Extension of Time Period for Maintaining Records on Outer Continental Shelf Net Profit Share Oil and Gas Leases

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 220

RIN 1010-AB46

Extension of Time Period for Maintaining Records on Outer

Continental Shelf Net Profit Share Oil and Gas Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Minerals Management Service (MMS) previously published a

Notice of Proposed Rulemaking to amend its offshore Net Profit Share

Lease (NPSL) regulations relating to record maintenance requirements

and certain audit requirements. The MMS now is issuing a further notice

of proposed rulemaking on this proposed change.

DATES: Written comments must be received on or before June 13, 1994.

ADDRESSES: Mail your written comments to the Minerals Management

Service, Royalty Management Program, Rules and Procedures Staff, P.O.

Box 25165, Mail Stop 3901, Denver, Colorado 80225-0165, Attention:

David S. Guzy.

FOR FURTHER INFORMATION CONTACT:

David S. Guzy, Chief, Rules and Procedures Staff at (303) 231-3432.

SUPPLEMENTARY INFORMATION: The principal author of this proposed rule

is David A. Hubbard of the MMS Royalty Management Program, Valuation

and Standards Division, Lakewood, Colorado.

I. Background

(a) History of NPSL Accounting Rules

A chronology of the NPSL rules follows:

May 30, 1980--before Congress passes the Federal Oil and

Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C., 1701 et seq.--

the Department of Energy (DOE) publishes regulations on accounting

procedures for offshore NPSL's (10 CFR part 390).

December 1981--the Secretary of the Interior receives

authority to administer the NPSL rules (Pub. L. 97-100).

January 11, 1983 (48 FR 1182)--NPSL rules transferred to

the Department of the Interior (Department), MMS, and redesignated 30

CFR part 261.

August 5, 1983--30 CFR part 261 is redesignated 30 CFR

part 220 (48 FR 35642).

(b) Current and Original Rules Compared

Other than minor administrative changes, MMS' version of the NPSL

accounting rules in 30 CFR part 220 duplicates DOE's original rules in

10 CFR part 390. Both provide that:

Ledger cards showing charges and credits to the NPSL

capital account must be maintained for 36 months after the lessee

ceases NPSL operations;

All other documents, journals, and records must be

maintained for 36 months from the due date or date of mailing of the

statement of account on an NPSL, whichever comes later;

The Department has the right to start an audit any time

within 36 months of the due date of the statement to be audited or the

date it was mailed, whichever is later.

(c) NPSL vs. FOGRMA Recordkeeping Requirements

The record maintenance periods in the NPSL rules conflict with

current statutory record maintenance requirements on all Federal and

Indian oil and gas leases, including leases on the OCS. Section 103 of

FOGRMA, 30 U.S.C. 1713, ``Required Recordkeeping,'' states, in part

that a lessee, operator, or other person * * * shall establish and

maintain any records, make any reports, and provide any information

that the Secretary may, by rule, reasonably require * * *. Upon the

request of any officer or employee duly designated by the Secretary or

any State or Indian tribe * * * the appropriate records, reports, or

information * * * shall be made available for inspection and

duplication by such officer or employee, State, or Indian tribe.

Records * * * shall be maintained for 6 years * * * unless the

Secretary notifies the record holder that he has initiated an audit * *

* and that such records must be maintained for a longer period. In any

case when an audit or investigation is underway, records shall be

maintained until the Secretary releases the record holder of the

obligation to maintain such records.

Section 3(5) of FOGRMA, 30 U.S.C. 1702, defines the term ``lease''

to include ``any * * * profit share arrangement * * * issued or

approved by the United States under a mineral leasing law that

authorizes exploration for, extraction of, or removal of oil or gas.''

So, FOGRMA applies to NPSL records.

(d) General MMS Recordkeeping Rules

The MMS issued regulations at 30 CFR 212.50, ``Required

recordkeeping and reports,'' after FOGRMA's enactment. They state in

part that all records * * * shall be maintained * * * for 6 years * * *

unless the recordholder is notified, in writing, that records must be

maintained for a longer period. When an audit or investigation is

underway, records shall be maintained until the recordholder is

released by written notice of the obligation to maintain records.

Paragraphs (a) and (b) of MMS regulations at 30 CFR 212.51,

``Records and files maintenance,'' state in part that each lessee * * *

shall make and retain accurate and complete records necessary to

demonstrate that payments of rentals, royalties, net profit shares, and

other payments related to offshore and onshore Federal and Indian oil

and gas leases are in compliance with lease terms, regulations, and

orders * * *. Lessees * * * required to keep records under this section

shall maintain and preserve them for 6 years * * * unless the Secretary

notifies the recordholder of an audit * * * and that they must be

maintained for a longer period. When an audit or investigation is

underway, records shall be maintained until the recordholder is

released in writing from the obligation to maintain the records * * *.

Thus, part 212 specifically requires that NPSL records be

maintained at least 6 years after generation. Under Sec. 212.50, this

period may be longer if the recordholder is notified in writing.

(e) Who Is Responsible for NPSL Reporting?

The June 11, 1981, Notice to Lessees for Implementation of Net

Profit Share Accounting for OCS Oil and Gas Leases, 46 FR 30897,

clarifies NPSL reporting responsibilities. It states:

The designated NPSL operator must meet the reporting

requirements of 30 CFR 390.031 (1980) (now 30 CFR 220.031 (1992)) for

all lease interest holders.

Until production starts, each operator must file an annual

report by 60 days after the lease anniversary date.

After production starts, a monthly report must be filed

and payments made.

Each operator is responsible for making NPSL payments.

Further, the MMS Oil and Gas Payor Handbook, vol. II, section

3.3.8, states that NPSL operators must file a Report of Sales and

Royalty Remittance (Form MMS-2014) monthly.

(f) First Proposed Rule

On June 7, 1990, MMS published a Notice of Proposed Rulemaking in

the Federal Register (55 FR 23248). The MMS proposed to amend the

FOGRMA implementation requirement at 30 CFR 220.030 to make its

recordkeeping requirements the same as FOGRMA's and those of 30 CFR

212.50 and 212.51. The MMS proposed the changes because the NPSL

accounting procedures predate and conflict with FOGRMA and MMS' general

recordkeeping rules.

The MMS also proposed to delete 30 CFR 220.033 because 30 CFR

217.50 already applies to all oil and gas audits, including NPSL's. The

MMS is preparing separately a proposed rulemaking to revise 30 CFR part

217, Audits and Inspections; NPSL audit requirements will be included

in that rulemaking.

(g) Agreements With Operators

After MMS published the proposed rule, it signed agreements with

over half of the existing NPSL operators. Under these agreements

operators can either supply NPSL records directly to MMS or maintain

them until MMS completes a lease audit. All who signed the agreement

opted to maintain the records themselves rather than send them to MMS.

II. Further Notice of Proposed Rulemaking

The June 1990 proposed rule would have assured consistency between

the NPSL rules and FOGRMA by putting the FOGRMA 6-year recordkeeping

requirements in the NPSL rules. But, given the audit needs described in

paragraph IV below, MMS concluded that a modified approach was needed.

The main thrust of this revised proposed rule parallels the

recordkeeping agreements now in place between MMS and a majority of

NPSL operators. Because of this substantial change from the June 1990

proposed rule, MMS is publishing this revised proposed rule in the

Federal Register for public review and comment.

The MMS received comments from one industry respondent on the June

1990 proposed rulemaking. Those comments were considered in this

revised proposed rulemaking; they are discussed in paragraph III below.

The revised proposed rule is summarized and discussed in paragraph IV

below.

III. Comments Received on June 1990 Proposed Rule

The June 1990 proposed rule provided for a 30-day public comment

period ending July 9, 1990. We received comments from one industry

source.

(a) The commenter felt a period longer than 30 days should be

allowed for comments on the proposed rulemaking. They felt MMS had

ample time since FOGRMA's enactment to make the proposed amendment, and

to allow only a 30-day comment period was not justified.

MMS Response: The MMS received comments from only one source, and

no one else asked for more time. Thus, MMS believes the 30-day comment

period was long enough for all interested parties to reply to the

proposed rule.

(b) The commenter said the amendments must be prospective from the

effective date of the final rule.

MMS Response: Section 305 of FOGRMA states that the provisions of

this Act shall apply to oil and gas leases issued before, on, or after

the date of the enactment of this Act, except that in the case of a

lease issued before such date, no provision of this Act or any rule or

regulation prescribed under this Act shall alter the express and

specific provisions of such a lease.

Since NPSL lease terms do not include time periods for keeping

records, NPSL's have been subject to FOGRMA's requirements as a matter

of law since its enactment in 1983. Thus, the proposed changes would

not be ``retroactive.''

(c) The commenter said there were a number of leases issued under

the initial regulations--i.e., 10 CFR 390.030, 390.033, and 390.034,

now unchanged at 30 CFR 220.030, 220.033, and 220.034--but after

enactment of FOGRMA section 103, and these leases must be

grandfathered.

MMS Response: As discussed above, section 103 of FOGRMA applies to

all NPSL's; section 305 is clear on this point. The fact that some

NPSL's were issued while the initial regulations were in effect, but

after FOGRMA's enactment, has no bearing on the applicability of

section 305 or the section 103 recordkeeping requirements. Statutory

requirements always supersede inconsistent regulatory obligations.

(d) The commenter did not agree that Sec. 220.033, Audits, should

be removed in favor of Sec. 217.50. The commenter gave no reasons for

this objection.

MMS Response: The MMS proposed to delete Sec. 220.033 to clarify

that NPSL audits will be subject to procedures already described in 30

CFR part 217. The MMS is preparing a proposed rulemaking to revise 30

CFR part 217; it will address NPSL audits. There is no need to

duplicate the NPSL audit requirements in Sec. 220.033.

IV. Summary of Revised Proposed Rule

(a) Need for Rule

This revised proposed rulemaking amends Sec. 220.030 to clarify

that the minimum period for maintaining records on NPSL's, like all

other lease subject to FOGRMA, is 6 years after record creation. In

some cases lessees create NPSL cost records, but production may not

start for several more years; thus an MMS audit logically may not start

for more than 6 years past first record creation. Although the audit

may not begin before production starts or before long cost accrual

periods pass, all costs accumulated in the NPSL capital account after

lease issuance affect the account balance in later periods. Thus,

unlike leases where production costs do not affect royalties, NPSL

records need long-term maintenance so MMS can properly verify the

capital account balance at the start of any period.

(b) MMS Proposal

To preserve the required records until an audit begins, MMS

proposes that the current NPSL operator furnish all records on the NPSL

capital account to the Deputy Associate Director for Audit as they are

created, on an annual basis. Or, the operator could sign an agreement

to maintain the records for 6 years after cessation of operations and

provide them for audit as needed. Then the operator would keep the

records until notified by MMS that they are no longer needed. The MMS

already has signed such agreements with a majority of the current NPSL

operators.

The proposed rule would require the operator to provide MMS all

NPSL capital account records the operator now holds that are older than

6 years--unless the operator agrees, in writing, to maintain them and

furnish them to MMS on request. Also, Sec. 220.031(c) would be changed

to clarify NPSL reporting and payment requirements. Lastly, the

existing Sec. 220.033 would be removed and Sec. 220.034 revised and

redesignated as a new Sec. 220.033.

(c) Public Comment

The MMS's policy is to give the public a chance to take part in the

rulemaking process whenever possible. So, you may send written comments

or suggestions about this notice to the location shown in the ADDRESSES

section of this preamble. Comments must be received by the date

identified in the DATES section of this preamble.

V. Procedural Matters

The Regulatory Flexibility Act

The rule is needed to conform regulations to existing statutory

requirements. The Department has determined that this rulemaking will

not have a significant economic effect on a substantial number of small

entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

Executive Order 12630

The Department certifies that the rule does not represent a

governmental action capable of interference with constitutionally

protected property rights. Thus, a Takings Implication Assessment need

not be prepared under Executive Order 12630, ``Government Action and

Interference with Constitutionally Protected Property Rights.''

Executive Order 12778

The Department has certified to the Office of Management and Budget

that these final regulations meet the applicable standards provided in

sections 2(a) and 2(b)(2) of Executive Order 12778.

Executive Order 12866

This document has been reviewed under Executive Order 12866 and is

not a significant regulatory action requiring review by the Office of

Management and Budget.

Paperwork Reduction Act of 1980

This rule does not contain information collection requirements

which require approval by the Office of Management and Budget under 44

U.S.C. 3501 et seq.

National Environmental Policy Act of 1969

We have determined that this rulemaking is not a major Federal

action significantly affecting the quality of the human environment,

and a detailed statement under section 102(2)(C) of the National

Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not

required.

List of Subjects in 30 CFR Part 220

Coal, Continental shelf, Geothermal energy, Government contracts,

Mineral royalties, Natural gas, Petroleum, Public lands--mineral

resources, Reporting and recordkeeping requirements.

Dated: February 25, 1994.

Bob Armstrong,

Assistant Secretary--Land and Minerals Management.

For the reasons set out in the preamble, it is proposed to amend 30

CFR part 220 as follows:

PART 200--ACCOUNTING PROCEDURES FOR DETERMINING NET PROFIT SHARE

PAYMENT FOR OCS OIL AND GAS LEASES

1. The authority citation for part 220 continues to read as

follows:

Authority: Sec. 205, Pub. L. 95-372, 92 Stat. 643 (43 U.S.C.

1337).

2. Paragraph (b) of Sec. 220.030 is revised to read as follows:

Sec. 220.030 Maintenance of records.

* * * * *

(b) The Federal Oil and Gas Royalty Management Act, 30 U.S.C. 1713,

requires that NPSL records be maintained for 6 years after they are

generated unless the Secretary or designee notifies the record holder

that an audit or investigation involving such records has begun, and

that they must be kept longer. Because NPSL audits or investigations

may not start within 6 years of lease record creation, the NPSL

operator must provide records under either paragraph (b)(1) or (b)(2):

(1) The current NPSL operator must provide MMS all the NPSL capital

account records annually through the end of lease operations. The first

records must be supplied within [60 days following the final rule's

effective date], or, for new operators, within 60 days of the date they

become the new operator; all NPSL records created up to that time,

except any provided earlier, must be included. Following the initial

submission the operator must submit records each calendar year through

cessation of operations by January 31 of the year following the end of

the calendar year. The records must be mailed to the Minerals

Management Service, Royalty Management Program, Deputy Associate

Director for Audit, P.O. Box 25165, Denver, Colorado 80225-0165; or

(2) The current NPSL operator may sign an agreement with MMS to

maintain records on the NPSL capital account for 6 years after

cessation of operations and make them available to MMS for audit or

investigation on request. This signed agreement must be received by MMS

on or before the date the initial records must be supplied under

paragraph (b)(1) of this section, and submitted to MMS at the address

under paragraph (b)(1). Under the agreement, records must be kept until

an audit or investigation is completed and the Director releases the

recordholder from maintaining the records. But, if other sources later

show evidence of possible fraud, collusion, or underpayments, MMS may

further examine records and transactions of earlier audit periods.

3. Paragraph (c) of Sec. 220.031 is revised to read as follows:

Sec. 220.031 Reporting and payment requirements.

* * * * *

(c) Each lessee subject to this part shall submit with the required

Form MMS-2014, which shall be due at the same time as the report

required in paragraph (b) of this section, any net profit share payment

due the United States for the period covered by the report.

* * * * *

220.032 [Amended]

4. Paragraph (d) of Sec. 220.032 is amended by revising the

reference to ``Sec. 220.033'' in the first sentence to read ``30 CFR

part 217.''

Sec. 220.033 [Removed]

5. Section 220.033 is removed.

Sec. 220.034 [Redesignated as Sec. 220.033]

6. Section 220.034 is redesignated as Sec. 220.033.

7. Paragraph (a) of redesignated Sec. 220.033 is revised to read as

follows:

Sec. 220.033 Redetermination and appeals.

(a) If an inspection of records or an audit causes the Director to

find an error in the NPSL capital account or the net profit share

payment--whether in favor of the Government or the lessee--the Director

will redetermine the net profit share base, recalculate the net profit

share payment due the United States, and notify the lessee of the

recalculation.

* * * * *

[FR Doc. 94-8810 Filed 4-12-94; 8:45 am]

BILLING CODE 4310-MR-M