM estimates there are approximately 120,000 existing oil and gas facilities associated with Federal and Indian leases. Many facilities would have one FMP for oil and one FMP for gas, resulting in approximately 220,000 FMPs. We anticipate that designating FMPs for almost all operators would not require any physical changes to existing facilities other than the signage requirements discussed below. The only exception would be in some instances of commingling or off-lease measurement, which are discussed below in connection with proposed §§ 3173.14 through 3173.21 (commingling) and proposed §§ 3173.22 through 3173.28 (off-lease measurement).

In connection with its creation of a new FMP system, the BLM is proposing to revise its existing well and facility identification provisions at 43 CFR 3162.6(b) and (c) to include a signage requirement for wells on Federal and Indian lands and facilities at which Federal or Indian oil or gas is measured or processed. Additional proposed revisions to § 3162.6 would:

(1) Make the surveyed-location language in paragraphs (b) and (c) consistent, including a new reference to longitude and latitude; and (2) Remove a sentence in paragraph (b) that provided a grace period for well signs that were in existence on the effective date of the earlier rulemaking

(2) in which that section was promulgated.

Section 3173.13 Requirements for Approved Facility Measurement Points

Proposed § 3173.13 sets forth the requirements that would be applicable to all approved FMPs. Proposed paragraphs (a) and (b) would require operators to stamp or stencil FMP numbers on a fixed plate on specified measurement equipment within 30 days after BLM approval of the FMP, and maintain that stamp/stencil in a legible condition. Under proposed paragraph (c), the operator would be required to use any assigned FMP numbers in reporting and recordkeeping on the first day of the month after an FMP is assigned. Finally, proposed paragraph (d) would require an operator to file a Sundry Notice in connection with any changes or modifications to an approved FMP.

Sections 3173.14 through 3173.21 Commingling and Allocation Approvals

As explained below, §§ 3173.14 through 3173.21 of the proposed rule would restrict the instances in which the BLM would approve commingling and would establish standards that an operator would need to meet to obtain an approval. Current regulations (43 CFR 3162.7-2 and 3162.7-3) require BLM approval before commingling production from a Federal or Indian lease with production from other sources; however, there are no regulations addressing how or under what circumstance commingling should be approved. The requirements proposed in these sections are consistent with and would codify the policy outlined by the BLM in 2013 with respect to commingling approvals in IM 2013-152, “Reviewing Requests for Surface and Downhole Commingling of Oil and Gas Produced from Federal and Indian Leases.” The principal substantive difference between the provisions proposed below and the BLM's existing IM is that the proposed rule would establish a procedure for the BLM to review existing CAAs when the operator applies for approval of an FMP. In contrast, the IM focuses solely on new commingling arrangements.

Section 3173.14 Conditions for Commingling and Allocation Approval (Surface and Downhole)

Commingling, for the purpose of this proposed rule, is the combining of production from multiple sources (leases, unit PAs, CAs, or non-Federal or non-Indian properties) before measurement for royalty purposes. For example, an operator may have multiple leases or properties in the same vicinity with a single sales point for all the production from those leases or properties. While the volume measured at the sales point is used to determine royalty due, an allocation method is employed to determine what percentage of that volume is attributable to each lease or property. The allocation percentage is typically determined by dividing the volume or rate of production from a lease, unit PA, or CA by the total volume or rate from all sources. Allocation by volume is determined using allocation meters; allocation by rate is determined through periodic well testing.

Industry often uses the term “commingling” to mean any combining of production before measurement. The industry informal usage could include the combining of production from more than one well on a single lease, unit PA, or CA, and the combining of downhole production from multiple formations, even if they are within the same lease, unit PA, or CA and have the same ownership. For the purpose of this proposed rule, none of these examples would be considered commingling and

this proposed rule would not affect any of them.

The BLM generally uses the term “downhole commingling” to refer to combining production between intervals within a wellbore (see 43 CFR 3162.3-2). Downhole commingling requires BLM approval under that section as a subsequent well operation; however, unless the approval under § 3162.3-2 includes combining production from different leases, unit PAs, or CAs, or production from different geologic formations within the same lease, unit PA, or CA that have different ownership, an operator would not need a separate approval for downhole commingling with respect to production measurement under this proposed rule.

Operators apply for commingling approval for several reasons, including: (1) It can simplify accounting to have the sales point be the same as the point of royalty measurement; (2) Lower operating costs can be achieved by reducing the number of meters required (when using well testing as the allocation method); and (3) Lower operating costs can also be achieved by eliminating the need for separate plumbing and surface equipment (pipelines, separators, dehydrators, compressors, tanks, etc.).

Commingling can also have some advantages for the BLM: (1) More accurate measurement can sometimes be achieved from a meter measuring combined flows due to better-conditioned, more consistent, and higher flow rates than from a single low-volume meter measuring erratic flow with a high potential for multiple phases of fluid; (2) The environmental footprint can be reduced by reducing the need for duplicate surface equipment; and (3) Production accounting can be simplified by reducing the number of meters to inspect and verify.

However, these advantages may be realized without potential negative effects on royalty only if the leases, unit PAs, and CAs being commingled are all 100 percent Federal or are leased 100 percent by the same Indian tribe and are all at the same fixed royalty rate. In that situation, the allocation method is irrelevant because the total amount of Federal or Indian royalty due will be the same regardless of how it is allocated to the individual leases, unit PAs, or CAs included in the commingling approval. Consequently, the BLM can ensure accurate measurement and proper reporting by inspecting and verifying only the sales/royalty meter(s).

On the other hand, if the properties being commingled are not 100 percent Federal or leased 100 percent by the same Indian tribe, or have different royalty rates, then the method of allocation will affect the royalty due. The same is true of Indian allotted leases in virtually all circumstances. The ownership of Indian allotted leases has descended from the original allottees through several generations to numerous current owners, each owning a small percentage of the royalty interest. A situation in which two allotted leases have the same lessor ownership (
i.e.,
the royalty interests are owned by the same individual allottees in identical proportions) would be extremely rare. Consequently, the method of allocation would affect the royalty due in essentially all circumstances involving allotted leases.

Because the allocation method in these instances has royalty implications, the BLM would have to be able to ensure accurate measurement and proper reporting of all meters or facilities involved in the allocation process. This includes the sales meters and all allocation meters or facilities. Approval of commingling in these situations would greatly increase the workload for the BLM because there could be dozens of allocation meters involved, all of which would be subject to inspection and verification. In addition, the allocation methods are often complex and prone to errors and adjustments which increase the risk of mis-measurement and mis-reporting if commingling were to be permitted.

Commingling production from Federal or Indian leases with production from State or private properties that are not part of a unit or CA introduces additional complexities. Unlike a unit or CA, where the BLM has explicit authority over measurement points on non-Federal or non-Indian properties included in the agreement, the BLM has no authority over measurement points on non-Federal or non-Indian lands whose production would be commingled with production from Federal or Indian leases where no unit or CA exists. Therefore, it would be impossible, as a practical matter, for the BLM to verify that the allocation percentages are correct, regardless of how they were determined.

Not only does commingling in situations where there are potential impacts to royalty make verification more difficult, it also increases the uncertainty of volume and quality measurements of oil and gas removed or sold from the lease, unit PA, or CA. When royalty is based on allocated volumes (whether determined by allocation meter or well testing), it is virtually impossible to achieve or verify the required uncertainty level for the allocated volumes. For example, when allocation is done by well testing,
6

the royalty-bearing volume of oil and gas is calculated by multiplying the oil and gas measured at the central point of royalty measurement by the allocation percentage obtained through well testing. The uncertainty of the measurement of the allocated volume is the combined uncertainty of the volume measurement at the central point of royalty measurement and the uncertainty inherent in the allocation percentage. The BLM currently has no standards for well testing and, even if it did, the fact that the production remains unmeasured for 29 out of 30 days (in the case of monthly well testing) results in an indeterminate level of uncertainty. For allocation by allocation meter, the uncertainty of the allocation percentage is the cumulative uncertainty of every allocation meter and the central point of royalty measurement.

6
Well testing involves periodic testing of the production rate for a well, lease, unit, or CA--for example, for 1 or 2 days of each production month. Commingled volumes are then allocated back to the contributing properties according to the relative production rates measured for each of the contributing properties.

Based on these considerations, and to ensure that the BLM can verify the measurements on which royalty is based, paragraph (a) of proposed § 3173.14 would generally prohibit the commingling of production from Federal or Indian leases, unit PAs, or CAs, unless all the properties proposed for commingling were 100 percent Federal or leased 100 percent by the same Indian tribe, and at the same fixed royalty rate.

Proposed paragraph (b) sets forth the proposed rule's only two exceptions that would allow commingling outside these circumstances (in other words, where commingling would be allowed if, for example, there is a combination of Federal and non-Federal ownership, or Indian allotted leases are involved, etc.). First, under proposed paragraph (b)(1), the BLM would consider approving commingling for certain low-volume properties. These would be leases, unit PAs, or CAs that do not produce sufficient volumes for the operator to realize, from continued production, a sufficient rate of return on the investment required to achieve non-commingled measurement of volumes produced from the lease, unit PA, or CA, such that a prudent operator would opt to plug a well or shut-in the lease, unit PA, or CA if the commingling request were not approved. In the absence of information demonstrating a different rate, a rate of return less than 10 percent (calculated before Federal,

State, and local taxes) will be regarded as not sufficient to achieve non-commingled measurement. The BLM may accept a different rate of return if the operator provides sufficient justification. The BLM is seeking comments on the suitability of this rate of return for defining a low-volume property. The BLM would also define a low-volume property as a lease, unit PA, or CA where the cost required to achieve non-commingled production would exceed the net present value of the royalty projected from the lease, unit PA, or CA proposed for commingling over the equipment life.

Second, under proposed § 3173.14(b)(2), the BLM is also proposing to consider approving commingling where overriding considerations indicate that the BLM should approve a commingling application notwithstanding potential negative royalty impacts from commingled measurement. Such situations could include topographic or other environmental considerations that make non-commingled measurement physically impractical or undesirable, in view of where additional measurement and related equipment necessary to achieve non-commingled measurement would have to be located. Proposed paragraph (b)(3) would require the AO to determine whether approving the commingling would be in the public interest, taking into account relevant environmental considerations and production verifiability and accountability.

In connection with these proposed changes, the BLM is proposing to revise 43 CFR 3162.3-2 to differentiate between the combining of production between intervals within a wellbore on the same lease, unit PA, or CA (downhole commingling)—which does not affect production accountability—and the combining of production from different leases, unit PAs or CAs—which does. Proposed revisions to 43 CFR 3162.3-2(a) would make it clear that operators who wish to combine production between intervals within a wellbore on the same lease, unit PA, or CA could continue to seek approval for this activity under that section, and would not need a separate approval under this proposed rule.

Section 3173.15 Applying for a Commingling and Allocation Approval

Section 3173.15 of the proposed rule would establish the requirements operators must follow when requesting a CAA and the information they would need to include.

Section 3173.16 Existing Commingling and Allocation Approvals

Under proposed § 3173.16, the BLM would be required to review an existing CAA upon receipt of an operator's request for assignment of an FMP number to a facility associated with the CAA. Proposed paragraph (a) would require the BLM to review the existing CAA for consistency with the minimum standards and requirements under proposed § 3173.14. The AO would notify the operator in writing of any inconsistencies or deficiencies.

Under proposed paragraph (b), the operator would have 20 business days to correct any inconsistencies or deficiencies. Under proposed paragraph (c), the BLM could impose new or amended conditions of approval (COAs) on an existing CAA to make it compliant with the requirements of this proposed rule. If the operator fails to correct the deficiencies identified by the BLM, proposed paragraph (d) would allow the AO to terminate the CAA. Under proposed paragraph (e), if the BLM approved a new CAA to replace an existing agreement, it would be effective on the first day of the month following its approval.

The BLM estimates that there are currently approximately 2,600 surface commingling approvals nationally, approximately 300 of which involve commingling production from Federal or Indian leases with production from State or private properties. It is also estimated that there are another approximately 8,000 downhole commingling approvals, 400 of which involve commingling production from Federal or Indian leases with production from State or private properties.

The BLM is proposing a review of existing commingling approvals for two reasons. First, many existing commingling approvals are old and are not well documented. Operators are sometimes unaware of existing commingling approvals or the provisions in the approvals. Second, many approvals have involved allocation methods that are difficult or impossible to inspect and verify for a variety of reasons, including a lack of a well-defined allocation method, overly-complex or unverifiable allocation methods, and the inclusion of properties with allocation meters over which the BLM has no jurisdiction.

The following are some common existing commingling situations that would likely not be approved under this proposed rule unless an operator could show that it meets one of the exceptions identified above. In addition to describing these situations, the discussion below also identifies alternative arrangements that would help minimize surface impacts:

Example 1:

Commingling production from Federal or Indian leases with production from State or private properties, using allocation meters on each property.

Under the proposed rule, commingling in this situation would not be approved due to the mixed ownership. However, because existing allocation meters on Federal leases or federally approved units or CAs are already subject to the applicable BLM oil and gas measurement requirements, those meters generally could be used as FMPs to determine royalty value directly instead of being used to determine allocation percentages. As a result, there would be little or no additional surface impacts or significant economic impacts from disallowing such commingling, as the measurement for purposes of royalty would simply occur at the meters that previously had served as allocation meters.

Example 2:

Commingling production from Federal or Indian leases with production from State or private properties, using well testing as the allocation method.

Under the proposed rule, commingling in this situation again would not be approved due to mixed ownership. The operator would be required to install FMPs to measure the oil and gas sold or removed from each lease, unit PA, or CA. (If there is more than one Federal lease with the same fixed royalty rate or more than one Indian tribal lease 100 percent owned by the same tribe at the same fixed royalty rate, the BLM could approve commingling production from the Federal leases only or from the Indian leases only, but not from both Federal leases and Indian leases.) Installing additional FMPs could require some additional surface disturbance for measurement and treatment equipment. However, well testing typically requires both a test separator and equipment to measure the oil and gas produced during the well test. While permanent separation and measurement equipment for an FMP may require more surface area than the test equipment, the effect on surface area disturbance should be minimal.

Example 3:

A liquids-gathering system collects commingled production from properties including both Federal or Indian leases and State or private lands, and pipes it to a central off-lease facility for processing and measurement.

This situation often arises as a result of environmental mitigation measures designed to reduce surface impacts,

especially those resulting from tanker-truck traffic transporting oil from tanks located on the lease, unit PA, or CA. Under the proposed rule, commingling in this situation again would not be approved due to mixed ownership. Instead, there would be at least two alternatives that would ensure that the BLM could verify production and at the same time minimize surface impacts:

First, under the proposed rule, a CAA could be obtained for those Federal or Indian leases, unit PAs, and CAs meeting the requirements of § 3173.14 of this proposed rule. Separate lines would be needed to keep Federal or Indian production segregated from State or private production until it was measured at a central processing facility. An off-lease measurement approval under §§ 3173.22 through 3173.24 of this proposed rule would also be required. Some additional surface disturbance would be necessary for the additional pipeline and duplicate separation and measurement equipment at the central location. However, this alternative would eliminate the need for tanks (and the resulting truck traffic), separators, and measurement equipment on-site. If a CAA were not practical, then separate pipelines would be needed for each Federal or Indian lease, unit PA, or CA.

Second, a CAA could be obtained for those Federal or Indian leases, unit PAs, and CAs meeting the requirements of §§ 3173.22 through 3173.24 of this proposed rule. The Federal or Indian oil and gas could be separated and measured on one of the Federal or Indian leases, units PAs, or CAs and then either removed by separate pipelines, or recombined into a single stream and removed in a single pipeline. This would require at least two sets of separators and measurement equipment on the producing properties—one set for the Federal or Indian production, and one set for the State and private production. As with the previous option, however, there would be no tanks on the properties, thereby eliminating truck traffic. This scenario would require that the oil be measured at the outlet of a separator with no associated tank. While this adds some complexity, it has proven to be feasible using technology such as Coriolis meters. If a CAA were not practical, then individual separation and measurement equipment would be needed for each Federal or Indian lease, unit PA, or CA.

Section 3173.17 Relationship of a Comingling and Allocation Approval to Royalty-Free Use of Production

Section 3173.17 of the proposed rule would clarify that approval of a CAA does not constitute approval of off-lease royalty-free use of production as fuel in facilities located at an FMP approved under the CAA. Under the currently applicable rule (see Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases No. 4A (NTL-4A), 44 FR 76600 (Dec. 27, 1979), which implements judicial decisions construing relevant statutory provisions and lease terms), the lessee or operator may claim royalty-free use only for gas or oil used on the same lease, on the unit for the same unit PA, or on the same CA from which the gas or oil was produced. Thus, if an FMP approved under a CAA is located on one of the leases or CAs or units whose production flows to the FMP, the lessee or operator generally may claim royalty-free use only for that portion of the gas or oil used as fuel in facilities at the FMP that corresponds to the portion of the total production flowing to the FMP that is allocable to that lease, CA, or unit, unless the BLM approves “off-lease” royalty-free use of production from other Federal leases, CAs, or units whose production flows to the FMP (see discussion below). Similarly, if the FMP is not on any of the leases or CAs or units whose production flows to the FMP, the lessee or operator may not claim royalty-free use for any of the production used as fuel, absent BLM approval. The lessee or operator could seek such approval for “off-lease” royalty-free use by separate application, as discussed further below.

Section 3173.18 Modification of a Commingling and Allocation Approval

Section 3173.18(a) of the proposed rule identifies the circumstances under which all operators who are parties to a CAA may request a modification, including: Changes to the allocation schedule; inclusion of additional leases, unit PAs, or CAs; termination of a lease, unit, or PA within the CAA; or a change in operator. Proposed § 3173.18(b) would identify the information that must be submitted in connection with a modification request.

Section 3173.19 Effective Date of a Commingling and Allocation Approval

Section 3173.19(a) and (b) of the proposed rule would identify the effective date of a CAA after the approval of an application or modification, respectively. Proposed § 3173.19(c) would clarify that a CAA does not modify any of the terms of any leases, unit PAs, or CAs

Section 3173.20 Terminating a Commingling and Allocation Approval

Section 3173.20(a) of the proposed rule would provide that any operator who is a party to a CAA may unilaterally terminate it by submitting a Sundry Notice to the BLM. The operator would be required to identify new FMPs for its lease(s), unit PA(s), or CA(s) in the Sundry Notice.

Proposed paragraph (b) would authorize the BLM to terminate an approved CAA for any reason. By way of illustration, the proposed rule identifies certain circumstances in which the BLM might exercise that authority, such as when there have been changes in technology, regulation, or policy, or the operator has not complied with the terms of the CAA. Proposed paragraph (c) would provide for automatic termination of a CAA if only one lease, unit PA, or CA remains in the CAA.

After termination, proposed paragraph (d) would require the BLM to notify in writing all operators who are party to the CAA of the effective date of the termination and the reasons for it. Under proposed paragraph (e), upon termination, each lease, unit PA, or CA, would revert to separate on-lease measurement, unless off-lease measurement is approved under §§ 3173.22 through 3173.28 of this proposed rule.

Section 3173.21 Combining Production Downhole in Certain Circumstances

Section 3173.21 of the proposed rule would identify certain circumstances in which downhole comingling would be subject to the requirements of this proposed rule. Under proposed paragraph (a)(1), the combination of production from a single well drilled into different hydrocarbon pools or geologic formations under separate adjacent properties, regardless of ownership, where none of the pools or formations are common to more than one of the properties, would constitute commingling under the proposed rule. If, on the other hand, the pools or geologic formations are common to more than one property, then under proposed paragraph (a)(2), the operator would be required to establish a unit PA or communitization agreement as opposed to obtaining a CAA. Proposed paragraph (b) would clarify that combining production downhole from different geologic formations on the same lease from a single well, while requiring AO approval, is not

considered commingling for purposes of this proposed rule, unless those formations have different ownership.

Sections 3173.22 through 3173.28 Off-Lease Measurement Approvals

Sections 3173.22 through 3173.28 of the proposed rule would establish the circumstances in which the BLM would approve measurement of production off the lease, unit, or CA (referred to as “off-lease measurement”). Under the BLM's existing regulations (43 CFR 3162.7-2 (oil) and 43 CFR 3162.7-3 (gas)), all measurement must be on-lease, unit, or CA, unless otherwise authorized by the BLM. However, there are currently no national standards that operators must meet when applying for off-lease measurement. Neither Order 3 nor other regulations address how or under what circumstances the BLM will approve off-lease measurement. The proposed provisions below would provide such standards.

Section 3713.22 Requirements for Off-Lease Measurement

Off-lease measurement has led to much confusion over the location of measurement points. Many existing meters measure commingled Federal, private, and State production, which the operators allocate back to the individual lease, unit PA, CA, or CAA located upstream. These off-lease central-delivery-point allocation systems have led to significant discrepancies between operator-allocated volumes, which operators report to ONRR, and the volumes that the BLM calculates during follow-up audits. In the absence of a national standard for off-lease measurement, BLM State Offices have created their own standards, which are not consistent.

Section 3173.22 of this proposed rule would establish conditions under which off-lease measurement would be approved. Under this proposed section, the BLM would allow off-lease measurement of production only from a single Federal or Indian lease, unit PA, CA, or CAA, and only at an approved FMP. This proposal could restrict the types of situations in which off-lease measurement could occur, and therefore could result in the construction of facilities (
i.e.,
meters) that previously would not have been required under existing practice. Although the BLM generally prefers to limit the number of facilities and surface disturbances that occur on Federal leases, the BLM believes that limiting the use of off-lease measurement would provide for more accurate accounting of oil and gas production as required by Section 101(a) of FOGRMA, 30 U.S.C. 1711(a).

Section 3173.23 Applying for Off-Lease Measurement

Section 3173.23 of the proposed rule would establish the requirements operators must follow when applying for an off-lease measurement approval or amending an existing approval, including required supporting information and related documentation.

Section 3173.24 Effective Date of an Off-Lease Measurement Approval

Proposed § 3173.24 would provide that off-lease measurement approvals are effective immediately, unless the BLM specifies a different effective date in the approval.

Section 3173.25 Existing Off-Lease Measurement Approval

Under this proposed section, an existing off-lease measurement approval would be reviewed upon receipt of an operator's request for the assignment of an FMP number to a facility associated with the off-lease measurement approval. Proposed § 3173.25(a) would require the BLM to review the existing off-lease measurement approval for consistency with the minimum standards and requirements in proposed § 3173.22. The AO would notify the operator in writing of any inconsistencies or deficiencies. Under proposed paragraph (b), the operator would have to correct the inconsistencies or deficiencies within 20 business days. Under proposed paragraph (c), in connection with approving the requested FMP, the BLM could impose new or amended COAs on an existing off-lease measurement approval to make it consistent with the requirements of this proposed rule. If the operator fails to correct the deficiencies, proposed paragraph (d) would allow the AO to terminate the off-lease measurement approval. Under proposed paragraph (e), if the BLM approves a new off-lease measurement arrangement, that new arrangement would be effective on the first day of the month following its approval.

The BLM estimates that for FY 2014, there were approximately 25,404 producing onshore Federal and Indian leases, unit PAs, and CAs. Of those, approximately 1,500 have off-lease measurement approvals where there is no commingling (in situations, for example, where the well is located in difficult-to-access or environmentally sensitive area). The BLM anticipates that a few of these off-lease measurement points may not meet the minimum standards of this rule and would not be re-approved. If any existing off-lease measurement point is not re-approved under the proposed rule, the lessee or operator would be required to move the measurement facilities back on-lease or install new measurement facilities on-lease.

Section 3173.26 Relationship of Off-Lease Measurement Approval to Royalty-Free Use of Production

Section 3173.26 of the proposed rule would clarify that approval of off-lease measurement does not constitute approval of off-lease royalty-free use of production as fuel in facilities located at an approved off-lease FMP. Under NTL-4A, as noted above, the lessee or operator may claim royalty-free use only for gas or oil used on the same lease, on the unit for the same unit PA, or on the same CA from which the gas or oil was produced. Thus, the lessee or operator may not claim royalty-free use for any of the production used as fuel at an off-lease FMP, absent BLM approval. The lessee or operator could seek such approval by separate application.

Section 3173.27 Termination of Off-Lease Measurement Approval

Section 3173.27(a) of the proposed rule would provide that an operator may terminate an off-lease measurement arrangement through the submittal of a Sundry Notice to the BLM, which would have to identify the new FMPs for the lease(s), unit(s), or CA(s) that had been subject to the off-lease measurement approval. Proposed paragraph (b) of this section would authorize the BLM to terminate an approved off-lease measurement arrangement for any reason. By way of illustration, this proposed paragraph would identify certain circumstances under which the BLM might exercise that authority. Proposed paragraph (c) would provide that the BLM would notify the operator in writing of the termination of the off-lease measurement approval, the reasons for termination, and the effective date of the termination. Under proposed paragraph (d), after termination, each lease, unit, or CA that was subject to the off-lease measurement approval would revert to on-lease measurement.

Section 3173.28 Instances Not Constituting Off-Lease Measurement, for which No Approval Is Required

Section 3173.28 of the proposed rule would identify two circumstances that would not be considered off-lease measurement for purposes of the proposed rule. The first is where an FMP is located on a well pad of a directionally-drilled well that produces oil or gas from a lease, unit, or CA on which the well pad is not located. The

second is where a lease, unit, or CA is made up of separate non-contiguous tracts. If production is moved from one tract to another tract within the same lease, unit, or CA, and the production is not diverted during movement between the tracts before the FMP (except for production used royalty-free), measurement would not be considered to be off-lease measurement.

Section 3173.29 Immediate Assessments for Certain Violations

Proposed § 3173.29 would expand the number and types of violations that would be subject to immediate assessments. Currently, BLM regulations at 43 CFR 3163.1(b) identify three violations that warrant immediate assessments. Section IV. of Order 3 identifies one further violation that results in an immediate assessment. The existing immediate assessments are not civil penalties and are separate from the civil penalties authorized under Section 109 of FOGRMA, 30 U.S.C. 1719.

The authority for the BLM to impose these assessments was explained in the preamble to the final rule in which 43 CFR 3163.1 was originally promulgated in 1987:

The provisions providing assessments have been promulgated under the Secretary of the Interior's general authority, which is set out in Section 32 of the Mineral Leasing Act of 1920, as amended and supplemented (30 U.S.C. 189), and under the various other mineral leasing laws. Specific authority for the assessments is found in Section 31(a) of the Mineral Leasing Act (30 U.S.C. 188(a)), which states, in part “. . . the lease may provide for resort to [sic] appropriate methods for the settlement of disputes or for remedies for breach of specified conditions thereof.” All Federal onshore and Indian oil and gas lessees must, by the specific terms of their leases which incorporate the regulations by reference, comply with all applicable laws and regulations. Failure of the lessee to comply with the law and applicable regulations is a breach of the lease, and such failure may also be a breach of other specific lease terms and conditions. Under Section 31(a) of the Act and the terms of its leases, the BLM may go to court to seek cancellation of the lease in these circumstances. However, since at least 1942, the BLM (and formerly the Conservation Division, U.S. Geological Survey), has recognized that lease cancellation is too drastic a remedy, except in extreme cases. Therefore, a system of liquidated damages was established to set lesser remedies in lieu of lease cancellation.

The BLM recognizes that liquidated damages cannot be punitive, but are a reasonable effort to compensate as fully as possible the offended party, in this case the lessor, for the damage resulting from a breach where a precise financial loss would be difficult to establish. This situation occurs when a lessee fails to comply with the operating and reporting requirements. The rules, therefore, establish uniform estimates for the damages sustained, depending on the nature of the breach.

53 FR 5384, 5387 (Feb. 20, 1987). The immediate assessments reflect a recognition that the BLM continues to incur costs associated with correcting violations of lease terms and regulations.

The additional assessments in this proposed rule address violations that pose particular threats to the integrity of the BLM's production accounting system. These are violations that significantly increase the BLM's workload and enforcement costs. Accordingly, the BLM proposes to make the 10 violations listed in proposed § 3173.29 subject to immediate assessments.

Three immediate assessments would apply to purchasers and transporters as well as operators. This extension is being proposed because they pertain to operational functions on the lease site that a purchaser or transporter may, in some circumstances, perform instead of the operator—
e.g.,
removing a Federal seal without authorization (proposed § 3173.4) or failure to report theft or mishandling of production (proposed § 3173.8). Extending responsibility to purchasers and transporters with respect to functions they perform also implements the site security provisions of Section 102(b) of FOGRMA, 30 U.S.C. 1712(b), which require operators to develop and comply with site security plans, or minimum site security measures that the Secretary deems appropriate, that are designed to protect the oil or gas produced or stored on an onshore lease site from theft. Thus, the authority for these requirements is found in both the general rulemaking authority of the various mineral leasing statutes (including the MLA at 30 U.S.C. 189 and the Mineral Leasing Act for Acquired Lands at 30 U.S.C. 359) and the rulemaking authority in Section 301(a) of FOGRMA, 30 U.S.C. 1751(a).

The recordkeeping requirements imposed on purchasers and transporters in § 3170.7 of the proposed rule discussed above are imposed under Section 103(a) of FOGRMA, 30 U.S.C. 1713(a). Similar to the authority granted in the MLA at 30 U.S.C. 189, the general rulemaking authority of FOGRMA Section 301(a) provides authority for the BLM to impose immediate assessments on purchasers and transporters who fail to follow the proposed new requirements for recordkeeping and records maintenance.

All of the immediate assessments under this proposed rule would be set at $1,000 per violation. The BLM chose the $1,000 figure because it generally approximates what it would cost the agency on average to identify and document a violation and verify remedial action and compliance.

Enforcement Actions

This proposal would remove the enforcement, corrective action, and abatement period provisions of Order 3. In their place, the BLM would develop an internal inspection and enforcement handbook that would provide direction to BLM inspectors on how to classify a violation—as either major or minor—what the corrective action should be, and what the timeframes for correction should be. The proposed rule would take the approach that the violation's severity and corrective action timeframes should be decided on a case-by-case basis, determined based on the definitions in the regulations. In deciding how severe a violation is, BLM inspectors must take into account whether a violation could result in “immediate, substantial, and adverse impacts on public health and safety, the environment, production accountability, or royalty income.” (Definition of “major violation,” 43 CFR 3160.0-5.) The AO would use the enforcement handbook in conjunction with 43 CFR subpart 3163, which provides for assessments and civil penalties when lessees and operators fail to remedy their violations in a timely fashion, and for immediate assessments for certain violations.

Elimination of Self Inspections

The BLM is proposing to eliminate the self-inspection provision of Order 3, section III.F., because it has been impractical for the BLM to enforce. Order 3 requires a lessee or operator to establish an inspection program for the purpose of periodically measuring production volumes and assuring that there is compliance with the BLM's minimum site security requirements. However, Order 3's language is vague and the BLM has never supplemented it with internal guidance or enforcement policy. As a result, the BLM determined this requirement was of limited utility. In lieu of reworking or updating this requirement, this proposed rule would strengthen recordkeeping requirements for operators, transporters, and purchasers, which the BLM believes will ultimately accomplish the same results and be of more use going forward.

Miscellaneous changes to other BLM regulations in 43 CFR part 3160

As noted at the beginning of this section-by-section analysis, the BLM is proposing other changes to provisions in 43 CFR part 3160. Some of those have already been discussed above in connection with provisions of this proposed rule to which they relate. The remaining proposed revisions are those noted here.

1. The authority citation for part 3160 would be corrected to include 25 U.S.C. 396, the grant of rulemaking authority to the Secretary for allotted Indian leases, which does not appear in the current print edition of the CFR.

2. Section 3160.0-3, Authority, would be updated to include the amendments to the Federal Oil and Gas Royalty Management Act of 1982 enacted by the Federal Oil and Gas Royalty Simplification Act of 1996.

3. Section 3161.1, Jurisdiction, would be updated to include references to FMPs, the Indian Mineral Development Act, and Tribal Energy Resource Agreements. The revisions would also mirror the new language in proposed § 3170.2.

4. Section 3162.3-2 would be revised by adding a new paragraph (d), which would refer operators to proposed provisions in subpart 3173 for details on how to apply for approval of FMPs, surface or subsurface commingling from different leases, unit PAs and CAs, or off-lease measurement.

5. Section 3162.4-3, the provisions regarding the no-longer-used Form 3160-6 (the monthly report of operations) would be removed.

6. Section 3162.6, Well and facility identification, would be revised to correct the misspelled word “indentification” in paragraph (a) to read “identification.” Paragraph (b) would be revised to remove a provision allowing abbreviated sign designations and a “grandfathering” provision for old well signs. Paragraph (c) would be revised to extend signage requirements to include facilities at which oil or gas produced from Federal or Indian leases is stored or processed. The fifth sentence of the current paragraph (c) would become the new paragraph (d), with its wording revised. The current paragraph (d) would become paragraph (e).

7. Section 3162.7-5, Site security on Federal and Indian (except Osage) oil and gas leases, would be removed. The provisions in the proposed rule that correspond to, or cover the same subject matter as, the several paragraphs in § 3162.7-5 are shown in the following table:

BILLING CODE 4310-84-C

EP13JY15.117

BILLING CODE 4310-84-P
8. Section 3163.2, Civil penalties, would be rewritten to address purchasers and transporters who are not operating rights owners. Paragraph (k) would be amended to change “shall” to “will” and to remove the references to “other liquid hydrocarbons,” because other liquid hydrocarbons would be encompassed within the definition of the term “oil” in proposed § 3170.3.

9. Section 3164.1, Onshore Oil and Gas Orders, would be revised to remove the reference to Order No. 3, Site Security, from the table in paragraph (b) because the Order would be replaced by this codified proposed rule.

Onshore Order Public Meetings, April 23-24, 2013

On April 24 and 25, 2013, the BLM held a series of public meetings to discuss proposed revisions to Orders 3, 4, and 5. The meetings were webcast so tribal members, industry, and the public across the country could participate and ask questions either in person or over the internet. Following the forum, the BLM opened a 36-day informal comment period, during which 13 comment letters were submitted. The following summarizes comments the BLM received relating to Order 3 and our response:

1.
The BLM should use the API number or the LR (Legacy Rehost) 2000 system serial number rather than create a new FMP numbering system.

The BLM disagrees with this comment and believes that this suggestion would be unworkable. The BLM and State regulators use API numbers to identify individual wells while at the same time the BLM uses LR 2000 system serial numbers to identify leases. The BLM's proposed FMP numbering system would be used to identify facilities (meters) that serve any number of wells and leases, and whose measurements affect the calculation of the volume or quality of production on which royalty is owed. The FMP numbers would be based on an FMP numbering system that the former Minerals Management Service developed for offshore production reporting. ONRR continues to use that system. The FMP numbering system used by ONRR will generate numbers that indicate whether a lease is onshore or offshore, the mineral produced (oil or gas), whether the measurement is commingled or off-lease, and other relevant information. The BLM believes that using the same FMP numbering system for production reporting for onshore leases likely will save time and

money by developing a system compatible with that already in use by ONRR.

2.
Clarify the level of detail on site facility diagrams involving royalty-free use.

The BLM agrees with this comment. In light of this suggestion, the BLM is proposing that the operator identify each piece of equipment powered by production from the lease, unit, or CA. If the operator claims royalty-free volumes, the diagram (or an attachment) would have to state the estimated volume the equipment consumes per day and per month, how the volume is determined, the equipment manufacturer's name, rated use, and equipment serial number. (Alternatively, the royalty-free volume used by the equipment could be measured.) The proposed rule includes a number of general sample site facility diagrams.

3.
Reduce the level of detail required on site facility diagrams for equipment used to determine quality and quantity of production.

The BLM agrees with this comment. The proposed rule would require the operator to submit the relevant information regarding meters and other measurement equipment when it requests an FMP designation or amends an existing FMP. Thus, requiring this information on the site facility diagrams is unnecessary.

4.
“Grandfather” existing approvals for off-lease measurement and commingling, and “grandfather” existing site facility diagrams.

The BLM believes that a “grandfathering” approach is not workable. “Grandfathering” would result in a patchwork of multiple and incompatible requirements. The BLM would have to track which approvals were grandfathered. The BLM is proposing to update commingling approval requirements because existing requirements have proven problematic in ensuring and verifying accurate measurement. If existing approvals were “grandfathered,” updated requirements would come into effect only incrementally and over many years as new facilities came on line and older facilities were modified.

5.
“Grandfather” existing equipment and Order 3 requirements.

The BLM disagrees with this comment. Grandfathering is generally unworkable for two reasons. First, grandfathering results in two tiers of equipment—older equipment that must meet the standards of a rule that is no longer in effect and newer equipment that has to meet the standards of the new rule. This not only requires the BLM to maintain, inspect against, and enforce two sets of regulations (one of which no longer applies to equipment coming into service), but also to track which FMPs have been grandfathered and which are subject to the new regulations. Second, the purpose for promulgating new regulations is to ensure accurate and verifiable measurement of oil and gas removed or sold from Federal and Indian leases. In lieu of grandfathering, the BLM has proposed grace periods for bringing existing facilities into compliance with the proposed standards (see §§ 3173.12, 3173.16, and 3173.25). These grace periods would be tied to volumes measured by the soon-to-be-designated FMPs, giving lower-volume operations more time to apply for their FMPs.

6.
Determine if commingling is economically justified by using net present value of investment cost of non-commingled measurement in lieu of a rate-of-return method (used in this proposed rule), and that if the net present value of the investment cost was less than 1.5 times the investment, then commingling should be approved.

The BLM requested clarification of this comment to analyze the potential impacts of the proposed method. However, the BLM received no response to its inquiry. Consequently, the BLM does not believe it has an adequate basis on which to propose such a method. In connection with this proposed rule, the BLM would be interested in any information regarding alternate methods for determining if commingling is economically justified.

7.
The economic analysis of a request for commingling approval should consider all costs of lease development and not just the costs associated with achieving non-commingled measurement.

The BLM disagrees with this comment. The BLM believes this would be unworkable, time-consuming, and expensive, as well as inaccurate with respect to the issue addressed. The BLM would not have access to all of the drilling and development costs, the calculations would be inordinately complex, and those costs in any event are not determinative of whether commingled measurement is economically justified. Whether commingled measurement is economically justified is a function of the marginal cost difference between commingled measurement and non-commingled measurement.

8.
The BLM should not take enforcement actions against purchasers and transporters for not maintaining and submitting records.

The BLM disagrees with this comment. The requirement for purchasers and transporters to maintain records is imposed by FOGRMA. This proposed rule would affect approximately 200-300 purchasers and transporters, but as explained earlier, the BLM believes it is necessary to support the BLM's production verification and accountability efforts.

9.
Immediate assessments are arbitrary, ambiguous, and unnecessary.

The BLM disagrees with this comment. The specific immediate assessments proposed and the reasons for proposing them are discussed earlier.

10.
The BLM Enforcement Manual should be made public.

The BLM agrees with this comment. The Enforcement Manual will be posted on the BLM Web site at approximately the same time as the effective date of the final rule.

IV. Procedural Matters

Executive Orders 12866 and 13563, Regulatory Planning and Review

Executive Order 12866 provides that the Office of Information and Regulatory Affairs (OIRA) will review all significant rules. OIRA has determined that this rule is not significant.

Executive Order 13563 reaffirms the principles of E.O. 12866 while calling for improvements in the nation's regulatory system to promote predictability, to reduce uncertainty, and to use the best, most innovative, and least burdensome tools for achieving regulatory ends. The executive order directs agencies to consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public where these approaches are relevant, feasible, and consistent with regulatory objectives. E.O. 13563 emphasizes further that regulations must be based on the best available science and that the rulemaking process must allow for public participation and an open exchange of ideas. We have developed this proposed rule in a manner consistent with these requirements.

1. The proposed rule would not have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.

The requirement for more detailed site facility diagrams is the most significant proposed provision that could increase the cost associated with the development of Federal and Indian

oil and gas leases. The BLM already requires Federal and Indian oil and gas producers to provide generalized diagrams that show each piece of equipment that is used at a facility, including connections between each piece of equipment, and valve positions on production storage tanks. Under this proposed rule, operators would be required to submit new diagrams that also show additional information. Companies may incur additional costs associated with verifying and submitting this information and new diagrams.

The BLM estimates that 3,700 operators would submit approximately 125,000 new diagrams when the requirement is first implemented and that it would take the BLM approximately 3 years to process the submissions. The total one-time cost to the regulated community would be approximately $63.3 million, spread over 3 years. An operator would be required to submit the new diagrams for a facility that is in service before the final rule's effective date within 30 days after the BLM assigns the FMP number(s) to that facility. An operator would be required to submit the new diagrams for a new facility (
i.e.,
one not yet in service on the effective date of the final rule) within 30 days after construction of the facility. On an ongoing basis, the BLM estimates operators would submit about 5,000 new diagrams per year for a total annual cost to the regulated community of $2.5 million. Once incorporated into the submission and review process, this requirement should not significantly change costs for the BLM, lessees, operators, purchasers, or transporters.

Another proposed administrative change in this rule would require operators, within 27 months after the effective date of the final rule, to obtain BLM-issued FMP numbers, which would be used for labeling facilities and for reporting. Currently, companies have their own individualized internal systems for identifying facilities where production is measured for determining royalty. The BLM anticipates that 3,700 operators would submit 220,000 initial applications for the new FMP numbers, which operators would then stamp or stencil on a fixed plate. It would take the BLM approximately 3 years to process the FMP applications. The BLM estimates there would be a total one-time cost to the regulated community of approximately $55.7 million to convert to the new numbering system, which would be spread over 3 years. On an ongoing basis, the BLM anticipates operators would submit approximately 4,000 new and amended FMP applications each year, for an approximate cost to the regulated community of $1 million per year.

This proposed rule would establish new requirements associated with lessees and operators commingling production from different leases, CAs, or PAs, and in some instances existing commingling approvals would be modified. Of the approximately 10,541 existing commingling approvals, the BLM anticipates that only 710 of them would not meet the new requirements because they include private and State leases whose production is commingled with production from Federal or Indian oil and gas leases. Under the proposed rule, the BLM would modify or terminate these unless the operator could demonstrate that the cost of achieving non-commingled measurement would not be economically recoverable based on the low volume of oil and gas produced or could show other extenuating circumstances.

The BLM estimates that 50 percent, or 355, of the existing approvals that do not meet the proposed new requirements would remain in place due to their low production volumes and the other 50 percent would be terminated or modified. Measuring equipment, most likely allocation meters, serving the terminated arrangements would have to be converted into FMPs and updated to meet the new oil and gas measurement standards that the BLM anticipates proposing as separate rules that would be codified at new 43 CFR subparts 3174 and 3175. The costs for upgrading measuring equipment would be most appropriately discussed in the preambles and economic analyses supporting those proposed rules. Operators could incur some administrative costs associated with converting allocation meters into FMPs if they wish to continue to use these facilities for their own internal allocation purposes. For new and modified commingling agreements, we anticipate the proposed revision would increase industry costs by about $5.1 million per year.

Proposed new records management requirements could, depending on individual business practices, have a small direct economic impact on lessees, operators, transporters, and purchasers. These minor added expenses would primarily relate to incorporating the new requirements into existing records management practices and procedures. An estimated 200 to 300 purchasers and transporters would have new recordkeeping responsibilities under this proposed rule. It is highly probable that purchasers and transporters are already compiling records that would, for the most part, satisfy the proposed requirements. The BLM believes that these new recordkeeping requirements would impose a minimal cost on the regulated community.

Expanded recordkeeping requirements pertaining to water-draining and hot-oiling operations would cost lessees and operators approximately $1.2 million per year in annual ongoing costs. This change would enhance production accountability by making it easier for the BLM to verify the volumes of water that operators drain from storage tanks and the volumes of oil that they temporarily remove from storage, use for operational purposes, and then return to storage.

The fifth and final provision that would involve a direct cost to the regulated community is a proposal that would establish new requirements that would apply to lessees and operators who measure production off-lease, but who are not part of any commingling approval. Of the approximately 1,500 existing off-lease measurement approvals, the BLM estimates that less than 5 percent would be terminated or modified because they do not meet the standards of the proposed rule. Operators of those leases, CAs, or units that do not meet the new requirements would have to install and maintain new meters on the lease, CA, or unit. The BLM estimates that the cost of moving or installing new meters on the lease, CA, or unit would be $20,000 per measurement point, for a one-time total cost to industry of $1.6 million.

This proposed rule would increase the number of categories of violations where immediate assessments could be imposed. The BLM anticipates enforcement actions and immediate assessments would continue to be relatively infrequent occurrences.

To accommodate the issuance of FMP numbers and the inclusion of purchasers and transporters within certain of the rule's requirements, the BLM would need to enhance AFMSS, the BLM's main oil and gas data system. The BLM would also experience an increased workload associated with issuing FMP numbers, diagram reviews, and other administrative requirements. The BLM estimates a one-time cost, spread over a 3-year period, to the BLM of about $29.1 million to implement the proposed changes. On an ongoing basis the BLM estimates its costs would increase by about $3.4 million per year.

In total, the BLM estimates these requirements would increase operator

annual expenses by approximately $13.5 million. In addition, there would be a one-time cost to implement the new provisions of about $121.5 million. The one-time implementation costs would be spread over 3 years, or about $40 million per year.

2. The proposed rule would not create inconsistencies with other agencies' actions. It would not change the relationships of the BLM to other agencies and their actions.

3. The proposed rule would not materially affect entitlements, grants, user fees, or loan programs, or the rights and obligations of their recipients. The proposed rule does not address any of these programs or issues.

4. The proposed rule would not raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

Regulatory Flexibility Act

The BLM certifies that this proposed rule would not have a significant economic effect on a substantial number of small entities as defined under the Regulatory Flexibility Act (5 U.S.C. 601
et seq.
). The Small Business Administration (SBA) has developed size standards to carry out the purposes of the Small Business Act and those size standards can be found at 13 CFR 121.201. Small entities for mining, including the extraction of crude oil and natural gas, are defined by the SBA as an individual, limited partnership, or small company considered being at “arm's length” from the control of any parent companies, with fewer than 500 employees.

Of the 6,628 domestic firms involved nationwide in oil and gas extraction, 99 percent, or 6,530, had fewer than 500 employees. There are another 10,160 firms involved nationwide in drilling and other support functions. Of the firms providing support functions, 98 percent of those firms had fewer than 500 employees. Based on this national data, the preponderance of firms involved in developing on-shore oil and gas resources are small entities as defined by the SBA.

In addition to lessees and operators, the BLM must consider the size of the purchasers' and transporters' firms. There are multiple North American Industry Classification System (NAICS) categories that could include firms involved in the purchasing and transporting of petroleum from Federal and Indian leases. For example, some purchasers could be petroleum refiners. For petroleum refiners, the SBA standard says a small business cannot have more than 1,500 employees or more than 125,000 barrels per calendar day total Operable Atmospheric Crude Oil Distillation capacity. Capacity includes owned or leased facilities as well as facilities under a processing agreement or an arrangement such as an exchange agreement or a throughput agreement. For wholesalers, including petroleum wholesalers, the SBA standard for a small entity is one that has fewer than 100 employees. For truck transporters, the SBA defines a small entity as a firm with less than $27.5 million in annual receipts. For natural gas pipeline operators, the standard is a maximum of $27.5 million in receipts per year. For crude oil pipelines the standard is fewer than 1,500 employees.

As discussed above, national data, including number of firms, number of employees by firm, and annual receipts by firm, is not discretely identified for purchasers and transporters of petroleum or natural gas. The potentially affected purchasers and transporters would likely be a minor component in any number of the relevant NAICS categories. Of the few NAICS categories where reported employment, receipt, and production data matches up with the SBA size standards, the preponderance of the firms would be considered small entities as defined by the SBA.

Based on the available national data, the preponderance of firms involved in developing, producing, purchasing, and transporting oil and gas from Federal and Indian lands are small entities as defined by the SBA. As such, it appears a substantial number of small entities would be potentially affected by the proposed rule to some degree.

Using the best available government data, the BLM estimates there are approximately 3,700 lessees and operators conducting operations on Federal and Indian lands that could be affected by the proposed rule. Additionally, the BLM estimates there are approximately 200 to 300 purchasers and transporters operating on Federal and Indian lands that potentially could be affected by this proposed rule.

In addition to determining whether a substantial number of small entities are likely to be affected by this rule, the BLM must also determine whether the rule is anticipated to have a significant economic impact on those small entities. Based on its analysis, the BLM anticipates the cost of implementing the proposed provisions to potentially reduce the average annual net income of impacted small entities by less than 0.001 percent. Except for the electronic filing requirement, all of the proposed provisions would apply to entities regardless of size. However, entities with the greatest activity would likely experience the greatest increase in compliance costs. As a general matter, smaller business entities are more likely to operate a smaller number of sites and FMPs for which they would have to submit the information and documentation that this proposed rule would require. Copies of the analysis can be obtained from the contact person listed earlier (see
FOR FURTHER INFORMATION CONTACT
).

Based on the available information, we conclude that the proposed rule would not have a significant impact on a substantial number of small entities. Therefore, a final Regulatory Flexibility Analysis is not required, and a Small Entity Compliance Guide is not required.

Small Business Regulatory Enforcement Fairness Act

This proposed rule is not a major ru

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-16737. Public record. Not legal advice.