Revision of Valuation Regulations Governing Oil and Gas Transportation and Processing Allowances

DEPARTMENT OF THE INTERIOR

30 CFR Part 206

RIN 1010-AB94

Revision of Valuation Regulations Governing Oil and Gas

Transportation and Processing Allowances

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rulemaking.

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SUMMARY: The Minerals Management Service (MMS) proposes to amend its

Royalty Management Program (RMP) valuation regulations governing oil

and gas transportation and processing allowances regarding the timely

filing of required forms.

DATES: Comments must be submitted on or before October 6, 1995.

ADDRESSES: Written comments regarding the proposed rule should be

mailed or delivered to: Minerals Management Service, Royalty Management

Program, Rules and Procedures Staff, Denver Federal Center, Building

85, P.O. Box 25165, Mail Stop 3101, Denver, Colorado, 80225-0165.

FOR FURTHER INFORMATION CONTACT: David Guzy, Chief, Rules and

Procedures Staff, Telephone (303) 231-3432, Fax (303) 231-3194.

SUPPLEMENTARY INFORMATION: The principal author of this proposed

rulemaking is Janet Chichester, Compliance Verification Division, MMS,

RMP.

I. Background

On January 15, 1988, MMS published a final rule in the Federal

Register amending and clarifying regulations governing the valuation of

oil and gas for royalty computation purposes (53 FR 1184). The

rulemaking provided comprehensive procedures for valuation of minerals

produced from Federal and Indian lands including regulations governing

certain allowances considered in calculating and reporting royalties.

The regulations provided for transportation allowances for oil (30 CFR

Secs. 206.104 and 206.105); transportation allowances for gas (30 CFR

Secs. 206.156 and 206.157); and processing allowances for gas (30 CFR

Secs. 206.158 and 206.159).

The rulemaking distinctly changed the historical administrative

practice of MMS and its predecessor agency, the U.S. Geological Survey,

regarding allowances. Prior to the 1988 rule, MMS required royalty

payors to obtain the agency's written approval before taking an

allowance deduction in reporting and paying royalties. With the new

rule, MMS adopted a self-implementing concept for allowances. Instead

of requiring agency preapproval, the regulations provided for the

royalty payor to file timely certain required forms as a condition for

the taking of an allowance on the Report of Sales and Royalty

Remittance (Form MMS-2014).

The allowance forms filing requirements of the current oil and gas

valuation regulations provide for an annual cycle for providing

information to MMS. Before the beginning of each calendar year, or

during the year but before the taking of an allowance on the Form MMS-

2014, payors must submit the required form for any oil transportation,

gas transportation, or gas processing allowances that they expect to

take during the year. The forms ask for information sufficient to

identify the payor, the lease/revenue source/product

[[Page 40128]]

code/selling arrangement, and an estimate of the allowance rate per

unit that is anticipated for the year.

By the end of March following the allowance year, the payor must to

submit the same forms as before but with additional data fields

completed to indicate the actual costs experienced and the allowances

actually taken on Forms MMS-2014 during the year. Also, several

supplementary schedules representing details of actual costs must be

submitted for non-arm's-length allowances.

The filing of the actual cost forms serves several purposes for MMS

and the payor. The forms provide the actual costs incurred in

transporting and/or processing production for the allowance year,

together with the actual allowance deductions taken on the Form MMS-

2014. The forms also satisfy the regulatory requirement to have an

estimated cost allowance form on file for the succeeding allowance

year.

The consequences of a payor's noncompliance with the forms filing

requirements of the regulations are monetarily significant. Simply

stated, if a payor takes an allowance deduction against royalty value

on the Form MMS-2014 without a required allowance form on file, the

payor is subject to loss of allowance and to late payment interest

charges. The concept of the regulations is that a required form must be

on file before the taking of an allowance; if a payor does not meet

this requirement MMS considers the allowance to be lost by the payor.

Consequently, the payor is directed to pay back the allowance and,

after payback, is charged late payment interest associated with the

lost allowance.

The current regulations provide for a grace period of three months

that gives payors a window of time to comply with the forms filing

requirements of the regulations without losing an allowance. The grace

period permits lessees to retain allowances reported on a Form MMS-2014

for up to three months prior to the month that a required allowance

form is filed with MMS. Though a payor will not experience a loss of

allowance for the grace period, MMS will assess the payor a late

payment interest charge from the Form MMS-2014 receipt date or due date

(whichever is later) to the allowance form receipt date. By regulation,

MMS may approve a grace period longer than three months upon a showing

of good cause by the lessee.

In evaluating the effectiveness of its rules, particularly as they

related to product valuation, MMS published in the June 17, 1992,

Federal Register, a ``Request for Information for Improvements to

Regulation'' (57 FR 27008). MMS' request stated that the rules for

product valuation were substantially modified in 1988 based on an

effort started in January 1985 with the creation of the Royalty

Management Advisory Committee. The request further stated that it had

been several years since most of the regulations in 30 CFR Parts 201

through 243 were published, and public comments were requested to help

MMS assess where improvements to rules could be made. The comment

period closed August 17, 1992.

Many commenters felt that the allowance form filing requirements of

the valuation regulations needed significant commentary as being in

need of improvement. They expressed concerns about both the allowance

form filing requirements and the regulatory sanctions for failure to

comply with the allowance reporting requirements. Suggested

recommendations ranged from refinements of existing forms to a

wholesale elimination of allowance form filings because they serve no

useful purpose. Regarding penalties for failure to timely file required

allowance forms, commenters stated that the existing penalties were

unduly harsh and that the ``punishment'' is not reflective of the

``crime.''

II. Findings and Conclusions of Allowance Study Group

Based on public comments and the over four years of experience MMS

gained in administering the allowance requirement of the oil and gas

valuation regulations, MMS formed a study group in April 1993, to

evaluate the existing regulatory requirements for oil and gas

allowances and formulate recommendations for improvement. The study

group was comprised of participants from the Council of Petroleum

Accounting Societies, the State and Tribal Royalty Audit Committee, and

MMS. Consistent with its charter, the study group addressed the current

regulatory requirements and practices of MMS related to oil and gas

transportation and processing allowances. More specifically, the study

group addressed the following topics as key aspects of the review:

The need for and usefulness of the current regulatory

requirements for allowance forms submission, including the information

required on each form.

The need for and equity of allowance payback and late

payment interest charges for untimely filed forms.

The need for regulatory approval thresholds; e.g., 50

percent (transportation) and 66\2/3\ percent (processing).

Alternative approaches to administering allowances. The

study group report was issued December 3, 1993. The report was

subsequently endorsed by the Royalty Management Advisory Committee at

its December 14, 1993, public meeting in Lakewood, Colorado. A copy of

the study group report may be obtained by contacting the person

identified in the ``For Further Information Contact'' section of this

Notice.

The principal ``Findings and Conclusions'' of the study group are,

by topic, as follows:

a. The Need for and Usefulness of the Current Regulatory Requirement

for Allowance Forms Submission, Including the Information on Each Form

The study group found that the concept of requiring the filing of

forms that contain information supplementary to that presented on the

Form MMS-2014 was reasonable. However, the study group also found that

the current approach to information filings is flawed in terms of the

information on which the regulatory requirements focus. Although the

current approach places substantial focus on ``estimated'' allowance

filings that payors are required to submit to MMS prior to taking an

allowance deduction on the Form MMS-2014, the most useful and accurate

information is the actual cost information payors provide on required

forms after the end of the allowance year. The study group concluded

that MMS should maintain allowance information filing requirements to

the extent that MMS, States, and Tribes use the information.

Furthermore, the study group concluded that MMS' administration of

allowances should focus on actual data reported annually to MMS rather

than the current focus on estimated allowance rates reported at the

beginning of the allowance year. The study group concluded that it was

necessary for MMS to continue its practice under current regulations of

requiring the submission of an annual form notifying the agency of the

payor's intent to take an allowance deduction from royalty value but

that estimated allowance rates should not be required as a part of the

information filing.

b. The Need for and Equity of Allowance Payback and Late Payment

Interest Charges for Failure To File Forms

The study group found that while substantial compliance with forms

filing requirements does exist, the penalty of

[[Page 40129]]

a complete loss of allowance due to the untimely filing of required

forms ``was not consistent with the crime.'' The study group addressed

several alternatives to a payback penalty under the current concept of

requiring a form to be on file prior to the taking of an allowance. The

group observed that the payback penalty was rooted in the concept that

qualification for an allowance deduction was subject to the filing of a

form. While the study group did not reject this concept, it concluded

that the penalty of a loss of allowance was not necessarily consistent

with the agency's objectives.

The group observed that the agency's primary interest is

effectively administering allowances through a regulatory information

gathering and notice process. The objective is to gather timely and

accurate actual cost information to assess the legitimacy of allowance

deductions as opposed to generating a revenue stream by focusing

sanctions on the filing dates of forms containing estimated cost

information. The group was able to reach agreement that the current

payback sanction was excessive after considering a number of

alternatives. The study group reached an agreement on the option of

``Federal Oil and Gas Royalty Management Act (FOGRMA) Late Payment

Interest plus a Fixed Percentage of the Amount of the Allowance'' as

the preferred alternative to the payback. However, the group was not

able to reach agreement on the specific fixed percentage of the

allowance amount.

c. The Need for Regulatory Approval Thresholds

The study group concluded that the current thresholds should remain

in place. Their conclusion was based on the relatively low activity

level of requests to exceed the current thresholds of 50 percent for

transportation allowances and 66\2/3\ percent for processing

allowances. It also was based on the reasonableness of providing

increased agency scrutiny to those instances involving allowance costs

that consume an unusually large amount of the royalty value.

d. Alternative Approaches to Administer Allowances

The study group formulated a proposed alternative approach to

information gathering for allowance administration. This approach is

further discussed later in the preamble.

III. Recommendations of the Study Group

The study group recommended that MMS:

a. On a prospective basis, pursue changing its current regulatory

reporting requirements in several respects. These changes should reduce

the focus on the submittal of estimated allowance information that has

little value to the agency and increase the focus on the actual

information that has substantive value to the agency. Complete

implementation of this recommendation could involve changes in

regulations, forms, and systems software over a period of several

years. In the near term, MMS should expedite those changes that do not

require regulatory action; e.g., changes to the current allowance

forms.

b. On a prospective basis, pursue changing, consistent with the

first recommendation, the current regulatory sanctions for failure to

timely file required allowance forms. Sanctions should be changed to

create meaningful incentives for payors to file actual cost allowance

forms. Existing sanctions in the form of allowance payback and late

payment interest for the ``estimated'' cost information should be

changed consistent with the proposed alternative approach to

administering allowances.

c. Retain the existing regulatory requirements that payors receive

annual agency approval prior to taking transportation and processing

allowances that exceed 50 percent and 66\2/3\ percent, respectively, of

the royalty value of the product subject to the allowance deduction.

d. Publish the results of the public commentary received in

response to the Federal Register Notice dated November 28, 1988,

regarding extraordinary cost allowances. Further comment should also be

solicited to identify circumstances that may have developed in the

interim that MMS should consider.

e. Pursue establishing automated data bases to capture the detailed

actual allowance cost information payors submit and develop and

implement edits and exception processing routines to monitor actual

allowance costs reported on allowance forms and the Form MMS-2014.

IV. Alternative Approach Suggested by Study Group

The study group's report provided an alternative approach to

administering allowances based on its conclusions that:

MMS should continue to focus on the administration of

allowances through information gathering methods that supplement the

Form MMS-2014.

MMS should focus its allowance administration efforts on

actual costs instead of estimated costs.

The current penalty structure for failing to file required

forms not only places undue focus on estimated allowance information

but also results in penalties ``inappropriate for the crime.''

The study group believed that the alternative approach would

provide MMS with the necessary notice and information that it needs to

properly administer allowances, reduce current information reporting

requirements, and possess sufficient incentives for payors to comply

with the reporting requirements of the regulations. Prototype forms

were also developed that could be used in the process of implementing

the alternative approach.

The framework of the alternative approach the study group developed

is described below:

a. Royalty payors would continue to be required to submit a Notice

of Intent to Take Transportation and Processing Allowances prior to the

beginning of each allowance year or within the allowance year. One

form, instead of three, would be used for all allowance types and would

be filed at the payor code/lease level rather than the payor code/lease

number/revenue source/product code/selling arrangement level. The

report would not include an estimated rate. Failure to file this notice

would constitute a missing report with the payor being assessed $10 per

allowance line required on the Notice of Intent To Take Transportation

and Processing Allowances.

b. Three months following the end of each allowance year, the payor

would continue to file an actual cost allowance report. For arm's-

length allowances, the report would show the payor code/lease number/

revenue source/product code/selling arrangement on which allowances

were taken. MMS would gather actual cost data from the AFS as needed.

For non-arm's-length allowances, the detailed cost breakouts currently

required would continue to be provided. MMS would continue to grant,

upon request, extensions of up to three months to file actual cost

reports.

Payors failing to timely file required forms would be assessed an

amount equal to a fixed percent, to be determined through rulemaking,

of the total allowance amount deducted on Forms MMS-2014 during the

year plus an amount calculated as equal to late payment interest from

the date the actual cost form was due until the date the form is

actually received.

MMS concludes that the recommendations of the study group will

serve to improve its administration of oil and gas allowances,

particularly as related to forms filing requirements and

[[Page 40130]]

associated sanctions. Therefore, MMS proposes to change its current

regulatory requirements consistent with the substance of the

alternative approach the study group presented.

V. Additional Changes by MMS

The majority of the changes reflected in this proposed rulemaking

are contained in the study group report. Aditionally, MMS included

several clarifications and additional changes based on MMS' experiences

in administering allowances.

a. Failure To File Assessment

The study group did not specify in its alternative approach a fixed

percentage assessment for payors' failure to timely file actual cost

forms. For purposes of this rulemaking, MMS included a percentage rate

of 10 percent. MMS specifically requests comments on this rate or an

alternative rate. MMS also requests specific comments on whether or not

an upper limit, or cap, should be established for such assessments, and

how the upper limit should be constructed; e.g., absolute dollar amount

per occurrence, etc.

b. Improper Netting Assessment

One of several changes involves the introduction of an assessment

for the ``improper netting'' of allowances against royalty value when

reporting royalties on the Form MMS-2014. ``Improper netting'' is a

circumstance where two arm's-length transactions, one representing a

sale and the other representing transportation and/or processing,

supported by two separate invoices, are improperly reported on the

payor's Form MMS-2014 as a one-line transaction. The proposed

assessment is 20 percent, or twice the assessment (10 percent) that is

proposed for failure to timely file required allowance forms. MMS

believes that improper netting should carry an increased assessment

because the practice represents, in effect, concealment of information

with adverse impacts on MMS' efforts to monitor the accuracy of royalty

payments. MMS specifically requests comments on the 20 percent rate

proposed and whether an upper limit or cap should be established and

how it should be constructed.

c. Unauthorized Allowance Assessment and Interest Requirement

Another change involves the introduction of an assessment and an

interest requirement for certain circumstances where an oil or gas

transportation or processing allowance in excess of regulatory

thresholds is taken on Form MMS-2014 without the required prior MMS

approval. Specifically, the current oil and gas regulations require

prior MMS approval before a transportation or processing allowance that

is in excess of 50 percent or 66\2/3\ percent, respectively, of the

value of production may be taken on Form MMS-2014. An assessment of $10

per line is proposed for each reported allowance line taken in excess

of the regulatory thresholds without obtaining the required prior

approval from MMS.

Furthermore, an interest-based additional assessment is proposed

for the period of time that the royalty payor has had the monetary

benefit of the allowance in excess of the administrative threshold

without having received MMS approval. MMS considered requiring the

royalty payor to pay back an allowance taken in excess of the threshold

but determined that an interest charge approach based on the amount in

excess of the threshold would be a reasonable deterrent. MMS requests

specific comment on the construction of this proposal and alternative

approaches that should be considered.

d. Erroneous Reporting Assessment

MMS also proposes an assessment for reporting erroneous information

on required allowance forms. MMS continues to experience significant

additional workload caused by erroneously reported information on

allowance forms. MMS seeks to establish an erroneous reporting

assessment to encourage more accurate reporting. This proposed

assessment authority currently exists for monthly production and

royalty reports. An assessment has proven to be an effective tool to

improve the accuracy of reported information.

e. Transportation Factors

MMS is considering the elimination of the current treatment of

transportation factors in arm's-length contracts as reductions in

value. Instead, MMS would treat such costs as transportation

allowances. In the March 1988 valuation rulemaking, the concept of the

transportation factor was adopted to reduce administrative burden for

MMS and the industry. MMS has found through experience that

transportation factors have created some confusion between MMS and the

industry. Numerous instances have been encountered where disagreement

existed between MMS and industry as to whether a transportation element

of a sales arrangement was an allowance or a transportation factor

under the regulations. In many of these cases, it was determined that

the transportation cost should be treated as an allowance rather than a

factor. In these cases, the payor had not filed required allowance

forms and, consequently, was subject to substantial sanctions. Rather

than proposing the elimination of transportation factors in the

rulemaking, MMS is seeking specific comments on the extent to which

royalty payors are now using transportation factors and what impacts

would be caused if transportation factors were eliminated from the

current regulations.

f. Technical Corrections

MMS proposes several technical corrections and clarifications

including a lessee's option to use a depreciation or a return on

depreciable capital investment basis in calculating actual allowance

costs.

VI. Proposed Amendments

For the reasons discussed above, MMS proposes to amend its

valuation regulations to change the allowance forms filing requirements

for oil and gas. Furthermore, MMS is amending its valuation regulations

to change the existing sanctions for not timely filing required

allowance forms. MMS is also introducing new assessments for (1)

failure to properly report allowances as separate lines on the Form

MMS-2014, a practice commonly referred to as ``netting''; (2)

noncompliance with regulatory requirements to obtain prior approval

from MMS before taking oil and gas transportation allowances that

exceed 50 percent of the value of the production, or gas processing

allowances that exceed 66\2/3\ percent of the value of gas plant

products; and (3) reporting erroneous information on required allowance

forms. MMS also proposes several minor technical corrections and

clarifications.

MMS is also proposing similar amendments to coal allowance

regulations at 30 CFR 206 which are being published separately.

a. Oil Transportation Allowances

MMS proposes to amend Sec. 206.105 by deleting the fourth and fifth

sentences of paragraph (a)(1)(i) that state:

Before any deduction may be taken, the lessee must submit a

completed page one of Form MMS-4110 (and Schedule 1), Oil

Transportation Allowance Report, in accordance with paragraph (c)(1)

of this section. A transportation allowance may be claimed

retroactively for a period of not more than 3 months prior to the

first day of the month that Form MMS-4110 is filed with MMS, unless

MMS approves a longer period upon a showing of good cause by the

lessee.

MMS proposes replacing the deleted sentences with the following

sentences:

[[Page 40131]]

Before any transportation allowance deduction may be taken on

Form MMS-2014, Report of Sales and Royalty Remittance, the lessee

must file a Form MMS-4398, Notice of Intent To Take Oil and Gas

Transportation and Processing Allowances, in accordance with

paragraph (c)(1) of this section. For the actual transportation

allowance calculated for the reporting period, the lessee must file

a Form MMS-4110, Oil Transportation Allowance Report, in accordance

with paragraph (c)(1) of this section.

MMS proposes to amend Sec. 206.105(b)(1) by deleting the third and

fourth sentences of paragraph (b)(1) that state:

Before any estimated or actual deduction may be taken, the

lessee must submit a completed Form MMS-4110 in its entirety in

accordance with paragraph (c)(2) of this section. A transportation

allowance may be claimed retroactively for a period of not more than

three months prior to the first day of the month that Form MMS-4110

is filed with MMS, unless MMS approves a longer period upon a

showing of good cause by the lessee.

MMS proposes replacing the deleted sentences with the two following

sentences:

Before any transportation allowance deduction may be taken on

Form MMS-2014, the lessee must file a Form MMS-4398, Notice of

Intent to Take Oil and Gas Transportation and Processing Allowances,

in accordance with paragraph (c)(2) of this section. After the Form

MMS-4398 reporting period, the lessee must file a Form MMS-4110 in

accordance with paragraph (c)(2) of this section.

These changes remove the retroactive three-month limit for oil

transportation allowances and incorporate the new reporting form. The

Form MMS-4398 would be a new form that implements the recommendations

of the study team report. A Notice of Proposed Information Collection

will be published separately in the Federal Register for this form.

MMS proposes to further amend Sec. 206.105(b)(1) by deleting from

the sixth sentence the phrase ``* * * estimated or * * *'' The sixth

sentence would read:

When necessary or appropriate, MMS may direct a lessee to modify

its actual transportation allowance deduction.

These changes would be technical corrections that improve the

clarity of the language.

MMS proposes to amend Sec. 206.105(c)(1) by deleting existing

paragraphs (i), (ii), (iii), and (iv) and replacing them with new

paragraphs that read:

(i) With the exception of those transportation allowances

specified in paragraphs (c)(1)(v) and (vi) of this section, the

lessee must file a Form MMS-4398 for transportation allowances for

each calendar year. The lessee must file the Form MMS-4398 by the

due date of the first sales month in which a transportation

allowance is reported on Form MMS-2014. A Form MMS-4398 received by

the end of the month that Form MMS-2014 is due will be considered

timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one of Form MMS-4110 for the actual transportation

allowance calculated. This form is due within 3 months after the end

of the reporting period, unless MMS approves a longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents must be

submitted within a reasonable period of time, as determined by MMS.

These changes would incorporate the new reporting form for oil

transportation allowances, Notice of Intent to Take Oil and Gas

Transportation and Processing Allowances, Form MMS-4398.

MMS proposes to amend Sec. 206.105(c)(2) by deleting existing

paragraphs (i), (ii), (iii), and (iv), and replacing them with new

paragraphs that read:

(i) With the exception of those transportation allowances

specified in paragraph (c)(2)(iv), (vi) and (vii) of this section,

the lessee must file a Form MMS-4398 for transportation allowances

for each calendar year. The lessee must file the Form MMS-4398 by

the due date of the first sales month in which a transportation

allowance is reported on Form MMS-2014. A Form MMS-4398 received by

the end of the month that Form MMS-2014 is due will be considered

timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file a page one and all supporting schedules of Form MMS-4110 which

show actual transportation costs within three months after the end

of the reporting period, unless MMS approves a longer period.

Consistent with this amendment, paragraphs (c)(2)(v), (vi), (vii),

and (viii) would be redesignated (c)(2)(iv), (v), (vi), and (vii).

These changes would incorporate the new reporting form for oil

transportation allowances, Notice of Intent to Take Oil and Gas

Transportation and Processing Allowances, Form MMS-4398.

MMS proposes to amend Sec. 206.105(c) by adding paragraph (5)

stating:

A lessee is required to file a new Form MMS-4110 if adjustments

are made to actual non-arm's-length transportation allowances on

Form MMS-2014.

MMS proposes to amend Sec. 206.105(d) and revise the title to read:

b. Interest Charges and Assessments for Incorrect or Late Reports and

Failure To Report

This change to the title would be necessary to reflect the changes

in the content of the section.

MMS proposes to further amend Sec. 206.105(d) by deleting

paragraphs (1), (2), and (3) and replacing them with the following

schedule:

(d) Interest charges and assessments for incorrect or late reports

and failure to report MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

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If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4398......... $10 per allowance line

required on Form MMS-4398.

Deducts a transportation allowance on Form MMS- An amount equal to 10 percent From the date that Form MMS-

2014 without complying with requirements for of the total allowance 4398 was due until the date

actual cost reporting on Form MMS-4295. amount deducted on Forms MMS- that the form was received.

2014 during the year.

[[Page 40132]]

Takes a transportation allowance on Form MMS-2014 An amount equal to 20 percent From the end of the month in

by improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the coal oil instead of reporting amount netted on Form MMS- containing the netted

the allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. Payment of interest on the

that results in an underpayment of royalties. amount of the underpayment.

----------------------------------------------------------------------------------------------------------------

These changes would adopt the study group's recommendations

concerning the need for and equity for failure to file allowance forms.

The study group also determined that the current payback sanction is

excessive. However, MMS' objective is to gather timely and accurate

actual cost information to assess the legitimacy of allowance

deductions. Accordingly, the study group recommend that payors failing

to timely file required forms would be assessed an amount equal to a

fixed paercent of the total allowance amount deducted during the year

plus an amount calculated as equal to late-payment interest from the

date the actual cost was due until the date the form was actually

received.

These changes would add specific language for assessments for

incorrect or late reports and for failure to report. These changes

implement the recommendation of the study group report on sanctions.

c. Gas Transportation Allowances

MMS proposes to amend Sec. 206.157 by deleting the fourth and fifth

sentences of paragraph (a)(1)(i) that state:

Before any deduction may be taken, the lessee must submit a

completed page one of Form MMS-4295 (and Schedule 1), Gas

Transportation Allowance Report, in accordance with paragraph (c)(1)

of this section. A transportation allowance may be claimed

retroactively for a period of not more than 3 months prior to the

first day of the month that Form MMS-4295 is filed with MMS, unless

MMS approves a longer period upon a showing of good cause by the

lessee.

MMS proposes adding in place of the deleted sentences the following

sentences:

Before any transportation allowance deduction may be taken on

Form MMS-2014, Report of Sales and Royalty Remittance, the lessee

must file a Form MMS-4398, Notice of Intent To Take Oil And Gas

Transportation and Processing Allowances, in accordance with

paragraph (c)(1) of this section. After the Form MMS-4398 reporting

period, the lessee must file a Form MMS-4295, Gas Transportation

Allowance Report, in accordance with paragraph (c)(1) of this

section.

These changes would remove the retroactive three-month limit for

gas transportation and incorporate the new reporting form, Notice of

Intent to Take Oil and Gas Transportation and Processing Allowance,

Form MMS-4398. MMS further proposes to remove Sec. 206.157(a)(5) as

follows:

(5) Where an arm's-length sales contract price or a posted price

includes a provision whereby the listed price is reduced by a

transportation factor, MMS will not consider the transportation

factor to be a transportation allowance. The transportation factor

may be used in determining the lessee's gross proceeds for the sale

of the product. The transportation factor may not exceed 50 percent

of the base price of the product without MMS approval.

MMS proposes to amend Sec. 206.157(b)(1) by deleting the third and

fourth sentences that state:

Before any estimated or actual deduction may be taken, the

lessee must submit a completed Form MMS-4295 in accordance with

paragraph (c)(2) of this section. A transportation allowance may be

claimed retroactively for a period of not more than 3 months prior

to the first day of the month that Form MMS-4295 is filed with MMS,

unless MMS approves a longer period upon a showing of good cause by

the lessee.

MMS proposes replacing the two deleted sentences with the following

sentences:

Before any transportation deduction may be taken on Form MMS-

2014, the lessee must file a Form MMS-4398, Notice of Intent to Take

Oil and Gas Transportation and Processing Allowances, in accordance

with paragraph (c)(2) of this section. For the actual transportation

allowance incurred after the Form MMS-4398 reporting period, the

lessee must file a Form MMS-4295 in accordance with paragraph (c)(2)

of this section.

These changes would remove the retroactive 3-month limit for gas

transportation and incorporate the new reporting form, Notice of Intent

to Take Oil and Gas Transportation and Processing Allowances, Form MMS-

4398.

MMS proposes to further amend Sec. 206.157(b)(1) by deleting from

the sixth sentence the phrase `` * * * estimated or * * * ''

The sixth sentence would read:

When necessary or appropriate, MMS may direct a lessee to modify

its actual transportation allowance deduction.

These changes would be technical corrections that improve the

clarity of the language.

MMS proposes to amend Sec. 206.157(c)(1) by deleting existing

paragraphs (i), (ii), (iii), and (iv) and replacing them with new

paragraphs that read:

(i) With the exception of those transportation allowances

specified in paragraph (c)(1) (v) and (vi) of this section, the

lessee must file a Form MMS-4398 for transportation allowances for

each calendar year by the due date of the first sales month in which

a transportation allowance is reported on Form MMS-2014. A Form MMS-

4398 received by the end of the month that Form MMS-2014 is due will

be considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one of Form MMS-4295 for transportation allowance actuals

within 3 months after the end of the reporting period, unless MMS

approves a longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents will be

submitted within a reasonable period of time, as determined by MMS.

These changes incorporate the new reporting form for gas

transportation allowances, Form MMS-4398.

MMS proposes to amend Sec. 206.157(c)(2) by deleting existing

paragraphs (i), (ii), (iii), and (iv), and adding new paragraphs that

read:

(i) With the exception of those transportation allowances

specified in paragraphs (c)(2) (iv), (vi) and (vii) of this section,

the lessee must file a Form MMS-4398 for transportation allowances

for each calendar year by the due date of the first sales month in

which a transportation allowance is reported on Form MMS-2014. A

Form MMS-4398 received by the end of the month that Form MMS-2014 is

due will be considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file a page one and all supporting schedules of Form MMS-4295

[[Page 40133]]

which show actual transportation costs within three months after the

end of the reporting period, unless MMS approves a longer period.

Consistent with this amendment, paragraphs (c)(2) (v), (vi), (vii),

and (viii) of Sec. 206.157 are redesignated (c)(2) (iv), (v), and (vi),

and (vii).

These changes would incorporate the new reporting form for gas

transportation allowances, Form MMS-4398.

MMS proposes to amend Sec. 206.157(c) by adding paragraph (5)

stating:

A lessee is required to file a new Form MMS-4295 if adjustments

are made to actual non-arm's-length transportation allowances on

Form MMS-2014.

MMS proposes to amend Sec. 206.157(d) and add the words `` * * *

charges and * * * '' to the title that will read:

d. Interest charges and assessments for incorrect or late reports

and failure to report.

This change to the title would be necessary to reflect the changes

in the content of the section.

MMS proposes to amend Sec. 206.157(d) by deleting paragraphs (1),

(2) and (3) and replacing them with the following schedule:

(d) Interest charges and assessments for incorrect or late reports

and failure to report MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4398......... $10 per allowance line .............................

required on Form MMS-4402.

Deducts a transportation allowance on Form MMS- An amount equal to 10 percent From the date that Form MMS-

2014 without complying with requirements for of the total allowance 4295 was due until the date

actual cost reporting on Form MMS-4295. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a transportation allowance on Form MMS-2014 An amount equal to 20 percent From the end of the month in

by improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the gas instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. Payment of interest on the

that results in an underpayment of royalties. amount of the underpayment.

----------------------------------------------------------------------------------------------------------------

These changes would adopt the study group's recommendations

concerning the need for and equity of allowance payback and late-

payment interest charges for failure to file allowance forms. The study

group also determined that the current payback sanction is excessive.

However, MMS' objective is to gather timely and accurate actual cost

information to assess the legitimacy of allowance deductions.

Accordingly, the study group recommended that payors failing to timely

file required forms would be assessed an amount equal to a fixed

percent of the total allowance amount deducted during the year plus an

amount calculated as equal to late-payment interest from the date the

actual cost was due until the date the form was actually received.

These changes would add specific language for interest and

assessments for incorrect or late reports and for failure to report.

These changes would implement recommendations of the study group report

on sanctions.''

e. Gas Processing Allowances

MMS proposes to amend Sec. 206.159 by deleting the third and fourth

sentences of paragraph (a)(1)(i) that state:

Before any deduction may be taken, the lessee must submit a

completed page one of Form MMS-4109, Gas Processing Allowance

Summary Report, in accordance with paragraph (c)(1) of this section.

A processing allowance may be claimed retroactively for a period of

not more than three months prior to the first day of the month that

Form MMS-4109 is filed with MMS, unless MMS approves a longer period

upon a showing of good cause by the lessee.

MMS proposes replacing the two deleted sentences with the two

following sentences:

Before any processing allowance deduction may be taken on Form

MMS-2014, Report of Sales and Royalty Remittance, the lessee must

file a Form MMS-4398, Notice of Intent To Take Oil And Gas

Transportation and Processing Allowances, in accordance with

paragraph (c)(1) of this section. After the Form MMS-4398 reporting

period, the lessee must file a Form MMS-4109, Gas Processing

Allowance Summary Report, in accordance with paragraph (c)(1) of

this section.

MMS proposes amending Sec. 206.159(b)(1) by deleting the third and

fourth sentences that state:

Before any estimated or actual deduction may be taken, the

lessee must submit a completed Form MMS-4109 in accordance with

paragraph (c)(2) of this section. A processing allowance may be

claimed retroactively for a period of not more than 3 months prior

to the first day of the month that Form MMS-4109 is filed with MMS,

unless MMS approves a longer period upon a showing of good cause by

the lessee.

MMS proposes replacing the two deleted sentences with the two

following sentences:

Before any processing allowance deduction may be taken on Form

MMS-2014, the lessee must file a Form MMS-4398, Notice of Intent To

Take Transportation and Processing Allowances, in accordance with

paragraph (c)(2) of this section. After the Form MMS-4398 reporting

period, the lessee must file a Form MMS-4109 in accordance with

paragraph (c)(2) of this section.

These changes would remove the retroactive three-month limit for

gas processing and incorporate the new reporting form, Form MMS-4398.

MMS proposes to further amend Sec. 206.159(b)(1) by deleting from

the seventh sentence the phrase `` * * * estimated or * * * '' The

revised seventh sentence would read:

When necessary or appropriate, MMS may direct a lessee to modify

its actual processing allowance.

These changes would be technical corrections and language

clarification.

MMS proposes to amend Sec. 206.159(c)(1) by deleting existing

paragraphs (i), (ii), and (iii) and replacing them with new paragraphs

that read:

(i) With the exception of those processing allowances specified

in paragraph (c)(1)(v) of this section, the lessee must file a Form

MMS-4398 for processing allowances for each calendar year by the due

date of the first sales month in which a processing allowance is

reported on Form MMS-2014. A Form MMS-4398 received by the end of

the month that Form MMS-2014 is due will be considered timely

received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

processing allowance and will continue until the end of the calendar

year.

[[Page 40134]]

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one of Form MMS-4109 for processing allowances within

three months after the end of the reporting period, unless MMS

approves a longer period.

MMS proposes to amend Sec. 206.159(c)(2) by deleting existing

paragraphs (i), (ii), (iii), (iv), and (vi) and replacing them with new

paragraphs that read:

(i) With the exception of those processing allowances specified

in paragraph (c)(2) (v) and (vi) of this section, the lessee must

file a Form MMS-4398 for processing allowances for each calendar

year by the due date of the first sales month in which a processing

allowance is reported on Form MMS-2014. A Form MMS-4398 received by

the end of the month that Form MMS-2014 is due will be considered

timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

processing allowance and will continue until the end of the calendar

year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one and all supporting schedules of Form MMS-4109 which

show actual processing costs within 3 months after the end of the

reporting period, unless MMS approves a longer period.

(iv) MMS may require that a lessee submit all data used by the

lessee to prepare the actual costs submitted on its Form MMS-4109.

The data must be provided within a reasonable period of time, as

determined by MMS.

Consistent with this change, paragraphs (vii) and (viii) would

be redesignated paragraphs (vi) and (vii).

These changes would incorporate the new reporting form for gas

processing allowances, Form MMS-4398.

MMS proposes to amend Sec. 206.159(c) by adding paragraph (5) to

state:

A lessee is required to file a new Form MMS-4109 if adjustments

are made to actual non-arm's-length processing allowances on Form

MMS-2014.

MMS proposes to amend Sec. 206.159(d) and add the words ``* * *

charges and * * *'' to the title so it reads:

f. Interest charges and assessments for incorrect or late reports

and failure to report

This change to the title would be necessary to reflect the changes

in the content of the section.

MMS proposes to further amend Sec. 206.159(d) by deleting paragraph

(1), (2) and (3) and replacing them with the following schedule:

(d) Interest charges and assessments for incorrect or late reports

and failure to report MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4398......... $10 per allowance line .............................

required on Form MMS-4398.

Deducts a processing allowance on Form MMS-2014 An amount equal to 10 percent From the date that Form MMS-

without complying with requirements for actual of the total allowance 4109 was due until the date

cost reporting on Form MMS-4109. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a processing allowance on Form MMS-2014 by An amount equal to 20 percent From the end of the month in

improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the gas instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a processing allowance that ............................. On the amount of the

results in an underpayment of royalties. underpayment.

----------------------------------------------------------------------------------------------------------------

These changes would adopt the study group's recommendations

concerning the need for and equity of allowance payback and late-

payment interest charges for failure to file allowance forms. The study

group also determined that the current payback sanction is excessive.

However, MMS' objective is to gather timely and accurate actual cost

information to assess the legitimacy of allowance deductions.

Accordingly, the study group recommended that payors failing to timely

file required froms would be assessed an amount equal to a fixed

percent of the total allowance amount deducted during the year plus an

amount calculated as equal to late-payment interest from the date the

actual cost was due until the date the form was actually received.

These changes would add specific language for interest charges and

assessments for incorrect or late reports and for failure to report.

These changes would implement the recommendations in the study group

report for sanctions.

VII. Other Matters

Separate regulations concerning valuation of natural gas for

royalty purposes are currently being developed for Federal leases and

for Indian leases through two separate negotiated rulemaking

committees. These committees are addressing both natural gas valuation

and transportation and processing allowance issues.

The committee addressing natural gas valuation for Federal leases

recommended in its March 1995 report that transportation and processing

allowance forms no longer be required. This recommendation is one of

numerous recommendations for broad changes to existing regulations

governing the valuation of natural gas produced from Federal leases.

The future rulemaking to be prepared considering the recommendations of

the Federal negotiated rulemaking committee will include the proposal

for eliminating the requirement for allowance forms. Thus the

amendments being proposed today to change the oil and gas valuation

regulations governing transportation and processing allowances may be

impacted by the results of the future rulemaking. Similar impacts may

occur for natural gas produced from Indian leases depending on the

outcome of the negotiated rulemaking committee addressing the valuation

of natural gas production from Indian lands.

MMS also would like comment on the effective date for the final

rule. One option is to make any final rule effective as of January 1,

1995, the beginning of the current allowance year. Another option is to

make the rule effective as of the date of publication of this proposed

rule since royalty payors are on notice of the possible rule change on

that date. Commenters should address this issue in their comments.

VIII. Procedural Matters

The Regulatory Flexibility Act

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

[[Page 40135]]

U.S.C. 601 et seq.). The proposed rule will streamline and improve

existing regulatory reporting requirements related to allowances that

are used to calculate royalty payments on oil and gas produced from

Federal and Indian lands.

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.

Paperwork Reduction Act of 1980

The information collection requirements contained in this rule have

been approved by the Office of Management and Budget under 44 U.S.C.

3501 et seq., and assigned Clearance Numbers 1010-0022, 1010-0061, and

1010-0075. Form MMS-4398 has been submitted to OMB for approval.

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 206

Coal, Continental shelf, Geothermal energy, Government contracts,

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

mineral resources, Reporting and recordkeeping requirements.

Dated: May 19, 1995.

Bob Armstrong,

Assistant Secretary--Land and Minerals Management.

For the reasons set out in the preamble, 30 CFR part 206 is

proposed to be amended as set forth below:

PART 206--PRODUCT VALUATION

1. The authority citation for Part 206 is revised to read as

follows:

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.; 31 U.S.C. 9701.; 43 U.S.C. 1301 et seq., 1331 et

seq., and 1801 et seq.

Subpart C--Federal and Indian Oil

2. Section 206.105 is proposed to be amended by revising paragraphs

(a)(1)(i), (b)(1), (c)(1)(i) through (iv), (c)(2)(i) through (iii),

removing paragraph (c)(2)(iv), redesignating paragraphs (c)(2)(v),

(vi), (vii), and (viii) as paragraphs (c)(2)(iv), (v), (vi), and (vii),

revising newly redesignated paragraphs (c)(2)(iv) through (vii) adding

new paragraph (c)(5) and revising paragraph (d) to read as follows:

Sec. 206.105 Determination of transportation allowances.

(a) * * *

(1)(i) For transportation costs incurred by a lessee pursuant to an

arm's-length contract, the transportation allowance shall be the

reasonable, actual costs incurred by the lessee for transporting oil

under that contract, except as provided in paragraphs (a)(1) (ii) and

(iii) of this section, subject to monitoring, review, audit, and

adjustment. The lessee shall have the burden of demonstrating that its

contract is arm's-length. Such allowances shall be subject to the

provisions of paragraph (f) of this section. Before any transportation

allowance deduction may be taken on Form MMS-2014, Report of Sales and

Royalty Remittance, the lessee must file a Form MMS-4398, Notice of

Intent To Take Oil And Gas Transportation and Processing Allowances, in

accordance with paragraph (c)(1) of this section. For the actual

transportation allowance calculated for the reporting period, the

lessee must file a Form MMS-4110, Oil Transportation Allowance Report,

in accordance with paragraph (c)(1) of this section.

* * * * *

(b) * * *

(1) If a lessee has a non-arm's-length transportation contract or

has no contract, including those situations where the lessee performs

transportation services for itself, the transportation allowance will

be based upon the lessee's reasonable, actual costs as provided in this

paragraph. All transportation allowances deducted under a non-arms-

length or no-contract situation are subject to monitoring, review,

audit, and adjustment. Before any transportation allowance deduction

may be taken on Form MMS-2014, the lessee must file a Form MMS-4398,

Notice of Intent to Take Oil and Gas Transportation and Processing

Allowances, in accordance with paragraph (c)(2) of this section. After

the Form MMS-4398 reporting period, the lessee must file a Form MMS-

4110 in accordance with paragraph (c)(2) of this section. MMS will

monitor the allowance deductions to determine whether lessees are

taking deductions that are reasonable and allowable. When necessary or

appropriate, MMS may direct a lessee to modify its actual

transportation allowance deduction.

* * * * *

(c) * * *

(1) * * *

(i) With the exception of those transportation allowances specified

in paragraphs (c)(1)(v) and (vi) of this section, the lessee must file

a Form MMS-4398 for transportation allowances for each calendar year.

The lessee must file the Form MMS-4398 by the due date of the first

sales month in which a transportation allowance is reported on Form

MMS-2014. A Form MMS-4398 received by the end of the month that the

Form MMS-2014 is due will be considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one of Form MMS-4110 for the actual transportation allowance

calculated. This Form is due within 3 months after the end of the

reporting period, unless MMS approves a longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents must be

submitted within a reasonable period of time, as determined by MMS.

* * * * *

(2) * * *

(i) With the exception of those transportation allowances specified

in paragraphs (c)(2)(iv), (vi) and (vii) of this section, the lessee

must file a Form MMS-4398 for transportation allowances for each

calendar year. The lessee must file the Form MMS-4398 by the due date

of the first sales month in which a transportation allowance is

reported on Form MMS-2014. A Form MMS-4398 received by the end of the

month that MMS-2014 is due will be considered timely received.

[[Page 40136]]

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file a page one and all supporting schedules of Form MMS-4110 which

show actual transportation costs within 3 months after the end of the

reporting period, unless MMS approves a longer period.

(iv) Non-arm's-length contract or no-contract transportation

allowances which are in effect at the time these regulations become

effective will be allowed to continue until such allowances terminate.

For the purposes of this section, only those allowances that have been

approved by MMS in writing shall qualify as being in effect at the time

these regulations become effective.

(v) Upon request by MMS, the lessee shall submit all data used to

prepare its Form MMS-4110. The data shall be provided within a

reasonable period of time, as determined by MMS.

(vi) MMS may establish, in appropriate circumstances, reporting

requirements which are different from the requirements of this section.

(vii) If the lessee is authorized to use its FERC-approved or State

regulatory agency-approved tariff as its transportation cost in

accordance with paragraph (b)(5) of this section, it shall follow the

reporting requirements of paragraph (c)(1) of this section.

* * * * *

(5) A lessee is required to file a new Form MMS-4110 if adjustments

are made to actual non-arm's-length transportation allowances on Form

MMS-2014.

(d) Interest charges and assessments for incorrect or late reports

and failure to report. MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance wit 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4398......... $10 per allowance line

required on Form MMS-4398.

Deducts a transportation allowance on Form MMS- An amount equal to 10 percent From the date that Form MMS-

2014 without complying with requirements for of the total allowance 4398 was due until the date

actual cost reporting on Form MMS-4292. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a transportation allowance on Form MMS-2014 An amount equal to 20 percent From the end of the month in

by improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the product instead of reporting amount netted on Form MMS- containing the netted

the allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. On the amount of the

that results in an underpayment of royalties. underpayment.

----------------------------------------------------------------------------------------------------------------

* * * * *

Subpart D--Federal and Indian Gas

3. Section 206.157 is proposed to be amended by revising paragraphs

(a)(1)(i), removing paragraph (a)(5), revising paragraphs (b)(1),

(c)(1)(i) through (iv), (c)(2)(i), (ii), and (iii), removing paragraph

(c)(2)(iv), redesignating paragraphs (c)(2)(v) through (viii) as

paragraphs (c)(2)(iv) through (vii), revising newly designated

paragraphs (c)(2) (iv) through (vii), adding paragraph (c)(5) and

revising paragraph (d) to read as follows:

Sec. 206.157 Determination of transportation allowances.

(a) * * *

(1)(i) For transportation costs incurred by a lessee pursuant to an

arm's-length contract, the transportation allowance shall be the

reasonable, actual costs incurred by the lessee for transporting the

unprocessed gas, residue gas and/or gas plant products under that

contract, except as provided in paragraphs (a)(1)(ii) and (iii) of this

section, subject to monitoring, review, audit, and adjustment. The

lessee will have the burden of demonstrating that its contract is

arm's-length. Such allowances shall be subject to the provisions of

paragraph (f) of this section. Before any transportation allowance

deduction may be taken on Form MMS-2014, Report of Sales and Royalty

Remittance, the lessee must file a Form MMS-4398, Notice of Intent To

Take Oil and Gas Transportation and Processing Allowances, in

accordance with paragraph (c)(1) of this section. After the Form MMS-

4398 reporting period, the lessee must file a Form MMS-4295, Gas

Transportation Allowance Report, in accordance with paragraph (c)(1) of

this section.

* * * * *

(b) * * *

(1) If a lessee has a non-arm's-length transportation contract or

has no contract, including those situations where the lessee performs

transportation services for itself, the transportation allowance will

be based upon the lessee's reasonable actual costs as provided in this

paragraph. All transportation allowances deducted under a non-arm's-

length or no contract situation are subject to monitoring, review,

audit, and adjustment. Before any transportation deduction may be taken

on Form MMS-2014, the lessee must file a Form MMS-4398, Notice of

Intent To Take Oil and Gas Transportation and Processing Allowances, in

accordance with paragraph (c)(2) of this section. For the actual

transportation allowance incurred after the Form MMS-4398 reporting

period, the lessee must file a Form MMS-4295 in accordance with

paragraph (c)(2) of this section. MMS will monitor the allowance

deductions to ensure that deductions are reasonable and allowable. When

necessary or appropriate, MMS may direct a lessee to modify its actual

transportation allowance deduction.

* * * * *

(c) * * *

(1) * * *

(i) With the exception of those transportation allowances specified

in paragraph (c)(1)(v) and (vi) of this section, the lessee must file a

Form MMS-4398 for transportation allowances for each calendar year by

the due date of the first sales month in which a transportation

allowance is reported on Form MMS-2014. A Form MMS-4398 received by the

end of the month that Form MMS-2014 is due will be considered timely

received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will

[[Page 40137]]

continue until the end of the calendar year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one of Form MMS-4295 for transportation allowance actuals

within 3 months after the end of the reporting period, unless MMS

approves a longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents will

submitted within a reasonable period of time, as determined by MMS.

* * * * *

(2) * * *

(i) With the exception of those transportation allowances specified

in paragraphs (c)(2)(iv), (vi) and (vii) of this section, the lessee

must file a Form MMS-4398 for transportation allowances for each

calendar year by the due date of the first sales month in which a

transportation allowance is reported on Form MMS-2014. A Form MMS-4398

received by the end of the month that Form MMS-2014 is due will be

considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After Form MMS-4398 reporting period, lessees must file a

page one and all supporting schedules of Form MMS-4295 which show

actual transportation costs within three months after the end of the

reporting period, unless MMS approves a longer period.

(iv) Non-arm's-length contract or no-contract based transportation

allowances which are in effect at the time these regulations become

effective will be allowed to continue until such allowances terminate.

For the purposes of this section, only those allowances that have been

approved by MMS in writing shall qualify as being in effect at the time

these regulations become effective.

(v) Upon request by MMS, the lessee shall submit all data used to

prepare its Form MMS-4295. The data shall be provided within a

reasonable period of time, as determined by MMS.

(vi) MMS may establish in appropriate circumstances, reporting

requirements which are different from the requirements of this section.

(vii) If the lessee is authorized to use its FERC-approved or State

regulatory agency-approved tariff as its transportation cost in

accordance with paragraph (b)(5) of this section, it shall follow the

reporting requirements of paragraph (c)(1) of this section.

* * * * *

(5) A lessee is required to file a new Form MMS-4295 if adjustments

are made to actual non-arm's-length transportation allowances on Form

MMS-2014.

(d) Interest charges and assessments for incorrect or late reports

and failure to report.

(5) Interest required to be paid by this section shall be

determined in accordance with 30 CFR 218.54.

* * * * *

4. Section 206.159 is proposed to be amended by revising paragraphs

(a)(1)(i), (b)(1), (b)(2)(iv), (c)(1)(i), (ii), (iii),

(c)(2)(i),(ii),(iii) and (iv), removing paragraph (c)(2)(vi),

redesignating paragraphs (c)(2)(vii) and (viii) as paragraphs

(c)(2)(vi) and (vii), revising newly redesignated paragraphs (c)(2)(vi)

and (c)(2)(vii) adding paragraph (c)(5), and revising paragraphs (d) to

read as follows:

Sec. 206.159 Determination of processing allowances.

(a) * * *

(1)(i) For processing costs incurred by a lessee pursuant to an

arm's-length contract, the processing allowance shall be the reasonable

actual costs incurred by the lessee for processing the gas under that

contract, except as provided in paragraphs (a)(1) (ii) and (iii) of

this section, subject to monitoring, review, audit, and adjustment. The

lessee shall have the burden of demonstrating that its contract is

arm's-length. Before any processing allowance deduction may be taken on

Form MMS-2014, Report of Sales and Royalty Remittance, the lessee must

file a Form MMS-4398, Notice of Intent To Take Oil And Gas

Transportation and Processing Allowances, in accordance with paragraph

(c)(1) of this section. After the Form MMS-4398 reporting period, the

lessee must file a Form MMS-4109, Gas Processing Allowance Summary

Report, in accordance with paragraph (c)(1) of this section.

* * * * *

(b) * * *

(1) If a lessee has a non-arm's-length processing contract or has

no contract, including those situations where the lessee performs

processing for itself, the processing allowance will be based upon the

lessee's reasonable actual costs as provided in this paragraph. All

processing allowances deducted under a non-arm's-length or no-contract

situation are subject to monitoring, review, audit, and adjustment.

Before any processing allowance deduction may be taken on Form MMS-

2014, the lessee must file a Form MMS-4398, Notice of Intent to take

Oil and Gas Transportation and Processing Allowances, in accordance

with paragraph (c)(2) of this section. After the Form MMS-4398

reporting period, the lessee must file a Form MMS-4109 in accordance

with paragraph (c)(2) of this section. MMS will monitor the allowance

deduction to ensure that deductions are reasonable and allowable. When

necessary or appropriate, MMS may direct a lessee to modify its actual

processing allowance.

(2) * * *

(iv) A lessee may use either depreciation and a return on

undepreciated capital investment in accordance with paragraph

(b)(2)(iv)(A) of this section, or a cost equal to the initial capital

investment in the processing plant multiplied by a rate of return in

accordance with paragraph (b)(2)(iv)(B) of this section. When a lessee

has elected to use either method for a processing plant, the lessee may

not later elect to change to the other alternative without approval of

MMS.

* * * * *

(c) * * *

(1) * * *

(i) With the exception of those processing allowances specified in

paragraph (c)(1)(v) and (vi) of this section, the lessee must file a

Form MMS-4398 for processing allowances for each calendar year by the

due date of the first sales month in which a processing allowance is

reported on Form MMS-2014. A Form MMS-4398 received by the end of the

month that Form MMS-2014 is due will be considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

processing allowance and will continue until the end of the calendar

year.

(iii) After Form MMS-4398 reporting period, the lessee must file

page one of Form MMS-4109 for processing allowances within 3 months

after the end of the reporting period, unless MMS approves a longer

period.

* * * * *

(2) * * *

(i) With the exception of those processing allowances specified in

paragraphs (c)(2)(v) and (vi) of this section, the lessee must file a

Form MMS-4398 for processing allowances for each calendar year by the

due date of the first sales month in which a processing allowance is

reported on Form MMS-2014. A Form MMS-4398 received by the end of the

month that

[[Page 40138]]

Form MMS-2014 is due will be considered timely received.

(ii) The Form MMS-4398 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

processing allowance and will continue until the end of the calendar

year.

(iii) After the Form MMS-4398 reporting period, the lessee must

file page one and all supporting schedules of Form MMS-4109 which show

actual processing costs within 3 months after the end of the reporting

period, unless MMS approves a longer period.

(iv) MMS may require that a lessee submit all data used by the

lessee to prepare the actual costs submitted on its Form MMS-4109. The

data must be provided within a reasonable period of time, as determined

by MMS.

(v) * * *

(vi) MMS may establish, in appropriate circumstances, reporting

requirements which are different from the requirements of this section.

(vii) If the lessee is authorized to use the volume weighted

average prices charged other persons as its processing allowance in

accordance with paragraph (b)(4) of this section, it shall follow the

reporting requirements of paragraph (c)(1) of this section.

* * * * *

(5) A lessee is required to file a new Form MMS-4109 if adjustments

are made to actual non-arm's-length processing allowances on Form MMS-

2014.

(d) Interest charges and assessments for incorrect or late reports

and failure to report.

(1) If a lessee fails to timely or accurately file a Form MMS-4398

for processing allowances, the lessee may be assessed $10 per allowance

line required on Form MMS-4398.

(2) If a lessee deducts a processing allowance on its Form MMS-2014

without complying with the requirements of this section for Form MMS-

4109 actual cost reporting, the lessee may be assessed an amount equal

to 10 percent of the total allowance amount deducted on Forms MMS-2014

during the year plus interest calculated from the date the actual cost

Form MMS-4109 was due until the date the form was received.

(3) If a lessee takes a processing allowance on its Form MMS-2014

by improperly netting the allowance against the value of the gas

instead of reporting the allowance as a separate line item on Form MMS-

2014 as required by paragraph (c)(4) of this section, the lessee may be

assessed an amount equal to 20 percent of the total allowance amount

netted on Form MMS-2014 plus interest calculated from the end of the

month in which Form MMS-2014 containing the netted allowance was

submitted to the date MMS discovers the netted amount.

(4) If a lessee erroneously reports a processing allowance which

results in an underpayment of royalties, interest shall be paid on the

amount of that underpayment.

(5) Interest required to be paid by this section shall be

determined in accordance with 30 CFR 218.54.

* * * * *

[FR Doc. 95-19295 Filed 8-4-95; 8:45 am]

BILLING CODE 4310-MR-P