ONRR 2020 Valuation Reform and Civil Penalty Rule

Federal RegisterJan 15, 2021

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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1206 and 1241

[Docket No. ONRR-2020-0001; DS63644000 DRT000000.CH7000 212D1113RT]

RIN 1012-AA27

ONRR 2020 Valuation Reform and Civil Penalty Rule

AGENCY:

Department of the Interior, Office of the Secretary, Office of Natural Resources Revenue.

ACTION:

Final rule.

SUMMARY:

The Office of Natural Resources Revenue (“ONRR”) is amending certain regulations on how it values oil and gas produced from Federal leases for royalty purposes, values coal produced from Federal and Indian leases for royalty purposes, and assesses civil penalties for violations of certain statutes, regulations, leases, and orders associated with mineral leases. In addition, it is making some minor, non-substantive corrections to its regulations.

DATES:

Effective date:

This rule is effective February 16, 2021.

Compliance date:

With respect to the amendments to 30 CFR part 1206 only, compliance is required for production that occurs on or after May 1, 2021. Compliance with the amendments to 30 CFR part 1241 is required on the effective date.

FOR FURTHER INFORMATION CONTACT:

For questions on procedural issues, contact Dane Templin, Regulations Supervisor, at (303) 231-3149 or

Dane.Templin@onrr.gov.

For questions on technical issues related to royalty valuation, contact Amy Lunt, Supervisor Royalty Valuation Team A, at (303) 231-3746 or

Amy.Lunt@onrr.gov,

or Peter Christnacht, Supervisor Royalty Valuation Team B, at (303) 231-3651 or

Peter.Christnacht@onrr.gov.

For questions on technical issues related to civil penalties, contact Michael Marchetti, Program Manager Office of Enforcement, at (303) 231-3125 or

Michael.Marchetti@onrr.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. ONRR's Rulemaking Authority

B. Rulemaking Objectives

C. Executive Discretion is a Permissible Initiative for Rulemaking

D. ONRR's Relevant Prior Rulemakings and Associated Litigation

E. Public Comment Overview

II. Amendment Discussion—Part 1206 Product Valuation

A. Index-Based Valuation Method To Value Federal Gas

B. Transportation Allowance for Certain Offshore Federal Oil and Gas Gathering Costs

C. Allowance Limits for Federal Oil and Gas

D. The Default Provision for Federal Oil, Gas, and Coal and Indian Coal

E. “Misconduct” Definition for Federal Oil, Gas, and Coal and Indian Coal

F. Contract Signature Requirement for Federal Oil, Gas, and Coal and Indian Coal

G. Citation to Legal Precedent as Part of a Valuation Determination Request

H. Coal Valued for Royalty Purposes Based on an Electricity Sale

I. “Coal Cooperative” Definition

III. Amendment Discussion—Part 1241 Penalties

A. Civil Penalties for Payment Violations

B. Consideration of Aggravating and Mitigating Circumstances When ONRR Assesses a Civil Penalty

C. Forfeiture of a Stay of the Civil Penalty Accrual Under Limited Circumstances

IV. Non-Substantive Corrections

V. Economic Analysis

VI. Severability Statement

VII. Procedural Matters

A. Regulatory Planning and Review (Executive Orders 12866 and 13563)

B. Regulatory Flexibility Act

C. Small Business Regulatory Enforcement Fairness Act

D. Unfunded Mandates Reform Act

E. Takings (Executive Order 12630)

F. Federalism (Executive Order 13132)

G. Civil Justice Reform (Executive Order 12988)

H. Consultation With Indian Tribal Governments (Executive Order 13175)

I. Paperwork Reduction Act (44 U.S.C. 3501

et seq.

)

J. National Environmental Policy Act

K. Effects on the Energy Supply (Executive Order 13211)

L. Clarity of this Regulation

M. Congressional Review Act

Table of Abbreviations and Commonly Used Acronyms in This Rule

Abbreviation

What it means

2016 Valuation Rule

ONRR's Consolidated Federal Oil and Gas and Federal and Indian Coal Valuation Reform Rule, 81 FR 43338 (July 1, 2016).

2016 Civil Penalty Rule

ONRR's Amendments to Civil Penalty Regulations, 81 FR 50306 (August 1, 2016).

2017 Postponement Notice

ONRR's Notice of Postponement, 82 FR 11823 (February 27, 2017) (sought to stay implementation of the 2016 Valuation Rule).

2017 Repeal Rule

ONRR's Repeal of the 2016 Valuation Rule, 82 FR 36934 (August 7, 2017).

2020 Proposed Rule

ONRR's 2020 proposed rule titled: ONRR 2020 Valuation Reform and Civil Penalty Rule, 85 FR 62054 (October 1, 2020).

ALJ

Administrative Law Judge.

APA

Administrative Procedure Act of 1946, as amended.

API

American Petroleum Institute.

APD

Application for a Permit to Drill.

BLM

Bureau of Land Management.

BLS

Bureau of Labor Statistics.

BOEM

Bureau of Ocean Energy Management.

BSEE

Bureau of Safety and Environmental Enforcement.

Department

U.S. Department of the Interior.

Deepwater Policy

MMS's May 20, 1999, memorandum titled “Guidance for Determining Transportation Allowances for Production from Leases in Water Depths Greater Than 200 Meters”.

E.O.

Executive Order.

FCCP

Failure to Correct Civil Penalty.

FERC

Federal Energy Regulatory Commission.

FLPMA

Federal Land Policy and Management Act of 1976.

FOGRMA

Federal Oil and Gas Royalty Management Act of 1982.

Fiscal Year.

GOM

Gulf of Mexico.

IBLA

Interior Board of Land Appeals.

ILCP

Immediate Liability Civil Penalty.

MLA

Mineral Leasing Act of 1920.

MMS

Minerals Management Service.

NEPA

National Environmental Policy Act of 1970.

NGL

Natural Gas Liquids.

OCS

Outer Continental Shelf.

OCSLA

Outer Continental Shelf Lands Act of 1953.

ONRR

Office of Natural Resources Revenue.

Secretary

Secretary of the U.S. Department of the Interior.

S.O.

Secretarial Order.

I. Introduction

This final rule amends ONRR's regulations under 30 CFR Chapter XII, Parts 1206 (product valuation) and 1241 (penalties). In 30 CFR part 1206, this final rule amends certain definitions (Subpart A) and provisions used to value Federal oil (Subpart C), Federal gas (Subpart D), Federal coal (Subpart F), and Indian coal (Subpart J). In 30 CFR part 1241, this final rule amends ONRR's regulations on the practices it uses to assess civil penalties (Subparts A and C).

This rule is effective 30 days after its publication in the

Federal Register

. However, ONRR recognizes that lessees typically report and pay royalties based on monthly production, sales, and costs. In addition, compliance with the requirements of the Rule will require system modifications by ONRR to accept reports and for industry reporters in order to submit reports. These system modifications will take some time to program. For those reasons, a separate compliance date is provided under the

DATES

caption to establish that—for the amendments to 30 CFR part 1206 only—lessees must conform to the amended requirements under this final rule beginning with production that occurs on and after May 1, 2021.

As stated under the

DATES

caption, the amendments to 30 CFR part 1241 shall become effective on and compliance is required by February 16, 2021.

ONRR explained in the 2020 Proposed Rule that, with regard to 30 CFR part 1206, several of ONRR's proposed amendments would extend, revise, or remove regulations that ONRR had adopted through the 2016 Valuation Rule.

See

85 FR 62054-62062. ONRR also explained the factors it was considering in its decision making, including: (1) Executive Orders (E.O.s) and Secretarial Orders (S.O.s) issued after the 2016 Valuation Rule's effective date; (2) specific to coal cooperatives and coal valuation based on electricity sales, ONRR's consideration of the parties' briefs filed in litigation challenging the 2016 Valuation Rule and the court's decision in that litigation to stay implementation of the rule's Federal and Indian coal provisions; and (3) ONRR's continued work to consider and implement regulatory changes that simplify or better explain ONRR's processes, and to provide early clarity regarding royalties owed.

See

85 FR 62054-62057.

For 30 CFR part 1241, ONRR explained in the 2020 Proposed Rule that, in addition to some of the reasons listed above, ONRR was considering changes to its civil penalty practices to conform with a (subsequently-vacated) Federal District Court's decision on an industry challenge to ONRR's 2016 Civil Penalty Rule and to conform the civil penalty regulations to certain IBLA decisions.

See

85 FR 62055 and 62056.

ONRR finds that those reasons, additional reasons raised in public comments, and additional information (identified by ONRR or provided to ONRR by its sister agencies) warrant the amendments adopted in this final rule on the following topics:

1. Allowing a lessee producing Federal oil and gas from the OCS under leases in water depths of 200 meters or greater to take a deduction for certain gathering costs as part of its transportation allowance.

2. Allowing a lessee to apply to ONRR for approval to claim an extraordinary processing allowance for Federal gas in situations where the gas stream, plant design, and/or unit costs were extraordinary, unusual, or unconventional relative to standard industry conditions and practice.

3. Removing the definition of “misconduct” from 30 CFR part 1206 as it applies to Federal oil and gas, and Federal and Indian coal.

4. Removing the default provision and references thereto from the regulations applying to Federal oil and gas, and Federal and Indian coal.

5. Removing the requirement that a lessee have contracts signed by all parties in order for those contracts to be recognized valid and binding with respect to the valuation of Federal oil and gas, and Federal and Indian coal.

6. Removing the requirement for a lessee to cite legal precedent when seeking a valuation determination for Federal oil and gas or a valuation decision for Federal or Indian coal.

7. Expanding the option to use index-based valuation to arm's-length Federal gas sales, which, under the 2016 Valuation Rule, was only available for non-arm's-length Federal gas sales.

8. For unprocessed and residue gas valued using the index-based valuation method, changing from the high index price to the average index price.

9. Changing the transportation deductions allowed under an index-based valuation method to reflect more recent transportation cost data reported to ONRR.

10. Amending other regulation language to make non-substantive corrections so as to make the regulations more clear and workable.

11. Amending ONRR's Federal and Indian coal valuation regulations to remove the requirement to value certain coal based on the sale of electricity.

12. Amending ONRR's Federal and Indian coal valuation regulations to remove the definition of “coal cooperative” and the method to value sales between members of a “coal cooperative.”

13. Amending ONRR's civil penalty regulations to clarify that ONRR will consider the unpaid, underpaid, or late payment amounts in the severity analysis for payment violations only.

14. Amending ONRR's civil penalty regulations to clarify that ONRR may consider aggravating and mitigating circumstances when calculating the amount of a civil penalty.

15. Amending ONRR's civil penalty regulations to remove an ALJ's ability to vacate the benefit of a stay of an accrual of penalties if the ALJ later determines that a violator's defense to a notice of noncompliance was frivolous.

This rule does not adopt three amendments that ONRR proposed in the 2020 Proposed Rule. This rule does not:

1. Remove or otherwise amend the regulatory cap on transportation allowances for Federal oil and gas.

2. Remove or otherwise amend the regulatory cap on processing allowances for Federal gas.

3. Allow a lessee producing oil or gas on the OCS in waters shallower than 200 meters to file an application seeking ONRR's permission to include certain gathering costs in its transportation allowance.

A. ONRR's Rulemaking Authority

ONRR's royalty program is “a complex and highly technical regulatory program, in which the identification and classification of relevant criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.”

Amoco Prod. Co.

Watson,

410 F.3d 722, 729 (D.C. Cir. 2005) (internal quotations and citation omitted). FOGRMA grants the Secretary authority to “prescribe such rules and regulations as he deems reasonably necessary to carry out this chapter.”

See

30 U.S.C. 1751(a);

See also

30 U.S.C. 1701(b)(2) (“It is the purpose of this chapter . . . to clarify, reaffirm, expand and define the authorities and responsibilities of the Secretary of the Interior to implement and maintain a royalty management system for oil and gas leases on Federal lands, Indian lands, and the [OCS]. . . .”). A similar broad grant of authority to promulgate regulations is provided to the Secretary under the MLA at 30 U.S.C. 189 and OCSLA at 43 U.S.C. 1334. ONRR is amending its royalty valuation and civil penalty regulations, and has considered all relevant information within this context in accordance with the Department's statutory mandate, as set forth under the MLA, OCSLA, and FOGRMA.

Regarding the commenter's reference to FLPMA, that Act governs leasing activities primarily carried out by other Department bureaus and offices. For energy leasing, exploration, and development activities to be conducted on Federal or Indian land, these Department bureaus and offices evaluate the environmental impacts by conducting NEPA analyses. Thus, environmental impacts associated with newly proposed projects or operations are evaluated during the leasing and permitting stages by the appropriate bureau or office. If a project or operation is significantly modified or expanded beyond the initial approvals and corresponding NEPA analysis, the responsible agency will reevaluate any additional environmental impacts and conduct the appropriate NEPA analysis. This rule does not lessen the obligation borne by other Department bureaus and offices to perform NEPA analyses at all appropriate stages in the leasing and lease administration process.

In response to the commenter's statement pertaining to stakeholder involvement, ONRR solicited input from all interested persons and stakeholders, including environmental organizations, as part of this rulemaking. Through the publication of the 2020 Proposed Rule in the

Federal Register

on October 1, 2020, ONRR provided “interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments” as required under the APA. 5 U.S.C. 553(c). The 2020 Proposed Rule provided all interested persons with a 60-day public comment period to submit information for ONRR's consideration.

Public Comment:

Another public commenter stated that ONRR likely will be required to once again change its regulations as a result of a change in Administrations. The commenter cites to statements suggesting that a future Administration would modify or reverse the E.O.s currently relied upon by ONRR for this rulemaking.

ONRR Response:

The commenter cited general environmental policy objectives of a new Administration, which are not in place at the time of this rulemaking, and failed to identify any specific conflicts between any such policies and the proposed amendments. ONRR bases its policies on statutory dictates and its current priorities, rather than speculation about what a future administration might do. ONRR, in part, based the 2020 Proposed Rule on E.O.s and S.O.s in effect at the time of its publication, and on the policies underlying those directives. Those same E.O.s and S.O.s are still in effect for ONRR to consider in this final rule. Moreover, the underlying policies are valid, and deserve weight, aside from the particulars of the E.O.s and S.O.s. Please refer to Sec. I.A. for a general overview of this rule's objectives and the amendment discussion sections for additional explanations specific to each amendment.

II. Amendment Discussion—Part 1206 Product Valuation

A. Index-Based Valuation Method To Value Federal Gas

General Comments

Public Comment:

ONRR requested and received comments on the index-based valuation method amendments. Specifically, ONRR asked for alternatives to requiring a lessee to evaluate all pricing points where a lessee's gas may flow. Several commenters from or representing the regulated community suggested that ONRR use the pricing point where a lessee's gas actually flows, rather than evaluate all possible pricing points. These commenters suggested this would lessen the burden on a lessee to research all possible index points and create greater certainty that a lessee did not overlook any possible index points.

ONRR Response:

As ONRR monitors reporting and payments under the index-based valuation methods adopted in the 2016 Valuation Rule and in this final rule, and systematically examines actual transaction data, ONRR will continue to look for alternatives to evaluating all accessible index pricing points, including alternatives that require tracing production to determine the actual index pricing point. However,

at this time, ONRR does not have the data to support the suggested change. Accordingly, ONRR is not making the change in this final rule.

Public Comment:

ONRR received several comments requesting ONRR update the transportation and fractionation (“T&F”), and processing adjustments, published at

https://www.ONRR.gov,

for the NGL index-based valuation method. These commenters stated that the values are outdated and do not reflect current markets or FERC published rates. The commenters also expressed concerns that the NGL index-based method does not allow for deductions for pre-plant transportation and the transportation deductions for unprocessed and residue gas should apply to NGLs.

ONRR Response:

ONRR did not propose amendments to the adjustments to the NGL index-based valuation method. While these comments are beyond the scope of this rulemaking, ONRR regulations state the T&F adjustments will be periodically updated (§ 1206.142(d)(2)(ii)), as outlined in the preamble to the 2016 Valuation Rule. ONRR will continue to periodically review and update these adjustments, as necessary. However, at this time, ONRR is not amending the proposed unprocessed and residue gas transportation deductions to apply to NGLs.

Public Comments:

A commenter requested that ONRR develop a valuation method for areas that do not have access to index-pricing points, specifically for gas produced in Alaska.

ONRR Response:

Currently, ONRR is not incorporating a specific valuation method for areas that do not have access to index-pricing points. A lessee cannot elect to use an index-based method in these areas, and the lessee must continue using the first arm's-length sale to value Federal gas.

Public Comments:

Some commenters requested that ONRR modify the index-based valuation method, and some commenters specifically submitted comments for consideration during future rulemakings. These comments include: (1) ONRR should consider extending the election period to value Federal gas, under the index-based valuation method, from two years to a minimum of three years; (2) ONRR should require or mandate a lessee value Federal gas using the index-based valuation method; (3) ONRR should develop an index-based method to value gas at the wellhead; and (4) ONRR should allow a lessee to propose an alternative valuation method under certain situations that force a lessee to value gas under the index-based valuation method (

e.g.

gas sold under a keepwhole contract with no arm's-length gross proceeds sales from the same lease, flared gas).

ONRR Response:

In this final rule, ONRR will not adopt these suggested changes as these changes are outside of the scope of this rulemaking. Additionally, ONRR will not act to implement suggestions for an extended election period or mandatory use of index-based valuation methods. At this time, both ONRR and lessees are best served in implementation of new valuation methods by shorter commitments and optional use.

1. Expansion of the Federal Gas Index Pricing Valuation Method Under a Non-Arm's-Length Contract to Federal Gas Sold Under Arm's-Length Contracts (§§ 1206.141(c) and 1206.142(d))

The 2016 Valuation Rule amended 30 CFR part 1206 to allow a lessee two valuation methods to value its non-arm's-length Federal gas sales. The first valuation method was to value Federal gas based on the first arm's-length sale occurring after a non-arm's-length sale or transfer of the gas to the lessee's affiliate. The second valuation method was to elect to use an index-based valuation method. This index-based valuation method aligns with a provision from the 2000 Federal Oil Valuation Rule, “Establishing Oil Value for Royalty Due on Federal Leases” (65 FR 14022, March 15, 2000), that allowed a lessee to elect to value Federal oil using index prices when it sells or transfers oil to an affiliate that, in turn, then sells the oil at arm's-length. The 2020 Proposed Rule would extend optional use of the index-based valuation method to arm's-length sales of Federal gas.

Comments on the Proposed Amendment

Public Comment:

Several commenters supported the expansion of the index-based valuation method for Federal gas sold under an arm's-length contract. Commenters agreed that having the option to elect an index-based method lessens the burden and provides early certainty for all payors. Commenters noted that a lessee is more likely to use the index-based method if it is applicable to all its Federal gas sales and that this valuation method will truly lessen the administrative burden by allowing a lessee to use one approach to value gas sold under multiple contracts. The commenters reiterated that extending the index-based method to all Federal gas sales will further eliminate the burden to unbundle and comply with marketable condition regulations. One commenter stated that the index-based valuation method should be mandatory instead of being a method that gas producers can select for non-arm's-length sales for two-year periods.

ONRR Response:

Many commenters were in favor of the proposed changes published in the 2020 Proposed Rule. In this final rulemaking, ONRR is adopting the amendment as proposed in the 2020 Proposed Rule to allow a lessee with an arm's-length sale to elect to value its gas production under the index-based valuation method. Regarding the commenter's statement that the index-based valuation method should be mandatory, ONRR is not choosing to make it mandatory at this time for all sales, but will collect data based on optional use to inform possible future rulemaking.

Public Comment:

Some commenters opposed the extension of the index-based method, and stated that ONRR has not provided enough data to modify the position it took in the 2016 Valuation Rule, including that arm's-length sales are the best indicator of value.

ONRR Response:

ONRR maintains that arm's-length sales are generally the best indicator of value. Index prices are derived from arm's-length sales reported to index pricing publications. The index-based valuation method simplifies the current valuation method and, in addition, provides transparency and early certainty to a lessee. The index-based method provides early certainty because the elements of the index-based formula are all known at the time royalty reports are first due, which is the end of the month following the month of production, and not subject to subsequent adjustment. In contrast, when royalty value is based on actual sales prices, transportation costs, and, for gas, processing costs, adjustments to those prices and costs in subsequent months change royalty values and require re-reporting. Also, the sales prices, transportation costs, and processing costs may be disputed through an ONRR audit or other ONRR compliance activity.

The index-based method, in contrast, uses transparent, certain prices published prior to the royalty due date, and a fixed percentage of those published prices as an “allowance” to cover the costs of transportation. ONRR recognizes that ONRR and all Federal lessees can benefit from the certainty and transparency that the index-based valuation method provides. Additionally, complex valuation situations are not limited to non-arm's-length dispositions. In arm's-length transactions, many third-party pipeline

and service providers now charge lessees “bundled” fees that include costs to place production into marketable condition. Both ONRR and lessees with arm's-length sales, transportation, and/or processing contracts have found allocating the costs between allowed and disallowed costs is necessary for valuation based on gross proceeds, but administratively costly and time consuming. These are not required with index-based royalty reporting and payment cost allocations.

Public Comment:

A commenter suggested that ONRR require a lessee to pay on whichever value is higher between gross proceeds and the index-based valuation method to eliminate the temptation to manipulate index prices.

ONRR Response:

Requiring a lessee each and every month to value gas by both gross proceeds and the index-based valuation method forces a lessee to use two valuation methods and increases the burden of either method individually. This would not achieve the mutual goal of a simple or certain valuation method for ONRR or a lessee. While there have been instances of traders attempting to manipulate index prices in recent years, these have been infrequent and involve limited volumes. ONRR believes that index prices are an acceptable method to value royalties for the following reasons: (1) The FERC must approve pricing publications used as the source of index prices for Federal gas royalty reporting and payments; (2) index publishers have protections to prevent and discourage price manipulation; (3) ONRR maintains discretion to disallow the use of an index point; and (4) index prices already influence royalty valuation, as they are used as the sales price or as part of a sales price formula in many arm's-length sales contracts. Further, as discussed in the preamble to the 2020 Proposed Rule, even when a lessee elects to use the index-based valuation method to report and pay royalties, ONRR retains the right and ability to from time to time examine, review, analyze, and audit the lessee's actual transaction data—including sales, transportation, processing, and contracts for services required to place production in marketable condition. By periodically examining actual transaction data, ONRR will be well positioned to ascertain the continuing validity of both the index prices and ONRR's continued use of an index-based valuation method. If ONRR finds an index price unreliable, ONRR will have the opportunity to stop using that index price. And if ONRR finds that its index-based valuation method needs adjustment, ONRR will have the opportunity to change the method through future rulemaking.

ONRR appreciates the comments supporting, seeking modification to, and opposing the proposed amendments to §§ 1206.141(c) and 1206.142(d). After careful consideration, and for the reasons explained in the 2020 Proposed Rule and this final rule, ONRR is adopting the proposed changes to §§ 1206.141(c) and 1206.142(d) as part of this final rule.

2. Published Average Bidweek Price (§§ 1206.141(c)(1)(i) and (ii); and 1206.142(d)(1)(i) and (ii))

For unprocessed gas and residue gas, the 2016 Valuation Rule's index-based valuation method requires use of the highest monthly bidweek price for the index pricing points that a lessee's gas can flow to, whether or not there is a constraint for that production month, less a specified deduction. The 2020 Proposed Rule proposed to amend the 2016 Valuation Rule to use the highest of the monthly bidweek

average

prices for the index pricing points that a lessee's gas can flow to, whether or not there is a constraint for that production month, instead of the highest of the monthly bidweek

high

prices.

See

85 FR 62058.

When ONRR uses the term in the 2020 Proposed Rule, “published average bidweek price,” or “bidweek average” for short, it refers to what many publications call the “index” or “average” price. For example, the Platts Inside FERC's Gas Market Report labels this price as the “index,” while the Natural Gas Intelligence's (“NGI”) Bidweek Survey labels this price as the “average.”

An index-based valuation method using bidweek

average

prices still results in a royalty value comparable to the fair market value a lessee could receive under the typical arm's-length contract, and ONRR anticipates this method will be used by more lessees, because it better reflects the average price the average lessee receives, rather than the high price only one lessee receives. Greater use of the index-based valuation method will ease both the lessee's administrative burden and ONRR's.

Lastly, using the bidweek average price for unprocessed gas and residue gas aligns with the use of average prices used in the NGL index-based valuation method (§ 1206.142(d)(2)(i)) and the Federal oil regulations (§ 1206.102). Using average prices for all the index-based valuation methods provides consistency and transparency, increases accuracy, and avoids confusion and potential errors.

Comments on the Proposed Amendment

Public Comment:

ONRR received several comments that support using the bidweek average price rather than the bidweek high price in the index-based valuation method. Commenters stated that the bidweek average price more closely reflects the price a lessee could obtain and is closer to the value of gross proceeds. Commenters stated the bidweek average price results in a more reasonable value for royalty purposes and that a lessee is more likely to elect the index-based valuation method. Another commenter stated that bidweek average prices are more certain and reliable because they represent many transactions at the same pricing point. On the contrary, the highest bidweek price may only represent a single transaction, which may or may not reflect normal market dynamics.

ONRR Response:

The bidweek high price is the highest price reported for any transaction that qualifies for reporting, which may or may not reflect usual market dynamics. The bidweek average price is just that—an average price from many arm's-length transactions at the same pricing point. For the reasons discussed above, ONRR is adopting the use of the bidweek average price in this final rule.

Public Comment:

A commenter supported using the bidweek average prices since a lessee could more easily access the bidweek average price based on its own contract pricing but would have to pay a third-party publication to access the high bidweek prices.

ONRR Response:

If a lessee chooses to use contract prices that reference an index price, rather than a price found in a subscription or publication, it is up to the lessee to verify that the contract price is accurate, and that it reflects all possible index pricing-points. ONRR will rely on ONRR's subscriptions to verify pricing in any compliance activity. ONRR is not aware of any difference in subscription costs between publications identifying the bidweek average and the bidweek high prices.

Public Comment:

Several commenters stated that ONRR should require the highest of the bidweek high prices, because it better protects the interests of the taxpayers and States. Additionally, commenters opposed adopting any amendment that would decrease royalties paid to ONRR.

ONRR Response:

ONRR disagrees that using the bidweek high price better protects the lessor's interest than using the bidweek average price. While the bidweek average price is lower than the bidweek high price, the bidweek average more closely reflects the gross

proceeds that a lessee would typically receive in an arm's-length transaction, and therefore is more likely to actually be used by lessees. ONRR maintains that other protections are still in place, such as requiring the lessee to choose this option for a minimum of two years and requiring the lessee to use the highest bidweek average price to which the gas could flow when multiple pricing points are involved.

Furthermore, in the context of the overall rulemaking, it is possible that the index-based valuation method (if actually used) may increase royalties paid under this method. As outlined in the Procedural Matters section, overall royalty values under the 2020 Valuation Rule's index-based valuation method are around $0.04/MMBtu higher than the prices reported to ONRR for arm's-length sales, even with the use of average rather than high bidweek prices.

ONRR appreciates the comments supporting, seeking the modification to, and opposing the proposed amendments to §§ 1206.141(c)(1)(i) and (ii) and 1206.142(d)(1)(i) and (ii). After careful consideration, and for the reasons stated in the 2020 Proposed Rule and this final rule, this final rule adopts the proposed amendment in full.

3. Transportation Deductions (§§ 1206.141(c)(1)(iv) and 1206.142(d)(1)(iv))

The 2016 Valuation Rule amended ONRR's regulations to allow a lessee that elects to use the index-based valuation method to include an adjustment for transportation based on the location of its lease (

e.g.,

OCS, GOM, or all other areas). The rule further constrained the transportation adjustment to a specified range measured in cents per MMbtu. The 2016 Valuation Rule adjustments and minimum-to-maximum ranges were as follows:

Location

Transportation

adjustment

(%)

Minimum rate

(cents per MMbtu)

Maximum rate

(cents per MMbtu)

OCS, GOM

$0.10

$0.30

All Other Areas

0.10

0.30

ONRR based the transportation adjustment and minimum-to-maximum constraint on its analysis of transportation allowances reported to ONRR for production months in calendar years 2007 to 2010 (proposed 2016 Valuation Rule, 80 FR 618, January 6, 2015).

In the 2020 Proposed Rule, ONRR performed the same analysis for production months in calendar years 2014 through 2018. Based on this analysis of more recent time periods, ONRR proposed to revise the allowed transportation adjustments and minimum-to-maximum constraints as follows:

Location

Transportation

adjustment

(%)

Minimum rate

(cents per MMbtu)

Maximum rate

(cents per MMbtu)

OCS, GOM

$0.10

$0.40

All Other Areas

0.10

0.50

The 2020 Proposed Rule explained that these values more closely reflect the actual costs a lessee will incur to transport gas to an index-pricing point.

See

85 FR 62058. ONRR will continue to monitor reported transportation allowances to ensure that the adjustments under its regulations for the index-based valuation method continue to be representative of the actual costs that lessees report to ONRR.

Comments on the Proposed Amendment

Public Comment:

ONRR received comments supporting the proposal to update the transportation adjustment values in order to more accurately reflect the current markets and rates charged for arm's-length transportation.

ONRR Response:

ONRR agrees with these comments that the transportation adjustment amounts should more closely reflect the average cost a lessee incurs to transport gas to an index pricing point. ONRR will continue to monitor transportation allowances reported by lessees, including those who have not elected to report under the index price valuation method but under gross proceeds, and will periodically review, examine, analyze, or audit actual transportation transactions and the costs of placing gas into marketable condition to ensure that the adjustments under these regulations remains representative of the costs a lessee incurs on average.

Public Comment:

Commenters stated that ONRR should not update the transportation adjustments for the index-based valuation method. These commenters opposed any amendment that will result in lower royalties paid to the Federal Government and disbursed to State and local governments.

ONRR Response:

While ONRR understands these concerns, ONRR's analysis of data supports modifying the adjustments to more closely reflect the average costs a lessee incurs to transport gas to an index pricing point. ONRR will continue to monitor transportation adjustments, and will periodically review, examine, analyze, or audit actual transportation contracts and the costs of placing gas into marketable condition to ensure that the adjustments remain reflective of the average cost lessees incur.

Public Comment:

An industry commenter stated that because the transportation adjustments were calculated using data from calendar years 2014 through 2018, they are already outdated. Most transportation contracts have moved to fixed-fee rates since that time and with lower commodity prices, transportation can exceed the updated adjustments. The commenter suggested ONRR find alternatives to a set percentage or evaluate transportation adjustments more frequently.

ONRR Response:

ONRR will monitor and review the transportation adjustments. If ONRR finds that the transportation adjustments cease to reflect typical costs, ONRR can take action to update the transportation adjustment to ensure that its index-based valuation method captures a reasonable value for royalty purposes.

Public Comment:

A commenter expressed concern that ONRR failed to document and explain its calculations of the revised index-based

transportation adjustments. The commenter expressed a need for greater transparency to ensure that ONRR is accountable to the public for its decisions.

ONRR Response:

ONRR identified the weighted per unit transportation rate and imputed the transportation percentage from the data reported on the form ONRR-2014 for the months in the noted calendar years for properties reporting a transportation allowance. Using this method, ONRR identified a maximum, minimum, and average range for both OCS and all other properties. ONRR used these values to establish the updated transportation deductions in the 2020 Proposed Rule.

ONRR appreciates the comments supporting, seeking the modification to, and opposing the proposed amendments to §§ 1206.141(c)(1)(iv) and 1206.142(d)(1)(iv). After careful consideration, and for the reasons set out in the 2020 Proposed Rule and this final rule, this final rule will adopt the proposed amendment in full.

4. Zero Value (§§ 1206.141(f) and 1206.142(g))

In the 2020 Proposed Rule, ONRR proposed to add language to the unprocessed (§ 1206.141(f)) and processed (§ 1206.142(g)) gas regulations clarifying ONRR's long-standing policy that the value of any product cannot be reported as less than zero. Consistent with language included in lease documents, including a lessee's duty to market gas at no cost to the Federal Government, lessees have never been permitted to report negative royalty values. Adding this to the regulatory language promotes consistent and clear regulations.

When ONRR published the 2020 Proposed Rule, its systems were unable to accept a reporting line with a $0.00 royalty value. In instances where the royalty value would correctly be $0.00, ONRR instructed reporters to code the reporting line using Transaction Code 20 and report a royalty value less allowances of $0.01. The 2020 Proposed Rule's proposed regulatory text reflected this constraint by including language that, for example, prevented a lessee from reducing “the royalty value of any production

to zero.”

Emphasis added.

ONRR now has the system capability to accept a report with a $0.00 royalty value, and no longer has a need to include a workaround for that constraint in this final rule. Thus, in the example above, this final rule will modify the proposed amendment to §§ 1206.141(f) and 1206.142(g) to state that “Under no circumstances may your gas be valued for royalty purposes

at less than zero.”

Emphasis added.

Comments on the Proposed Amendment

Public Comment:

A commenter requested ONRR clarify this provision. The commenter stated that payors received guidance from ONRR stating, “for those situations where your value for royalty purposes, plus any disallowed costs or additional consideration under your sales contract, is less than or equal to $0.00, ONRR's regulations and your Federal lease require you to report and value any Federal gas production removed or sold from your lease, even if the value is zero or less than zero.” The guidance further instructed reporters to report those zero royalty values, where the proposed rule does not allow a zero-royalty value. The inconsistency in guidance and the proposed rule changes create confusion and uncertainty, the commenter said.

ONRR Response:

ONRR acknowledges that its guidance and the proposed amendment may be inconsistent. However, the purpose of the amendment is to resolve any confusion that may have arisen under ONRR's prior regulations and guidance. If there is an inconsistency between the amendments adopted in this final rule and any prior guidance, this final rule will control. ONRR recognizes that, in the absence of the clarifying language in this final rule, a lessee might seek to report a royalty value of zero in instances where gross proceeds or index prices are at or below zero, after adding back any disallowed costs or additional considerations. However, this final rule clarifies that products cannot be valued, for royalty purposes, less than zero, but can be valued at zero. This regulatory change is consistent with language included in most lease documents, including a lessee's duty to market gas at no cost to the Federal Government. Lessees have never had the ability to report negative royalty values.

ONRR appreciates the comments supporting, seeking the modification to, and opposing the proposed amendments to §§ 1206.141(f) and 1206.142(g). After careful consideration, and for the reasons stated in the 2020 Proposed Rule and this final rule, this final rule adopts the proposed amendment with the modification described above to clarify that a lessee can report a $0.00 royalty value. This modification between the 2020 Proposed Rule and this final rule impacts a limited number of instances to change the reported royalty value from $0.01 to $0.00. As such, ONRR finds there will be no material change to the royalties it collects, and it does not further distinguish the modification in this rule's economic analysis.

5. Providing Sales Records (§§ 1206.141(g) and 1206.142(h))

The 2020 Proposed Rule proposed to add new regulation language to reinforce ONRR's statutory authority under 30 U.S.C. 1713(a), which expressly requires “a lessee, operator, or other person directly involved in developing, producing, transporting, purchasing, or selling oil or gas . . . through the point of first sale or the point of royalty computation, whichever is later, establish and maintain any records, . . . and provide any information” required by rule to ONRR when it is “conducting an audit or investigation.” ONRR proposed the addition of regulatory language to clarify that it may continue to request and receive a lessee's and its affiliate's sales and expense records, even when a lessee pays royalties under an index-based valuation method.

The ability to continue to evaluate sale and expense records will ensure the index-based valuation method remains a fair market value for Federal oil and gas lessees' production. ONRR has the authority to request this information when conducting an audit or investigation, and the new regulatory text will preserve the ability to obtain a lessee's records in order to evaluate whether the index-based valuation method remains a fair value for royalty purposes.

Comments on the Proposed Amendment

Public Comment:

Several commenters acknowledge ONRR already has the authority to collect records from a lessee during the normal course of audit and compliance activity. However, the commenters expressed concern that frequent and persistent requests for data will create an unnecessary burden. The commenters referenced the preamble language in the 2020 Proposed Rule and ONRR's suggestion that the index-based method should create simplicity and early certainty when reporting royalties. Commenters expressed concern that ONRR will continue to request and audit these records and eliminate any of the simplicity that the index-based method affords.

ONRR Response:

ONRR does not believe that adding this language to regulatory text will create an unnecessary burden on a lessee that elects to use the index-based method. Further, any burden to a lessee is outweighed by the certainty of knowing that ONRR will have access to information needed to periodically evaluate the reliability of individual

index prices. Finally, if ONRR requires a lessee to provide information under this section, and that information establishes that the index-based method is no longer representative of fair market value, any change to or repeal of the method would be done through rulemaking, and would only have prospective application.

ONRR appreciates the comments supporting, seeking the modification to, or opposing the proposed amendments to §§ 1206.141(g) and 1206.142(h). After careful consideration, and for the reasons explained in the 2020 Proposed Rule and this final rule, ONRR is adopting the proposed changes to §§ 1206.141(g) and 1206.142(h) as part of this final rule.

B. Transportation Allowance for Certain Offshore Federal Oil and Gas Gathering Costs

In the 2020 Proposed Rule, ONRR explained the origins of its current “gathering” definition and how ONRR and MMS have considered over the years whether to allow the cost of certain offshore gathering activities to be included in a lessee's transportation allowance.

See

85 FR 62054. Central to this amendment's discussion are the Deepwater Policy (

https://www.onrr.gov/Laws_R_D/pubcomm/PDFDocs/990520.pdf

) and the 2016 Valuation Rule, which rescinded the Deepwater Policy.

See

81 FR 43338.

Because of the unique nature of the OCS, particularly in the deepwater OCS, the 2020 Proposed Rule proposed to amend ONRR's regulations to permit the same deductions previously taken under the Deepwater Policy. Under the Deepwater Policy, a lessee could claim certain gathering costs in its transportation allowance if certain criteria were met, including:

• A part of the lease must lie in waters deeper than 200 meters.

• The transportation allowance must otherwise be determined in accordance with ONRR's regulations.

• The costs must be allocated between the royalty bearing and non-royalty bearing substances (for example, water or production subject to a zero royalty rate).

• The leases and units must be treated similarly.

• Movement prior to a central accumulation point is still disallowed from a transportation allowance. A central accumulation point, for purposes of the Deepwater Policy, may be a single well, a subsea manifold, the last well in a group of wells connected in series, or a platform extending above the water's surface.

• The movement must be to a facility not located on a lease adjacent to the lease on which the production originated. An adjacent lease is defined as a lease with at least one point of contact with the producing lease or unit.

The 2020 Proposed Rule proposed to permit a lessee to request, and ONRR to approve, an application of the deepwater gathering-as-transportation principles in shallow waters under certain circumstances.

The 2020 Proposed Rule also proposed to remove certain language that the 2016 Valuation Rule added to ONRR regulations. Specifically, through the 2020 Proposed Rule, ONRR removed (1) the language under §§ 1206.110(a)(2)(ii) and 1206.152(a)(2)(ii), which provided “[f]or [production from] the OCS, the movement of [production] from the wellhead to the first platform is not transportation,” and (2) the portion of the “gathering” definition at § 1206.20, which stated that “any movement of bulk production from the wellhead to a platform offshore.”

While the 2020 Proposed Rule's preamble fully explained ONRR's intent behind its proposal to adopt regulatory text that is consistent with the former Deepwater Policy, the proposed regulatory text failed to include all of the Deepwater Policy's requirements. Specifically, the proposed regulatory text was not consistent across the oil and gas sections and did not include the adjacency limitation or the requirement for a lessee to identify a central accumulation point at or near the subsea wellheads (explained in the 6th and 5th bulleted points respectively,

supra.

Comments on the Proposed Amendment

Public Comment:

Industry commenters endorsed ONRR's attempt to adopt regulations consistent with the Deepwater Policy. These commenters argued that the Deepwater Policy supported innovative technology development that minimized surface facilities, reduced environmental risks, and increased ultimate recovery. They also argued that adopting regulations consistent with the Deepwater Policy would return a longstanding ONRR practice that lessees relied on to inform their business decisions.

ONRR Response:

Based on public comments such as these, adoption of regulations consistent with the Deepwater Policy may reduce a lessee's total royalty burden, resulting in a lower total cost to operate on the OCS, and thereby potentially encouraging continued production and conservation of resource. Additionally, consistent and transparent regulations reduce uncertainty for investors, which provides a competitive advantage for development of domestic production. Recent Executive and Secretarial Orders call on Federal agencies to appropriately promote and unburden domestic energy production, especially OCS resources.

See

E.O. 13783, “Promoting Energy Independence and Economic Growth,” E.O. 13795, “Implementing an America-First Offshore Energy Strategy,” and S.O. 3350, which promotes the America-First Offshore Energy Strategy.

Public Comment:

One industry commenter, while supportive of the Deepwater Policy, argued that adoption of regulations consistent with the Deepwater Policy is moot. This commenter suggested that ONRR intends to disallow deductions for any movement of production that is not fully in marketable condition, and cited

DCOR, LLC,

ONRR-17-0074-OCS (FE), 2019 WL 6127405 (Aug. 26, 2019) (“

DCOR”

ONRR Response:

The fact pattern and analysis in

DCOR

are distinguishable from the amendments in this rule to allow a lessee to claim certain OCS gathering costs. For example, no part of the leases in

DCOR

were located in water depths deeper than 200 meters. These amendments provide a specific exception to the general principle that a lessee may not include gathering costs in its transportation allowance.

Public Comment:

Several commenters noted the inconsistency between the oil and gas sections of the proposed rule. The oil section at § 1206.110 included the following language: “For oil produced on the OCS in waters deeper than 200 meters, the movement of oil from the wellhead to the first platform is transportation for which a transportation allowance may be claimed” and “On a case-by-case basis, you may apply to ONRR to have your actual, reasonable and necessary costs of the movement of oil produced on the OCS in waters shallower than 200 meters from the wellhead to the first platform to be treated as transportation for which a transportation allowance may be claimed.”

See

85 FR 62080. The gas section of the proposed rule, however, included no such language.

See

85 FR 62084.

ONRR Response:

In the final rule, ONRR is correcting for the omissions in its proposed regulation text at § 1206.110 to clearly adopt regulations consistent with the Deepwater Policy, except for the provision that would have allowed a lessee to apply for treatment of shallow water gathering as deductible transportation. ONRR is inserting parallel language in the gas regulations at § 1206.152.

Public Comment:

One commenter suggested that the language at § 1206.110(a)(1)(i) should end with “including” instead of “except.”

ONRR Response:

In the final rule, ONRR restructured the regulation text. The movement of bulk production from or near subsea wellheads to the first platform is gathering. However, this regulatory amendment provides an exception to the general application of the gathering and transportation regulations, allowing subsea gathering costs to be included in a transportation allowance when the regulatory requirements are met.

Public Comment:

One commenter requested that, when a lessee submits a request to apply the deepwater gathering-as-transportation principles to a lease in shallow waters, the regulation include a time limit for ONRR to respond and require ONRR to provide an explanation if the request is denied.

ONRR Response:

This final rule does not allow a lessee to apply for treatment of shallow water gathering as deductible transportation. A lessee may not submit, nor may ONRR approve, such a request under this final rule. Accordingly, there is no need for ONRR to adopt a time limit for its action on a shallow water request. However, ONRR intends to continue studying any need for, and the economic impact of, a shallow water gathering allowance, and may propose a future rulemaking on this subject.

Public Comment:

Public interest groups opposed the effort, arguing the policy permitted, in the form of a transportation allowance, is an improper deduction under ONRR's regulatory scheme. A commenter argued that ONRR does not have the authority to incentivize production and should not attempt to do so using a policy like this to minimize a lessee's royalty obligations. Another commenter stated that the oil and gas industry has received several royalty relief measures for offshore production and that the government should not be further helping industry at the taxpayers' expense.

ONRR Response:

Although ONRR's primary focus is the collection, verification, and disbursement of natural resources revenues, it shares the Department's policy goals to promote the development of natural resources and to obtain for the public a reasonable financial return on assets that belong to the public.

See

S.O. 3350 and S.O. 3360. ONRR has the statutory authority to promulgate regulations and to carry out the stated purposes of the Acts as explained further in the introduction of this final rule. The mineral leasing authorities granted to the Secretary by Congress provide broad authorities to “prescribe necessary and proper rules and regulations and to do any and all things necessary to carry out and accomplish the purposes of [the leasing statutes]”, including the collection of all revenues associated with such activities, including the OCS. 30 U.S.C. 189 (MLA); 30 U.S.C. 1751 (FOGRMA); 43 U.S.C. 1334(a) (OCSLA).

Public Comment:

The States of California and New Mexico opposed this change, arguing it will cause companies to improperly deduct costs that should be considered gathering and is inconsistent with the definition of gathering clarified in conjunction with the rescission of the Deepwater Policy in the 2016 Valuation Rule. These States asserted the 2016 Valuation Rule allowed for a more consistent and reliable application of the regulations.

ONRR Response:

Historically, the regulatory framework for gathering and transportation did not recognize the unique technology and development model, higher risk and substantial cost of developing and producing oil and gas in unique environments, like the deepwater OCS. However, by practice from 1999 until the 2016 Valuation Rule, these types of developments were allowed as part of a lessee's transportation deduction.

The commenters are correct that subsea movement of bulk production before the royalty measurement point would be defined, under the 2016 Valuation Rule and this final rule, as gathering. However, in this final rule, pursuant to the Secretary's authority to create rules and definitions for royalty collection purposes and to provide for the expeditious and orderly development of the OCS, ONRR is creating a new regulatory exception to the rules for gathering and transportation in order to provide a deduction for a lessee that carries the higher risk and cost of production in the deepwater OCS.

This change from the 2016 Valuation Rule is being made at this time because the GOM is currently viewed as a mature hydrocarbon province; most of the acreage available for leasing has received multiple seismic surveys, has been offered for lease a number of times, or is under lease. Many of the remaining reserves are located in smaller fields that do not warrant stand-alone development and are unlikely to be developed, unless using subsea completions with tiebacks to existing platforms. The risks and costs of subsea tiebacks are significant, especially when developing a resource within a high pressure and high temperature reservoir, and many of the remaining undiscovered technically recoverable resources in the GOM are within this type of reservoir. The actual discovery, development, and production of oil and natural gas results not from the inventory and data compiled by the government, but from efforts by a diverse set of companies working to identify oil and gas prospects that warrant investment. When examining alternative investment opportunities, companies will consider not only the oil and gas potential of an area, but also the expected costs of development, as compared to alternative investments. The expected profitability of specific projects will be affected by a company's determinations of geologic and economic risk.

Public Comment:

A few public interest groups and States noted that in the 2016 Valuation Rule, ONRR explained the Deepwater Policy had served its purpose and is no longer necessary. These commenters argued that ONRR has not sufficiently explained the reason for adopting regulations consistent with the Deepwater Policy.

ONRR Response:

When the Deepwater Policy was written in 1999, the Department's intent was to acknowledge that: “new technologies involved in deepwater development were not specifically contemplated” in the regulations at that time.

See

63 FR 56217. In the 2016 Valuation Rule, based on the significant deepwater development that had occurred since 1999, and consistently high commodity prices during the years the 2016 Valuation Rule was in development, the Department determined that the Deepwater Policy had served its purpose and was no longer needed. More recently, however, commodity prices have once again significantly changed. Rather than make policy decisions based on commodity prices that are nearly impossible to predict, the Department has reassessed the statutory direction provided clearly in the OCSLA which states that: “the [OCS] is a vital national resource reserve held by the Federal Government for the public, which should be made available for expeditious and orderly development, subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs,” (

see

43 U.S.C. 1332), and has assessed concrete data provided by BOEM and BSEE on permitting activity as well as geologic prospects on the OCS. Consequently, the decision to adopt regulations consistent with the Deepwater Policy has been made for several reasons.

First, from 2010-2014, the average NYMEX oil price was approximately $92/bbl and the average natural gas price was approximately $3.85/MMBTU, while over the last five years (July 2015 to June 2020), the average NYMEX oil price was approximately $51/bbl and the average natural gas price was approximately $2.67/MMBTU.

In addition to the decreases in commodity prices, APDs in the GOM have declined, from an average of 173 in FY 2016 through FY 2019 to 140 in FY 2020. During the same time period, onshore APDs have significantly increased, from an average of 3,548 in FY 2016 through FY 2019 to 6,234 in FY 2020.

Also, when ONRR's 2016 Valuation Rule was promulgated, BOEM had published its 2011 National Assessment of Undiscovered Oil and Gas Resources of the U.S. Outer Continental Shelf. BOEM's 2016 version of the same assessment—which was not available when the 2016 Valuation Rule was promulgated—showed declines in the GOM's economically recoverable oil resources and significant declines in the economically recoverable natural gas resources. Information from BOEM shows the remaining economically and technically recoverable oil and gas resources are all significantly lower than the 2016 estimates. The estimated number of large GOM oil pools has been reduced and the estimated remaining natural gas resources has been further scaled back.

Regarding other input on this topic, in the 2020 Proposed Rule, ONRR sought comments on how its regulations could be revised to address deductions for other remote areas, like Alaska's North Slope. ONRR thanks several commenters for their helpful responses. ONRR did not include provisions specific to remote areas in this final rule but will continue examining the issue.

In this final rule, ONRR retains the provision allowing lessees to deduct certain offshore deepwater gathering costs in its transportation allowance when certain criteria are met. Certain production environments, like the deepwater OCS, require unique technology and carry more risk and costs than onshore environments, resulting in a deepwater OCS development model that is drastically different from onshore counterparts. Additionally, the GOM is currently viewed as a maturing hydrocarbon province; most of the acreage available for leasing has received multiple seismic surveys and has been leased. Many of the remaining reserves are located in smaller fields that do not warrant stand-alone development and will be developed, if at all, using subsea completions with tiebacks to existing platforms. However, the risks and costs of subsea tiebacks are significant, especially when developing a resource within a high pressure and high temperature reservoir. Many of the remaining undiscovered technically recoverable resources in the GOM are within this type of reservoir.

See https://www.boem.gov/sites/default/files/oil-and-gas-energy-program/Energy-Economics/Fair-Market-Value/2018-GOM-International-Comparison.pdf.

The regulations adopting language consistent with the deepwater policy recognize the benefits that offshore production offers the American public in meeting U.S. demand for oil and gas when compared to onshore U.S. production by allowing for a smaller surface footprint with increased well productivity and longer lifespans.

See https://www.nap.edu/read/25439/chapter/4#14.

Additionally, deepwater economic limits are expected to be greater than shallow water economic limits because deepwater structures are larger, more complex, further from shore, and almost all structures are manned. This further emphasizes the impact that granting an allowance for deepwater gathering costs, when applied over the life of a facility, offers by increasing net revenue to shift the break-even cost curve and extend the life of the reservoir.

See

Mark J. Kaiser, in Decommissioning Forecasting and Operating Cost Estimation, 2019.

Offshore oil and gas production is of strategic national importance, as it has accounted for between 15-20 percent of domestic oil production over the past decade and generates billions of dollars in revenue for the U.S. Treasury, various conservation initiatives, and revenue sharing for four Gulf states. Crude oil produced from the OCS is generally of heavier quality and refined in the Gulf Coast for use throughout the country to meet U.S. national energy needs.

ONRR and its predecessor, MMS, recognized the increased risk, cost, and national importance of producing in the deepwater OCS, but historically did not provide a regulatory mechanism for a lessee to deduct appropriate expenses. In 1999, MMS adopted the Deepwater Policy, which granted deductions for the higher costs of moving production in the deepwater OCS while also creating some confusion about the authority of the policy (provided through Departmental memorandum) and its relationship to MMS' valuation regulations. This final rule resolves that confusion by clearly articulating the elements of the Deepwater Policy in the regulatory text.

ONRR's current regulations prohibit a lessee from including gathering costs in its transportation allowance for all Federal oil and gas production.

See

§§ 1206.110(a) and 1206.152(a). The regulations define gathering as “the movement of lease production to a central accumulation or treatment point on the lease, unit, or communitized area, or to a central accumulation or treatment point off of the lease, unit, or communitized area that BLM or BSEE approves for onshore and offshore leases, respectively, including any movement of bulk production from the wellhead to a platform offshore.”

See

30 CFR 1206.20. Gathering does not end and transportation does not begin before a lessee moves production to the point where it is measured for royalty purposes.

See

30 CFR 1206.20 and 1206.171; 53 FR 1184 at 1190-1191 (January 15, 1988);

DCOR,

ONRR-17-0074-OCS (FE), 2019 WL 6127405. In adopting regulations consistent with the Deepwater Policy, ONRR is amending § 1206.110(a) and § 1206.152(a) to permit a lessee to include, in its transportation allowance, costs incurred in moving offshore production upstream of the royalty measurement point when certain requirements are satisfied. Solely for purposes of this amendment, ONRR is defining central accumulation point to include a single well, a subsea manifold, the last well in a group of wells connected in a series, or a platform extending above the surface of the water, even when prior to the royalty measurement point, and only to the extent all other regulation requirements are met.

See, infra.,

§§ 1206.110(a)(2)(ii) and 1206.152(a)(2)(ii). In all other situations, the central accumulation point remains at or downstream of the royalty measurement point.

The 2020 Proposed Rule included a provision allowing a lessee to request, and ONRR to approve, an application of the deepwater gathering-as-transportation principles in water depths of 200 meters and shallower. ONRR is not adopting the specific provision relating to shallow water gathering in the final rule. While there was such a provision in ONRR's Deepwater Policy in effect from 1999 through 2016, no lessee ever requested an allowance for its shallow water gathering. The fact lessees did not request such relief shows the provision did not effectively incentivize shallow water production, nor did it provide ONRR with a foundation for estimating the economic impact of a shallow water gathering allowance. While ONRR

invited public comment on a possible shallow water gathering allowance in the 2020 Proposed Rule, the public comments received also did not provide sufficient information to justify or quantify the impact of such an allowance. ONRR intends to further examine the matter and, if determined to be appropriate, may make shallow water gathering the subject of a future rulemaking.

In this final rule, ONRR removed the proposed language at § 1206.110. In its place, ONRR is adding regulatory text that is largely consistent with the Deepwater Policy except for the shallow water provision. This language is included in the final rule under both §§ 1206.110(a) and 1206.152(a), and references thereto in the definition of “gathering” under § 1206.20.

C. Allowance Limits for Federal Oil and Gas

The MLA requires a lessee to pay royalties at a minimum of 12.5 percent in amount or value of production removed or sold from the leased lands. 30 U.S.C. 226(b)(1)(A). OCSLA requires a royalty of not less than 12.5 percent in amount or value of production saved, removed, or sold from the leases. 43 U.S.C. 1337(a)(1)(A). Although the MLA and OCSLA do not define the term “value,” it is well-established that the Secretary has the authority and considerable discretion to establish the value for royalty purposes of production from Federal oil and gas leases.

United States

Ohio Oil Co.,

163 F.2d 633 (10th Cir. 1947);

Cont'l Oil Co.

United States,

184 F.2d 804 (9th Cir. 1950);

Marathon Oil Co.

United States,

604 F. Supp. 1375 (D. Alaska 1985);

Amoco Prod. Co.,

29 IBLA 234 (1977).

The regulations at 30 CFR part 1206 govern value and, under these regulations, the Secretary allows deductions for transportation and processing.

See, e.g.,

30 CFR 1206.110, 1206.152, and 1206.159. Secretarial discretion, augmented by case law, supports the Federal lessor sharing in the increased value to the royalty share and costs of the royalty share when a lessee transports production to a market off the lease or processes natural gas into gas plant products.

From the late 1980s to December 30, 2016, ONRR regulations permitted a lessee to request that ONRR allow it to exceed the regulatory limits for transportation allowances (50 percent limit for Federal oil and Federal gas) or processing allowances (66

2/3

percent limit for Federal gas) (“request to exceed”). Under a different process, a lessee could provide data and documentation to support its request to claim an extraordinary processing allowance (“request to claim”). The 2016 Valuation Rule converted the prior regulatory limits from a soft cap (that is, one that could be exceeded upon application to and approval by ONRR) to a hard cap (one that could not be exceeded) and terminated all currently-existing approvals. At that time, a significant number of companies had received approvals to exceed the transportation and processing allowance limits and ONRR had approved two applications for extraordinary processing allowances.

In the 2020 Proposed Rule, ONRR proposed to remove the hard caps on transportation and processing costs and revert to soft caps, and also to allow a lessee to once again request an extraordinary processing allowance. As before the 2016 Valuation Rule, the lessee would submit to ONRR a request to exceed form (form ONRR-4393) and ONRR would review and approve the request before the lessee could properly report allowances in excess of soft regulatory limits. Similarly, a lessee requesting ONRR approval for an extraordinary processing allowance would submit documentation supporting its claim for ONRR to review and either approve or deny.

Based on comments ONRR received on the 2020 Proposed Rule and the economic analysis in this final rule, ONRR finds that this final rule should retain the hard caps on transportation and processing allowances but reinstate the provision allowing a lessee to request approval for an extraordinary processing allowance. ONRR's economic analysis shows that the financial impact to the Federal lessor, states, and industry arising from the retention of the hard caps is less than $500,000 per year. This represents a significant change from ONRR's economic analysis in the 2020 Proposed Rule, and the benefit to lessees and financial impact to states is considerably less than ONRR originally estimated. In broad terms, the updated royalty impact associated with changing the hard caps to soft caps is insufficient to support making the change when considered in combination with public comments on this issue and, to a lesser extent, the potential increased administrative burden on ONRR and lessees. Section VII, entitled “Procedural Matters,” of this final rule describes a breakdown of the royalty impacts associated with gas transportation, oil transportation, and gas processing. ONRR addresses public comments on the 2020 Proposed Rule in the Public Comments section of this final rule below.

Finally, with respect to reinstating the language allowing a lessee to request an extraordinary processing allowance, ONRR reviewed comments from industry and the State of Wyoming where the facilities that were the subject of the two prior approvals for extraordinary processing allowances were located. Both were supportive of the proposed change. For the reasons outlined in the extraordinary processing allowance section below, this final rule reinstates a lessee's ability to request approval for an extraordinary processing allowance.

Several commenters provided comments on portions of the 2016 Valuation Rule that were beyond the scope of the 2020 Proposed Rule. The comments ranged in support of continuing to value arm's-length percent-of-proceeds contracts as processed gas, to supporting the requirement that transportation and processing pricing factors be reported as allowances, instead of being netted from the gross sales price or value. Other comments related to the 2016 Valuation Rule included objection to the removal of a provision that allowed a lessee to use FERC or state-approved tariffs to calculate transportation rates in non-arm's-length transportation allowances, the removal of line fill costs in the calculation of arm's-length transportation allowances, and the removal of transportation factors in the price of the product. Several commenters recommended that ONRR restore the 1.3 multiplier to the BBB bond rate used to calculate non-arm's-length transportation costs. These commenters also suggested that, in light of Standard and Poor's decision to no longer provide its BBB bond rate free to industry, ONRR select a different rate and publish the rate on

ONRR.gov

to alleviate confusion and inconsistency when calculating non-arm's-length transportation allowances. Lastly, ONRR received comments asserting that valuing sales of arm's-length unprocessed gas as processed gas, such as in the case of percent-of-index and percent-of-proceeds contracts, is arbitrary. ONRR appreciates the comments but does not address the comments in the sections below because the comments are outside the scope of this rulemaking.

1. Transportation Allowance Limits for Federal Oil and Gas (§§ 1206.110(d)(1) and (2) and 1206.152(e)(1) and (2))

In the 2016 Valuation Rule, ONRR eliminated the regulations that allowed it to approve oil (§ 1206.110) and gas (§ 1206.152) transportation allowances

in excess of 50 percent of the value of a lessee's production.

In the 2020 Proposed Rule, ONRR proposed to revert to the historical practice of treating the 50 percent cap as a soft cap on oil and gas transportation costs. As discussed in the background above, ONRR retains the hard caps from the 2016 Valuation Rule in this final rule.

Comments on the Proposed Amendment

Public Comment:

Several commenters supported ONRR's authority to approve transportation allowances in excess of the 50 percent allowance cap. These commenters stated that the option to request approval to exceed the 50 percent cap is necessary because it allows a lessee to deduct its actual, reasonable, and necessary transportation costs, even if those costs exceed 50 percent, which is especially important in a low commodity price environment.

ONRR Response:

ONRR agrees that the oil and gas markets changed between the adoption of the 2016 Valuation Rule and the 2020 Proposed Rule. ONRR understands that market volatility and the global pandemic have adversely affected the oil and gas industry. However, it may be counterproductive to make regulatory changes based on market volatility because frequent regulatory changes may decrease early certainty to lessees and make Federal leases less attractive to current and potential lessees. Retaining the hard caps on allowances supports a fair return to the public on their non-renewable natural resources.

Public Comment:

A commenter suggested that ONRR approve exceptions to the 50 percent limit prospectively for a two-year or three-year period to reduce the administrative burden associated with applying for and approving or denying these requests. Another commenter stated that ONRR could offset the administrative burden associated with reviewing and approving requests to exceed the transportation allowance limits by approving allowances for more than a single year at a time.

ONRR Response:

ONRR appreciates comments and suggestions related to reducing administrative burden. ONRR is retaining the hard caps in this final rule, which eliminates any associated increase in administrative burdens.

Public Comment:

A commenter suggested that ONRR modify the allowance to include a 120-day time limit for ONRR to respond to a request and that ONRR provide a detailed explanation if ONRR denies a request. The commenter argues these actions provide certainty to the lessee regarding their allowance calculations.

ONRR Response:

ONRR appreciates these suggestions. However, since ONRR is retaining the hard caps rather than removing them in this final rule, there will not be any application to which a 120-day mandate could apply, nor will there be a need to provide a detailed explanation for a denial.

Public Comment:

A commenter recommended that ONRR reinstate any approval to exceed the 50 percent transportation allowance limits for oil and gas that was in place prior to the reinstatement of the 2016 Valuation Rule.

ONRR Response:

The 2016 Valuation Rule terminated all approvals to exceed the transportation allowance limits prior to its January 1, 2017, effective date. ONRR has no authority to grant future applications retroactively, and is retaining the hard caps in this final rule.

Public Comment:

A commenter asserted that ONRR should eliminate transportation allowances entirely because they amount to an uncapped subsidy of the oil, gas, and coal industries.

ONRR Response:

Transportation allowances are a well-established standard supported by case law and precedent.

See, e.g.

30 CFR 1206.110 and 1206.152 and

United States

Gen. Petroleum Corp. of California,

73 F. Supp. 225, 262 (S.D. Cal. 1946). This final rule retains the hard caps on transportation and processing allowances.

Public Comment:

A commenter asserted that ONRR should eliminate allowances entirely because providing a lessee the option to deduct transportation or processing allowances in excess of the caps disincentivizes lessees to reduce their costs. Another commenter asserted that allowing lessees to request to exceed the limits does not incentivize the lessee to lower operational costs and negatively impacts royalty payments, which in some instances support local schools.

ONRR Response:

Transportation and processing allowances are intended to benefit both a lessee and the Federal lessor because of typically higher market values found off the lease, or from recovering NGLs. Courts have upheld the use of allowances to calculate the value of Federal oil and gas production for royalty purposes.

See United States

Gen. Petroleum Corp. of California,

73 F. Supp. 225, 262 (S.D. Cal. 1946) (stating “It has been held that if there is no open market in the place where an article ordinarily would be sold, the market value of such article in the nearest open market less cost of transportation to such open market becomes the market value of the article in question.”),

aff'd sub nom. Cont'l Oil Co.

United States,

184 F.2d 802 (9th Cir. 1950).

Also, a lessee already has an incentive to minimize its transportation and processing costs. Typically, the Federal Government's royalty share of production is 12

1/2

or 16

2/3

percent. The lessee retains the remaining 87

1/2

or 83

1/3

percent respectively, and has every incentive to minimize the transportation and processing costs borne by its sizable share. The Federal Government benefits from the lessee's incentive to be cost-conscious on its greater share. ONRR does not expect limiting the transportation and processing allowances on a smaller share of production to change lessee behavior in incurring transportation and processing expenses borne by the lessee's greater share. In this final rule, ONRR retains the hard caps on allowances, consistent with the commenter's request. ONRR acknowledges that market conditions and the global pandemic have negatively impacted many budgets, including for schools.

Public Comment:

A commenter asserted that ONRR did not provide justification for incentivizing production in low-quality reservoirs, which the commenter suggested may cause harmful environmental externalities. A second commenter suggested ONRR did not address any environmental consequences associated with reinstating the requests to exceed the transportation limit. Another commenter asserted that ONRR did not fully perform its due diligence to ensure consistency with multiple use management laws.

ONRR Response:

Allowing a lessee to request to exceed the hard caps may not provide sufficient economic incentive for that lessee to continue producing or seek additional production from Federal lands. The Federal Government's royalty share of production is typically 12

1/2

or 16

2/3

percent; the lessee's share of production is typically the remaining 87

1/2

or 83

1/3

percent. Small changes in the calculation of the value of the Federal Government's 12

1/2

or 16

2/3

percent share become even smaller when spread over the value of the lessee's 87

1/2

or 83

1/3

percent share, making it difficult for the Federal Government to effectively incentivize industry action. While allowing a lessee to request to exceed the hard caps could provide some economic incentive to the lessee, such action would also increase the lessee's administrative cost burden. See Section V for ONRR's economic analysis. ONRR has determined that, on

balance, removing the hard caps is not warranted, and is retaining the hard caps in its regulations.

ONRR addresses public comments about environmental considerations in the introduction to this rule. As to the comment regarding consistency with multiple use management laws, the commenter failed to specify which multiple use management laws ONRR failed to consider. While ONRR cannot respond directly to this comment, it has addressed the specific acts raised by other commenters in the introduction.

Oil:

ONRR retained the current language in § 1206.110(d)(1) and (2), which limits transportation allowances to 50 percent of the value of oil transported. Despite the current market volatility, ONRR believes that it is in the public interest to retain the hard cap.

Gas:

ONRR retained the current language in § 1206.152(e)(1) and (2), which limits transportation allowances to 50 percent of the value of unprocessed gas, residue gas, or gas plant products transported. Despite the current market volatility, ONRR believes that it is in the public interest to retain the hard cap.

2. Processing Allowance Limits for Federal Gas (§ 1206.159(c)(2) and (3))

In the 2016 Valuation Rule, ONRR eliminated the regulation allowing it to approve gas processing allowances in excess of 66

2/3

percent of the value of a lessee's gas production.

In the 2020 Proposed Rule, ONRR proposed to revert to historical practices by treating the regulatory limit as a “soft cap” on gas processing costs (66

2/3

percent regulatory limit). As discussed in the background above, ONRR retains the hard caps from the 2016 Valuation Rule in this final rule.

Comments on the Proposed Amendment

Public Comment:

Several commenters supported the 2020 Proposed Rule's provision for ONRR to approve requests to exceed the 66

2/3

percent limit on processing allowances. The commenters stated that the right to request approval to exceed the 66

2/3

percent cap needs to be reinstated because its removal denied lessees the ability to deduct all of their actual, reasonable, and necessary processing costs when those costs exceed 66

2/3

percent. The commenters asserted that this is especially true when the physical make-up of the gas necessitates complex plant designs which result in higher processing costs. Last, a commenter took issue with ONRR terminating any approval that it previously issued for a lessee to exceed the 66

2/3

percent limitation.

ONRR Response:

Although the oil and gas market clearly changed between the drafting of the 2016 Valuation Rule and the 2020 Proposed Rule, and ONRR understands that the oil and gas industry, like many industries, has been adversely affected by market volatility and the global pandemic, ONRR's regulations are designed to continue to function during uncommon or unavoidable circumstances affecting costs and value. ONRR believes retaining the hard caps on allowances supports a fair return to the public on non-renewable natural resources.

Public Comment:

A commenter suggested ONRR reduce administrative costs arising from processing the requests to exceed by approving the exception for periods of two or more years for lessees with contracts that have been reviewed and which are consistently over the limits.

ONRR Response:

ONRR appreciates the suggestion. Because ONRR is retaining the hard caps in this final rule, there are no associated administrative costs.

Public Comment:

A commenter suggested that ONRR modify the allowance to include a 120-day mandate for ONRR to respond to a request and that ONRR provide a detailed explanation if ONRR denies a request.

ONRR Response:

ONRR appreciates the suggestions and responded to a parallel suggestion in the discussion of transportation costs, above. That response is applicable here, as well.

Public Comment:

A commenter stated they oppose ONRR's approval to exceed the 66

2/3

percent cap on processing allowances and allowances in general. Another commenter stated that allowing a lessee to request to exceed the 66

2/3

percent limitation on processing allowances is a savings for industry at the expense of taxpayers due to a reduction in royalty payments.

ONRR Response:

The comments regarding the 66

2/3

percent processing allowance mirror the comments that ONRR received for the 50 percent limitation on transportation allowances for oil. Please refer to ONRR's responses regarding the 50 percent transportation cap.

ONRR retained the current language in § 1206.159(c)(2) and (3), which limits processing allowances to 66

2/3

percent of the value of the gas plant products recovered. Despite the current volatile market conditions, ONRR believes that it is in the public interest to retain the hard cap on processing allowances.

3. Extraordinary Processing Allowances for Federal Gas (§ 1206.159(c)(4))

The 2016 Valuation Rule removed the provision that was in place between March 1, 1988 (53 FR 1230, January 15, 1988), and December 31, 2016 (81 FR 43338, July 1, 2016), under § 1206.158(d)(2), which allowed a lessee to request an extraordinary processing allowance. Under the prior § 1206.158(d)(2), on application to and with ONRR's approval, a lessee could deduct its actual and reasonable processing costs up to 99 percent of the value of the gas plant products extracted and up to 50 percent of the value of the residue gas.

See

81 FR 43353, July 1, 2016. For ONRR's approval, a lessee's application must have demonstrated that the gas stream, plant design, and/or unit costs were extraordinary, unusual, or unconventional relative to standard industry conditions and practice.

See e.g. Amoco Prod. Co.

Baca,

300 F. Supp. 2d 1, 13-14 (D.D.C. 2003);

see also Exxon Corp.,

118 IBLA 221, n. 7 (1991). In justifying the elimination of extraordinary processing allowances, ONRR stated in the 2016 Valuation Rule that “the markets and the technology have changed sufficiently such that this provision and these approvals are no longer necessary.”

See

81 FR 43353 (July 1, 2016).

The 2016 Valuation Rule terminated the two existing ONRR-approved extraordinary processing allowance claims for lessees processing gas at two facilities in Wyoming. In response to the 2020 Proposed Rule, the Governor of Wyoming and the members of Wyoming's Congressional delegation submitted comments stating that this allowance is essential for two major gas-processing facilities in Wyoming. The commenter further explained that this process is challenging and expensive. According to the commenter, these gas processing operations provide an important source of valuable gasses, including helium, which is relied upon by consumers in Wyoming and the rest of the country. The commenters representing Wyoming argued that extraordinary processing allowances are warranted because certain Wyoming gas processing facilities face a serious competitive disadvantage without them, which may cause those plants to be prematurely retired.

Upon receipt of those comments, ONRR reexamined the facts and the assertion in the 2016 Valuation Rule that there were technological advances that rendered the extraordinary processing allowances unnecessary. While gas markets have indisputably

changed since MMS added the extraordinary processing allowance provision to the regulations (53 FR 1230, January 15, 1988), and gas processing technologies have improved overall, the technology necessary to process these two gas streams, characterized by high concentrations of nitrogen, carbon dioxide, hydrogen sulfide, methane, and almost no recoverable NGLs,

see Exxon Corp.,

118 IBLA 221, n. 7 (1991), remains substantially the same.

See, e.g.,

Eow, J.S. (2002), Recovery of sulfur from sour acid gas: A review of the technology. Environ. Prog., 21: 143-162,

https://doi.org/10.1002/ep.670210312;

Reviews in Chemical Engineering, Volume 29, Issue 6, Pages 449-470, eISSN 2191-0235, ISSN 0167-8299, DOI:

https://doi.org/10.1515/revce-2013-0017.

Therefore, reinstating the provision that allowed a lessee to request approval to take an extraordinary processing allowance is appropriate, as the technology to process these unique gas streams has not changed, despite technological advances in processing relevant to many other areas and types of gas streams.

Further, as was noted by the Governor of Wyoming and Wyoming's Congressional delegation, one of these unique gas streams contains recoverable quantities of helium, an element that is vital to the Nation's security and economic prosperity.

See

Final List of Critical Minerals 2018,

https://www.usgs.gov/news/interior-releases-2018-s-final-list-35-minerals-deemed-critical-us-national-security-and,

published May 18, 2018 (83 FR 23295). Helium production is governed by the Helium Stewardship Act of 2013, Public Law 113-40, codified at 50 U.S.C. 167-167q, and is administered by the BLM.

See

https://www.blm.gov/programs/energy-and-minerals/helium.

Accordingly, the U.S. has important economic and national security interests in ensuring the continuation of a reliable supply of helium, including that recovered from unique gas streams requiring costly equipment to remove carbon dioxide and hydrogen sulfide before helium can be extracted.

See, e.g., https://www.nap.edu/read/9860/chapter/7#41.

In instances where a lessee might not otherwise choose to produce a gas resource containing helium, allowing a lessee to apply for an extraordinary processing allowance approval for the natural gas portion of their production stream, may lower natural gas production costs and incentivize new or continued production of helium. However, the extraordinary processing allowance does not apply to helium and to obtain a reduction in helium rates, the helium extractor would need to request this separately with the BLM Amarillo Federal Leased Lands Team.

In light of the foregoing, and after careful consideration of the public comments discussed in more detail below, this final rule reverts to ONRR's long-standing historical practice and reinstates the provision that was in place between March 1, 1988 (53 FR 1230, January 15, 1988), and December 31, 2016 (81 FR 43338, July 1, 2016), under 30 CFR 1206.158(d)(2)(i) to the updated § 1206.159(c)(4). Adoption of this amendment will allow a lessee to apply to ONRR for approval to claim an extraordinary processing allowance.

Comments on the Proposed Amendment

Public Comment:

Several commenters stated that ONRR should restore the option for lessees to request approval for extraordinary processing allowances. The commenters argued that ONRR's prior limited approvals were for gas streams with unique gas compositions that were processed at gas plants with complex plant designs and extremely high unit costs. The commenters stated that the lessees with those approvals made investment decisions based on the approvals. Without the ability to deduct additional, extraordinary processing costs against the value of the residue gas recovered, the economic viability of lease operations was questionable. These commenters further asserted that ONRR was incorrect in the 2016 Valuation Rule when it stated that technological advancements since the 1990s meant that these approvals were no longer necessary.

ONRR Response:

Reinstating this provision may remove the potential disincentive for a lessee to develop Federal lands disadvantaged by gas streams requiring complex and costly facilities, which, like the composition of the gas streams, are unique, extraordinary, or unconventional. Receiving an approval under this provision may also provide a lessee an incentive to continue producing through uncommon or unavoidable circumstances affecting costs and value. As already discussed, ONRR concedes that, despite other technological advances relevant to processing, the technology necessary to process unique gas streams such as that used at the two Wyoming facilities discussed above has not changed appreciably since the prior approvals were given in the 1990s.

Public Comment:

Several commenters requested that ONRR reinstate the extraordinary processing allowance approvals terminated by the 2016 Valuation Rule.

ONRR Response:

The 2016 Valuation Rule terminated the prior approvals that ONRR granted before January 1, 2017. 81 FR 43338 (July 1, 2016). This final rule will add language allowing a lessee to again request an approval. However, ONRR will apply this final rule prospectively, beginning with its effective date. ONRR cannot reinstate the two extraordinary processing allowance approvals that the 2016 Valuation Rule terminated, nor can ONRR grant such allowances for the period between January 1, 2017, and the effective date of this final rule. Rather, each of the lessees will need to reapply to ONRR for approval. And, as before the 2016 Valuation Rule, ONRR may only approve a lessee's request after reviewing the lessee's documentation for adequacy, reasonableness, and accuracy. ONRR anticipates that it will again receive few requests and will rarely grant approval under this provision, as was the case when the language was in place between March 1, 1988, and December 31, 2016.

Public Comment:

A commenter stated that ONRR should not restore the ability for a lessee to request an extraordinary processing allowance approval because the 2016 Valuation Rule ensured a fair return to the public.

ONRR Response:

ONRR is committed to ensuring a fair return to the American public for oil and gas produced from Federal lands. Allowing a lessee to deduct actual, reasonable, extraordinary post-production processing costs is part of ensuring a fair return. Prior to the 2016 Valuation Rule, just two approvals for extraordinary processing allowances were in effect. Both were for leases in Wyoming. The State of Wyoming receives about half of the royalties reported and paid for Federal leases in Wyoming, and shares in any reduction in those royalties, including reductions occasioned by an extraordinary processing allowance. Nonetheless, the comments submitted by the Governor of Wyoming and Wyoming's Congressional delegation urge ONRR to adopt regulations restoring a lessee's ability to apply for extraordinary processing allowances, and state that the positive overall economic impact to Wyoming of continuing operation of the Federal leases that historically benefitted from extraordinary processing allowances outweighs any reduction in royalties Wyoming receives. Further, in more than 30 years, ONRR has received fewer than 10 requests to approve extraordinary processing allowances (and approved only two), which

indicates that such requests are very rare.

Public Comment:

One commenter stated that, if there is a potential danger to local communities if extraction of high sulfur gas streams goes wrong, the company should pay the taxpayers a fair share (and no less) for the resources.

ONRR Response:

As discussed above, allowing a lessee to deduct actual, reasonable post-production processing costs is part of ensuring a fair return for the right to produce Federal resources. And “if extraction of high sulfur gas streams goes wrong,” other laws potentially hold the responsible party liable for personal, property, and environmental damage. ONRR's regulations governing the method of calculating the amount of a lessee's royalty payment were never intended to compensate for accidental personal, property, or environmental damages should someone or something suffer injury or damage as a result of a failure associated with the processing of a natural resource. ONRR further addressed public comments regarding environmental concerns in the General Comments section in this rule's introduction.

ONRR appreciates the comments supporting, seeking the modification to, or opposing the proposed amendment to allow a lessee to apply to ONRR for approval to claim an extraordinary processing allowance. After careful consideration, and for the reasons explained in the introduction above, this final rule will adopt the proposed amendment to § 1206.159(c)(4). In the 2020 Proposed Rule, this paragraph was designated as § 1206.159(c)(4). To account for other changes to § 1206.159, paragraph (c)(4) is redesignated as § 1206.159(c)(5) in this final rule.

D. The Default Provision for Federal Oil, Gas, and Coal and Indian Coal

The 2016 Valuation Rule introduced a provision on how ONRR will exercise the Secretary's authority to establish royalty value when typical valuation methods are unavailable, unreliable, or unworkable. This provision, which appears in several places in the 2016 Valuation Rule, is generally referred to as “the default provision.” ONRR's intent in 2016 was to increase clarity, consistency, and predictability on when and how ONRR would exercise the Secretary's discretion to determine royalty value when other royalty valuation methods fail.

The 2020 Proposed Rule sought to amend 30 CFR part 1206 to eliminate the default provision from four sections and a number of references thereto. The amendment, if adopted, would effectively revert ONRR's practices to those in place prior to publication of the 2016 Valuation Rule. ONRR premised the proposed change on E.O.s 13783 and 13795 and the policies reflected in those directives, and on ONRR's consideration of continuing concerns from regulated entities with respect to how ONRR would apply the default provision, as most recently expressed by industry members in the Petitioners' Joint Opening Brief (ECF No. 89), filed December 4, 2020, in

API

U.S. Dept. of the Interior, et al,

Case No. 19-cv-120-S, U.S. District Court for the District of Wyoming.

In the 2016 Valuation Rule and 2020 Proposed Rule, ONRR determined that inserting and subsequently removing the default provision will not affect royalty values because neither the default provision nor its absence changes ONRR's goal, which is to determine the value of the produced commodity for royalty purposes based on the best or a reasonable measure of market value. Further, removing the default provision does not affect ONRR's ability to establish a royalty value in those infrequent instances where a typical valuation method is unavailable, unreliable, or unworkable because the Secretary's discretion to establish a royalty value does not derive from ONRR's regulations.

See, e.g.,

17 U.S.C. 1751 and BOEM OCS lease form, section 6(b)(“The value of production for purposes of computing royalty shall be the reasonable value of the production as determined by the Lessor.”).

In this final rule, ONRR amends 30 CFR part 1206 to eliminate the default provision found in §§ 1206.105, 1206.144, 1206.254, and 1206.454, and a number of references thereto, effectively returning ONRR's practices to those that were in place for decades prior to the adoption of the 2016 Valuation Rule.

Comments on the Proposed Amendments

Public Comment:

Several commenters supported the default provision's elimination because the commenters opine that the default provision introduces ambiguity as to who within ONRR has the authority to invoke the default provision. There was also concern that the default provision would be applied inconsistently. Further, commenters expressed concerns about the lack of criteria for determining “reasonable” sales prices and transportation costs, which could theoretically result in a lessee not being allowed to value royalties based upon arm's-length sales contracts or deduct all reasonable, actual transportation, and processing costs. These commenters assert that the default provision is overly broad and open-ended, allowing ONRR to determine the value of production or the amount of allowance in instances where a lessee cannot provide documentation requested by ONRR the lessee asserts it has no legal or practical ability to obtain. These commenters support regulations with more certainty in valuation, because they lead to less risk, efficiency in reporting and audits, and improved planning for ONRR and lessees.

ONRR Response:

Prior to the adoption of the 2016 Valuation Rule, ONRR successfully performed compliance activities and, when appropriate, exercised Secretarial discretion, to establish royalty values, even in the absence of an express default provision. Considering the recent direction given by E.O.s 13783 and 13795, which promote domestic energy production and reduce regulatory burden, together with the confusion around when and how the default provision would be applied, ONRR has reevaluated whether the default provision is necessary. ONRR intended the provision to be used in situations where determination of value was unclear, and not to determine the value of production in cases where reasonable, actual transportation and processing costs are well supported. ONRR agrees that the default provision is unnecessary. Further, the default provision invites litigation over what are the “lowest reasonable measures of market price,” “highest reasonable measure of transportation costs,” “highest reasonable measure of processing costs,” and “highest reasonable measure of washing allowances.”

See, e.g.,

30 CFR 1206.104(c)(2), 1206.110(f)(2), 1206.143(c)(2), 1206.153(g)(2), 1206.159(e)(2), 1206.253(c)(2) 1206.260(g)(2), 1206.267(d)(2). Also, arguably, the default provision allows a lessee in certain circumstances to report and pay royalties based on sales prices up to ten percent less than the lowest reasonable measure of market price; transportation costs up to ten percent higher than the highest reasonable measure of transportation costs; processing costs up to ten percent higher than the highest reasonable measure of processing costs; and washing allowances up to ten percent higher than the highest reasonable measure of washing allowances.

See, e.g.,

30 CFR 1206.104(c)(2), 1206.110(f)(2), 1206.143(c)(2), 1206.153(g)(2), 1206.159(e)(2), 1206.253(c)(2), 1206.260(g)(2),

1206.267(d)(2). The default provision does not best protect the United States against inadequate royalty payments and is being removed from ONRR regulations by this final rule.

Public Comment:

Some commenters expressed concern over reporting errors causing ONRR to “penalize” a lessee and impose an entirely different (and presumable higher) valuation for royalty purposes through the application of the default provision without first allowing the lessee to correct its reporting to conform to the applicable regulations.

ONRR Response:

Where royalty value cannot be determined under the regulations, such as instances of breach of a lessee's duty to market, ONRR will use statutory authority to determine Federal oil and gas royalty value in accordance with the lease terms, statutes, and regulations in the same manner as ONRR did prior to adoption of the 2016 Valuation Rule.

Public Comment:

Many commenters expressed concerns over the ten percent variance, arguing that it does not take into account arm's-length sales and transportation contracts, particularly where the lack of fully-developed transportation and processing infrastructure could vary by more than 10 percent from “reasonable measures.” The commenters also stated that the ten percent test is too broadly written and could be triggered by transactions that have the same economic effect but are structured differently.

ONRR Response:

ONRR is to capture a reasonable measure of fair market value for production.

See, e.g.,

43 U.S.C. 1344(a)(4). Fair market value is influenced by sales prices, transportation costs, processing costs, and the costs of placing production in marketable condition. The ten percent variance is problematic, but for reasons other than expressed in these public comments. The ten percent variance is from the lowest

reasonable

sales price and the highest

reasonable

transportation and processing costs. For this reason, the default provision is in conflict with ONRR's mandate to capture full, reasonable fair market value, not up to ten percent less.

Public Comment:

Several commenters suggested that, if ONRR elects to retain the default provision, it should be narrowly tailored to address the most blatant of reporting discrepancies, and defined in such a way that a lessee is not left to guess if and when ONRR will decide to insert itself into regular business transactions and what the results of such intervention might be. One commenter further asserted that ONRR should indicate when its judgment will or will not be substituted, how such discretion would or would not be wielded, and what factors would or would not be used. The commenters added that ONRR should also clarify how the provision would establish pricing for misconduct, breach of duty to market, or instances where ONRR cannot verify value.

ONRR Response:

ONRR appreciates the suggestions to tailor and further define when and how it would use the default provision. However, ONRR believes that the default provision has created uncertainty and unintended consequences in the valuation of production, as discussed above. Therefore, this final rule eliminates the default provision.

Public Comment:

One commenter stated that ONRR should give proper notice to a payor so that additional information or justification as to the valuation could be provided first. The commenter further asserted that the default provision should not be triggered by simple or inadvertent reporting errors, nor by some arbitrary percentage below the lowest “reasonable” measure of value in arm's-length situations, or above the highest “reasonable” measure of transportation or processing cost as under the 2016 Valuation Rule.

ONRR Response:

In this final rule, ONRR eliminates the default provision contained in the 2016 Valuation Rule because the default provision created uncertainty and a regulatory burden, as well as unintended consequences adverse to the lessor. The final rule reverts to historical practices under which MMS and ONRR successfully performed compliance activities. Where appropriate, ONRR will exercise Secretarial discretion to establish royalty values in the absence of the default provision. ONRR believes that it unintentionally increased uncertainty due to lessees' perception that ONRR might apply the default provision in place of accurate lessee reporting, thereby creating a regulatory burden for lessees.

Public Comment:

One commenter suggested that a lessee should be allowed to fix a mis-reported value to conform to ONRR's regulations rather than the agency unilaterally setting its preferred value.

ONRR Response:

In the future, ONRR may request more information and/or specific proposals regarding ways to address reporting errors. Lessees are currently required to correct any reporting errors within 30 days of the date the lessee learns of the error.

See

30 CFR 1210.30.

Public Comment:

A commenter suggested that because several phrases relating to the default provision were not addressed by the 2020 Proposed Rule that ONRR may still exercise seemingly unfettered discretion to review a lessee's royalty valuation that is based on

bona fide

arm's-length contract. This commenter requested that ONRR issue a separate rulemaking to target the remaining default provisions to meet the intent of the 2020 Proposed Rule.

ONRR Response:

ONRR appreciates the suggestions to address the other phrases that were not the subject of the 2020 Proposed Rule. However, it is outside of the scope of this rulemaking.

Public Comment:

One commenter stated that ONRR did not provide a reasoned explanation for removing the default provision, and thus creates uncertainty surrounding the valuation of oil, gas, and coal. The commenter went on to say that removal of this provision will reintroduce uncertainty by leaving a lessee unsure when ONRR will exercise the Secretary's discretion. The commenter also stated that ONRR fails to recognize the lessee's right to appeal any order issued by or on behalf of the Secretary regarding royalty valuation, even though those appeals create an important check on the Secretary's power. Further, this commenter argued that ONRR did not consider alternatives and chose to repeal the default provision without providing justification other than broad executive policies. Accordingly, the commenter concluded that removing the default provision is arbitrary and capricious.

ONRR Response:

ONRR disagrees with the suggestion that the default provision is necessary or that its removal will cause uncertainty. ONRR used its delegated Secretarial discretion, lease terms, statutes, and regulations to determine Federal oil and gas royalties prior to adoption of the 2016 Valuation Rule, and will continue to do so after the default provision's removal from ONRR regulations. The default provision created uncertainty and unintended consequences as discussed above, and the regulations did not best define the situations when ONRR should apply a default provision.

Public Comment:

Another commenter stated that the default provision should be retained because its removal would undermine ONRR's ability to ensure proper royalty collection.

ONRR Response:

ONRR disagrees that the default provision is necessary or that its removal will adversely affect its ability to ensure proper royalty collection. In fact, as discussed above, the default provision may have restricted ONRR's ability to use

Secretarial discretion when a lessee reports royalties significantly lower than the lowest reasonable value.

ONRR appreciates the commenters supporting, seeking the modification to, and opposing the proposed amendment to §§ 1206.101, 1206.102, 1206.104, 1206.105, 1206.110, 1206.141, 1206.142, 1206.143, 1206.144, 1206.152, 1206.160, 1206.252, 1206.253, 1206.254, 1206.256, 1206.260, 1206.267, 1206.451, 1206.452, 1206.453, 1206.454, 1206.460, 1206.461, 1206.467, and 1206.468. For the reasons explained in the 2020 Proposed Rule and this final rule, this final rule will adopt the proposed amendments to §§ 1206.101, 1206.102, 1206.104, 1206.105, 1206.110, 1206.141, 1206.142, 1206.143, 1206.144, 1206.152, 1206.160, 1206.252, 1206.253, 1206.254, 1206.256, 1206.260, 1206.267, 1206.451, 1206.452, 1206.453, 1206.454, 1206.460, 1206.461, 1206.467, and 1206.468 in full.

E. “Misconduct” Definition for Federal Oil, Gas, and Coal and Indian Coal

In the 2016 Valuation Rule, ONRR added a definition of the term “misconduct” under § 1206.20 to mean: “any failure to perform a duty owed to the United States under a statute, regulation, or lease, or unlawful or improper behavior, regardless of the mental state of the lessee or any individual employed by or associated with the lessee.” In the preamble to the 2016 Valuation Rule, ONRR explained that it added the misconduct definition in conjunction with the adoption of the “default” provision. “This new definition will apply to—and in conjunction with the—default provision. Misconduct, in this subpart, is different than—and in addition to—any violations subject to civil penalties under . . . FOGRMA . . . . Behavior that constitutes misconduct under part 1206 does not need to be willful, knowing, voluntary, or intentional. This is a valuation mechanism, not an enforcement tool.”

ONRR is eliminating the default provision from its regulations in this final rule. Accordingly, the definition of “misconduct” added to ONRR regulations in conjunction with and for the operation of the default provision is also being eliminated.

Comments on the Proposed Amendment

Public Comment:

Some commenters stated that the 2016 Valuation Rule generated uncertainty for royalty reporters by creating a broad definition of “misconduct.” The commenters argued this definition could be misapplied, leading to the imposition of civil penalties under the 2016 Civil Penalty Rule. The commenters explained that they interpreted the 2016 Valuation Rule's definition of “misconduct” to allow ONRR to penalize a lessee under the “default provision” for reporting an incorrect product code, sales type, or other non-value-based field on a royalty report (form ONRR-2014), without an opportunity to correct the error. Additionally, penalizing a lessee for non-value-based errors is not reasonable, the commenters said, because there are many fields on form ONRR-2014 that do not affect ONRR's ability to ensure that it has collected every dollar due. Thus, these commenters support the 2020 Proposed Valuation Rule's elimination of the definition of “misconduct.”

One commenter stated that the definition of misconduct was expansive enough to capture even inadvertent paperwork errors. Furthermore, the commenter stated that the 2016 definition of misconduct duplicates existing regulations to the extent that a lessee is required to correct reporting errors under § 1206.30.

ONRR Response:

The definition of “misconduct” in 30 CFR 1206.20 is no longer needed because the default provision is being eliminated by this final rule.

Public Comment:

Some commenters suggested that ONRR amend the definition of “misconduct” in § 1206.20 by including the words “intentional” or “knowing or willful” before “misconduct” where it appears in 30 CFR part 1206. Alternatively, the commenters suggested, ONRR could insert a provision such as “ONRR will not allege misconduct absent some intent by the lessee to lower its royalty payments to the government beyond what is reasonable” to ensure that, for example, the failure of the lessee to conform to formal or informal agency guidance does not establish misconduct, while good faith efforts to comply constitutes mitigating circumstances and should not result in the issuance of a penalty. Another commenter said that intentional conduct aimed at reducing royalties owed should be an aggravating factor, while innocent reporting mistakes, a favorable compliance record, and adherence to ONRR guidance should be mitigating factors.

ONRR Response:

ONRR defined “misconduct” in the 2016 Valuation Rule to clarify when ONRR would exercise the Secretary's discretion to determine value of production under the default provision. Because the default provision is being eliminated by this final rule, the related definition of “misconduct” is also being eliminated, and thus, it is unnecessary to amend, in any manner, the definition of misconduct.

Public Comment:

One commenter stated that ONRR did not provide a reasoned or substantive explanation for proposing in the 2020 Proposed Rule to remove the misconduct definition. The commenter asserted that ONRR's proposal unnecessarily reintroduces uncertainty to the application of the valuation regulations. Additionally, the commenter opined that ONRR directly contradicted its earlier position on an issue without properly justifying its decision. This commenter suggested that before removing the definition, ONRR must first provide a reasoned explanation for the change. Accordingly, the commenter stated that removing the definition for the term “misconduct” is arbitrary and capricious.

ONRR Response:

This final rule provides ONRR's reasoned explanation to remove the definition of “misconduct.” In summary, this rule removes the definition because: (1) ONRR originally added the definition in conjunction with, and for the operation of, the default provision that this rule also removes; (2) in light of this rule's objectives, ONRR gives greater weight to comments that the definition increased uncertainty and undue burdens in the regulated community; and (3) ONRR maintains and has not eroded its ability to ensure and compel accurate reporting including, for example, the requirement under § 1210.30 for a lessee to “submit accurate, complete, and timely information,” regardless of whether those errors were caused by misconduct.

ONRR appreciates the comments supporting, seeking the modification to, and opposing the proposed amendment. After careful consideration, and for the reasons explained above, ONRR is adopting the proposed amendment to remove the definition of “misconduct” in § 1206.20 as part of this final rule.

F. Contract Signature Requirement for Federal Oil, Gas, and Coal and Indian Coal

The 2016 Valuation Rule required a lessee or a lessee's “affiliate [to] make all contracts, contract revisions, or amendments in writing, and all parties to the contract must sign the contract, contract revisions, or amendments” for all valuation methods, including gross proceeds and index-based options, to verify the correctness of royalty reports and payments.

See

§§ 1206.104(g)(1); 1206.143(g)(1); 1206.253(g)(1); and 1206.453(g)(1) (2016 Valuation Rule). If a written contract was not signed by all parties to the contract, the 2016 Valuation Rule directs that ONRR use

the default provision to determine royalty value.

In the 2020 Proposed Rule, ONRR seeks to eliminate the requirement that a lessee create and maintain contracts signed by all parties where the lessee would not do so in the normal course of business, except as required by 30 CFR 1207.5, which states that a lessee must place in written form and retain any oral sales arrangement negotiated by the lessee. The proposed amendment also seeks to create greater consistency with ONRR's definition of contract, which includes oral contracts and written contracts that are not signed by all parties.

See

30 CFR 1206.20.

Even with the amendments adopted in this final rule, ONRR will still be able to evaluate a lessee's course of performance under all contracts, oral and written, signed and unsigned, consistent with ONRR's historical agency practice. ONRR has long been able to request copies of a lessee's sales contracts and all agreements, other contracts, and other documents relevant to the valuation of production, including any written or electronic evidence of transportation contracts, processing contracts, and contracts for services to place production in marketable condition.

See

30 CFR 1207.5 (“Copies of all sales contracts . . . and copies of all agreements, other contracts, or other documents which are relevant to the valuation of production are to be maintained by the lessee and made available upon request . . . to . . . ONRR . . . .”). Given this broad, long-standing authority to request all lessee's records that bear on royalty value, in the 2020 Proposed Rule ONRR sought public comment on whether the new requirements imposed by the 2016 Valuation Rule should be retained.

ONRR recognizes that contracts may be valid and enforceable, as a matter of law, despite the absence of writing or signatures.

See

the definition of “contract” in 30 CFR 1206.20. In this final rule, ONRR seeks to resolve the ambiguity that exists between its definition of contract—which recognizes the validity of oral agreements and of written agreements that have not been signed by all parties—and the 2016 Valuation Rule's imposition of a requirement for every contract to be in writing and signed by all parties, despite a lessee's normal business practices to the contrary. ONRR has determined that the 2016 Valuation Rule's new requirement does not align with contract law, that industry operates without signed documents as a matter of course without issue, and that ONRR can use other methods to determine the terms of an oral contract or a written contract that is not signed by all parties.

Comments on the Proposed Amendment

Public Comment:

Several industry commenters supported removal of the contract signature requirement, stating that real world practices do not always require written contracts and that there is no need for signatures to affirm a contractual agreement. Additionally, commenters noted that the 2016 Valuation Rule inadvertently contradicted the definition of “contract” in the regulation itself, which, at § 1206.20, defines “contract” as “any oral or written agreement . . . that is enforceable by law,” and which does not require the contract to be signed by the parties. Commenters also noted that eliminating the written contract requirement would not diminish a lessee's obligation to justify its Federal or Indian oil or gas valuation to ONRR, and that the mere absence of a written contract is not a valid reason for ONRR to interject itself and reestablish royalty value by using the default provision.

ONRR Response:

ONRR agrees that the 2016 Valuation Rule overlooked the fact that oral agreements and unsigned written agreements may be binding and legally enforceable, eliminating the need for the agency to implement new requirements. Additionally, the 2016 Valuation Rule's requirement of contract signatures is inconsistent with the definition of contract found in 30 CFR 1206.20. This amendment will more readily synchronize ONRR's regulations with the long-standing definition of “contract” that is found in § 1206.20, which acknowledges that a contract may be oral or in writing and does not have to be signed. ONRR also acknowledges that oral contracts are legally enforceable, making the signature requirement unworkable and potentially burdensome upon lessees by creating a heightened requirement that may not be part of standard business practice. ONRR also agrees that eliminating the signed contract requirement does not diminish the lessee's obligation to prove its contract terms and justify its valuation methods to the agency. Long-standing ONRR regulations allow ONRR to request a lessee provide all documents relevant to the valuation of production during the course of its compliance and audit efforts. ONRR believes this provides it with an appropriate mechanism by which to verify appropriate valuation.

Public Comment:

One industry commenter stated that many current agreements among producers and other parties active in the market exist electronically or via email exchanges, renew automatically, or include terms that require something not in written form. Further, the commenter indicated that the signed written contract requirement in 2016 Valuation Rule is stricter than what is required to establish a contract under general commercial law. The commenter provided an example, stating that a course of dealing could not be used to satisfy ONRR's signed contract requirement, but could be sufficient to establish a binding arrangement in a court of law, in the event of a contract dispute. This commenter also believes that ONRR has decades of experience evaluating contracts prior to the 2016 Valuation Rule, and this broad authority and experience should be adequate to carry the agency forward.

ONRR Response:

ONRR agrees that the 2016 Valuation Rule overlooked the fact that many agreements renew automatically and include terms that require acknowledgement in some manner other than a written agreement signed by all parties. This amendment will eliminate inconsistency between this stated industry practice and ONRR's regulatory requirements that rely on accurate recordkeeping and how those records are to be maintained by lessees over time. ONRR also recognizes the 2016 Valuation Rule created a more stringent standard than what most lessees are subject to as part of their normal commercial transactions, and by adopting the amendment proposed in the 2020 Valuation Rule, ONRR hopes to more readily align with standard commercial practices. ONRR also agrees that prior agency practice and expertise can inform its audit and compliance activities, and that eliminating the signed contract provision will not negatively impact these efforts. These longstanding agency practices include ONRR requests to lessees for documents bearing on the valuation of production, including any written sales, transportation, or processing agreements, any documentation of an oral sales agreement, and any documentation that reflects the existence of, or pertaining to, an oral or written sales, transportation, or processing agreement, or agreement for services to place production into marketable condition.

Public Comment:

One industry commenter stated that ONRR's assertion that the contract signature requirement is defective is a premature conclusion for the agency to make. The commenter asserted that ONRR should amend the definition so that it is consistent throughout all product valuation regulations instead of repealing the written contract requirement altogether.

Alternatively, the commenter stated that ONRR should broaden the definition of contract to require that all contracts be in writing. The commenter also expressed concern that ONRR is simply returning to an old regimen that, by ONRR's own admission in the preamble to the 2016 Valuation Rule, is outdated and flawed.

ONRR Response:

The fact that oral and unsigned, written agreements may be legally binding and enforceable between the parties impacted ONRR's decision to revisit this requirement in the 2020 Proposed Rule. ONRR is adopting the proposed amendment for the reasons stated in this final rule.

Public Comment:

Several public-interest commenters stated that this proposed amendment directly contradicts the reason ONRR provided in the 2016 Valuation Rule for the inclusion of contract signatures. These commenters also believe that ONRR has not properly justified this amendment, and that verification activities would suffer without written contracts.

ONRR Response:

In terms of ONRR's verification activities, ONRR believes that its compliance and audit processes will not be negatively impacted by eliminating the 2016 Valuation Rule's requirement for written contracts signed by all parties. ONRR has several methods by which it can confirm transaction-based information from a lessee without relying solely on written contracts signed by all parties. This includes ONRR's ongoing ability to request a full array of documents—both signed and unsigned, hard-copy and electronic—along with its continuing use of Generally Accepted Government Auditing Standards (“GAGAS” or “

Yellow Book

Standards”) to review and audit transactions based on information received from a lessee. In using these different investigatory methods, ONRR ensures compliance and verification activities that meet or exceed its regulatory mandate. ONRR is adopting the proposed amendment for the reasons stated in this final rule.

ONRR is eliminating the requirement that a lessee create and maintain contracts signed by all parties when the lessee would not otherwise do so in the normal course of business. Affected sections are §§ 1206.104(g)(1), 1206.143(g)(1), 1206.253(g)(1), and 1206.453(g)(1).

G. Citation to Legal Precedent as Part of a Valuation Determination Request

The 2016 Valuation Rule introduced a requirement that a lessee provide, along with the lessee's valuation request, any citations to legal precedent, including adverse precedent, that it believes are persuasive as part of its analysis of the issues. These requirements are set forth in §§ 1206.108(a)(5), 1206.148(a)(5), 1206.258(a)(5), and 1206.458(a)(5).

In the 2020 Proposed Rule, ONRR proposes to eliminate this requirement. More specifically, the 2020 Proposed Rule proposed to remove the phrase “including citations to all relevant precedents (including adverse precedents)” from §§ 1206.108(a)(5), 1206.148(a)(5), 1206.258(a)(5), and 1206.458(a)(5).

ONRR is familiar with, and commonly a party to, matters that generate precedent for Federal oil and gas, Federal coal, and Indian coal royalty valuation issues. Although citations might expedite the processing time for a lessee's request for a valuation determination, it is not necessary to require a lessee to provide citations to precedent. Further, ONRR believes that it would be unproductive to attempt to enforce or litigate such a requirement, especially because a failure to include a citation to precedent may not, on its own, provide a sufficient reason to deny an otherwise valid request for a valuation determination. Lessees may always cite precedent when they wish to do so in submitting a valuation request, but it is not necessary to require lessees to do this.

Comments on the Proposed Amendment

Public Comment:

One industry commenter found the requirement to provide legal citations to be problematic because the requirement creates an undue burden on lessees which discourages lessees from seeking formal guidance from ONRR. The commenter explained that requiring legal citations amounts to providing a legal brief to ONRR in support of a lessee's request for a valuation determination, which is unduly burdensome and out of reach for many smaller operators with no legal support staff.

ONRR Response:

ONRR agrees with this commenter and believes that the requirement to provide legal citations creates an unnecessary burden on lessees. ONRR recognizes that many lessees do not employ in-house legal counsel or have outside legal counsel on retainer who could assist with this degree of detailed legal research. Because of the significant legal costs and operational challenges that result from this requirement of the 2016 Valuation Rule, ONRR agrees that eliminating this provision removes a significant challenge for lessees who seek more formal guidance.

Public Comment:

One industry commenter noted that the IBLA oftentimes issues valuation determinations via Orders, which are unpublished and difficult to find using traditional electronic search tools. This creates an issue for lessees because ONRR may be the only entity privy to this information. Further, the commenter stated that it is ONRR's responsibility to ensure that the agency administers its regulations in a consistent manner, not industry's.

ONRR Response:

ONRR recognizes this limitation and agrees that the best way to eliminate the issue is to remove the requirement to cite to legal precedent. The IBLA's issuance of unpublished Orders and directives that cannot be accessed by the general public creates an unanticipated burden on lessees that this proposed amendment seeks to rectify. Further, ONRR conducts its own extensive legal research when evaluating the issues in a lessee's request for a valuation determination. Because ONRR already engages in this level of legal analysis, it is unnecessary for a lessee to duplicate efforts that the agency is already conducting as a matter of course.

Public Comment:

Several industry commenters were concerned that ONRR will require excessive data and legal analysis in order for a lessee to receive valuation guidance or a determination.

ONRR Response:

Although citations might expedite the processing time for a lessee's request, ONRR does not believe that it is necessary to require a lessee to provide citations to legal precedent or regulatory authority. This is particularly true for novel issues for which there may be no legal reference to cite. Therefore, ONRR is removing this requirement.

Public Comment:

One industry commenter expressed concern that the lack of sufficient legal citation would give ONRR a reason to deny a request for a valuation determination.

ONRR Response:

A lessee always has the option to cite to legal precedent in requesting a valuation determination. Even with the amendment adopted in this final rule, lessees may choose to include legal precedent to support or substantiate its arguments; but such citations are by no means a requisite step in the valuation determination or valuation guidance process.

Public Comment:

One industry commenter stated that many mid-sized and smaller independent “Mom and Pop” oil and gas oil companies do not have access to in-house counsel or general counsel to help them research case law and legal citations in support of their valuation determination.

ONRR Response:

ONRR addressed a substantially similar comment, above,

and refers the commenter to the responses in the preceding section.

Public Comment:

A public-interest commenter stated that the burden should remain on the lessee to provide ONRR with citation to legal precedent that bolster or support the lessee's request for a valuation determination.

ONRR Response:

Although citations and reference to legal authority might expedite the processing time for a lessee's request, ONRR does not believe that it is necessary to require lessees to provide citations for this purpose. Further, ONRR believes that maintaining this requirement may disincentivize lessees from seeking a valuation determination or valuation guidance. ONRR's position is that all requests for guidance and valuation determinations are welcome, and ONRR should not create a system that discourages lessees from contacting ONRR for support or assistance.

Public Comment:

A commenter indicated that citation to case law and other legal precedent may be a good barometer for ONRR to use to decide whether the lessee's request has sufficient merit, especially since a valuation determination may remain in effect for decades or longer.

ONRR Response:

ONRR disagrees with this commenter. Although legal citations may provide support for a valuation determination, ONRR must still undertake comprehensive factual and legal research, and a lessee's citation to precedent will not relieve ONRR of the obligation to do so for every valuation determination. Maintaining the regulation that requires citation to legal precedent could inadvertently prevent companies from seeking a valuation determination. ONRR does not want to place unnecessary burdens on lessees and holds that the amendment eliminating the requirement to cite to legal precedent should be adopted.

For the reasons discussed in the 2020 Proposed R

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