Amendments of Regulations to Establish Liability for Royalty Due on Federal and Indian Leases, and To Establish Responsibility to Pay and Report Royalty and Other Payments

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 211

RIN 1010-AB45

Amendments of Regulations to Establish Liability for Royalty Due

on Federal and Indian Leases, and To Establish Responsibility to Pay

and Report Royalty and Other Payments

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Minerals Management Service (MMS), Royalty Management

[[Page 30493]] Program (RMP) proposes to amend its regulations to

establish and clarify which persons may be held liable for unpaid or

underpaid royalties, compensatory royalties, or other payments on

Federal and Indian minerals leases. The proposed rules also would

establish who is required to report and pay royalties on production

from leases not in approved Federal or Indian agreements or leases in

approved Federal or Indian agreements containing 100 percent Federal or

Indian Tribal leases with the same lessor, the same royalty rate, and

the same fund code for royalty distribution (hereinafter referred to as

100 percent Federal or Indian agreements). In the near future, MMS

intends to issue a further notice of proposed rulemaking regarding who

is required to report and pay royalties on production from leases in

all other approved Federal or Indian Agreements.

DATES: Comments must be submitted on or before August 8, 1995.

ADDRESSES: Mail written comments, suggestions or objections regarding

the proposed amendment to: Minerals Management Service, Royalty

Management Program, Rules and Procedures Staff, P.O. Box 25165, MS

3101, Mail Stop 3101, Denver, Colorado 80225-0165.

FOR FURTHER INFORMATION CONTACT:

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

3432, FAX (303) 231-3194. Minerals Management Service, Royalty

Management Program, building 85, P.O. Box 25165, Mail Stop 3101,

Denver, Colorado 80225-0165.

SUPPLEMENTARY INFORMATION: The principal authors of this rule are

members of a team of Minerals Management Service employees led by

Cecelia Williams of the Office of Enforcement, Lakewood, Colorado, and

attorneys from the Office of the Solicitor in Washington, D.C.

I. General

Since its formation in 1982, and following the mandate of the

Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C.

1701 et seq., MMS improved substantially the process of accounting for

and collecting royalties on mineral production from Federal and Indian

leases. MMS implemented automated procedures to detect potentially

unpaid and underpaid royalties after payors file their monthly royalty

reports, and developed an effective audit program in conjunction with

states and Indian tribes.

When MMS determines that royalties are underpaid for a Federal or

Indian lease, MMS generally bills the person who filed a Payor

Information Form (PIF) (Form MMS-4025 for oil and gas and Form MMS-4030

for solid minerals) for that lease, and that payor usually resolves the

matter with MMS. However, sometimes that royalty payor no longer is

able to pay (e.g., it is bankrupt or otherwise out of business), or it

asserts that someone else is responsible for the royalty payment. In

other situations, an interest in the lease is assigned between the time

the royalty obligation accrued and the time MMS discovers and orders

payment. In such events, the current payor often does not agree to pay

the deficiency, requiring MMS to determine who is liable for the

royalty or other payment deficiency.

The purpose of these proposed rules is to establish and clarify

which persons are liable, either individually or in conjunction with

others, if royalties, compensatory royalties, or other payments due for

a Federal or Indian lease are unpaid or underpaid. As explained in more

detail below, this includes record title owners of a lease and

operating rights owners other than record title owners. In addition,

MMS would amend the Payor Information Form (PIF) (Form MMS-4025 for oil

and gas and MMS-4030 for solid minerals), required under 30 CFR 210.10,

to expressly provide that the payor agrees to pay any additional

royalties owed on the production for which it reported royalties

originally. Operators and other persons could be liable for the

underpayments in certain circumstances. The rules further would clarify

how liability attaches, and terminates, when a record title interest is

assigned or operating rights are transferred. For the most part, these

proposed rules are consistent with current MMS practice and procedures.

MMS also proposes to amend its rules to provide who is required to

report and pay royalties on production from, or attributable to, leases

not in approved Federal or Indian agreements or leases in 100 percent

Federal or Indian agreements (all leases in the agreement have the same

lessor, the same royalty rate, and the same fund code for distribution,

e.g. same state or county). MMS is reserving for a further notice of

proposed rulemaking rules regarding who is required to report and pay

royalties on production from leases in all other approved Federal or

Indian agreements.

Commenters must recognize that the standards for who is required to

report and pay could be different from the standards for determining

liability for underpayments. For example, as explained in more detail

below, if you hold half of the record title interest in a Federal lease

(that is not in an approved Federal or Indian agreement), you would be

liable ultimately for 50 percent of the royalties due on production

from that lease. However, under the proposed rules, the person who

actually takes and sells the production from a lease that is not in an

approved Federal or Indian agreement is required to report and pay each

month, so you may not be the person required initially to report that

production and remit the royalties. If that payor underpaid royalties,

MMS may seek to collect additional monies from you, and then only for

50 percent of the production.

II. Section-by-Section Analysis

Subpart A--General Provisions

Section 211.10 Purpose

This section would explain that this part of the MMS rule is

intended to address two principal issues. The first is to establish

which persons are liable for royalty, compensatory royalty, and other

payments on a lease by virtue of ownership of a lease interest or other

connection to lease production. The second issue addressed in this part

concerns which persons would be required to report and pay royalties on

lease production each month or as otherwise required. However, as

explained above, at this time MMS is proposing new rules addressing

reporting and paying requirements only for leases not in approved

Federal or Indian agreements or leases in 100 percent Federal or Indian

agreements.

Section 211.11 Scope

This section would explain the general content of Subparts A, B,

and C. Subpart A explains which leases the rules on liability and

reporting and paying would apply to, and the definitions you would need

to know. Subpart B establishes who would be liable under the leases set

out in Subpart A and the extent of that liability. Subpart C explains

who would be responsible for reporting and paying royalties on the

leases set out in Subpart A, and would describe the obligations to

report and pay properly.

Section 211.12 Leases to Which This Part Applies

This section would explain that the rules on liability contained in

this part apply to all Federal and Indian mineral leases. This

includes, but is not limited to, Indian oil and gas leases, onshore

Federal oil and gas leases (whether on public domain or acquired lands,

and regardless of the statute under which the lease was issued), oil

and gas leases [[Page 30494]] on the Outer Continental Shelf (OCS),

Federal and Indian coal leases, and Federal geothermal leases. Leases

or other agreements under the Indian Mineral Development Act of 1982

also would be included.

As explained in more detail below, there will be situations where

Federal or Indian leases are part of an approved Federal or Indian

agreement (e.g., a unit or communitization agreement) that includes

state or fee leases. When the proposed rules refer to a lease, this

includes only the Federal and Indian leases in that agreement.

Leases issued by private predecessors in interest to the Federal

government, under which the Federal government subsequently became the

lessor when it acquired land subject to such a lease, would not be

included within the scope of these rules.

Section 211.13 Definitions

This section would include definitions of certain terms that are

relevant to the regulations in this part.

Approved Federal or Indian agreement would be defined as

an agreement for exploration or development of mineral resources as

described by 25 CFR Subchapter I, 30 CFR Subchapter B--Offshore, and 43

CFR Part 3000. This definition basically would incorporate existing

descriptions of unit agreements and communitization agreements for

Federal and Indian leases.

Compensatory Royalty would be defined as the amounts the

Bureau of Land Management (BLM) or Offshore Minerals Management

assesses to compensate for failure to prevent drainage. This definition

would basically summarize the BLM's regulations at 43 CFR 3100.2 (1993)

and 43 CFR 3162.2(a) (1993). This term is separate and distinct from

``other payments'' defined below.

Operator would be defined by referencing several existing

definitions in 30 CFR and 43 CFR to maintain consistency between the

proposed definition and existing definitions in departmental rules.

Operating rights owner (working interest owner) would be defined as

a person who owns or has been transferred operating rights in a lease

subject to the regulations in this proposed new part. The operating

rights owner could be the record title owner. However, the record title

owner may transfer some or all of its operating rights to another

person who may further transfer those rights. The operating rights

owner has the right to take and sell production from a Federal or

Indian lease, and is often referred to as the working interest owner.

(See BLM rules at 43 CFR 3100.0-5(d)).

Other payments would be defined to include, but not be limited to,

rentals minimum royalties, bonuses, net profit share payments, gas

storage agreement payments, late and erroneous reporting assessments,

and late payment interest charges. The term is intended to include all

payments due to MMS's Royalty Management Program (including payments

directly to Indian lessors and other royalty recipients), except for

compensatory royalty payments assessed for drainage. It would not

include the cost of plugging and abandonment of wells, or other lease

reclamation obligations.

Payor would be defined by referencing several existing

sections in 30 CFR to maintain consistency between the proposed

definition and existing departmental rules. MMS proposes to combine the

definition of payor at 30 CFR 208.2 with the payor rule at 30 CFR

210.51 which further defines payor. By combining the existent

regulations, it is MMS' intent to make clear that a payor is the person

who is responsible for reporting and paying royalties consistent with

the liability provisions of this proposed rule in sections 211.14,

211.15, 211.16, 211.17, and 211.18.

Payor code would be defined as the five-character code

that MMS assigns to the persons required to report and pay royalties.

The payor code uniquely identifies the persons responsible for

reporting and paying royalties and other payments. The payor code is

used on royalty reports, payments, and correspondence to MMS. Persons

required to report and pay must obtain a payor code from MMS.

Payor Information Form (PIF) would be defined as the Form

MMS-4025 for oil and gas and geothermal resources, and Form MMS-4030

for solid minerals, as described in 30 CFR 210.10(c)(3) and (4). The

PIF is a document that informs MMS who will report and pay royalties

and other payments to the Federal or Indian mineral lessor. As

explained below, the present PIF would be revised to provide expressly

that the payor agrees to pay any additional royalties and other

payments owed on production for which it reported, or should have

reported, originally.

Person would be defined basically the same as in FOGRMA at

30 U.S.C. Sec. 1702(12). It would include, but not be limited to, any

and all entities that report and make royalty and other payments to MMS

or the Indian lessor.

Record title owner would be defined as the person who has

entered into a lease subject to this part or a person to whom the

responsible leasing agency has approved assignment of all or part of

the record title interest. This term also means the same as record

title holder, record title interest owner, or lessee of record. The

record title owner may transfer all or a part of the operating rights

to another person and in fact may have no involvement in lease

operations or the sale of production. After the record title owner

transfers its operating rights, it usually maintains an overriding

royalty interest, but the record title owner has no right to the

production from or allocated to the operating rights it transferred.

Royalty would be defined as any payment based on the

volume or value of production from a lease subject to this part. This

is basically the same definition as in FOGRMA, expanded to include

other minerals.

Take would be defined as occurring when the operating

rights owner sells or removes production from or allocated to a lease,

or when such sale occurs for the benefit of an operating rights owner.

Production would be ``taken'' when it is removed from the lease or

agreement. Production would not be ``taken'' if it is used on or for

the benefit of the lease or agreement (and not subject to royalty under

MMS rules), except for lease use gas for leases issued under section 6

of the Outer Continental Shelf Lands Act, 43 U.S.C. 1335 (because that

gas is subject to royalty under the lease terms). Also, for purposes of

these rules, a purchaser who receives production would not be

considered to have ``taken'' the production.

Subpart B--Liability

Section 211.14 Who is Liable for Royalties and Other Payments Due on a

Lease?

The purpose of this section is to provide a comprehensive

explanation regarding which persons are liable to the MMS for royalties

or other payments due on a lease. It does not apply to compensatory

royalties which are addressed in the next section. It also does not

apply to, or affect, other lease obligations such as plugging and

abandonment.

Unless you are subject to one of the paragraphs in this part of the

rule, you would have no liability. However, you may be liable under

more than one paragraph. For example, as explained further below, you

may be liable for royalty on half the production on the lease under

paragraph (a) of this section because you own 50 percent of the record

title. In addition, you could be liable for all the royalty on

production under paragraph (b) of this section if [[Page 30495]] you

own operating rights in that lease and ``take'' 100 percent of that

production.

a. Record title owners. Paragraph (a) of this section applies to

record title owners. As explained in the definitions section, the

record title owner is the person to whom the lease originally was

issued, or the assignee of that person. You may be the record title

owner for a whole lease or a portion of a lease. As a record title

owner, you would be liable for royalties on the percentage of

production from the lease that equals the percentage of your record

title ownership in the lease. Therefore, if you are a 50 percent record

title owner, and the MMS determines that the person who reported and

paid royalties on the total production from the lease for a particular

month undervalued that production, then you are responsible to MMS for

50 percent of the resulting underpayment plus any interest owed

thereon. The amount of underpaid royalties or other payments would be

determined through application of statutes, regulations (e.g., royalty

valuation rules in 30 CFR Part 206), lease terms and orders.

It also is possible that you may be liable for royalties on

production for a month that exceeds your percentage ownership of the

lease. (Some leases may prescribe a royalty reporting period other than

monthly. Because most leases are monthly, we will refer to the

reporting ``month'' in this preamble. However, for your lease, a

different period may be applicable). If you also own operating rights

in the lease and for a month take production in an amount that exceeds

your percentage of record title ownership, you are liable for the

royalties due on that additional amount. Thus, if you are a 50 percent

record title interest owner, but for a month you take 75 percent of the

production, you are liable for the royalties due on 75 percent of the

production. If MMS determines that the royalties on that production

should be higher than what was paid, you are liable for those

additional royalties plus interest.

When a lease is issued, the holders of record title also own

operating rights in the lease. The liability of operating rights owners

for royalties is addressed in the next section. It is important to

understand, however, that under these proposed rules, even if you

transfer a portion or all of your operating rights, you still are

liable for royalties as the record title owner.

It also is important to remember that Subpart B of the proposed

rules addresses only liability for royalty and other payments. It is

Subpart C that establishes who must report and pay the royalties to MMS

each month. Thus, even though you may have liability for unpaid or

underpaid royalties for a production month, you may not be the person

who is required initially to report and pay the royalties to MMS. For

example, if you own 50 percent of the record title for the lease, but

transferred all your operating rights to another person, you have no

right to take production from the lease. However, if the person

required to report and pay the royalties on the total lease production

fails to pay, or underpays, MMS still would hold you liable for 50

percent of what was owed for that production.

As will be explained below, the record title owner is not the only

person who is liable for royalty. In fact, several different persons

may be liable, and the extent of each such person's responsibility is

addressed in later sections of the rule. Section 211.14(a) would

clearly provide that as a record title owner you are jointly and

severally liable for the royalty and other payments (to the extent of

your liability described above) with these other responsible persons

including:

(1) Any person transferred some or all of the operating rights

severed from your record title interest. This would include the

original transferee and subsequent transferees. Note, however, the

responsibility is limited to the extent of the transfer. Therefore, if

you are the 100 percent record title owner, but transfer only 30

percent of your operating rights to another person, you and that person

have joint and several liability for the 30 percent interest.

The transferee has no liability for the remaining 70 percent

interest by virtue of holding operating rights--there may be liability

for other reasons, discussed further below, such as a situation where

that holder of 30 percent of the operating rights actually takes a

greater percentage of the production.

(2) Any other person assigned or who has assumed the obligation to

pay royalty due. By way of illustration, if the purchaser of production

from your lease agrees in the sales contract to be responsible for the

payment of all royalties, and if MMS determines royalties were

underpaid, that purchaser would be liable for the royalties. However,

you too would be liable up to the percentage of your record title

interest or your takes if they are greater.

(3) Any person who filed a PIF with MMS for the production for

which you are liable. As explained later in this preamble, if a person

files a PIF for a lease and reports royalties for that lease, that

person is liable for proper payment of royalties due on the production.

Thus, if MMS determines that royalties were underpaid on that

production, the filer of the PIF is responsible for the additional

royalties. As a record title owner, you would be jointly and severally

liable for those additional royalties up to the percentage of your

record title interest or your takes if they are greater.

(4) Any other person liable under Part 211 for the royalty due for

which you are responsible. This would be a general provision to cover

an operator (but only in certain limited circumstances, discussed

below), a person who takes production from your lease (under the

limited circumstances discussed below), or any other person that is

liable for royalty under the regulations in this subpart.

It is important to note that the joint and several liability

described above is vertical, not horizontal. Therefore, if you are a 50

percent record title owner, you are not automatically liable for the

debts of the other record title owners for the same lease (although

liability may accrue by operation of other provisions of these

regulations). However, if you are a 50 percent record title owner and

transfer half of your operating rights, you would be jointly and

severally liable with the transferee for the royalties and other

payments due for the transferred operating rights interest.

Although this preamble has referred primarily to liability,

including joint and several liability, for royalties, the rules also

would apply to other payment obligations on the lease, including late

payment charges, reporting assessment, and rentals. The proposed

liability rules addressed above are intended to apply only to such

payment obligations payable to MMS's Royalty Management Program or

royalty recipients.

In these rules, MMS proposes that the record title owner's

liability for payment of royalty and other payments be proportionate to

its interest in a lease, because royalty and other payment obligations

are divisible according to that interest. There are, however, other

lease obligations of the several record title owners of a lease that

are not divisible, including plugging and abandonment of wells, and

other reclamation obligations. BLM enforces these and other lease

obligations for onshore leases and MMS's Offshore Minerals Management

program enforces lease obligations for offshore leases. These lease

obligations are not subject to this rulemaking.

Liability for compensatory royalty payments, addressed in

Sec. 211.15, is also a lease obligation that is not divisible.

Compensatory royalties are amounts assessed to compensate the Federal

[[Page 30496]] Government when a lessee breaches its operational

obligation to diligently protect the lease from drainage. See Benson-

Montin-Greer, 123 IBLA 341 (1992); See 43 CFR 3100.2 and 3162.2(a).

Just as the other means of satisfying the requirement to protect from

drainage (drilling of an offset well or communitization) are

indivisible, and thus joint and several, so is the alternative of

compensatory royalty payments. It is proposed that the liability of a

record title owner or operating rights owner for payment of

compensatory royalty would not be proportionate to the share owned. In

other words, each record title owner and operating rights owner would

be jointly and severally liable for the total amount of compensatory

royalty due.

As explained above, it is MMS's principal proposal in this rule

that the liability of a record title owner for royalties and other

payments is limited to its proportionate ownership interest in the

lease, or takes if greater. However, MMS would like comment on whether

MMS should hold each record title owner liable for the royalties and

other payments due on all the production from the lease. In other

words, under this alternative, all record title owners would be jointly

and severally liable for all the royalties and other payments, like

they are proposed to be for compensatory royalties. Commenters are

requested to provide legal authority and citations to support their

comments either in support of, or opposed to, this alternative

proposal.

b. Operating rights owners. When a lease is issued, the record

title owner owns operating rights for the lease equal to its percentage

of record title. The operating rights owner is the person who has the

right to take production from the lease equal to its percentage of

operating rights ownership. The record title owner may sever some or

all of its operating rights and transfer them to another person. In

such event, under Sec. 211.14.(b), if you are the transferee of the

operating rights, you would incur liability for royalty due on

production from, or allocated to, the lease, and for other payments, in

the amount MMS determines to be owed. The liability would be determined

essentially the same as for record title owners. Therefore, at a

minimum, you would be liable for royalty and other payments based on a

percentage equal to your percentage of operation rights ownership in

the lease. To illustrate, assume a Lease is issued to Record Title

Owner A and Record Title Owner B, each owning 50 percent. Record Title

Owner A then transfers half of its operating rights to you. In this

example, you would be liable for royalty due on 25 percent of the lease

production. However, under proposed Sec. 211.14(b)(1)(ii), if you

actually take 40 percent of the production from the Lease and sell it,

your liability extends to 40 percent of the production. Like record

title owners, your liability exists even if you assigned the obligation

to make the royalty payments to another person, such as the purchaser

of the production.

Under proposed Sec. 211.14(b)(2), if you own operating rights that

were not transferred from your record title interest, paragraph (a)

determines your liability. This is because your record title interest

would be equal to or greater than your operating rights interest and

would govern your liability. If you own operating rights that were

transferred from the record title interest, you are jointly and

severally liable for royalty and other payments with the person who

holds the record title interest from which your operating rights were

transferred. However, you are still only liable for your percentage

interest. You are not jointly and severally liable for the percentage

of the operating rights interest that the record title owner either

retained or transferred to another person. But, if you take more than

your percentage entitlement, then you expand your joint and several

liability. Thus, if in the above-described example you take 40 percent

of the production, Record Title Owner A takes 10 percent and Record

Title Owner B takes 50 percent, you and Record Title Owner A are

jointly and severally liable for 40 percent of the production. If the

example is changed and you take 10 percent of the production and Record

Title Owner A takes 40 percent, then you are jointly and severally

liable with Record Title Owner A for royalty on 25 percent of the

production (equal to your percentage of operating rights ownership).

(Remember: this section addresses liability only. The responsibility to

report and pay may be different and is addressed later.)

As an operating rights owner, you also would be jointly and

severally liable with the same other persons as the record title owner

described under proposed Sec. 211.14(a), including:

any other person assigned or who has assumed the

obligation to pay royalty or make other payments,

any person who filed a PIF for the production or other

payments for which you are liable, and

any other person who is liable for the payments under this

part.

For operating rights owners, like for record title owners, MMS's

principal proposal in these rules is to determine liability based on

percentage of ownership, or takes if greater. MMS would like commenters

to address whether it should provide instead that all operating rights

owners are jointly and severally liable for all royalties and other

payments due from the lease. Comments should include legal authority

and citations in support of the comment.

c. Persons who file PIFs with MMS. Under MMS's current royalty

accounting and collection procedures, any person may report and pay the

royalties and other payments owed on lease production. It may be the

record title owner, an operating rights owner, an operator or even a

purchaser. However, the MMS's Automated Financial System (AFS) requires

that a royalty payor file a Payor Information Form (PIF) (Form MMS-4025

for oil and gas and Form MMS-4030 for solid minerals) and be assigned a

payor code before the system will accept the monthly Report of Sales

and Royalty Remittance (Form MMs-2014). See the MMS ``Oil and Gas Payor

Handbook,'' Volume 1, at Chapter 2; and the MMS ``Solid Minerals Payor

Handbook'' at Chapter 2.

When MMS determines either through its automated compliance

procedures or an audit that royalties are underpaid, MMS will bill or

order payment from the payor for that deficiency. The payor is billed

because that is the person on whom MMS has information in its system

regarding that production; MMS's Royalty Management Program does not

maintain data on record title owners or operating rights owners.

Therefore, while there are other persons who may be liable for some or

all of the royalty deficiency (such as the record title owner or an

operating rights owner), it is essential that MMS be able to look first

to the payor for the underpayment. It would be the payor's

responsibility to then seek appropriate contribution from other

parties.

Under existing procedures, MMS has always considered that the

person who filed the PIF would be liable for underpaid royalties.

However, in Mesa Operating Limited Partnership, 125 IBLA 29 (Dec. 31,

1992), Mesa filed Payor Information Forms and paid MMS royalties on

production it purchased from several Indian oil and gas leases. Mesa

did not own any interest in these leases. MMS ordered Mesa to pay

additional royalties found to be owed on these leases. Mesa

administratively appealed MMS's order and the Interior Board of Land

Appeals (IBLA) held that when Mesa filed the Payor Information Forms

and made royalty payments, that [[Page 30497]] did not demonstrate that

Mesa had been assigned and accepted the royalty payment responsibility.

Although the IBLA held Mesa to be liable for other reasons, MMS is

proposing Sec. 211.14(c) to clarify the liability for the person who

files the PIF. Under this subsection, if you file a PIF, you would be

liable in the amount MMS determines for any unpaid or underpaid

royalties on the volumes for which you reported or should have

reported. Thus, if you are a purchaser of lease production and file a

PIF for that lease, you would be liable for the royalties and other

payments owed on the volume of production you received in a month. If

you file a PIF and arrange a sale or other disposition of lease

production for the benefit of an operating rights owner on the lease,

you would be liable for that volume. This would occur in situations

where you are the lease operator or a marketer. Finally, under

Sec. 211.14(c)(1)(iii), you would be liable for the amounts due on the

volume reported to MMS on the Report of Sales and Royalty Remittance

(Form MMS-2014) with your payor code. You would be allowed to correct

reporting errors and adjust those volumes accordingly.

Concurrently with this proposed rulemaking, MMS proposes to modify

the PIF. The new PIF would include a statement that the person

executing the PIF agrees to be liable for all the royalties owed on the

production for which it reports, or should report, each month. The new

PIF would provide for the payor to include its Taxpayer Identification

Number. A draft of the new PIF is attached to this notice of proposed

rulemaking as Appendix A (oil and gas, page 1) and Appendix B (solid

minerals). Commenters are requested to provide comments on the draft

PIF.

Under proposed Sec. 211.14(c)(2), if you are liable for royalties

and other payments because you filed a PIF, you would be jointly and

severally liable with:

All record title owners who are liable for that

production;

All operating rights owners who are liable for that

production; and

Any other person liable under the proposed rules for the

royalties and other payments due on that production.

The MMS is aware that companies have been set up to perform the

service of reporting and paying royalty to MMS. These companies

complete and submit monthly reports and payments to MMS using their

clients' MMS-assigned payor code. If you use one of these service

companies to report and pay royalties, under the proposed rules, the

service company does not incur any additional liability by virtue of

submitting a Form MMS-2014 and payments on your behalf. You would be

liable for any unpaid or underpaid royalties and other payments because

the service company acted as an agent on your behalf.

d. Operators. Under proposed Sec. 211.14(d), if you are a lease

operator, you would not be liable for royalty or other payments due on

a lease simply because you are the operator. You only would be liable

to the extent that you also may be a record title owner or an operating

rights owner under Sec. 211.14 (a) or (b).

Also, you assume liability if you file a PIF under Sec. 211.14(c),

or if you otherwise agree to be liable for royalty and other payments,

as discussed in the next paragraph. You also may be liable if a

regulation of the Department of the Interior provides that the operator

is liable for royalty or other payment. See 30 CFR 250.8 (1993); 43 CFR

3162.1 (1993).

e. Other liable persons. Proposed Sec. 211.14(e) is intended to be

a general provision to establish the liability of any person who agrees

to be liable. For example, a purchaser or a marketer may agree by

contract to pay royalties on behalf of an operating rights owner. In

that event, that purchaser or marketer would be liable to the same

extent as the person on whose behalf it agreed to pay.

While this rule proposes generally to hold co-tenants responsible

only for their entitled share of the production from a Federal or

Indian lease, or their takes if they are greater, the rule recognizes

that co-tenants or working interest owners may have other contractual

relationships which may increase their liability. For example, co-

tenants may decide to develop a property as partners or joint

venturers. In addition, a less formal organizational structure, known

as a ``mining partnership,'' also may result in expanded liability. The

general rule of liability for all such joint venturers or partners is

that each member is personally liable for all partnership obligations

arising out of contract or tort. Misco-United Supply, Inc. v. Petroleum

Corp., 462 F.2d 75 (5th Cir. 1972).

f. Operating rights owners of a lease in an approved Federal or

Indian agreement. The proposed liability rules in Sec. 211.14(a)-(e)

addressed thus far apply to all Federal or Indian leases, whether an

individual lease or a lease that is included in an approved Federal or

Indian agreement. However, for those Federal or Indian leases that are

included in an approved Federal or Indian agreement, there are

additional rules that would apply. Under proposed Sec. 211.14(f), if

you own operating rights in any Federal or Indian lease in the

agreement, and you take production that is allocable to a Federal or

Indian lease in that agreement, then you are liable for the royalties

or other payments due on the production. What this means is that if you

take production allocable to a Federal or Indian lease in your

agreement, and you own operating rights in that lease or any other

Federal or Indian lease in the agreement, MMS would hold you liable for

royalties and other payments for that production. This would be the

only section of the liability portion of these rules that could involve

an interest owner with an interest in a lease other than the lease the

production was from or attributable to.

For example, assume there is a unit that consists of four leases of

equal acreage, two Federal leases (Federal A and Federal B), one state

lease and one fee lease. Each lease is entitled to one-fourth of the

unit production and each lease has only one operating rights owner.

Assume that for the month of January 1994, the operating rights owner

for the Federal A lease actually takes no production. Assume further

that the operating rights owners for the Federal B and the state lease

each take half of the production that was allocable to the Federal A

lease. Under the proposed rule, the operating rights owner of the

Federal B lease would be liable to MMS for royalty and other payments

on the one-fourth of unit production allocable to the Federal B lease

plus the portion of production it took that was allocable to the

Federal A lease. The operating rights owner of the state lease would

not be liable to MMS for royalty and other payments for the volume of

production that it took that was allocable to the Federal A lease.

Under proposed Sec. 211.14(f)(2), liability would be joint and

several with the persons liable under the other subsections of the

rule. Thus, in the above example, for the volumes allocable to the

Federal A lease they took, the operating rights owners for the Federal

B lease would be jointly and severally liable with the operating rights

owners and record title owners for the Federal A lease (and, if

applicable, any other liable party such as an operator or the filer of

the PIF).

For this section MMS specifically would like comment on whether a

Federal or Indian lessee, in an agreement should be held liable if it

takes production from a Federal or Indian lease other than its own in

an agreement situation. Commenters are requested to provide legal

authority and citations in support of their comments. [[Page 30498]]

g. Other liability issues. As explained earlier, the purpose of

these rules is to address the legal issue of who is liable to MMS for

royalty or other payments due on a lease. These rules do not address

against whom MMS will take enforcement action if MMS discovers

underpaid royalties. MMS is retaining the discretion to determine which

person to pursue. However, since the liability of the person who files

the PIF would be clearly established under these rules and the amended

Forms, MMS-4025 and MMS-4030, in most cases MMS would issue a payment

order to that person. That person could then seek contribution from

other liable persons. While these proposed rules should make it easier

to determine who all the liable parties are, it is not MMS's intention

that these rules govern the relationship or liabilities between and

among the affected parties other than MMS.

Section 211.15 Who is Liable for Payment of Compensatory Royalty?

The purpose of this section is to provide an explanation regarding

which persons are liable to MMS for compensatory royalties due on a

lease. If you are not subject to one of the paragraphs in this section,

you would not be liable.

This section applies to record title owners. As explained in the

definitions section, the record title owner is the person to whom the

lease originally was issued, or the assignee of that person. You may be

the record title owner for a whole lease or a portion of a lease. As a

record title owner, no matter what your percentage interest, you are

jointly and severally liable for the full amount of compensatory

royalty owned with all other record title owners on that lease, all

operating rights owners on that lease, and any other persons obligated

to pay compensatory royalties under departmental rules.

This section also applies to operating rights owners. As explained

in the definitions section, the operating rights owner is the person

who has the right to take production from the lease equal to its

percentage of operating rights ownership in the lease, or the

transferee of that person. You may be the operating rights owner for a

whole lease or a portion of a lease. As an operating rights owner, you

are jointly and severally liable with all other operating rights owners

on that lease, all record title owners on that lease, and any other

person obligated to pay compensatory royalty under the regulations of

the Department of the Interior, for payment of all compensatory royalty

due on that lease, regardless of the percentage of your operating

rights ownership interest in the lease. For example, if you are a 50

percent operating rights owner, and MMS determines compensatory

royalties due on the lease equals $100,000, you are liable for the

entire $100,000, not 50 percent of the $100,000.

It is important to note that, unlike liability for payment of

royalties, liability for compensatory royalty is not proportionate to

the ownership interest. In addition, unlike liability for payment of

royalties, liability for compensatory royalty is joint and several

among each liable group, i.e. horizontally as well as vertically.

Therefore, if you are a 50 percent record title owner you are liable

for payment of compensatory royalties with all other record title

owners as well persons to whom you or another record title owner

transferred operating rights.

Section 211.15 How Does Assignment of Record Title Interests or

Transfer of Operating Rights Interests Affect Liability?

One of the other principal purposes of these proposed rules is to

clarify how assignment of record title or transfer of operating rights

affects the liability established in proposed Sec. 211.14 or

Sec. 211.15. It is important to state at the outset that the rules

proposed in this section, like the rules in the previous sections,

relate only to liability for royalties and other payments, such as

interest or assessments, or compensatory royalties, that are the

responsibility of MMS's Royalty Management Program. They do not address

responsibility for plugging and abandonment of wells, or other lease

reclamation requirements. Under applicable law, a record title owner's

responsibility for these other types of obligations may be different

than what would be prescribed in these rules for royalty, compensatory

royalty, or other payments.

Under paragraph (a) of this section of the proposed rule, if you

are a record title owner and you assign some or all of your record

title interest to another person, you would not be liable for royalties

and other payments for the interest you assigned that accrue on or

after the date of the assignment (unless you agree with the assignee to

remain liable for those payments). However, under Sec. 211.15 all

record title owners are jointly and severally liable for compensatory

royalties. Therefore, you would continue to be liable for compensatory

royalties that accrue after the effective date of the assignment unless

you assigned all of your record title interest in the lease.

Thus, for example, if you assign your record title and the

effective date is January 1, you are liable for all obligations through

December 31. If you assign only a part of your record title, your

liability for royalties and other payments would extinguish only for

the percentage assigned, but your liability for compensatory royalties

would not end. Note, however, that the termination provision in this

example relates only to liability under Sec. 211.14(a) by virtue of

record title ownership. You may continue to be liable for royalties or

other payments if you retain operating rights, if you file a PIF for

the production, or if you meet any of the other liability criteria in

Sec. 211.14 other than record title ownership. Your liability also may

not end on the assignment date if a departmental regulation provides

that your liability continues. In such event, that regulation would

control.

Under Sec. 211.16(a)(2), the person to whom you assign some or all

of your record title interest would not be liable for royalties,

compensatory royalties, or other payments for the percentage of the

interest assigned that accrued prior to the effective date of the

assignment (unless the assignee agrees to be liable for those

payments). Therefore, if the effective date of the assignment is

January 1, 1994, and in March 1994 MMS were to issue a payment demand

for underpaid royalties that occurred for production in July 1993, the

assignee would not be liable. This liability that accrued prior to the

assignment would be the responsibility of the assignor. You should be

aware, however, that a regulation of the leasing bureau could expand

this liability to an earlier date.

The concepts embodied in the proposed rules for assignor/assignee

liability are consistent with MMS administrative decisions. See Branch

Oil and Gas, MMS-88-0079-O&G (June 29, 1989).

The limitations on liability just described apply only to royalty,

compensatory royalty, and other payments. It may not apply to other

lease obligations such as plugging and abandonment of wells under

statutes, lease terms, or the regulations in Title 25, Title 30, or

Title 43.

Under section 211.16(b), which is applicable to transfer of

operating rights, the effects of that transfer are exactly the same as

those described for assignment of record title. This section would

apply to both a record title owner's transfer of operating rights and

an operating rights owner's (who is not a record title owner) transfer

of operating rights. [[Page 30499]]

Section 211.17 How Does Liability Affect the Requirement to Report and

Pay Royalties?

As stated earlier in this preamble, Subpart B of the proposed rules

relates to liability, not to the requirement to report and pay

royalties. Liability for royalties does not automatically mean that you

are required to report and pay--it means that if the person required to

report underpays, and if MMS does not resolve the underpayment with

that person, then you are responsible for some or all of the

deficiency.

The proposed rules on liability in Sec. 211.14 rely in part on a

person's ``entitled share'' of production, determined by its percentage

of owned interest of record title or operating rights, to establish

liability. However, as will be explained below regarding Subpart C,

this would not mean that MMS is requiring reporting on what has been

called an ``entitlement'' basis. In fact, it should be clear from these

proposed rules that in actual situations where the lease is committed

to an agreement in an approved Federal/Indian agreement, MMS proposes

to rely on a ``takes'' system to establish who is obligated to report

and pay royalties each month.

Subpart C--Reporting and Paying Royalties.

Subpart C would establish requirements for who is required to

report and pay royalties each month on lease production. As explained

above, all persons who are liable for royalties under Subpart B would

not be required to report and pay. They would be responsible only if

the person required to report and pay fails to pay or underpays.

Section 211.18 Who Is Required to Report and Pay Royalties?

Persons Who Take Production From Leases not in an Approved Federal or

Indian Agreement

The basic requirement under the proposed rules is that if you are

an operating rights owner who takes production from an individual lease

that is not part of an approved Federal or Indian agreement, you must

report and pay royalties for that production. If you own 40 percent of

the operating rights for a lease, but you actually take 70 percent of

the production for a month, you are required to report and pay on the

70 percent of the production you take.

As explained earlier, only the operating rights owners may take

production from a lease. An operator or purchaser who is not an

operating rights owner may be involved in the sales transaction, but

they do not take production for purposes of these rules.

Under Sec. 211.18(a)(1) of the proposed rule, if you take

production and are required to report and pay, you must:

1. File a PIF with MMS as specified in 30 CFR Part 210 and the MMS

Payor Handbook.

2. Report the volume and value of production and royalties owed on

a Form MMS-2014.

3. Pay the royalties owed as specified in 30 CFR Part 218 and the

MMS Payor Handbook.

However, as described below, under section 211.18(d), another

person may agree to report and pay on your behalf.

Persons who Take Production Allocable to Leases in Approved Federal or

Indian Agreements Containing 100 Percent Federal or Indian Tribal

Leases

If all of the leases in an agreement have the same lessor, the same

royalty rate, and the same fund code for royalty distribution (e.g.,

all the leases are on the OCS and not subject to 43 U.S.C. 1337(g), all

the leases are public domain leases in the same state, or all the

leases have the identical Tribal Indian lessor), it would appear to not

be necessary to specifically identify the individual leases in the

agreement to which the production is attributable. Royalties would be

reported and paid to the lessor on 100 percent of agreement production

each month. Therefore, MMS is considering a simplified reporting

procedure.

The current reporting requirements mandate that production be

treated and reported for the lease to which it is attributable. See 30

CFR 202.100(e). MMS is considering allowing the taking party to report

and pay royalties on the total volume taken on one or more of its AID

numbers associated with the agreement without concern about which lease

in the agreement the production actually is attributable to. However,

for those payors whose production is committed to a royalty-in-kind

contract, it would be necessary for them to continue to report volumes

for the specific AID number for the leases committed to that contract.

MMS proposes this option because specific lease identification is not

necessary in these circumstances since all leases have the same lessor,

royalty rate, and royalty distribution.

If this proposed rule is adopted, MMS would modify the Payor

Handbook to reflect this simplified reporting. In addition to this

method of simplified reporting, MMS also is considering simplified

reporting at the agreement level, similar to how production is now

reported. Under this option, MMS would establish a single AID number

for each participating area in the agreement. Each party taking

production from the agreement would report to MMS on this AID number.

MMS would report this information to the royalty recipient (States

or Bureau of Indian Affairs) and they would then make further

distribution to the actual owners or royalty recipients.

Each expansion or contraction of an existing unit would be reviewed

to determine if the new participating area qualifies to be reported in

this manner. If it does not meet the criteria for this type of

reporting, MMS would assign a new agreement AID number to the property.

(This option could be applied to all agreements, not just those that

meet the criteria).

Again, as discussed below, another person may agree to report and

pay royalties on your behalf.

Persons Who Take Production Allocable to Federal or Indian Leases in

all Other Approved Federal or Indian Agreements

For leases in agreements containing a mixture of Federal, Indian,

State, and/or fee leases or containing leases with varying royalty

rates or funds distributions (called mixed agreements), MMS is not

proposing any reporting or payment requirements under this rulemaking.

At this time, MMS has chartered a Federal negotiated rulemaking

committee Federal Register, 59 FR 32943, June 27, 1994) comprised of

Federal, industry, and State representatives to develop a negotiated

rulemaking that would address, among other matters, how to report and

pay royalties for these mixed agreements. Therefore, until this

committee completes its chartered task, MMS is not proposing rules for

this section. Once the committee is finished, MMS will issue a further

notice of proposed rulemaking with a recommendation for reporting and

paying royalties for these mixed agreements.

What if Another Person Agrees To Report and Pay for You?

You may be relieved of the requirement to report and pay royalties

under Secs. 211.18(a)-(c) if another person files a PIF under its name

and reports and pays the royalties for the production for which you are

required to report and pay under Secs. 211.18(a)-(c). For example, this

could be an operator or a purchaser who would follow the requirements

specified above. However, this relief relates only to the reporting and

payment obligation, therefore, you [[Page 30500]] still would be liable

for any unpaid or underpaid royalties under Sec. 211.14.

Liable Persons Who MMS Requires To Report and Pay

Under proposed Sec. 211.18(e), MMS may require any person liable

for royalty payments under subpart B to report and pay. This could be

necessary where the person principally required to report and pay under

Sec. 211.18 fails to do so.

Section 211.19 What Are the Obligations for Proper Reporting and

Paying?

How to report and pay. This paragraph would state that if you are

required to report and pay under Sec. 211.18, then you must do so

timely, accurately, and in the manner MMS specifies. This requires

following instructions in the MMS Payor Handbook and the valuation

regulations in 30 CFR Parts 202 and 206.

What you must do if you report or pay royalties incorrectly. Under

this proposed paragraph, if you do not report and pay royalties

properly, MMS may require you to submit amended reports and pay

additional royalties.

III. Procedural Matters

The Regulatory Flexibility Act

The Department certifies that this rule will not have significant

economic effect on a substantial number of small entities under the

Regulatory Flexibility Act (5 U.S.C. 611 et seq.). The proposed rule

will establish and clarify which persons are liable for unpaid or

underpaid royalties, compensatory royalties, or other payments on

Federal and Indian mineral leases. The proposed rule also clarifies who

is required to report and pay royalties on production from those

leases.

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 Office of Management and

Budget review.

Paperwork Reduction Act of 1980

The rule contains revised Payor Information Forms, therefore this

rule will be submitted to 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 211

Coal, Continental shelf, Geothermal energy, Indians-lands, Mineral

resources, Mineral royalties, Natural gas, Oil, Public lands--mineral

resources, Reporting and recordkeeping requirements.

Dated: March 21, 1995.

Bob Armstrong,

Assistant Secretary--Land and Minerals Management.

For the reasons set up in the preamble, 30 CFR Part 211 is proposed

to be added as follows:

PART 211--LIABILITY FOR ROYALTY DUE ON FEDERAL AND INDIAN LEASES

AND RESPONSIBILITY TO REPORT ROYALTY AND OTHER PAYMENTS

Subpart A--General Provisions

Sec.

211.10 Purpose.

211.11 Scope.

211.12 Leases to which this part applies.

211.13 Definitions.

Subpart B--Liability

211.14 Who is liable for royalties and other payments due on a

lease.

211.15 Who is liable for payment of compensatory royalty?

211.16 How does assignment of record title interests or transfer of

operating rights interests affect liability?

211.17 How does liability affect the requirement to report and pay

royalties?

Subpart C--Reporting and Paying Royalties

211.18 Who is required to report and pay royalties?

211.19 What are the obligations for proper reporting and paying?

Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et

seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et

seq., 1701 et seq.; 43 U.S.C. 1301 et seq., 1331 et seq.; 1801 et

seq..

Subpart A--General Provisions

Sec. 211.10 Purpose.

Part 211 establishes who is liable for royalty, compensatory

royalty, and other payments due on Federal and Indian leases. This part

also establishes who must report and pay those royalties.

Sec. 211.11 Scope.

(a) Subpart A explains which leases are subject to this part and

what definitions you need to know.

(b) Subpart B explains whether you are liable for royalties,

compensatory royalties, or other payments under those leases and the

extent of your liability. Nothing in this subpart applies to, or

affects, liability for other lease obligations.

(c) Subpart C explains whether you must report and pay royalties on

those leases and what your obligations are to report and pay properly.

(d) As explained under Subparts B and C, your liability may be

different from your obligation to report and pay royalties.

Sec. 211.12 Leases to which this part applies.

This part applies to the following leases:

(a) Oil and gas leases subject to 30 U.S.C. Sec. 1701 et seq. These

leases include Federal onshore leases, Indian leases, and leases on the

Outer Continental Shelf.

(b) Coal and other solid mineral leases and agreements that the

Secretary of the Interior administers under the mineral leasing laws.

These leases include Federal and Indian leases.

(c) Geothermal leases issued under the Geothermal Steam Act of

1970, 30 U.S.C. 1001 et seq.

(d) Leases or other agreements under the Indian Mineral Development

Act of 1982.

(e) Other mineral leases or agreements for which the Secretary of

the Interior collects royalty and other payments.

Sec. 211.13 Definitions.

In determining if you are liable or if you must report and pay

royalties, the following definitions apply:

Approved Federal or Indian agreement--means an agreement for

exploration or development of mineral resources as described at 25 CFR

Subchapter I, 30 CFR Subchapter B-Offshore, and 43 CFR Part 3000.

Compensatory royalty--means the amount the Bureau of Land

Management assesses to compensate for failure to prevent drainage under

43 CFR 3100.2 and 43 CFR 3162.2(a). [[Page 30501]]

Operator--means a person as defined by 30 CFR 208.3--Royalty in

kind; 30 CFR 216.6--Production accounting; 30 CFR 250.2--Offshore.

Persons defined as operators in the following sections are included

within the definition of operator in this section: 43 CFR 3100.0-5--

Onshore Leasing: General; 43 CFR 3200.0-5(v)--Geothermal Resources

Leasing: General; or 43 CFR 3400.0-5(cc)--Coal Management: General.

Operating rights owner (working interest owner)--means a person who

owns operating rights in a lease that is subject to this part. A record

title owner is the owner of operating rights under a lease except to

the extent that the operating rights or a portion thereof have been

transferred from record title.

Other payments--includes, but is not limited to, payments or

assessments such as rentals, minimum royalties, bonuses, net profit

share lease payments, gas storage agreement payments, late and

incorrect reporting assessments, and late payment interest charges.

Payor--means any person responsible for reporting and paying

royalties from a Federal or Indian lease or leases on Form MMS-2014, as

defined in 30 CFR Sec. 208.2 and as further defined in 30 CFR

Sec. 210.51.

Payor code--means the five-character MMS-assigned code that

uniquely identifies the company or individual responsible for reporting

and paying. It is used on royalty reports, payments, and correspondence

to MMS.

Payor Information Form (PIF)--means Form MMS-4025 for oil, gas, and

geothermal resources and Form MMS-4030 for solid materials, as

described in 30 CFR 210.10(c)(3)(4).

Person--means any individual, firm, corporation, association,

partnership, consortium, or joint venture (when established as a

separate entity). The term does not include Federal agencies.

Record title owner--means the person who has entered into a lease

subject to this Part or the person to whom the leasing agency has

approved the assignment of all or a portion of the record title

interest. For purposes of this Part, record title owner means the same

as record title holder, record title interest owner, and lessee of

record.

Royalty--means any payment based on the amount or value of

production of oil, gas, or other minerals from the Outer Continental

Shelf, Federal, or Indian lands, under any provision of a lease.

Take--occurs when the operating rights owner sells or removes

production from or allocated to a lease, or when such sale or removal

occurs for the benefit of an operating rights owner.

Subpart B--Liability

Sec. 211.14 Who is liable for royalties and other payments due on a

lease?

This section establishes which persons are liable for royalty or

other payments due on a lease. You are not liable for royalty or other

payments due on a lease except as provided in this section. However,

you may be liable under more than one paragraph of this section. The

limitation on liability established in this section applies only to

royalty and other payments. This limitation does not apply to

compensatory royalty and may not apply to other lease obligations

established under statute, lease terms, or regulations in Title 25,

Title 30, or Title 43.

(a) Record title owners.

(1) If you are a record title owner of a lease, you are liable for

royalty due on production from or allocated to the lease, and for other

payments, in the amount MMS determines under applicable statutes, lease

terms, regulations, or orders. You remain liable even if you transfer

some or all of your operating rights to another person or if you assign

to another person the obligation to report and pay royalty on some or

all of the production, or to make other payments. You are liable for

royalties or other payments owed on:

(i) The percentage of production equal to the percentage of your

record title ownership in the lease; and

(ii) The portion of production you take in a month that exceeds the

volume in paragraph (a)(1)(i) of this section.

(2) If you are a record title owner, you are jointly and severally

liable for the royalty or other payments due as described in paragraph

(a)(1) of this section with:

(i) Any person who owns some or all of the operating rights for the

lease that were transferred from the record title interest you

currently own, but only to the extent of the transfer;

(ii) Any other person assigned or who has assumed the obligation to

pay royalty due on the production or to make other payments for which

you are liable;

(iii) Any person who filed a PIF with MMS for the production or

other payments for which you are liable; and

(iv) Any other person liable under this part for the royalty due on

the production, or for the other payments, for which you are liable.

(b) Operating rights owners.

(1) If you own operating rights that were not transferred from the

record title interest, paragraph (a) determines your liability for

royalty and other payments due on a lease. If you own operating rights

that were transferred from the record title interest for a lease, you

are liable for royalty due on production from or allocated to the

lease, and for other payments, in the amount MMS determines under

applicable statutes, lease terms, regulations, or orders. You are

liable even if you assigned the obligation to pay royalty on some or

all of the production, or to make other payments, to another person.

You are liable for:

(i) The percentage of royalties or other payments owed that equals

the percentage of your operating rights ownership in the lease; and

(ii) The portion of production you take that exceeds the volume in

paragraph (b)(1)(i) of this section.

(2) If you own operating rights that were transferred from the

record title interest, you are jointly and severally liable for the

royalty or other payments due as described in paragraph (b)(1) of this

section with:

(i) The person who owns the record title interest from which your

operating rights were transferred;

(ii) Any other person assigned or who has assumed the obligation to

pay royalty due on the production or to make other payments for which

you are liable;

(iii) Any person who filed a PIF with MMS for the production or

other payments for which you are liable; and

(iv) Any other person liable under this part for the royalty due on

production or for the other payments for which you are liable.

(c) Persons who file PIFs with MMS.

(1) If you file a PIF with MMS, you are liable for royalty and

other payments due on the production from or allocated to the lease

specified on that PIF in the amount MMS determines under applicable

statutes, lease terms, regulations, or orders. You are liable under

this paragraph whether or not you own a record title interest or an

operating rights interest in the lease. You are liable for royalties

and other payments due on that production under one or more of the

following paragraphs:

(i) The volume received in a month if you purchase production from

or allocated to a lease.

(ii) The volume delivered in a month if you arrange a sale or other

disposition of production from or allocated to the lease for the

benefit of an operating rights owner on the lease.

(iii) The volume reported to MMS on the Report of Sales and Royalty

Remittance (Form MMS-2014) with your payor code.

(2) If you file a PIF with MMS, you are jointly and severally

liable for the royalty or other payments due as

[[Page 30502]] described in paragraph (c)(1) of this section with:

(i) All record title owners who are liable for the royalty due on

the production and for other payments;

(ii) All operating rights owners who are liable for the royalty due

on the production and for other payments; and

(iii) Any other person liable under this part for the royalty due

on production or for other payments for which you are liable.

(3) If another person uses your payor code to report royalties on

Form MMS-2014, that person is not liable for those royalties solely on

the basis of that reporting. However, that person may be liable under

paragraphs (a), (b), (d), or (e) of this section.

(d) Operators.

(1) If you are an operator, you are liable for royalty or other

payments due on a lease only if:

(i) You are subject to paragraph (a) or (b) of this section to the

extent you are a record title or operating rights owner; or

(ii) You are subject to paragraph (c) of this section by filing a

PIF; or

(iii) You are subject to paragraph (e) of this section by assuming

royalty or other payment liability by contract or agreement; or

(iv) You are liable under a regulation of the Department of the

Interior.

(e) Other liable persons.

(1) You are liable for royalty or other payments due in the amount

MMS determines under applicable statutes, lease terms, regulations, or

orders if:

(i) You have a contract or other agreement to assume that liability

on behalf of another person who is liable for those royalties or other

payments under this subpart; or

(ii) Liability is established under a regulation of the Department

of the Interior.

(f) Operating rights owners of a lease in an approved Federal or

Indian agreement.

(1) You are liable for the royalty and other payments due on

production allocated to a Federal or Indian lease in an approved

Federal or Indian agreement in the amount that MMS determines under

applicable statutes, lease terms, agreement terms, regulations, or

orders if:

(i) You own operating rights in that lease or in another Federal or

Indian lease in that agreement and

(ii) You take that production specified under paragraph (f)(1) of

this section.

(2) If you own operating rights and take production as provided in

paragraph (f)(1) of this section, you are jointly and severally liable

for the royalty and other payments with any other person who is liable

for the payments under this subpart.

Sec. 211.15 Who is liable for payment of compensatory royalty?

If you are a record title owner or operating rights owner of all or

a portion of a lease, you are jointly and severally liable for payment

of all compensatory royalty owed for that lease with:

(a) All other record title owners on that lease;

(b) All other operating rights owners on the lease; and

(c) Any other persons obligated to pay compensatory royalties under

regulations of the Department of the Interior.

Sec. 211.16 How does assignment of record title interests or transfer

of operating rights interests affect liability?

(a) If you assign some or all of your record title interest in a

lease to another person:

(1) You are not liable for royalties and other payments that accrue

on or after the effective date of the assignment for the percentage of

the interest you assign, except as provided in a regulation of the

Department of the Interior or unless you agree with the assignee to

remain liable for those payments. You will continue to be liable for

compensatory royalties that accrue for a lease after the effective date

of the assignment, unless you assigned all of your record title

interest in that lease.

(2) The person to whom you assign some or all of your record title

interest is not liable for royalties, compensatory royalties, or other

payments for the percentage of the interest assigned that accrued prior

to the effective date of the assignment, except as provided in a

regulation of the Department of the Interior or unless the assignee

agrees to be liable for those payments.

(3) The limitations on liability established in this section apply

only to royalty, compensatory royalty, and other payments. This

limitation may not apply to other lease obligations established under

statutes, lease terms, or regulations in Title 25, Title 30, or Title

43.

(b) If you transfer some or all of your operating rights interest

in a lease to another person:

(1) You are not liable for royalties and other payments that accrue

on or after the effective date of the transfer for the interest you

transfer, except as provided in a regulation of the Department of the

Interior or unless you agree with the transferee to remain liable for

those payments. You will continue to be liable for compensatory

royalties that accrue for a lease after the effective date of the

transfer, unless you transferred all of your operating rights interest

in that lease.

(2) The person to whom you transfer some or all of your operating

rights interest is not liable for royalties, compensatory royalties, or

other payments for the interest transferred that accrued prior to the

effective date of the transfer, except as provided in a regulation of

the Department of the Interior or unless the transferee agrees to be

liable for those payments.

(3) The limitations on liability established in this section apply

only to royalty, compensatory royalty, and other payments. This

limitation may not apply to other lease obligations established under

statutes, lease terms, or regulations in Title 25, Title 30, or Title

43.

Sec. 211.17 How does liability affect the requirement to report and

pay royalties?

Not all persons liable for royalty or other payments due on a lease

are required to report and pay those amounts to MMS. Subpart C

establishes the requirements for who reports and pays.

Subpart C--Reporting and Paying Royalties

Sec. 211.18 Who is required to report and pay royalties?

You must report and pay royalties for Federal and Indian leases in

accordance with this section. You also must report and pay royalties in

accordance with applicable statutes, lease terms, regulations, and

orders, and submit corrected reports or payments to MMS.

(a) Persons who take production from leases not in an approved

Federal or Indian agreement.

Except as provided in paragraph (d) of this section, if you are an

operating rights owner who takes production from a Federal or Indian

lease that is not included in an approved Federal or Indian agreement,

you must report and pay royalties and other payments on the production

you take. You must:

(1) File a PIF with MMS as specified in Part 210 of this chapter

and the MMS Payor Handbooks (see Secs. 210.54 and 210.204 for

availability)

(2) Report the royalties owed on a Form MMS-2014 as specified in

Part 210 of this chapter and the MMS Payor Handbooks; and

(3) Pay royalties as specified in Part 218 of this chapter and the

MMS Payor Handbooks.

(b) Persons who take production allocable to leases in approved

Federal or Indian agreements containing 100 percent Federal or Indian

tribal leases. [[Page 30503]]

(1) This paragraph provides requirements and instructions for

reporting and paying royalties and other payments for:

(i) Leases in an approved Federal agreement comprised only of

Federal leases that each have the same royalty rate and funds

distribution requirement; and

(ii) Approved Indian agreements comprised only of Indian tribal

leases that each have the same royalty rate and tribal lessor.

(2) Except as provided in paragraph (d) of this section, if you are

an operating rights owner who takes production allocated to a lease in

an agreement under this paragraph, you must report and pay royalties on

the production you take. You must:

(i) File a PIF with MMS as specified in Part 210 of this title and

the MMS Payor Handbooks;

(ii) Report the royalties owed for that production on a Form MMS-

2014. You must use one or more of your MMS-assigned lease accounting

identification numbers (AID). Also, you must follow the instructions

provided in Part 210 of this title and the MMS Payor Handbooks; and

(iii) Pay royalties on that production as specified in Part 218 of

this title and the MMS Payor Handbooks.

(c) Persons who take production allocable to Federal or Indian

leases in all other approved Federal or Indian agreements. [Reserved]

(d) What if another agrees to report and pay for you? If another

person files a PIF under its own name and reports and pays royalties

for the production for which you are required to report and pay under

paragraphs (a)-(c) of this section, then you are not required to report

and pay under paragraphs (a)-(c) of this section. However, you are not

relieved of any underlying liability you may have on the lease and you

may be required to report and pay under paragraph (e) of this section.

The person filing the PIF under its own name must follow the

requirements under paragraphs (a)-(c) of this section for the royalty

or other payments due.

(e) Liable persons who MMS requires to report and pay. MMS may

require any person liable for royalty or other payments under Subpart B

of this part to report and pay royalties as provided by this subpart.

Sec. 211.19 What are the obligations for proper reporting and paying?

(a) How to report and pay.

If you are required to report and pay royalties under Sec. 211.18,

you are obligated to report and pay those royalties timely, accurately,

and in the manner MMS specifies. Instructions for timely and proper

reporting are provided under Parts 210 and 218 of this title and in the

MMS Payor Handbooks. You also must report accurate volumes and values

of production on which royalties are due under applicable statutes,

lease terms, regulations, or orders. Parts 202 and 206 of this title

provide instructions for proper valuation and volume determinations.

(b) What you must do if you report or pay royalties incorrectly.

If you incorrectly report or pay royalties, you must submit

corrected reports or payments, or both, to MMS. Also, MMS may require

you to:

(1) Submit adjustments on Form MMS-2014;

(2) Correct production regarding sales exceptions;

(3) Comply with audit orders to perform;

(4) Pay bills;

(5) Pay applciable late-payment charges; and

(6) Pay civil penalties.

Note: The Following Appendices A and B will not appear in the

Code of Federal Regulations.

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[FR Doc. 95-13856 Filed 6-8-95; 8:45 am]

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