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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A95-19295

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** August 7, 1995
- **Citation:** 60 FR 40127

## Text

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.

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

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.

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-19295. Public record. Not legal advice.