Revision of Valuation Regulations Governing Oil and Gas Transportation and Processing Allowances, and Coal Washing and Transportation Allowances

SUMMARY: The Royalty Management Program (RMP) of the Minerals

Management Service (MMS) is amending its valuation regulations for oil

and gas transportation and processing allowances for production from

Federal leases. It also is amending the regulations for coal washing

and transportation allowances for production from Federal leases. The

principal change is to eliminate allowance forms filing for Federal

mineral leases. These changes will affect Federal oil and gas and coal

leases only. The rule will not change the existing regulations

applicable to Indian leases at this time.

EFFECTIVE DATE: March 1, 1996.

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

Procedures Staff, at (303) 231-3432.

SUPPLEMENTARY INFORMATION: The principal authors of this final rule are

Thomas K. Brozovich, Financial Compliance Branch, Compliance

Verification Division, and Harold E. Corley, Solid Minerals Valuation

Branch, Valuation and Standards Division, RMP, MMS, Lakewood, Colorado.

This rule is effective March 1, 1996, because mineral royalties are

reported monthly, and a reporting change in the middle of the month

would complicate reporting for both industry and MMS. The earlier

effective date of March 1 is also preferable because the rule reduces

the administrative reporting for the minerals industry for production

from Federal mineral leases.

I. Background

This final rule consolidates two proposed rules. In the Notices of

Proposed Rulemaking, MMS explained the process by which it administers

the allowance form filing requirements and asked for input on several

related issues (60 FR 40120, August 7, 1995, and 60 FR 40127, August 7,

1995). The current valuation regulations for oil, gas, and coal require

that certain forms be filed as a prerequisite to the deduction of

allowances on Form MMS-2014, Report of Sales and Royalty Remittance for

transportation, processing, and washing costs. Failure to timely file

required forms can result in significant consequences, including loss

of the allowance. An Allowance Study Group examined this issue at

length in 1993 and made certain recommendations to improve allowance

administration. Proposed rules incorporating the Allowance Study

Group's recommendations were published in the Federal Register on

August 7, 1995.

The purpose of these final regulations is to revise the oil and gas

allowance regulations for production from Federal leases which became

effective March 1, 1988, and the coal allowance regulations for

production from Federal leases which became effective March 1, 1989.

As explained further below, MMS is not making any changes at this

time to the regulations applicable for Indian leases. Instead, we will

keep the rulemaking regarding Indian leases open and will issue amended

regulations in the near future.

II. Comments on Proposed Rules

The proposed rulemakings provided for a 60-day public comment

period, which ended October 6, 1995, and, was extended to October 20,

1995, by a subsequent notice (60 FR 51963, October 4, 1995).

The Allowance Study Group and others within MMS identified issues

for which opinions were sought from interested parties during the

comment period. Specifically, the issues addressed:

a. The need for and usefulness of the current regulatory

requirement for allowance forms submission, including the information

on each form.

b. The need for and equity of allowance payback and late payment

interest charges for failure to file forms.

c. The need for regulatory approval thresholds or limits on the

amount of allowances which could be claimed without gaining permission.

d. The need to establish an assessment when payors improperly net

their allowances when reporting on Form MMS-2014.

e. The need to eliminate the current treatment of transportation

factors in arm's-length contracts as reductions in value.

f. The need to assess payors for exceeding allowance limits in

certain circumstances prior to receiving MMS approval.

g. The need to assess payors for erroneously reporting information

on allowance forms.

Twenty commenters submitted timely comments during the comment

period. Two additional commenters submitted late comments that were

received on October 24, 1995. Twenty of the comments were from industry

while two were from representatives of Indian lessors.

Comments from industry overwhelmingly suggested that we cease using

allowance forms as a means to track allowances while comments from the

Indian community supported the need to be able to track and verify

allowances.

When the original allowance regulations were implemented in 1988,

MMS was not contemporaneous with its audit efforts and forms were

needed to properly track allowances. However, we are now keeping

contemporaneous with our audits and have a reduced need for such forms.

Also, the Federal Gas Valuation Negotiated Rulemaking Committee

recommended, among other things, in its March 1995 report, that MMS

discontinue requiring transportation and processing allowance form

filings for gas production. The Indian Gas Valuation Negotiated

Rulemaking Committee is still discussing options. Accordingly, MMS has

decided to adopt this final rule to change allowance regulations for

Federal leases only at this time and to leave the rulemaking open for

allowance regulations for Indian leases. The existing regulations are

redesignated for Indian leases and are changed to remove references to

Federal leases.

Having different allowance rules for Federal leases than for Indian

leases requires completely separate valuation regulations. Therefore,

the current subparts are redesignated as Subpart C--Federal Oil,

Subpart D--Federal Gas, and Subpart F--Federal Coal, and references to

Indian leases are removed. The new designation for Indian valuation

regulations which will be unchanged from the existing regulations, will

be Part 206-Product Valuation, Subpart B--Indian Oil, Subpart E--Indian

Gas, and Subpart J--Indian Coal.

General Comments

Most of the commenters stated that we should not implement the

proposed rule, but that we should improve it and, in fact, go several

steps beyond the proposal.

Response. MMS has determined, except for requirements on Indian

leases, that the commenters pose strong arguments for further

streamlining the

[[Page 5449]]

regulations for allowance form filing requirements. Accordingly, we

have changed the regulations for Federal leases to implement many of

the suggestions. However, the current regulations remain intact for

Indian leases, pending further evaluation and decisions.

Specific Comments

(a) Almost every industry commenter suggested that MMS adopt the

recommendation of The Federal Gas Negotiated Rulemaking Committee to

cease requiring allowance form filings for natural gas. The commenters

also suggested we cease requiring such forms for oil and coal as well

as gas.

Response. MMS agrees with the industry commenters on this issue and

has incorporated their suggestions for Federal leases.

(b) Many of the industry commenters correctly stated that

discontinuing the forms filing requirement will make the issue of

payback bills and late payment interest moot.

Response. MMS agrees with this conclusion and has deleted such

consequences for violations on Federal leases.

(c) No comments were received on the issue of requiring approval to

exceed established oil and gas allowance limits.

Response. MMS believes that allowances should have established

limits which cannot be unilaterally exceeded. However, we also

understand that, occasionally, circumstances are such that the cost of

transporting or processing may exceed the allowable percentage limits.

Therefore, we are keeping the established limits which have been

effective since March 1, 1988.

(d) Most commenters said that an assessment for improperly netting

allowances on the Form MMS-2014 was not necessary because payors do not

purposely report in that manner. Further, they stated that such

exceptions should be addressed on a case-by-case basis.

Response. MMS believes it is necessary to have a deterrent for

improper reporting, especially netting allowances. We recognize that

some reporting may be inadvertent, and therefore, have implemented an

assessment provision which allows us to bill up to 10 percent of the

allowance reported as a netted amount but not to exceed $250 per lease

selling arrangement per sales period. This provision gives us the

flexibility to work with the payor who has infrequently or never netted

its allowances while being able to more aggressively address the

situation with the payor who chronically nets allowances.

(e) Many commenters recommended that MMS retain the oil and gas

transportation factors in arm's-length contracts to ease the buying,

selling, and reporting burden.

Response. MMS agrees that transportation factors should remain as a

viable industry mechanism for buying and selling even though some

problems differentiating factors from allowances existed in the past.

Therefore we have retained transportation factors for arm's-length

contracts.

(f) Few commenters responded on the need to assess payors for

exceeding oil and gas allowance limits prior to receiving MMS approval.

Response. MMS believes that exceeding established allowance limits

without prior MMS approval unjustly benefits industry and penalizes the

Federal Government. Accordingly, we have adopted an assessment, based

on an interest calculation methodology, presented in 30 CFR 218.54 to

bill companies which exceed established allowance limits without prior

MMS approval.

(g) Few commenters responded to the proposal to assess payors for

erroneous reporting and other violations. Those who did held the

general opinion that MMS has enough assessments to encourage correct

reporting and such violations should be handled on a case-by-case

basis.

Response. MMS agrees with the commenters. We have enough

assessments in many areas to encourage correct reporting the first

time. Therefore, only the additional limited assessments for netting

and exceeding allowance limits heretofore discussed will be implemented

in this rulemaking.

For the reasons discussed above, MMS is amending its valuation

regulations to have new allowance requirements for oil, gas, and coal

production from Federal lands. Allowance form filing requirements for

production from Indian lands are not being changed pending further

evaluation and discussions.

Allowance requirements for production from Federal lands are being

changed to eliminate unnecessary regulatory burdens on industry.

However, Federal allowance requirements will also reflect an assessment

for ``improper netting'' because this concealment of information has

adverse effects on MMS' efforts to monitor the accuracy of royalty

payments.

III. Section by Section Analysis

a. Federal Oil.

1. The only change to several sections within Subpart C--Federal

Oil involves the removal of Indian references. Therefore, the changes

to these sections will not be separately discussed for the purposes of

this rulemaking. The sections which are deleted entirely or partially

revised to eliminate the reference to Indian leases are:

Sec. 206.100 Purpose and scope.

Sec. 206.101 Definitions.

The following terms are changed or removed: Audit, BIA, Gross

proceeds, Indian allottee, Indian Tribe, Lease products, Lessee, and

Net profit share.

Sec. 206.102 Valuation standards.

Section 206.102(a)(2)(i) and (ii); (d), (i), (k) and (l) are

revised or removed to eliminate the reference to Indian leases.

Sec. 206.105 Determination of transportation allowances.

Section 206.105(b)(5) and (e)(2) are revised to eliminate the

reference to Indian leases.

2. We are also amending several sections of Subpart C--Federal Oil

to reflect comments from industry for elimination of allowance forms.

Further, based on recommendations of our Allowance Study Group, we are

revising the current assessment structure to focus our efforts on

administration of allowance information provided on Form MMS-2014 by

the payor, rather than generating a revenue stream from sanctions for

the untimely submission of allowance forms.

Accordingly, we are revising the following sections:

Sec. 206.101 Definitions.

Allowance We changed the definition to remove any implication of a

forms filing requirement, or of having to seek MMS approval prior to

claiming an allowance on Form MMS-2014.

Netting We added this definition to clarify the reporting situation

which will result in an assessment for not reporting allowances as a

separate line item on Form MMS-2014.

Sec. 206.104 Transportation allowances--general.

Section 206.104(b)(2) is amended to specify that Form MMS-4393 is

the application form used to request an exception to exceed the

regulatory allowance limitation of 50 percent for oil transportation.

Section 206.104(d) is amended to add the caveat about netting to

further clarify improper reporting of allowances on Form MMS-2014.

Sec. 206.105 Determination of transportation allowances.

Section 206.105(a)(1)(i) is amended to remove the requirement to

file Form

[[Page 5450]]

MMS-4110 (and the related 3-month retroactivity period) and specify

that the lessee/payor can use a self-implementing approach to claim an

allowance under an arm's-length contract by reporting an allowance as a

separate line entry on the Form MMS-2014.

Section 206.105(a)(3) is revised to reflect a change in the cost

allocation approval process. The lessee is still required to request

and receive approval for a cost allocation method for transportation of

both gaseous and liquid products through the same delivery system.

However, that approval process will no longer be tied to allowance form

filing. Instead, the lessee must submit the proposal within 3 months of

claiming the deduction on the Form MMS-2014.

Section 206.105(b)(1) is amended to remove the requirement to file

Form MMS-4110 (and the related 3-month retroactivity period) and

specify that the lessee/payor may use a self-implementing approach to

claim an allowance under a non-arm's-length or no contract by reporting

an allowance as a separate line entry on Form MMS-2014.

Section 206.105(b)(2)(v) is amended to specify that the reporting

period will be based on a calendar year as opposed to a forms filing

reporting period. We retained the use of the Standard and Poor's BBB

rating.

Section 206.105(b)(4) is amended to reflect a change in the cost

allocation approval process. The lessee is still required to request

and receive approval for a cost allocation method for transportation of

both gaseous and liquid products through the same delivery system.

However, that approval process will no longer be tied to allowance form

filing; instead, the lessee must submit the proposal within 3 months of

claiming the deduction on Form MMS-2014. Section 206.105(c)(1)(i) is

amended for sales under arm's-length contracts to specify that the

lessee must take the transportation allowance by reporting a separate

line item on the Form MMS-2014. Submitting the Form MMS-4110 is no

longer applicable.

Sections 206.105(c)(1) (ii) and (iii) these paragraphs are removed

because of the elimination of allowance forms.

Section 206.105(c)(1)(iv) is redesignated as Section

206.105(c)(1)(ii) because of paragraph renumbering. We will still

require the lessee to document its transportation costs and to make

that data available upon MMS request. Sections 206.105(c)(1)(v) and

(vi) are removed because of the elimination of allowance forms.

Section 206.105(c)(2)(i) is amended for sales under non-arm's-

length or no contracts to specify that the lessee takes the

transportation allowance by reporting a separate line item on the Form

MMS-2014. Submitting the Form MMS-4110 is no longer applicable.

Sections 206.105(c)(2) (ii) and (iii) are removed because of the

elimination of allowance forms.

Section 206.105(c)(2)(iv) is redesignated Sec. 206.105(c)(2)(ii)

because of paragraph renumbering. We are removing reference to Form

MMS-4110 and are retaining the lessee's use of cost estimates for the

current calendar year until such time as actual cost data becomes

available. Section 206.105(c)(2)(v) is removed because of the

elimination of allowance forms.

Section 206.105(c)(2)(vi) is redesigned as Sec. 206.105(c)(2)(iii)

to conform with the change in paragraph numbering. We will still

require the lessee to document its transportation costs and to make

that data available upon MMS request. We are removing reference to Form

MMS-4110.

Section 206.105(c)(2)(vii) is removed because of the elimination of

allowance forms.

Section 206.105(c)(2)(viii) is redesignated as

Sec. 206.105(c)(2)(iv) to conform with paragraph renumbering. The

lessee may use a FERC-approved or State regulatory agency-approved

tariff as its transportation cost. Section 206.105(c)(3) is removed

because of the elimination of allowance forms.

Section 206.105(c)(4) is removed because it duplicates the

requirement to report a separate line entry on the Form MMS-2014 when

claiming an allowance.

Section 206.105(d)(1)-(2) is amended to remove the sanction

language associated with untimely filing of allowance forms, and

replaces it with an assessment for improper netting. We have imposed

this new assessment, described under Section 206.105(d)(1), because of

the impact concealing allowance information on the Form MMS-2014 has on

MMS' ability to verify the allowance taken. The new assessment

provision allows us to bill up to 10 percent of the allowance reported

as a netted amount but not to exceed $250 per lease selling arrangement

per sales period. This provision gives us the flexibility to work with

the payor who has infrequently or never netted its allowances, while

being able to more aggressively address the situation with the payor

who chronically nets its allowances (i.e., a repeat offender). Use of

this new assessment is consistent with the conclusions and

recommendations of the multiconstituent Allowance Study Group.

We also have included under new Section 206.105(d)(2) the current

policy of assessing interest on the amount of an allowance taken in

excess of the threshold (50 percent of the value of the oil

transported) from the date the excess allowance is taken to the date

the lessee files an exception request (Form MMS-4393) with MMS.

Section 206.105(d)(2) is redesignated as Sec. 206.105(d)(3) to

conform with paragraph renumbering.

Section 206.105(d)(3) is redesignated as Sec. 206.105(d)(4) due to

paragraph renumbering.

Section 206.105(e)(1) is amended to remove reference to the

allowance form filing period. This paragraph still authorizes the

lessee to make adjustments to estimated allowances based on actual cost

data for the allowance reporting period. However, it clarifies that

when such adjustments result in an underpayment of royalty, the

interest for such underpayment is computed from the date the lessee

took the deduction to the date the lessee repays the difference to MMS.

b. Federal Gas

(1) The only change to several sections within Subpart D--Federal

Gas involves the removal of references to Indian leases or lessors. The

sections which are deleted entirely or partially revised to eliminate

the reference to Indian leases or lessors are:

Sec. 206.150 Purpose and scope.

Sec. 206.151 Definitions.

The following terms are changed or removed: Audit, BIA, Gross

proceeds, Indian allottee, Indian Tribe, Lease products, Lessee, and

Net profit share

Sec. 206.152 Valuation standards--unprocessed gas.

Section 206.152 (a)(3) (i) and (ii); (e)(2), (i), (k) and (l) are

revised or removed to eliminate the reference to Indian leases or

lessors.

Sec. 206.153 Valuation standards--processed gas.

Section 206.153 (a)(3) (i) and (ii); (e)(2), (i), (k) and (l) are

revised to eliminate the reference to Indian leases or lessors.

Sec. 206.154 Determination of quantities and qualities for computing

royalties.

Section 206.154(c)(4) is revised to eliminate the reference to

Indian leases or lessors.

[[Page 5451]]

Sec. 206.155 Accounting for comparison.

Section 206.155(b) is revised to eliminate the reference to Indian

leases or lessors.

Sec. 206.157 Determination of transportation allowances.

Section 206.157(e)(2) is revised to eliminate the reference to

Indian leases or lessors.

Sec. 206.159 Determination of processing allowances.

Section 206.159(c)(2)(v) is revised to eliminate the reference to

Indian leases or lessors.

(2) We are also amending several sections of Subpart D--Federal Gas

to update the current regulations (e.g., removal of Notice to Lessees

and Operators of Federal Onshore Oil and Gas Leases (NTL)) and to

reflect comments from industry for elimination of allowance forms.

Further, based on recommendations of our Allowance Study Group, we are

revising the current assessment structure to focus our efforts on

verifying allowance information provided on Form MMS-2014 by the payor,

rather than generating a revenue stream from sanctions on the filing

and timely submission of allowance forms.

Accordingly, we are revising the following sections:

Sec. 206.150 Purpose and scope.

Section 206.150(e) is eliminated in its entirety because NTL's were

terminated by the Federal Register Notice published on January 15,

1988, (53 FR 1230).

Sec. 206.151 Definitions.

Allowance We changed the definition to remove any implication of a

forms filing requirement, or of having to seek MMS approval prior to

claiming an allowance on Form MMS-2014.

Netting We added this definition to clarify the reporting situation

which will result in an assessment for not reporting allowances as a

separate line item on Form MMS-2014.

Sec. 206.156 Transportation allowances--general.

Section 206.156(c)(3) is amended to specify that Form MMS-4393 is

the application form used to request an exception to exceed the

regulatory allowance limitation of 50 percent for gas transportation.

Section 206.156(d) is amended to add the caveat about netting to

further clarify improper reporting of allowances on Form MMS-2014.

Sec. 206.157 Determination of transportation allowances.

Section 206.157(a)(1)(i) is amended to remove the requirement to

file Form MMS-4295, Gas Transportation Allowance Report (and the

related 3-month retroactivity period) and specify that the lessee/payor

may use a self-implementing approach to claim an allowance under an

arm's-length contract by reporting a separate line entry on Form MMS-

2014.

Section 206.157(a)(3) is amended to clarify that the lessee is

still required to request and receive approval for a cost allocation

method for transportation of both gaseous and liquid products through

the same delivery system. It also will clarify that the approval

process will no longer be tied to allowance form filing; instead, the

lessee must submit the proposal within 3 months of claiming the

deduction on Form MMS-2014.

Section 206.157(b)(1) is revised to remove the requirement to file

Form MMS-4295 (and the related 3-month retroactivity period) and

specify that the lessee/payor may use a self-implementing approach to

claim an allowance under a non-arm's-length or no contract by reporting

a separate line entry on Form MMS-2014.

Section 206.157(b)(2)(v) is amended to specify that the reporting

period will be based on a calendar year basis as opposed to a forms

filing reporting period. We retained the use of the Standard and Poor's

BBB rating.

Section 206.157(b)(4) is amended to clarify the approval for cost

allocation methods. The lessee is still required to request and receive

approval for a cost allocation method for transportation of both

gaseous and liquid products through the same delivery system. The

approval process will no longer be tied to allowance form filing;

instead, the lessee must submit the proposal within 3 months of

claiming the deduction on Form MMS-2014.

Section 206.157(c)(1)(i) is amended for sales under arm's-length

contracts to specify that the lessee takes the transportation allowance

by reporting a separate line item on Form MMS-2014. Submitting Form

MMS-4295 is no longer applicable.

Sections 206.157(c)(1) (ii) and (iii) are removed because of the

elimination of allowance forms.

Section 206.157(c)(1)(iv) is redesignated as Sec. 206.157(c)(1)(ii)

due to paragraph renumbering. We will still require the lessee to

document its transportation costs and to make all documentation

available upon MMS request.

Sections 206.157(c)(1) (v) and (vi) are removed because of the

elimination of allowance forms.

Section 206.157(c)(2)(i) is amended for sales under a non-arm's-

length or no contract to specify that the lessee takes the

transportation allowance by reporting a separate line item on MMS-2014.

Submitting Form MMS-4295 is no longer applicable.

Sections 206.157(c)(2) (ii) and (iii) are removed because of the

elimination of allowance forms.

Section 206.157(c)(2)(iv) is redesignated as Sec. 206.157(c)(2)(ii)

because of paragraph renumbering. We are removing reference to Form

MMS-4295 and are retaining the lessee's use of cost estimates for the

current calendar year until such time as actual cost data become

available.

Section 206.157(c)(2)(v) is removed because of the elimination of

allowance forms.

Section 206.157(c)(2)(vi) is redesignated as

Sec. 206.157(c)(2)(iii) because of paragraph renumbering. We will still

require the lessee to document its transportation costs and to make

that data available upon MMS request. We are removing reference to Form

MMS-4295.

Section 206.157(c)(2)(vii) is removed because of the elimination of

allowance forms.

Section 206.157(c)(2)(viii) is redesignated as

Sec. 206.157(c)(2)(iv) because of paragraph renumbering. The lessee may

use a FERC-approved or State regulatory agency-approved tariff as its

transportation cost.

Section 206.157(c)(3) is removed because of the elimination of

allowance forms.

Section 206.157(c)(4) is removed because it duplicates the

requirement to report a separate line entry on Form MMS-2014 when

claiming an allowance.

Sections 206.157(d) (1)-(2) are amended to remove the sanction

language associated with timely filing of allowance forms, and replace

it with an assessment for improper netting. We have imposed this new

assessment, described under Sec. 206.157(d)(1), because of the impact

concealing allowance information on Form MMS-2014 has on MMS' ability

to verify the allowance taken. The new assessment provision allows us

to bill up to 10 percent of the allowance reported as a netted amount

but not to exceed $250 per lease selling arrangement per sales period.

This provision gives us the flexibility to work with the payor which

has infrequently or never netted its allowances while being able to

more aggressively address the situation with

[[Page 5452]]

the payor who chronically nets its allowances (i.e., a repeat

offender). Use of this new sanction is consistent with the conclusions

and recommendations of the multiconstituent Allowance Study Group.

We also have included under new Sec. 206.157(d)(2) the current

policy of assessing interest on the amount of an allowance taken in

excess of the threshold (50 percent of the value of the gas

transported) from the date the excess allowance is taken to the date

the lessee files an exception request Form MMS-4393, Request to Exceed

Regulatory Allowance Limitation with MMS.

Section 206.157(d)(2) is redesignated as Sec. 206.157(d)(3) because

of paragraph renumbering.

Section 206.157(d)(3) is redesignated as Sec. 206.157(d)(4) because

of paragraph renumbering.

Section 206.157(e)(1) is amended to remove reference to the

allowance form filing period. This paragraph still authorizes the

lessee to make adjustments to estimated allowances based on actual cost

data for the allowance reporting period. However, it clarifies that

when such adjustments result in an underpayment of royalty, the

interest for such underpayment is computed from allowance reporting

period when the lessee took the deduction to the date the lessee repays

the difference to MMS.

Sec. 206.158 Processing allowances--general.

Section 206.158(c)(3) is amended to specify that Form MMS-4393 is

the application form used to request an exception to exceed the

regulatory allowance limitation of 66\2/3\ percent for gas processing.

Section 206.158(e) is amended to add the caveat about netting to

further clarify improper reporting of allowances on Form MMS-2014.

Sec. 206.159 Determination of processing allowances.

Section 206.159(a)(1)(i) is amended to remove the requirement to

file Form MMS-4109, Gas Processing Allowance Summary Report (and the

related 3-month retroactivity period) and specify that the lessee/payor

can use a self-implementing approach to claim an allowance under an

arm's-length contract by reporting a separate line entry on Form MMS-

2014. This change implements industry's comments requesting elimination

of allowance forms.

Section 206.159(a)(3) is amended to clarify that the lessee is

still required to request and receive approval for a cost allocation

method for transportation of both gaseous and liquid products through

the same delivery system. However, that approval process will no longer

be tied to allowance form filing; instead, the lessee must submit the

proposal within 3 months of claiming the deduction on Form MMS-2014.

Section 206.159(b)(1) is revised to remove the requirement to file

Form MMS-4109 (and the related 3-month retroactivity period) and

specify that the lessee/payor can use a self-implementing approach to

claim an allowance under a non-arm's-length or no contract by reporting

a separate line entry on Form MMS-2014. This change implements

industry's comments requesting elimination of allowance forms.

Section 206.159(b)(2)(v) is amended to specify that the reporting

period will be based on a calendar year basis as opposed to a forms

filing reporting period. We retained the use of the Standard and Poor's

BBB rating.

Section 206.159(c)(1)(i) is revised for sales under arm's-length

contracts, to specify that the lessee takes the gas processing

allowance by reporting a separate line item on Form MMS-2014.

Submitting Form MMS-4109 is no longer required.

Section 206.159(c)(1) (ii)-(iii) are removed because of the

elimination of allowance forms.

Section 206.159(c)(1)(iv) is redesignated as Sec. 206.159(c)(1)(ii)

because of paragraph renumbering. We still require the lessee to

document their processing costs and to make that data available upon

MMS request.

Sections 206.159(c)(1) (v) and (vi) are removed because of the

elimination of allowance forms.

Section 206.159(c)(2)(i) is revised for sales under a non-arm's-

length or no contract to specify that the lessee takes the gas

processing allowance by reporting a separate line item on Form MMS-

2014. Submitting Form MMS-4109 is no longer required.

Sections 206.159(c)(2)(ii) and (iii) are removed because of the

elimination of allowance forms.

Section 206.159(c)(2)(iv) is redesignated as Sec. 206.159(c)(2)(ii)

because of paragraph renumbering. We are removing reference to form

MMS-4109 and are retaining the lessee's use of cost estimates for the

current calendar year until such time as actual cost data becomes

available.

Section 206.159(c)(2)(v) is removed because of the elimination of

allowance forms.

Section 206.159(c)(2)(vi) is redesignated as

Sec. 206.159(c)(2)(iii) because of paragraph renumbering. We will still

require the lessee to document its processing costs and to make that

data available upon MMS request. We are removing reference to Form MMS-

4109.

Section 206.159(c)(2)(vii) is removed because of the elimination of

allowance forms.

Section 206.159(c)(2)(viii) is redesignated as

Sec. 206.159(c)(2)(iv) due to paragraph renumbering.

Section 206.159(c)(3) is removed because of the elimination of

allowance forms.

Section 206.159(c)(4) is removed because it duplicates the

requirement to report a separate line entry on Form MMS-2014 when

claiming an allowance.

Sections 206.159(d) (1) and (2) are revised to remove the

consequences associated with untimely filing of allowance forms, and

replacing them with an assessment for improper netting. We have imposed

this new assessment language, described under Sec. 206.159(d)(1), based

on the severity of concealing allowance information on Form MMS-2014.

The new assessment provision allows us to bill up to 10 percent of the

allowance reported as a netted amount but not to exceed $250 per lease

selling arrangement per sales period. This provision gives us the

flexibility to work with the payor who has infrequently or never netted

its allowances while being able to more aggressively address the

situation with the payor who chronically nets its allowances (i.e., a

repeat offender). Use of this new assessment is consistent with the

conclusions and recommendations of the multiconstituent Allowance Study

Group.

We also have included under new Sec. 206.159(d)(2) the current

policy of assessing interest on the amount of an allowance taken in

excess of the threshold (66 \2/3\ percent of the value of the gas

processed) from the date the excess allowance is taken to the date the

lessee files an exception request (Form MMS-4393) with MMS.

Section 206.159(d)(2) is redesignated as Sec. 206.159(d)(3) because

of paragraph renumbering.

Section 206.159(d)(3) is redesignated as Sec. 206.159(d)(4) because

of paragraph renumbering.

Section 206.159(e)(1) is amended to remove reference to the

allowance form filing period. This paragraph still authorizes the

lessee to make adjustments to estimated allowances based on actual cost

data for the allowance reporting period. However, it clarifies that

when such adjustments result in an underpayment of royalty, the

interest for such underpayment is

[[Page 5453]]

computed from the allowance reporting period when the lessee took the

deduction to the date the lessee repays the difference to MMS.

c. Federal Coal

(1) The only change to several sections within Subpart F--Federal

Coal involves the removal of references to Indian leases or lessors.

The sections which are deleted entirely or partially revised, to

eliminate the reference to Indian leases or lessors are:

Sec. 206.250 Purpose and scope.

Sec. 206.251 Definitions.

The following terms are changed or removed: Audit, BIA, Gross

proceeds, Indian allottee, Indian Tribe, Lease, and Lessee.

Sec. 206.253 Coal subject to royalties--general provisions.

Section 206.253 (a) and (c) are revised to eliminate the reference

to Indian leases or lessors.

Sec. 206.255 Point of royalty determination.

Section 206.255(a) and (b) are revised to eliminate the reference

to Indian leases or lessors.

Sec. 206.256 Valuation standards for cents-per-ton leases.

Section 206.256(a) is revised to eliminate the reference to Indian

leases or lessors.

Sec. 206.257 Valuation standards for ad valorem leases.

Section 206.257 (a), (d)(2), (h), (j), and (k) are revised to

eliminate the reference to Indian leases or lessors.

Sec. 206.258 Washing allowances--general.

Section 206.258(c) is revised to eliminate the reference to Indian

leases or lessors.

Sec. 206.261 Transportation allowances--general.

Section 206.261(a)(1), (a)(2), and (e) are revised to eliminate the

reference to Indian leases or lessors.

Sec. 206.262 Determination of transportation allowances.

Section 206.262(b)(3) is revised to eliminate the reference to

Indian leases or lessors.

(2) We are revising several sections of Subpart F--Federal Coal to

reflect comments from industry for elimination of allowance forms.

Further, based on recommendations of our Allowance Study Group, we are

revising the current assessment structure to focus our efforts on

verifying allowance information provided on Form MMS-2014, by the

payor, rather than generating a revenue stream from sanctions on the

filing and timely submission of allowance forms.

Accordingly, we are revising the following sections:

Sec. 206.251 Definitions.

Allowance We changed the definition to remove any implication of a

forms filing requirement, or of having to seek MMS approval prior to

claiming an allowance on the Form MMS-2014.

Netting We added this definition to clarify the reporting situation

which will result in an assessment for not reporting allowances as a

separate line item on Form MMS-2014.

Sec. 206.259 Determination of washing allowances.

Section 206.259(a)(1) is amended to remove the requirement to file

Form MMS-4292, Coal Washing Allowance Report (and the related 3-month

retroactivity period) and specifying that the lessee/payor can use a

self-implementing approach to claim an allowance under an arm's-length

contract by reporting a separate line entry on Form MMS-2014. This

change implements industry's comments requesting elimination of

allowance forms.

Section 206.259(b)(1) is amended to remove the requirement to file

Form MMS-4292 (and the related 3-month retroactivity period) and

specify that the lessee/payor may use a self-implementing approach to

claim an allowance under a non-arm's-length or no contract by reporting

a separate line entry on the Form MMS-2014.

Section 206.259(b)(2)(v) is amended to specify that the reporting

period will be based on a calendar year basis as opposed to a forms

filing reporting period. We retained the use of the Standard and Poor's

BBB rating.

Section 206.259(c)(1)(i) is amended for sales under arm's-length

contracts to specify that the lessee takes the coal washing allowance

by reporting a separate line item on Form MMS-2014. Submitting the Form

MMS-4292 is no longer required.

Sections 206.259(c)(1) (ii) and (iii) these paragraphs are removed

because of the elimination of allowance forms. Section

206.259(c)(1)(iv) is redesignated as Sec. 206.259(c)(1)(ii). We will

still require the lessee to document its washing costs and to make all

documentation available upon request by MMS.

Section 206.259(c)(1)(v) is removed because of the elimination of

allowance forms.

Section 206.259(c)(1)(vi) is removed because of the elimination of

allowance forms.

Section 206.259(c)(2)(i) is revised for sales under a non-arm's-

length or no contract to specify that the lessee takes the coal washing

allowance by reporting a separate line item on Form MMS-2014.

Submitting Form MMS-4292 is no longer required.

Sections 206.259(c)(2) (ii)-(iii) are removed because of the

elimination of allowance forms.

Section 206.259(c)(2)(iv) is redesignated as Sec. 206.259(c)(2)(ii)

due to paragraph renumbering. We are removing reference to Form MMS-

4292 and are retaining the lessee's use of cost estimates for the

current calendar year until such time as actual cost data become

available.

Section 206.259(c)(2)(v) is removed because of the elimination of

allowance forms.

Section 206.259(c)(2)(vi) is redesignated as

Sec. 206.259(c)(2)(iii) because of paragraph renumbering. We will still

require the lessee to document its washing costs and to make that data

available upon MMS request. We are removing reference to Form MMS-4292.

Section 206.259(c)(2)(vii) is removed because of the elimination of

allowance forms.

Section 206.259(c)(3) is removed because of the elimination of

allowance forms.

Section 206.259(c)(4) is removed because it duplicates the

requirement to report a separate line entry on Form MMS-2014 when

claiming an allowance.

Section 206.259(d)(1) is amended to remove the language associated

with timely filing of allowance forms, and replaces it with an

assessment for improper netting. We have imposed this new assessment,

described under Sec. 206.259 (d)(1), because of the impact concealing

allowance information on Form MMS-2014 has on MMS' ability to verify

allowances taken. The new assessment provision allows us to bill up to

10 percent of the allowance reported as a netted amount but not to

exceed $250 per lease selling arrangement per sales period. This

provision gives us the flexibility to work with the payor which has

infrequently or never netted its allowances while being able to more

aggressively address the situation with the payor which chronically

nets its allowances (i.e., a repeat offender). Use of this new

assessment is consistent with the conclusions and recommendations of

the multiconstituent Allowance Study Group.

Section 206.259(e)(1) is amended to remove reference to the

allowance form filing period. This paragraph still authorizes the

lessee to make

[[Page 5454]]

adjustments to estimated allowances based on actual cost data for the

allowance reporting period. However, it clarifies that when such

adjustments result in an underpayment of royalty, the interest for such

underpayment is computed from the allowance reporting period when the

lessee took the deduction to the date the lessee repays the difference

to MMS.

Sec. 206.262 Determination of transportation allowances.

Section 206.262(a)(1) is amended to remove the requirement to file

Form MMS-4293, Coal Transportation Allowance Report (and the related 3-

month retroactivity period) and specify that the lessee/payor may use a

self-implementing approach to claim an allowance under an arm's-length

contract by reporting a separate line entry on Form MMS-2014.

Section 206.262(b)(1) is amended to remove the requirement to file

Form MMS-4293 (and the related 3-month retroactivity period) and

specify that the lessee/payor may use a self-implementing approach to

claim an allowance under a non-arm's-length or no contract by reporting

a separate line entry on Form MMS-2014.

Section 206.262(b)(2)(v) is amended to specify that the reporting

period will be based on a calendar year basis as opposed to a forms

filing reporting period. We retained the use of the Standard and Poor's

BBB rating.

Section 206.262(c)(1)(i) is revised for sales under arm's-length

contracts to specify that the lessee takes the coal transportation

allowance by reporting a separate line item on Form MMS-2014.

Submitting Form MMS-4293 is no longer applicable.

Section 206.262(c)(1) (ii)-(iii) are removed because of the

elimination of allowance forms.

Section 206.262(c)(1)(iv) is redesignated as Sec. 206.262(c)(1)(ii)

because of paragraph renumbering. We will still require the lessee to

document its transportation costs and to make that data available upon

request by MMS.

Section 206.262(c)(1) (v)-(vi) are removed because of the

elimination of allowance forms.

Section 206.262(c)(2)(i) is amended for sales under a non-arm's-

length or no contract to specify that the lessee takes the coal

transportation allowance by reporting a separate line item on Form MMS-

2014. Submitting Form MMS-4293 is no longer applicable.

Sections 206.262(c)(2) (ii) and (iii) are removed because of the

elimination of allowance forms.

Section 206.262(c)(2)(iv) is redesignated as Sec. 206.262(c)(2)(ii)

due to paragraph renumbering. We are removing reference to Form MMS-

4293 and are retaining the lessee's use of cost estimates for the

current calendar year until such time as actual cost data become

available. Section 206.262(c)(2)(v) is removed because of the

elimination of allowance forms.

Section 206.262(c)(2)(vi) is redesignated as

Sec. 206.262(c)(2)(iii) because of paragraph renumbering. We will still

require the lessee to document its transportation costs and to make

that data available upon MMS request. We are removing reference to Form

MMS-4293.

Section 206.262(c)(2)(vii) is removed because of the elimination of

allowance forms.

Section 206.262(c)(2)(viii) is redesignated as

Sec. 206.262(c)(2)(iv) because of paragraph renumbering. The lessee may

use a FERC-approved or State regulatory agency-approved tariff as its

transportation cost.

Section 206.262(c)(3) is removed because of the elimination of

allowance forms.

Section 206.262(c)(4) is removed since it duplicates the

requirement to report a separate line entry on Form MMS-2014 when

claiming an allowance.

Section 206.262(d)(1) is amended to remove the language associated

with timely filing of allowance forms, and replaces it with an

assessment for improper netting. We have imposed this new assessment,

described under Sec. 206.259(d)(1), because of the impact of concealing

allowance information on Form MMS-2014 has on MMS' ability to verify

allowances taken. The new assessment provision allows us to bill up to

10 percent of the allowance reported as a netted amount but not to

exceed $250 per lease selling arrangement per sales period. This

provision gives us the flexibility to work with the payor which has

infrequently or never netted its allowances while being able to more

aggressively address the situation with the payor which chronically

nets its allowances (i.e., a repeat offender). Use of this new

assessment is consistent with the conclusions and recommendations of

the multiconstituent Allowance Study Group.

Section 206.262(e)(1) is amended to remove reference to the

allowance form filing period. This paragraph still authorizes the

lessee to make adjustments to estimated allowances based on actual cost

data for the allowance reporting period. However, it clarifies that

when such adjustments result in an underpayment of royalty, the

interest for such underpayment is computed from the allowance reporting

period when the lessee took the deduction to date the lessee repays the

difference to MMS.

d. Indian Oil

(1) As stated earlier, since there will be different reporting

requirements for claiming allowance deductions for Indian and Federal

lands, we have established a new valuation subpart, designated Subpart

B--Indian Oil. This new subpart mirrors what was the old combined

Subpart C--Federal and Indian Oil.

The following changes in paragraphs involve removal of Federal

references for new Subpart B--Indian Oil, and therefore will not be

separately discussed:

Sec. 206.50 Purpose and scope.

Section 206.50 (a)-(c).

Sec. 206.51 Definitions.

Audit, Field, Gathering, Gross proceeds, Lease products, Lessee,

Net profit share, Outer Continental Shelf, Posted price, and Section 6

lease.

Sec. 206.52 Valuation standards.

Section 206.52 (d), (i), and (k).

Sec. 206.53 Point of royalty settlement.

Section 206.53 (a) (1)-(2) and (b).

Sec. 206.54 Transportation allowances-general.

Section 206.54 (a) (1)-(2).

Sec. 206.55 Determination of transportation allowances.

Section 206.55 (b)(5), (c)(2)(viii), and (e)(2)-(3).

(2) To specify the form used to request a waiver to allowance

limitations, we made the following change:

Sec. 206.54 Transportation allowances-general.

Section 206.54(b)(2).

This further clarifies that the lessee must use Form MMS-4393 as

the application form to request an exception to exceed the regulatory

allowance limitation of 50 percent for oil transportation.

e. Indian Gas.

(1) Changes to the following paragraphs involve partial or total

removal of Federal references for new Subpart E--Indian Gas, and

therefore will not be separately discussed:

Sec. 206.170 Purpose and scope.

Section 206.170 (a)-(c), (e).

Sec. 206.171 Definitions.

Audit, Field, Gathering, Gross proceeds, Lease products, Lessee,

Net

[[Page 5455]]

profit share, Outer Continental Shelf, and Section 6 lease.

Sec. 206.172 Valuation standards-unprocessed gas.

Section 206.172 (e)(2), (i), and (k).

Sec. 206.173 Valuation standards-processed gas.

Section 206.173(e)(2), (i), and (k).

Sec. 206.174 Determination of quantities and qualities for computing

royalties.

Section 206.174 (a)(1)-(2), (c)(4), and (d)(1).

Sec. 206.177 Determination of transportation allowances.

Section 206.177 (b)(5), (c)(2)(viii), and (e)(2)-(3).

Sec. 206.179 Determination of processing allowances.

Section 206.179 (c)(2)(v), (e)(2)-(3).

(2) To specify the form used to request a waiver to allowance

limitations, we made the following change:

Sec. 206.176 Transportation allowances-general.

Section 206.176(c)(3).

This further clarifies that the lessee must use Form MMS-4393 as

the application form to request an exception to exceed the regulatory

allowance limitation of 50 percent for gas transportation.

Sec. 206.178 Processing allowances-general.

Section 206.178(c)(3).

This further clarifies that the lessee must use Form MMS-4393 as

the application form to request an exception to exceed the regulatory

allowance limitation of 66\2/3\ percent for gas processing.

f. Indian Coal

Changes to the following paragraphs involve removal of Federal

references for new Subpart J--Indian Coal, and therefore will not be

separately discussed:

Sec. 206.450 Purpose and scope.

Section 206.450 (a)-(b).

Sec. 206.451 Definitions.

Audit, Gross proceeds, Lease, and Lessee.

Sec. 206.453 Coal subject to royalties-general provisions.

Section 206.453(a), (c).

Sec. 206.455 Point of royalty determination.

Section 206.455 (a)-(b).

Sec. 206.456 Valuation standards for cents-per-ton leases.

Section 206.456(a).

Sec. 206.457 Valuation standards for ad valorem leases.

Section 206.457 (a), (d)(2), (h), and (j).

Sec. 206.458 Washing allowances-general.

Section 206.458(c).

Sec. 206.461 Transportation allowances-general.

Section 206.461 (a)(1)-(2), and (e).

Sec. 206.462 Determination of transportation allowances.

Section 206.462 (b)(3) and (c)(2)(viii).

g. Part 202--Royalties

Subpart D--Federal and Indian Gas

Section 202.151(a) is amended to revise the last sentence of this

paragraph to refer to the separate subparts governing allowances for

Federal and Indian gas.

IV. 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 U.S.C. 601 et seq.). The 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

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.

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 30 CFR Parts 206 and 202

Coal, Continental shelf, Geothermal energy, Government contracts,

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

mineral resources, Reporting and recordkeeping requirements.

Dated: January 26, 1996.

Bob Armstrong,

Assistant Secretary--Land and Minerals Management.

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

2. The heading for Subpart B--Oil, Gas, and OCS Sulfur, General--

[Reserved] is removed and a new Subpart B--Indian Oil is added to read

as follows:

Subpart B--Indian Oil

Sec.

206.50 Purpose and scope.

206.51 Definitions.

206.52 Valuation standards.

206.53 Point of royalty settlement.

206.54 Transportation allowances--general.

206.55 Determination of transportation allowances.

Subpart B--Indian Oil

Sec. 206.50 Purpose and scope.

(a) This subpart is applicable to all oil production from Indian

(Tribal and allotted) oil and gas leases (except leases on the Osage

Indian Reservation, Osage County, Oklahoma). The purpose of this

subpart is to establish the value of production, for royalty purposes,

consistent with the mineral leasing laws, other applicable laws, and

lease terms.

(b) If the specific provisions of any Federal statute, treaty,

settlement

[[Page 5456]]

agreement between the Indian lessor and a lessee resulting from

administrative or judicial litigation, or oil and gas lease subject to

the requirements of this subpart are inconsistent with any regulation

in this subpart, then the statute, treaty, lease provision or

settlement agreement shall govern to the extent of that inconsistency.

(c) All royalty payments made to MMS or Indian Tribes are subject

to audit and adjustment.

(d) The regulations in this subpart are intended to ensure that the

trust responsibilities of the United States with respect to the

administration of Indian oil and gas leases are discharged in

accordance with the requirements of the governing mineral leasing laws,

treaties, and lease terms.

Sec. 206.51 Definitions.

For the purposes of this subpart:

Allowance means an approved or an MMS-initially accepted deduction

in determining value for royalty purposes. Transportation allowance

means an allowance for the reasonable, actual costs incurred by the

lessee for moving oil to a point of sale or point of delivery off the

lease, unit area, or communitized area, excluding gathering, or an

approved or MMS-initially accepted deduction for costs of such

transportation, determined by this subpart.

Area means a geographic region at least as large as the defined

limits of an oil and/or gas field in which oil and/or gas lease

products have similar quality, economic, and legal characteristics.

Arm's-length contract means a contract or agreement that has been

arrived at in the market place between independent, nonaffiliated

persons with opposing economic interests regarding that contract. For

purposes of this subpart, two persons are affiliated if one person

controls, is controlled by, or is under common control with another

person. For purposes of this subpart, based on the instruments of

ownership of the voting securities of an entity, or based on other

forms of ownership: ownership in excess of 50 percent constitutes

control; ownership of 10 through 50 percent creates a presumption of

control; and ownership of less than 10 percent creates a presumption of

noncontrol which MMS may rebut if it demonstrates actual or legal

control, including the existence of interlocking directorates.

Notwithstanding any other provisions of this subpart, contracts between

relatives, either by blood or by marriage, are not arm's-length

contracts. MMS may require the lessee to certify ownership control. To

be considered arm's-length for any production month, a contract must

meet the requirements of this definition for that production month, as

well as when the contract was executed.

Audit means a review, conducted in accordance with generally

accepted accounting and auditing standards, of royalty payment

compliance activities of lessees or other interest holders who pay

royalties, rents, or bonuses on Indian leases.

BIA means the Bureau of Indian Affairs of the Department of the

Interior.

BLM means the Bureau of Land Management of the Department of the

Interior.

Condensate means liquid hydrocarbons (normally exceeding 40 degrees

of API gravity) recovered at the surface without resorting to

processing. Condensate is the mixture of liquid hydrocarbons that

results from condensation of petroleum hydrocarbons existing initially

in a gaseous phase in an underground reservoir.

Contract means any oral or written agreement, including amendments

or revisions thereto, between two or more persons and enforceable by

law that with due consideration creates an obligation.

Field means a geographic region situated over one or more

subsurface oil and gas reservoirs encompassing at least the outermost

boundaries of all oil and gas accumulations known to be within those

reservoirs vertically projected to the land surface. Onshore fields are

usually given names and their official boundaries are often designated

by oil and gas regulatory agencies in the respective States in which

the fields are located.

Gathering means the movement of lease production to a central

accumulation or treatment point on the lease, unit, or communitized

area, or to a central accumulation or treatment point off the lease,

unit, or communitized area as approved by BLM operations personnel for

onshore leases.

Gross proceeds (for royalty payment purposes) means the total

monies and other consideration accruing to an oil and gas lessee for

the disposition of the oil produced. Gross proceeds includes, but is

not limited to, payments to the lessee for certain services such as

dehydration, measurement, and/or gathering to the extent that the

lessee is obligated to perform them at no cost to the Indian lessor.

Gross proceeds, as applied to oil, also includes, but is not limited

to, reimbursements for harboring or terminating fees. Tax

reimbursements are part of the gross proceeds accruing to a lessee even

though the Indian royalty interest may be exempt from taxation. Monies

and other consideration, including the forms of consideration

identified in this paragraph, to which a lessee is contractually or

legally entitled but which it does not seek to collect through

reasonable efforts are also part of gross proceeds.

Indian allottee means any Indian for whom land or an interest in

land is held in trust by the United States or who holds title subject

to Federal restriction against alienation.

Indian Tribe means any Indian Tribe, band, nation, pueblo,

community, rancheria, colony, or other group of Indians for which any

land or interest in land is held in trust by the United States or which

is subject to Federal restriction against alienation.

Lease means any contract, profit-share arrangement, joint venture,

or other agreement issued or approved by the United States under a

mineral leasing law that authorizes exploration for, development or

extraction of, or removal of lease products--or the land area covered

by that authorization, whichever is required by the context.

Lease products means any leased minerals attributable to,

originating from, or allocated to Indian leases.

Lessee means any person to whom an Indian Tribe, or an Indian

allottee issues a lease, and any person who has been assigned an

obligation to make royalty or other payments required by the lease.

This includes any person who has an interest in a lease as well as an

operator or payor who has no interest in the lease but who has assumed

the royalty payment responsibility.

Like-quality lease products means lease products which have similar

chemical, physical, and legal characteristics.

Load oil means any oil which has been used with respect to the

operation of oil or gas wells for wellbore stimulation, workover,

chemical treatment, or production purposes. It does not include oil

used at the surface to place lease production in marketable condition.

Marketable condition means lease products which are sufficiently

free from impurities and otherwise in a condition that they will be

accepted by a purchaser under a sales contract typical for the field or

area.

Marketing affiliate means an affiliate of the lessee whose function

is to acquire only the lessee's production and to market that

production.

Minimum royalty means that minimum amount of annual royalty that

the lessee must pay as specified in the

[[Page 5457]]

lease or in applicable leasing regulations.

MMS means the Minerals Management Service of the Department of the

Interior.

Net-back method (or workback method) means a method for calculating

market value of oil at the lease. Under this method, costs of

transportation, processing, or manufacturing are deducted from the

proceeds received for the oil and any extracted, processed, or

manufactured products, or from the value of the oil or any extracted,

processed, or manufactured products at the first point at which

reasonable values for any such products may be determined by a sale

under an arm's-length contract or comparison to other sales of such

products, to ascertain value at the lease.

Net profit share (for applicable Indian lessees) means the

specified share of the net profit from production of oil and gas as

provided in the agreement.

Oil means a mixture of hydrocarbons that existed in the liquid

phase in natural underground reservoirs and remains liquid at

atmospheric pressure after passing through surface separating

facilities and is marketed or used as such. Condensate recovered in

lease separators or field facilities is considered to be oil. For

purposes of royalty valuation, the term tar sands is defined separately

from oil.

Oil shale means a kerogen-bearing rock (i.e., fossilized,

insoluble, organic material). Separation of kerogen from oil shale may

take place in situ or in surface retorts by various processes. The

kerogen, upon distillation, will yield liquid and gaseous hydrocarbons.

Person means any individual, firm, corporation, association,

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

separate entity).

Posted price means the price specified in publicly available posted

price bulletins, onshore terminal postings, or other price notices net

of all adjustments for quality (e.g., API gravity, sulfur content,

etc.) and location for oil in marketable condition.

Processing means any process designed to remove elements or

compounds (hydrocarbon and nonhydrocarbon) from gas, including

absorption, adsorption, or refrigeration. Field processes which

normally take place on or near the lease, such as natural pressure

reduction, mechanical separation, heating, cooling, dehydration, and

compression are not considered processing. The changing of pressures

and/or temperatures in a reservoir is not considered processing.

Selling arrangement means the individual contractual arrangements

under which sales or dispositions of oil are made. Selling arrangements

are described by illustration in MMS Royalty Management Program Oil and

Gas Payor Handbook.

Spot sales agreement means a contract wherein a seller agrees to

sell to a buyer a specified amount of oil at a specified price over a

fixed period, usually of short duration, which does not normally

require a cancellation notice to terminate, and which does not contain

an obligation, nor imply an intent, to continue in subsequent periods.

Tar sands means any consolidated or unconsolidated rock (other

than coal, oil shale, or gilsonite) that either contains a

hydrocarbonaceous material with a gas-free viscosity greater than

10,000 centipoise at original reservoir temperature, or contains

quarrying.

Sec. 206.52 Valuation standards.

(a)(1) The value of production, for royalty purposes, of oil from

leases subject to this subpart shall be the value determined under this

section less applicable allowances determined under this subpart.

(2) (i) For any Indian leases which provide that the Secretary may

consider the highest price paid or offered for a major portion of

production (major portion) in determining value for royalty purposes,

if data are available to compute a major portion, MMS will, where

practicable, compare the value determined in accordance with this

section with the major portion. The value to be used in determining the

value of production, for royalty purposes, shall be the higher of those

two values.

(ii) For purposes of this paragraph, major portion means the

highest price paid or offered at the time of production for the major

portion of oil production from the same field. The major portion will

be calculated using like-quality oil sold under arm's-length contracts

from the same field (or, if necessary to obtain a reasonable sample,

from the same area) for each month. All such oil production will be

arrayed from highest price to lowest price (at the bottom).

The major portion is that price at which 50 percent (by volume)

plus 1 barrel of the oil (starting from the bottom) is sold.

(b)(1) (i) The value of oil which is sold under an arm's-length

contract shall be the gross proceeds accruing to the lessee, except as

provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of this section. The

lessee shall have the burden of demonstrating that its contract is

arm's-length. The value which the lessee reports, for royalty purposes,

is subject to monitoring, review, and audit. For purposes of this

section, oil which is sold or otherwise transferred to the lessee's

marketing affiliate and then sold by the marketing affiliate under an

arm's-length contract shall be valued in accordance with this paragraph

based upon the sale by the marketing affiliate.

(ii) In conducting reviews and audits, MMS will examine whether the

contract reflects the total consideration actually transferred either

directly or indirectly from the buyer to the seller for the oil. If the

contract does not reflect the total consideration, then MMS may require

that the oil sold under that contract be valued in accordance with

paragraph (c) of this section. Value may not be less than the gross

proceeds accruing to the lessee, including the additional

consideration.

(iii) If MMS determines that the gross proceeds accruing to the

lessee under an arm's-length contract do not reflect the reasonable

value of the production because of misconduct by or between two

contracting parties, or because the lessee otherwise has breached its

duty to the lessor to market the production for the mutual benefit of

the lessee and the lessor, then MMS shall require that the oil

production be valued under the first applicable of paragraph (c)(2),

(c)(3), (c)(4), or (c)(5) of this section. When MMS determines that the

value may be unreasonable, MMS will notify the lessee and give the

lessee an opportunity to provide written information justifying the

lessee's value. If the oil production is then valued under paragraph

(c)(4) or (c)(5) of this section, the notification requirements of

paragraph (e) of this section shall apply.

(2) MMS may require a lessee to certify that its arm's-length

contract provisions include all of the consideration to be paid by the

buyer, either directly or indirectly, for the oil.

(c) The value of oil production from leases subject to this section

which is not sold under an arm's-length contract shall be the

reasonable value determined in accordance with the first applicable of

the following paragraphs:

(1) The lessee's contemporaneous posted prices or oil sales

contract prices used in arm's-length transactions for purchases or

sales of significant quantities of like-quality oil in the same field

(or, if necessary to obtain a reasonable sample, from the same area);

provided, however, that those posted prices or oil sales contract

prices are comparable to other contemporaneous posted prices or oil

sales contract prices used in arm's-length transactions for purchases

or sales of significant quantities of like-quality oil in the same

field (or, if necessary to obtain a

[[Page 5458]]

reasonable sample, from the same area). In evaluating the comparability

of posted prices or oil sales contract prices, the following factors

shall be considered: Price, duration, market or markets served, terms,

quality of oil, volume, and other factors as may be appropriate to

reflect the value of the oil. If the lessee makes arm's-length

purchases or sales at different postings or prices, then the volume-

weighted average price for the purchases or sales for the production

month will be used;

(2) The arithmetic average of contemporaneous posted prices used in

arm's-length transactions by persons other than the lessee for

purchases or sales of significant quantities of like-quality oil in the

same field (or, if necessary to obtain a reasonable sample, from the

same area);

(3) The arithmetic average of other contemporaneous arm's-length

contract prices for purchases or sales of significant quantities of

like-quality oil in the same area or nearby areas;

(4) Prices received for arm's-length spot sales of significant

quantities of like-quality oil from the same field (or, if necessary to

obtain a reasonable sample, from the same area), and other relevant

matters, including information submitted by the lessee concerning

circumstances unique to a particular lease operation or the salability

of certain types of oil;

(5) A net-back method or any other reasonable method to determine

value;

(6) For purposes of this paragraph, the term lessee includes the

lessee's designated purchasing agent, and the term contemporaneous

means postings or contract prices in effect at the time the royalty

obligation is incurred.

(d) Any Indian lessee will make available, upon request to the

authorized MMS or Indian representatives, to the Office of the

Inspector General of the Department of the Interior, or other persons

authorized to receive such information, arm's-length sales and volume

data for like-quality production sold, purchased, or otherwise obtained

by the lessee from the field or area or from nearby fields or areas.

(e) (1) Where the value is determined under paragraph (c) of this

section, the lessee shall retain all data relevant to the determination

of royalty value. Such data shall be subject to review and audit, and

MMS will direct a lessee to use a different value if it determines that

the reported value is inconsistent with the requirements of these

regulations.

(2) A lessee shall notify MMS if it has determined value under

paragraph (c)(4) or (c)(5) of this section. The notification shall be

by letter to MMS Associate Director for Royalty Management or his/her

designee. The letter shall identify the valuation method to be used and

contain a brief description of the procedure to be followed. The

notification required by this paragraph is a one-time notification due

no later than the end of the month following the month the lessee first

reports royalties on a Form MMS-2014 using a valuation method

authorized by paragraph (c)(4) or (c)(5) of this section and each time

there is a change from one to the other of these two methods.

(f) If MMS determines that a lessee has not properly determined

value, the lessee shall pay the difference, if any, between royalty

payments made based upon the value it has used and the royalty payments

that are due based upon the value established by MMS. The lessee shall

also pay interest on the difference computed under 30 CFR 218.54. If

the lessee is entitled to a credit, MMS will provide instructions for

the taking of that credit.

(g) The lessee may request a value determination from MMS. In that

event, the lessee shall propose to MMS a value determination method and

may use that value for royalty payment purposes until MMS issues a

value determination. The lessee shall submit all available data

relevant to its proposal. MMS shall expeditiously determine the value

based upon the lessee's proposal and any additional information MMS

deems necessary. In making a value determination, MMS may use any of

the valuation criteria authorized by this subpart. That determination

shall remain effective for the period stated therein. After MMS issues

its determination, the lessee shall make the adjustments in accordance

with paragraph (f) of this section.

(h) Notwithstanding any other provision of this section, under no

circumstances shall the value of production, for royalty purposes, be

less than the gross proceeds accruing to the lessee for lease

production, less applicable allowances determined under this subpart.

(i) The lessee is required to place oil in marketable condition at

no cost to the Indian lessor unless otherwise provided in the lease

agreement or this section. Where the value established under this

section is determined by a lessee's gross proceeds, that value shall be

increased to the extent that the gross proceeds have been reduced

because the purchaser, or any other person, is providing certain

services the cost of which ordinarily is the responsibility of the

lessee to place the oil in marketable condition.

(j) Value shall be based on the highest price a prudent lessee can

receive through legally enforceable claims under its contract. Absent

contract revision or amendment, if the lessee fails to take proper or

timely action to receive prices or benefits to which it is entitled, it

must pay royalty at a value based upon that obtainable price or

benefit. Contract revisions or amendments shall be in writing and

signed by all parties to an arm's-length contract. If the lessee makes

timely application for a price increase or benefit allowed under its

contract but the purchaser refuses, and the lessee takes reasonable

measures, which are documented, to force purchaser compliance, the

lessee will owe no additional royalties unless or until monies or

consideration resulting from the price increase or additional benefits

are received. This paragraph shall not be construed to permit a lessee

to avoid its royalty payment obligation in situations where a purchaser

fails to pay, in whole or in part or timely, for a quantity of oil.

(k) Notwithstanding any provision in these regulations to the

contrary, no review, reconciliation, monitoring, or other like process

that results in a redetermination by MMS of value under this section

shall be considered final or binding as against the Indian Tribes or

allottees until the audit period is formally closed.

(l) Certain information submitted to MMS to support valuation

proposals, including transportation allowances or extraordinary cost

allowances, is exempted from disclosure by the Freedom of Information

Act, 5 U.S.C. Sec. 552, or other Federal law. Any data specified by law

to be privileged, confidential, or otherwise exempt, will be maintained

in a confidential manner in accordance with applicable laws and

regulations. All requests for information about determinations made

under this part are to be submitted in accordance with the Freedom of

Information Act regulation of the Department of the Interior, 43 CFR

Part 2. Nothing in this section is intended to limit or diminish in any

manner whatsoever the right of an Indian lessor to obtain any and all

information to which such lessor may be lawfully entitled from MMS or

such lessor's lessee directly under the terms of the lease, 30 U.S.C.

1733, or other applicable law.

Sec. 206.53 Point of royalty settlement.

(a) (1) Royalties shall be computed on the quantity and quality of

oil as measured at the point of settlement approved by BLM for onshore

leases.

(2) If the value of oil determined under Sec. 206.52 of this

subpart is based

[[Page 5459]]

upon a quantity and/or quality different from the quantity and/or

quality at the point of royalty settlement approved by the BLM for

onshore leases, the value shall be adjusted for those differences in

quantity and/or quality.

(b) No deductions may be made from the royalty volume or royalty

value for actual or theoretical losses. Any actual loss that may be

sustained prior to the royalty settlement metering or measurement point

will not be subject to royalty provided that such actual loss is

determined to have been unavoidable by BLM.

(c) Except as provided in paragraph (b) of this section, royalties

are due on 100 percent of the volume measured at the approved point of

royalty settlement. There can be no reduction in that measured volume

for actual losses beyond the approved point of royalty settlement or

for theoretical losses that are claimed to have taken place either

prior to or beyond the proved point of royalty settlement. Royalties

are due on 100 percent of the value of the oil as provided in this

subpart. There can be no deduction from the value of the oil for

royalty purposes to compensate for actual losses beyond the approved

point of royalty settlement or for theoretical losses that are claimed

to have taken place either prior to or beyond the approved point of

royalty settlement.

Sec. 206.54 Transportation allowances--general.

(a) Where the value of oil has been determined under Section 206.52

of this subpart at a point (e.g., sales point or point of value

determination) off the lease, MMS shall allow a deduction for the

reasonable, actual costs incurred by the lessee to transport oil to a

point off the lease; provided, however, that no transportation

allowance will be granted for transporting oil taken as Royalty-In-Kind

(RIK); or

(b) (1) Except as provided in paragraph (b)(2) of this section, the

transportation allowance deduction on the basis of a selling

arrangement shall not exceed 50 percent of the value of the oil at the

point of sale as determined under Sec. 206.52 of this subpart.

Transportation costs cannot be transferred between selling arrangements

or to other products.

(2) Upon request of a lessee, MMS may approve a transportation

allowance deduction in excess of the limitation prescribed by paragraph

(b)(1) of this section. The lessee must demonstrate that the

transportation costs incurred in excess of the limitation prescribed in

paragraph (b)(1) of this section were reasonable, actual, and

necessary. An application for exception (using Form MMS-4393, Request

to Exceed Regulatory Allowance Limitation) shall contain all relevant

and supporting documentation necessary for MMS to make a determination.

Under no circumstances shall the value, for royalty purposes, under any

selling arrangement, be reduced to zero.

(c) Transportation costs must be allocated among all products

produced and transported as provided in Sec. 206.55. Transportation

allowances for oil shall be expressed as dollars per barrel.

(d) If, after a review and/or audit, MMS determines that a lessee

has improperly determined a transportation allowance authorized by this

subpart, then the lessee shall pay any additional royalties, plus

interest determined in accordance with 30 CFR 218.54, or shall be

entitled to a credit, without interest.

Sec. 206.55 Determination of transportation allowances.

(a) Arm's-length transportation contracts.

(1)(i) For transportation costs incurred by a lessee under 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

(a)(1)(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 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.

(ii) In conducting reviews and audits, MMS will examine whether the

contract reflects more than the consideration actually transferred

either directly or indirectly from the lessee to the transporter for

the transportation. If the contract reflects more than the total

consideration, then MMS may require that the transportation allowance

be determined in accordance with paragraph (b) of this section.

(iii) If MMS determines that the consideration paid under an arm's-

length transportation contract does not reflect the reasonable value of

the transportation because of misconduct by or between the contracting

parties, or because the lessee otherwise has breached its duty to the

lessor to market the production for the mutual benefit of the lessee

and the lessor, then MMS shall require that the transportation

allowance be determined in accordance with paragraph (b) of this

section. When MMS determines that the value of the transportation may

be unreasonable, MMS will notify the lessee and give the lessee an

opportunity to provide written information justifying the lessee's

transportation costs.

(2)(i) If an arm's-length transportation contract includes more

than one liquid product, and the transportation costs attributable to

each product cannot be determined from the contract, then the total

transportation costs shall be allocated in a consistent and equitable

manner to each of the liquid products transported in the same

proportion as the ratio of the volume of each product (excluding waste

products which have no value) to the volume of all liquid products

(excluding waste products which have no value). Except as provided in

this paragraph, no allowance may be taken for the costs of transporting

lease production which is not royalty-bearing without MMS approval.

(ii) Notwithstanding the requirements of paragraph (i), the lessee

may propose to MMS a cost allocation method on the basis of the values

of the products transported. MMS shall approve the method unless it

determines that it is not consistent with the purposes of the

regulations in this part.

(3) If an arm's-length transportation contract includes both

gaseous and liquid products, and the transportation costs attributable

to each product cannot be determined from the contract, the lessee

shall propose an allocation procedure to MMS. The lessee may use the

oil transportation allowance determined in accordance with its proposed

allocation procedure until MMS issues its determination on the

acceptability of the cost allocation. The lessee shall submit all

available data to support its proposal. The initial proposal must be

submitted by June 30, 1988 or within 3 months after the last day of the

month for which the lessee requests a transportation allowance,

whichever is later (unless MMS approves a longer period). MMS shall

then determine the oil transportation allowance based upon the lessee's

proposal and any additional information MMS deems necessary.

(4) Where the lessee's payments for transportation under an arm's-

length contract are not on a dollar-per-unit basis, the lessee shall

convert whatever

[[Page 5460]]

consideration is paid to a dollar value equivalent for the purposes of

this section.

(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.

(b) Non-arm's-length or no contract.

(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 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 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 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.

(2) The transportation allowance for non-arms-length or no-contract

situations shall be based upon the lessee's actual costs for

transportation during the reporting period, including operating and

maintenance expenses, overhead, and 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 transportation system multiplied by a rate of return

in accordance with paragraph (b)(2)(iv)(B) of this section. Allowable

capital costs are generally those for depreciable fixed assets

(including costs of delivery and installation of capital equipment)

which are an integral part of the transportation system.

(i) Allowable operating expenses include: Operations supervision

and engineering; operations labor; fuel; utilities; materials; ad

valorem property taxes; rent; supplies; and any other directly

allocable and attributable operating expense which the lessee can

document.

(ii) Allowable maintenance expenses include: Maintenance of the

transportation system; maintenance of equipment; maintenance labor; and

other directly allocable and attributable maintenance expenses which

the lessee can document.

(iii) Overhead directly attributable and allocable to the operation

and maintenance of the transportation system is an allowable expense.

State and Federal income taxes and severance taxes and other fees,

including royalties, are not allowable expenses.

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

depreciable capital investment. After a lessee has elected to use

either method for a transportation system, the lessee may not later

elect to change to the other alternative without approval of MMS.

(A) To compute depreciation, the lessee may elect to use either a

straight-line depreciation method based on the life of equipment or on

the life of the reserves which the transportation system services or on

a unit-of-production method. After an election is made, the lessee may

not change methods without MMS approval. A change in ownership of a

transportation system shall not alter the depreciation schedule

established by the original transporter/lessee for purposes of the

allowance calculation. With or without a change in ownership, a

transportation system shall be depreciated only once. Equipment shall

not be depreciated below a reasonable salvage value.

(B) MMS shall allow as a cost an amount equal to the initial

capital investment in the transportation system multiplied by the rate

of return determined under paragraph (b)(2)(v) of this section. No

allowance shall be provided for depreciation. This alternative shall

apply only to transportation facilities first placed in service after

March 1, 1988.

(v) The rate of return shall be the industrial rate associated with

Standard and Poor's BBB rating. The rate of return shall be the monthly

average rate as published in Standard and Poor's Bond Guide for the

first month of the reporting period for which the allowance is

applicable and shall be effective during the reporting period. The rate

shall be redetermined at the beginning of each subsequent

transportation allowance reporting period (which is determined under

paragraph (c) of this section).

(3)(i) The deduction for transportation costs shall be determined

on the basis of the lessee's cost of transporting each product through

each individual transportation system. Where more than one liquid

product is transported, allocation of costs to each of the liquid

products transported shall be in the same proportion as the ratio of

the volume of each liquid product (excluding waste products which have

no value) to the volume of all liquid products (excluding waste

products which have no value) and such allocation shall be made in a

consistent and equitable manner. Except as provided in this paragraph,

the lessee may not take an allowance for transporting lease production

which is not royalty-bearing without MMS approval.

(ii) Notwithstanding the requirements of paragraph (i), the lessee

may propose to MMS a cost allocation method on the basis of the values

of the products transported. MMS shall approve the method unless it

determines that it is not consistent with the purposes of the

regulations in this part.

(4) Where both gaseous and liquid products are transported through

the same transportation system, the lessee shall propose a cost

allocation procedure to MMS. The lessee may use the oil transportation

allowance determined in accordance with its proposed allocation

procedure until MMS issues its determination on the acceptability of

the cost allocation. The lessee shall submit all available data to

support its proposal. The initial proposal must be submitted by June

30, 1988 or within 3 months after the last day of the month for which

the lessee requests a transportation allowance, whichever is later

(unless MMS approves a longer period). MMS shall then determine the oil

transportation allowance on the basis of the lessee's proposal and any

additional information MMS deems necessary.

(5) A lessee may apply to MMS for an exception from the requirement

that it compute actual costs in accordance with paragraphs (b)(1)

through (b)(4) of this section. MMS will grant the exception only if

the lessee has a tariff for the transportation system approved by the

Federal Energy Regulatory Commission (FERC) for Indian leases. MMS

shall deny the exception request if it determines that the tariff is

excessive as compared to arm's-length transportation charges by

pipelines, owned by the lessee or others, providing similar

transportation services in that area. If there are no arm's-length

transportation charges, MMS shall deny the exception request if:

[[Page 5461]]

(i) No FERC cost analysis exists and the FERC has declined to

investigate under MMS timely objections upon filing; and

(ii) the tariff significantly exceeds the lessee's actual costs for

transportation as determined under this section.

(c) Reporting requirements--(1) Arm's-length contracts. (i) With

the exception of those transportation allowances specified in

paragraphs (c)(1)(v) and (c)(1)(vi) of this section, the lessee shall

submit page one of the initial Form MMS-4110 (and Schedule 1), Oil

Transportation Allowance Report, prior to, or at the same time as, the

transportation allowance determined, under an arm's-length contract, is

reported on Form MMS-2014, Report of Sales and Royalty Remittance. A

Form MMS-4110 received by the end of the month that the Form MMS-2014

is due shall be considered to be timely received.

(ii) The initial Form MMS-4110 shall be effective for a reporting

period beginning the month that the lessee is first authorized to

deduct a transportation allowance and shall continue until the end of

the calendar year, or until the applicable contract or rate terminates

or is modified or amended, whichever is earlier.

(iii) After the initial reporting period and for succeeding

reporting periods, lessees must submit page one of Form MMS-4110 (and

Schedule 1) within 3 months after the end of the calendar year, or

after the applicable contract or rate terminates or is modified or

amended, whichever is earlier, unless MMS approves a longer period

(during which period the lessee shall continue to use the allowance

from the previous reporting period).

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

transportation contracts, production agreements, operating agreements,

and related documents. Documents shall be submitted within a reasonable

time, as determined by MMS.

(v) Transportation allowances which are based on arm's-length

contracts and 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.

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

requirements which are different from the requirements of this section.

(2) Non-arm's-length or no contract.

(i) With the exception of those transportation allowances specified

in paragraphs (c)(2)(v), (c)(2)(vii) and (c)(2)(viii) of this section,

the lessee shall submit an initial Form MMS-4110 prior to, or at the

same time as, the transportation allowance determined under a non-

arm's-length contract or no-contract situation is reported on Form MMS-

2014. A Form MMS-4110 received by the end of the month that the Form

MMS-2014 is due shall be considered to be timely received. The initial

report may be based upon estimated costs.

(ii) The initial Form MMS-4110 shall be effective for a reporting

period beginning the month that the lessee first is authorized to

deduct a transportation allowance and shall continue until the end of

the calendar year, or until transportation under the non-arm's-length

contract or the no-contract situation terminates, whichever is earlier.

(iii) For calendar-year reporting periods succeeding the initial

reporting period, the lessee shall submit a completed Form MMS-4110

containing the actual costs for the previous reporting period. If oil

transportation is continuing, the lessee shall include on Form MMS-4110

its estimated costs for the next calendar year. The estimated oil

transportation allowance shall be based on the actual costs for the

previous reporting period plus or minus any adjustments which are based

on the lessee's knowledge of decreases or increases that will affect

the allowance. MMS must receive the Form MMS-4110 within 3 months after

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

period (during which period the lessee shall continue to use the

allowance from the previous reporting period).

(iv) For new transportation facilities or arrangements, the

lessee's initial Form MMS-4110 shall include estimates of the allowable

oil transportation costs for the applicable period. Cost estimates

shall be based upon the most recently available operations data for the

transportation system or, if such data are not available, the lessee

shall use estimates based upon industry data for similar transportation

systems.

(v) 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.

(vi) 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.

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

requirements which are different from the requirements of this section.

(viii) If the lessee is authorized to use its FERC-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.

(3) MMS may establish reporting dates for individual lessees

different from those specified in this subpart in order to provide more

effective administration. Lessees will be notified of any change in

their reporting period.

(4) Transportation allowances must be reported as a separate line

item on Form MMS-2014, unless MMS approves a different reporting

procedure.

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

failure to report. (1) If a lessee deducts a transportation allowance

on its Form MMS-2014 without complying with the requirements of this

section, the lessee shall pay interest only on the amount of such

deduction until the requirements of this section are complied with. The

lessee also shall repay the amount of any allowance which is disallowed

by this section.

(2) If a lessee erroneously reports a transportation allowance

which results in an underpayment of royalties, interest shall be paid

on the amount of that underpayment.

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

determined in accordance with 30 CFR 218.54.

(e) Adjustments.

(1) If the actual transportation allowance is less than the amount

the lessee has taken on Form MMS-2014 for each month during the

allowance form reporting period, the lessee shall be required to pay

additional royalties due plus interest computed under 30 CFR 218.54,

retroactive to the first day of the first month the lessee is

authorized to deduct a transportation allowance. If the actual

transportation allowance is greater than the amount the lessee has

taken on Form MMS-2014 for each month during the allowance form

reporting period, the lessee shall be entitled to a credit without

interest.

(2) For lessees transporting production from Indian leases, the

lessee must submit a corrected Form MMS-2014 to reflect actual costs,

together with any payment, in

[[Page 5462]]

accordance with instructions provided by MMS.

(f) Actual or theoretical losses. Notwithstanding any other

provisions of this subpart, for other than arm's-length contracts, no

cost shall be allowed for oil transportation which results from

payments (either volumetric or for value) for actual or theoretical

losses. This section does not apply when the transportation allowance

is based upon a FERC or State regulatory agency approved tariff.

(g) Other transportation cost determinations. The provisions of

this section shall apply to determine transportation costs when

establishing value using a netback valuation procedure or any other

procedure that requires deduction of transportation costs.

3. Subpart C--Federal and Indian Oil is amended by revising the

heading to read as follows:

Subpart C--Federal Oil

4. Section 206.100 is amended by revising paragraphs (a), (b), and

(c) to read as follows:

Sec. 206.100 Purpose and scope.

(a) This subpart is applicable to all oil production from Federal

oil and gas leases. The purpose of this subpart is to establish the

value of production, for royalty purposes, consistent with the mineral

leasing laws, other applicable laws, and lease terms.

(b) If the specific provisions of any Federal statute, settlement

agreement between the United States and a lessee resulting from

administrative or judicial litigation, or oil and gas lease subject to

the requirements of this subpart are inconsistent with any regulation

in this subpart, then the statute, lease provision or settlement

agreement shall govern to the extent of that inconsistency.

(c) All royalty payments made to MMS are subject to audit and

adjustment.

* * * * *

5. Section 206.101 is amended by adding in alphabetical order the

definition for Netting, revising the definitions for Allowance, Audit,

Gross proceeds, Lease products, Lessee, Net Profit share, and deleting

the definitions BIA, Indian allottee, Indian Tribe to read as follows:

Sec. 206.101 Definitions.

For the purposes of this subpart:

Allowance means a deduction in determining value for royalty

purposes. Transportation allowance means an allowance for the

reasonable, actual costs incurred by the lessee for moving oil to a

point of sale or point of delivery off the lease, unit area, or

communitized area, excluding gathering.

* * * * *

Audit means a review, conducted in accordance with generally

accepted accounting and auditing standards, of royalty payment

compliance activities of lessees or other interest holders who pay

royalties, rents, or bonuses on Federal leases.

* * * * *

Gross proceeds (for royalty payment purposes) means the total

moneys and other consideration accruing to an oil and gas lessee for

the disposition of the oil produced. Gross proceeds includes, but is

not limited to, payments to the lessee for certain services such as

dehydration, measurement, and/or gathering to the extent that the

lessee is obligated to perform them at no cost to the Federal

Government. Gross proceeds, as applied to oil, also includes, but is

not limited to, reimbursements for harboring or terminaling fees. Tax

reimbursements are part of the gross proceeds accruing to a lessee even

though the Federal royalty interest may be exempt from taxation. Moneys

and other consideration, including the forms of consideration

identified in this paragraph, to which a lessee is contractually or

legally entitled but which it does not seek to collect through

reasonable efforts are also part of gross proceeds.

* * * * *

Lease products means any leased minerals attributable to,

originating from, or allocated to Outer Continental Shelf or onshore

Federal leases.

Lessee means any person to whom the United States issues a lease,

and any person who has been assigned an obligation to make royalty or

other payments required by the lease. This includes any person who has

an interest in a lease as well as an operator or payor who has no

interest in the lease but who has assumed the royalty payment

responsibility.

* * * * *

Net profit share (for applicable Federal leases) means the

specified share of the net profit from production of oil and gas as

provided in the agreement.

Netting is the deduction of an allowance from the sales value by

reporting a one line net sales value, instead of correctly reporting

the deduction as a separate line item on the Form MMS-2014.

* * * * *

6. Section 206.102 is amended by redesignating paragraph (a)(1) as

paragraph (a), removing paragraph (a)(2), and revising paragraphs (d),

(i), (k), and (l) to read as follows:

Sec. 206.102 Valuation standards.

(a) * * *

* * * * *

(d) Any Federal lessee will make available, upon request to the

authorized MMS or State representatives, to the Office of the Inspector

General of the Department of the Interior, or other persons authorized

to receive such information, arm's-length sales and volume data for

like-quality production sold, purchased, or otherwise obtained by the

lessee from the field or area or from nearby fields or areas.

* * * * *

(i) The lessee is required to place oil in marketable condition at

no cost to the Federal Government unless otherwise provided in the

lease agreement or this section. Where the value established under this

section is determined by a lessee's gross proceeds, that value shall be

increased to the extent that the gross proceeds have been reduced

because the purchaser, or any other person, is providing certain

services the cost of which ordinarily is the responsibility of the

lessee to place the oil in marketable condition.

* * * * *

(k) Notwithstanding any provision in these regulations to the

contrary, no review, reconciliation, monitoring, or other like process

that results in a redetermination by MMS of value under this section

shall be considered final or binding as against the Federal Government

or its beneficiaries until the audit period is formally closed.

(l) Certain information submitted to MMS to support valuation

proposals, including transportation allowances or extraordinary cost

allowances, is exempted from disclosure by the Freedom of Information

Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to

be privileged, confidential, or otherwise exempt, will be maintained in

a confidential manner in accordance with applicable laws and

regulations. All requests for information about determinations made

under this part are to be submitted in accordance with the Freedom of

Information Act regulation of the Department of the Interior, 43 CFR

Part 2.

7. Section 206.104 is amended by revising paragraphs (b)(2), and

(d) to read as follows:

Sec. 206.104 Transportation allowances-general.

* * * * *

(b) * * *

[[Page 5463]]

(2) Upon request of a lessee, MMS may approve a transportation

allowance deduction in excess of the limitation prescribed by paragraph

(b)(1) of this section. The lessee must demonstrate that the

transportation costs incurred in excess of the limitation prescribed in

paragraph (b)(1) of this section were reasonable, actual, and

necessary. An application for exception (using Form MMS-4393, Request

to Exceed Regulatory Allowance Limitation) shall contain all relevant

and supporting documentation necessary for MMS to make a determination.

Under no circumstances shall the value, for royalty purposes, under any

selling arrangement, be reduced to zero.

* * * * *

(d) If, after a review and/or audit, MMS determines that a lessee

has improperly determined a transportation allowance authorized by this

subpart, then the lessee shall pay any additional royalties, plus

interest determined in accordance with 30 CFR 218.54, or shall be

entitled to a credit, without interest. If the lessee takes a deduction

for transportation on the Form MMS-2014 by improperly netting the

allowance against the sales value of the oil instead of reporting the

allowance as a separate line item, the lessee may be assessed an amount

under Sec. 206.105(d).

8. In Sec. 206.105, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),

(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3),

and (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),

and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),

and (c)(2)(iii), and (c)(2)(iv) respectively; and revising paragraphs

(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (b)(4), (c)(1)(i), (c)(2)(i),

newly designated (c)(2)(ii), newly designated (c)(2)(iii), (d), and (e)

to read as follows:

Sec. 206.105 Determination of transportation allowances.

(a) Arm's-length transportation contracts.

(1)(i) For transportation costs incurred by a lessee under 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

(a)(1)(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. MMS' prior approval is not required before a

lessee may deduct costs incurred under an arm's-length contract. Such

allowances shall be subject to the provisions of paragraph (f) of this

section. The lessee must claim a transportation allowance by reporting

it as a separate line entry on the Form MMS-2014.

* * * * *

(3) If an arm's-length transportation contract includes both

gaseous and liquid products, and the transportation costs attributable

to each product cannot be determined from the contract, the lessee

shall propose an allocation procedure to MMS. The lessee may use the

oil transportation allowance determined in accordance with its proposed

allocation procedure until MMS issues its determination on the

acceptability of the cost allocation. The lessee shall submit all

available data to support its proposal. The initial proposal must be

submitted within 3 months after the last day of the month for which the

lessee requests a transportation allowance. MMS shall then determine

the oil transportation allowance based upon the lessee's proposal and

any additional information MMS deems necessary.

* * * * *

(b) Non-arm's-length or no contract.

(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 to ensure that they are reasonable and allowable.

The lessee must claim a transportation allowance by reporting it as a

separate line entry on the Form MMS-2014. When necessary or

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

transportation allowance deduction.

(2) * * *

(i) * * *

(v) The rate of return must be the industrial rate associated with

Standard and Poor's BBB rating. The rate of return must be the monthly

average rate as published in Standard and Poor's Bond Guide for the

first month for which the allowance is applicable. The rate must be

redetermined at the beginning of each subsequent calendar year.

* * * * *

(4) Where both gaseous and liquid products are transported through

the same transportation system, the lessee shall propose a cost

allocation procedure to MMS. The lessee may use the oil transportation

allowance determined in accordance with its proposed allocation

procedure until MMS issues its determination on the acceptability of

the cost allocation. The lessee shall submit all available data to

support its proposal. MMS shall then determine the oil transportation

allowance on the basis of the lessee's proposal and any additional

information MMS deems necessary. The lessee must submit the allocation

proposal within 3 months of claiming the allocated deduction on the

Form MMS-2014.

* * * * *

(c) Reporting requirements.

(1) Arm's-length contracts.

(i) The lessee must notify MMS of an allowance based on incurred

costs by using a separate line entry on the Form MMS-2014.

(ii) * * *

(2) Non-arm's-length or no contract.

(i) The lessee must notify MMS of an allowance based on the

incurred costs by using a separate line entry on the Form MMS-2014.

(ii) For new transportation facilities or arrangements, the

lessee's initial deduction shall include estimates of the allowable oil

transportation costs for the applicable period. Cost estimates shall be

based upon the most recently available operations data for the

transportation system or, if such data are not available, the lessee

shall use estimates based upon industry data for similar transportation

systems.

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

prepare the allowance deduction. The data shall be provided within a

reasonable period of time, as determined by MMS.

(iv) * * *

(d) Interest and assessments.

(1) If a lessee nets a transportation allowance against the royalty

value on the Form MMS-2014, the lessee shall be assessed an amount of

up to 10 percent of the allowance netted not to exceed $250 per lease

selling arrangement per sales period.

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

2014 that exceeds 50 percent of the value of the oil transported

without obtaining prior approval of MMS under 206.104 of this subpart,

the lessee shall pay interest on the excess allowance amount taken from

the date such amount is taken to the date the lessee files an exception

request with MMS.

(3) If a lessee erroneously reports a transportation allowance

which results in an underpayment of royalties, interest shall be paid

on the amount of that underpayment.

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

determined in accordance with 30 CFR 218.54.

(e) Adjustments. (1) If the actual transportation allowance is less

than the

[[Page 5464]]

amount the lessee has taken on Form MMS-2014 for each month during the

allowance reporting period, the lessee shall pay additional royalties

due plus interest computed under 30 CFR 218.54 from the allowance

reporting period when the lessee took the deduction to the date the

lessee repays the difference to MMS. If the actual transportation

allowance is greater than the amount the lessee has taken on Form MMS-

2014 for each month during the allowance reporting period, the lessee

shall be entitled to a credit without interest.

(2) For lessees transporting production from onshore Federal

leases, the lessee must submit a corrected Form MMS-2014 to reflect

actual costs, together with any payment, in accordance with

instructions provided by MMS.

* * * * *

9. Subpart D is amended by revising the heading to read as follows:

Subpart D--Federal Gas

10. Section 206.150 is revised to read as follows:

Sec. 206.150 Purpose and scope.

(a) This subpart is applicable to all gas production from Federal

oil and gas leases. The purpose of this subpart is to establish the

value of production for royalty purposes consistent with the mineral

leasing laws, other applicable laws and lease terms.

(b) If the specific provisions of any statute or settlement

agreement between the United States and a lessee resulting from

administrative or judicial litigation, or oil and gas lease subject to

the requirements of this subpart are inconsistent with any regulation

in this subpart, then the lease, statute, or settlement agreement shall

govern to the extent of that inconsistency.

(c) All royalty payments made to MMS are subject to audit and

adjustment.

(d) The regulations in this subpart are intended to ensure that the

administration of oil and gas leases is discharged in accordance with

the requirements of the governing mineral leasing laws and lease terms.

11. Section 206.151 is amended by adding in alphabetical order the

definition for Netting, revising the definitions Allowance, Audit,

Gross proceeds, Lease products, Lessee, Net Profit share, and removing

the definitions BIA, Indian allottee, and Indian Tribe to read as

follows:

Sec. 206.151 Definitions.

* * * * *

Allowance means a deduction in determining value for royalty

purposes. Processing allowance means an allowance for the reasonable

costs for processing gas determined under this subpart. Transportation

allowance means an allowance for the cost of moving royalty bearing

substances (identifiable, measurable oil and gas, including gas that is

not in need of initial separation) from the point at which it is first

identifiable and measurable to the sales point or other point where

value is established under this subpart.

* * * * *

Audit means a review, conducted in accordance with generally

accepted accounting and auditing standards, of royalty payment

compliance activities of lessees or other interest holders who pay

royalties, rents, or bonuses on Federal leases.

* * * * *

Gross proceeds (for royalty payment purposes) means the total

monies and other consideration accruing to an oil and gas lessee for

the disposition of the oil produced. Gross proceeds includes, but is

not limited to, payments to the lessee for certain services such as

dehydration, measurement, and/or gathering to the extent that the

lessee is obligated to perform them at no cost to the Federal

Government. Gross proceeds, as applied to oil, also includes, but is

not limited to, reimbursements for harboring or terminaling fees. Tax

reimbursements are part of the gross proceeds accruing to a lessee even

though the Federal royalty interest may be exempt from taxation. Monies

and other consideration, including the forms of consideration

identified in this paragraph, to which a lessee is contractually or

legally entitled but which it does not seek to collect through

reasonable efforts are also part of gross proceeds.

* * * * *

Lease products means any leased minerals attributable to,

originating from, or allocated to Outer Continental Shelf or onshore

Federal leases.

Lessee means any person to whom the United States issues a lease,

and any person who has been assigned an obligation to make royalty or

other payments required by the lease. This includes any person who has

an interest in a lease as well as an operator or payor who has no

interest in the lease but who has assumed the royalty payment

responsibility.

* * * * *

Net profit share (for applicable Federal leases) means the

specified share of the net profit from production of oil and gas as

provided in the agreement.

Netting is the deduction of an allowance from the sales value by

reporting a one line net sales value, instead of correctly reporting

the deduction as a separate line item on the Form MMS-2014.

* * * * *

12. Section 206.152 is amended by revising paragraph (a)(2),

removing paragraph (a)(3), and revising paragraphs (e)(2), (h), (i),

(k) and (l) to read as follows:

Sec. 206.152 Valuation standards--unprocessed gas.

(a) * * *

(2) The value of production, for royalty purposes, of gas subject

to this subpart shall be the value of gas determined under this section

less applicable allowances.

* * * * *

(e) * * *

(2) Any Federal lessee will make available upon request to the

authorized MMS or State representatives, to the Office of the Inspector

General of the Department of the Interior, or other person authorized

to receive such information, arm's-length sales and volume data for

like-quality production sold, purchased or otherwise obtained by the

lessee from the field or area or from nearby fields or areas.

* * * * *

(h) Notwithstanding any other provision of this section, under no

circumstances shall the value of production for royalty purposes be

less than the gross proceeds accruing to the lessee for lease

production, less applicable allowances.

(i) The lessee is required to place gas in marketable condition at

no cost to the Federal Government unless otherwise provided in the

lease agreement. Where the value established under this section is

determined by a lessee's gross proceeds, that value shall be increased

to the extent that the gross proceeds have been reduced because the

purchaser, or any other person, is providing certain services the cost

of which ordinarily is the responsibility of the lessee to place the

gas in marketable condition.

* * * * *

(k) Notwithstanding any provision in these regulations to the

contrary, no review, reconciliation, monitoring, or other like process

that results in a redetermination by MMS of value under this section

shall be considered final or binding as against the Federal Government

or its beneficiaries until the audit period is formally closed.

[[Page 5465]]

(l) Certain information submitted to MMS to support valuation

proposals, including transportation or extraordinary cost allowances,

is exempted from disclosure by the Freedom of Information Act, 5 U.S.C.

Sec. 552, or other Federal Law. Any data specified by law to be

privileged, confidential, or otherwise exempt will be maintained in a

confidential manner in accordance with applicable law and regulations.

All requests for information about determinations made under this

subpart are to be submitted in accordance with the Freedom of

Information Act regulation of the Department of the Interior, 43 CFR

Part 2.

13. Section 206.153 is amended by removing paragraph (a)(3), and

revising paragraphs (e)(2), (i), (k), and (l) to read as follows:

Sec. 206.153 Valuation standards--processed gas.

* * * * *

(e) * * *

(2) Any Federal lessee will make available upon request to the

authorized MMS or State representatives, to the Office of the Inspector

General of the Department of the Interior, or other persons authorized

to receive such information, arm's-length sales and volume data for

like-quality residue gas and gas plant products sold, purchased or

otherwise obtained by the lessee from the same processing plant or from

nearby processing plants.

* * * * *

(i) The lessee is required to place residue gas and gas plant

products in marketable condition at no cost to the Federal Government

unless otherwise provided in the lease agreement. Where the value

established under this section is determined by a lessee's gross

proceeds, that value shall be increased to the extent that the gross

proceeds have been reduced because the purchaser, or any other person,

is providing certain services the cost of which ordinarily is the

responsibility of the lessee to place the residue gas or gas plant

products in marketable condition.

* * * * *

(k) Notwithstanding any provision in these regulations to the

contrary, no review, reconciliation, monitoring, or other like process

that results in a redetermination by MMS of value under this section

shall be considered final or binding against the Federal Government or

its beneficiaries until the audit period is formally closed.

(l) Certain information submitted to MMS to support valuation

proposals, including transportation allowances, processing allowances

or extraordinary cost allowances, is exempted from disclosure by the

Freedom of Information Act, 5 U.S.C. 552, or other Federal law. Any

data specified by law to be privileged, confidential, or otherwise

exempt, will be maintained in a confidential manner in accordance with

applicable law and regulations. All requests for information about

determinations made under this Part are to be submitted in accordance

with the Freedom of Information Act regulation of the Department of the

Interior, 43 CFR Part 2.

14. Section 206.154 is amended by revising paragraph (c)(4) to read

as follows:

Sec. 206.154 Determination of quantities and qualities for computing

royalties.

* * * * *

(c) * * *

(4) A lessee may request MMS approval of other methods for

determining the quantity of residue gas and gas plant products

allocable to each lease. If approved, such method will be applicable to

all gas production from Federal leases that is processed in the same

plant.

* * * * *

15. Section 206.155 is amended by revising paragraph (b) to read as

follows:

Sec. 206.155 Accounting for comparison.

* * * * *

(b) The requirement for accounting for comparison contained in the

terms of leases will govern as provided in Section 206.150(b) of this

subpart. When accounting for comparison is required by the lease terms,

such accounting for comparison shall be determined in accordance with

paragraph (a) of this section.

16. Section 206.156 is amended by revising paragraphs (c)(3), and

(d) to read as follows:

Sec. 206.156 Transportation allowances--general.

* * * * *

(c)* * *

(3) Upon request of a lessee, MMS may approve a transportation

allowance deduction in excess of the limitations prescribed by

paragraphs (c)(1) and (c)(2) of this section. The lessee must

demonstrate that the transportation costs incurred in excess of the

limitations prescribed in paragraphs (c)(1) and (c)(2) of this section

were reasonable, actual, and necessary. An application for exception

(using Form MMS-4393, Request to Exceed Regulatory Allowance

Limitation) shall contain all relevant and supporting documentation

necessary for MMS to make a determination. Under no circumstances shall

the value for royalty purposes under any selling arrangement be reduced

to zero.

(d) If, after a review and/or audit, MMS determines that a lessee

has improperly determined a transportation allowance authorized by this

subpart, then the lessee shall pay any additional royalties, plus

interest, determined in accordance with 30 CFR 218.54, or shall be

entitled to a credit, without interest. If the lessee takes a deduction

for transportation on the Form MMS-2014 by improperly netting the

allowance against the sales value of the oil instead of reporting the

allowance as a separate line item, he may be assessed an additional

amount under 206.157(d).

17. In Sec. 206.157, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),

(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3)

and, (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),

and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),

(c)(2)(iii), and (c)(2)(iv) respectively; and revising paragraphs

(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (b)(4), (c)(1)(i), (c)(2)(i),

newly designated (c)(2)(ii), newly designated (c)(2)(iii), (d), (e)(1)

and (e)(2) to read as follows:

Sec. 206.157 Determination of transportation allowances.

(a) Arm's-length transportation contracts. (1)(i) For

transportation costs incurred by a lessee under 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 (a)(1)(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.

MMS' prior approval is not required before a lessee may deduct costs

incurred under an arm's-length contract. Such allowances shall be

subject to the provisions of paragraph (f) of this section. The lessee

must claim a transportation allowance by reporting it as a separate

line entry on the Form MMS-2014.

* * * * *

(3) If an arm's-length transportation contract includes both

gaseous and liquid products and the transportation costs attributable

to each cannot be determined from the contract, the lessee shall

propose an allocation procedure to MMS. The lessee may use the

transportation allowance determined in accordance with its proposed

allocation procedure until MMS issues its determination on the

acceptability of the cost allocation. The lessee shall

[[Page 5466]]

submit all relevant data to support its proposal. MMS shall then

determine the gas transportation allowance based upon the lessee's

proposal and any additional information MMS deems necessary. The lessee

must submit the allocation proposal within 3 months of claiming the

allocated deduction on the Form MMS-2014.

* * * * *

(b) Non-arm's-length or no contract.

(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. The lessee must claim a transportation allowance

by reporting it as a separate line entry on the Form MMS-2014. When

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

estimated or actual transportation allowance deduction.

(2)* * *

(v) The rate of return must be the industrial rate associated with

Standard and Poor's BBB rating. The rate of return must be the monthly

average rate as published in Standard and Poor's Bond Guide for the

first month for which the allowance is applicable. The rate must be

redetermined at the beginning of each subsequent calendar year.

* * * * *

(4) Where both gaseous and liquid products are transported through

the same transportation system, the lessee shall propose a cost

allocation procedure to MMS. The lessee may use the transportation

allowance determined in accordance with its proposed allocation

procedure until MMS issues its determination on the acceptability of

the cost allocation. The lessee shall submit all relevant data to

support its proposal. MMS shall then determine the transportation

allowance based upon the lessee's proposal and any additional

information MMS deems necessary. The lessee must submit the allocation

proposal within 3 months of claiming the allocated deduction on the

Form MMS-2014.

* * * * *

(c) Reporting requirements.

(1) Arm's-length contracts. (i) The lessee must notify MMS of an

allowance based on incurred costs by using a separate line entry on the

Form MMS-2014.

* * * * *

(2) Non-arm's-length or no contract. (i) The lessee must notify MMS

of an allowance based on the incurred costs by using a separate line

entry on the Form MMS-2014.

(ii) For new transportation facilities or arrangements, the

lessee's initial deduction shall include estimates of the allowable gas

transportation costs for the applicable period. Cost estimates shall be

based upon the most recently available operations data for the

transportation system or, if such data are not available, the lessee

shall use estimates based upon industry data for similar transportation

systems.

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

prepare the allowance deduction. The data shall be provided within a

reasonable period of time, as determined by MMS.

* * * * *

(d) Interest and assessments. (1) If a lessee nets a transportation

allowance against the royalty value on the Form MMS-2014, the lessee

shall be assessed an amount of up to 10 percent of the allowance netted

not to exceed $250 per lease selling arrangement per sales period.

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

2014 that exceeds 50 percent of the value of the gas transported

without obtaining prior approval of MMS under section 206.156, the

lessee shall pay interest on the excess allowance amount taken from the

date such amount is taken to the date the lessee files an exception

request with MMS.

(3) If a lessee erroneously reports a transportation allowance

which results in an underpayment of royalties, interest shall be paid

on the amount of that underpayment.

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

determined in accordance with 30 CFR 218.54.

(e) Adjustments. (1) If the actual transportation allowance is less

than the amount the lessee has taken on Form MMS-2014 for each month

during the allowance reporting period, the lessee shall be required to

pay additional royalties due plus interest computed under 30 CFR 218.54

from the allowance reporting period when the lessee took the deduction

to the date the lessee repays the difference to MMS. If the actual

transportation allowance is greater than the amount the lessee has

taken on Form MMS-2014 for each month during the allowance reporting

period, the lessee shall be entitled to a credit without interest.

(2) For lessees transporting production from onshore Federal

leases, the lessee must submit a corrected Form MMS-2014 to reflect

actual costs, together with any payment, in accordance with

instructions provided by MMS.

* * * * *

18. Section 206.158 is amended by revising paragraphs (c)(3) and

(e) to read as follows:

Sec. 206.158 Processing allowances--general.

* * * * *

(c)* * *

(3) Upon request of a lessee, MMS may approve a processing

allowance in excess of the limitation prescribed by paragraph (c)(2) of

this section. The lessee must demonstrate that the processing costs

incurred in excess of the limitation prescribed in paragraph (c)(2) of

this section were reasonable, actual, and necessary. An application for

exception (using Form MMS-4393, Request to Exceed Regulatory Allowance

Limitation) shall contain all relevant and supporting documentation for

MMS to make a determination. Under no circumstances shall the value for

royalty purposes of any gas plant product be reduced to zero.

* * * * *

(e) If MMS determines that a lessee has improperly determined a

processing allowance authorized by this subpart, then the lessee shall

pay any additional royalties, plus interest determined in accordance

with 30 CFR 218.54, or shall be entitled to a credit, without interest.

If the lessee takes a deduction for transportation on the Form MMS-2014

by improperly netting the allowance against the sales value of the oil

instead of reporting the allowance as a separate line item, he may be

assessed an additional amount under 206.159(d).

19. In Sec. 206.159, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),

(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3),

and (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),

and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),

(c)(2)(iii) and (c)(2)(iv) respectively; and revising paragraphs

(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (c)(1)(i), (c)(2)(i) newly

designated (c)(2)(ii), newly designated (c)(2)(iii), (d), (e)(1) and

(e)(2) to read as follows:

Sec. 206.159 Determination of processing allowances.

(a) Arm's-length processing contracts.

(1)(i) For processing costs incurred by a lessee under 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 (a)(1)(iii)

of this section, subject to monitoring, review,

[[Page 5467]]

audit, and adjustment. The lessee shall have the burden of

demonstrating that its contract is arm's-length. MMS' prior approval is

not required before a lessee may deduct costs incurred under an arm's-

length contract. The lessee must claim a transportation allowance by

reporting it as a separate line entry on the Form MMS-2014.

* * * * *

(3) If an arm's-length processing contract includes more than one

gas plant product and the processing costs attributable to each product

cannot be determined from the contract, the lessee shall propose an

allocation procedure to MMS. The lessee may use its proposed allocation

procedure until MMS issues its determination. The lessee shall submit

all relevant data to support its proposal. MMS shall then determine the

processing allowance based upon the lessee's proposal and any

additional information MMS deems necessary. No processing allowance

will be granted for the costs of processing lease production which is

not royalty bearing. The lessee must submit the allocation proposal

within 3 months of claiming the allocated deduction on Form MMS-2014.

* * * * *

(b) Non-arm's-length or no contract. (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. The lessee must claim a

processing allowance by reflecting it as a separate line entry on the

Form MMS-2014. When necessary or appropriate, MMS may direct a lessee

to modify its estimated or actual processing allowance.

(2)* * *

(v) The rate of return must be the industrial rate associated with

Standard and Poor's BBB rating. The rate of return must be the monthly

average rate as published in Standard and Poor's Bond Guide for the

first month for which the allowance is applicable. The rate must be

redetermined at the beginning of each subsequent calendar year.

* * * * *

(c) Reporting requirements (1) Arm's-length contracts. (i) The

lessee must notify MMS of an allowance based on incurred costs by using

a separate line entry on the Form MMS-2014.

* * * * *

(2) Non-arm's-length or no contract.

(i) The lessee must notify MMS of an allowance based on the

incurred costs by using a separate line entry on the Form MMS-2014.

(ii) For new processing plants, the lessee's initial deduction

shall include estimates of the allowable gas processing costs for the

applicable period. Cost estimates shall be based upon the most recently

available operations data for the plant or, if such data are not

available, the lessee shall use estimates based upon industry data for

similar gas processing plants.

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

prepare the allowance deduction. The data shall be provided within a

reasonable period of time, as determined by MMS.

(d) Interest and assessments.

(1) If a lessee nets a processing allowance against the royalty

value on the Form MMS-2014, the lessee shall be assessed an amount of

up to 10 percent of the allowance netted not to exceed $250 per lease

selling arrangement per sales period.

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

that exceeds 66\2/3\ percent of the value of the gas processed without

obtaining prior approval of MMS under Section 206.158, the lessee shall

pay interest on the excess allowance amount taken from the date such

amount is taken to the date the lessee files an exception request with

MMS.

(3) 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.

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

determined in accordance with 30 CFR 218.54.

(e) Adjustments.

(1) If the actual processing allowance is less than the amount the

lessee has taken on Form MMS-2014 for each month during the allowance

reporting period, the lessee shall pay additional royalties due plus

interest computed under 30 CFR 218.54 from the allowance reporting

period when the lessee took the deduction to the date the lessee repays

the difference to MMS. If the actual processing allowance is greater

than the amount the lessee has taken on Form MMS-2014 for each month

during the allowance reporting period, the lessee shall be entitled to

a credit without interest.

(2) For lessees transporting production from onshore Federal

leases, the lessee must submit a corrected Form MMS-2014 to reflect

actual costs, together with any payment, in accordance with

instructions provided by MMS.

* * * * *

20. The subpart heading Subpart E--Solid Minerals, General

[Reserved] is removed and a new Subpart E--Indian Gas is added to read

as follows:

Subpart E--Indian Gas

Sec.

206.170 Purpose and scope.

206.171 Definitions.

206.172 Valuation standards--unprocessed gas.

206.173 Valuation standards--processed gas.

206.174 Determination of quantities and qualities for computing

royalties.

206.175 Accounting for comparison.

206.176 Transportation allowances--general.

206.177 Determination of transportation allowances.

206.178 Processing allowances--general.

206.179 Determination of processing allowances.

Subpart E--Indian Gas

Sec. 206.170 Purpose and scope.

(a) This subpart is applicable to all gas production from Indian

(Tribal and allotted) oil and gas leases (except leases on the Osage

Indian Reservation, Osage County, Oklahoma). The purpose of this

subpart is to establish the value of production for royalty purposes

consistent with the mineral leasing laws, other applicable laws, and

lease terms.

(b) If the specific provisions of any statute, treaty, or

settlement agreement between the Indian lessor and a lessee resulting

from administrative or judicial litigation, or oil and gas lease

subject to the requirements of this subpart are inconsistent with any

regulation in this subpart, then the lease, statute, treaty provision

or settlement agreement shall govern to the extent of that

inconsistency.

(c) All royalty payments made to any Tribe or allottee are subject

to audit and adjustment.

(d) The regulations in this subpart are intended to ensure that the

trust responsibilities of the United States with respect to the

administration of Indian oil and gas leases are discharged in

accordance with the requirements of the governing mineral leasing laws,

treaties, and lease terms.

Sec. 206.171 Definitions.

For purposes of this subpart:

Allowance means an approved or an (MMS)-initially accepted

deduction in determining value for royalty purposes. Processing

allowance means an allowance for the reasonable, actual costs incurred

by the lessee for

[[Page 5468]]

processing gas, or an approved or MMS-initially accepted deduction for

costs of such processing, determined pursuant to this subpart.

Transportation allowance means an allowance for the reasonable, actual

costs incurred by the lessee for moving unprocessed gas, residue gas,

or gas plant products to a point of sale or point of delivery off the

lease, unit area, communitized area, or away from a processing plant,

excluding gathering, or an approved or MMS-initially accepted deduction

for costs of such transportation, determined pursuant to this subpart.

Area means a geographic region at least as large as the defined

limits of an oil and/or gas field, in which oil and/or gas lease

products have similar quality, economic, and legal characteristics.

Arm's-length contract means a contract or agreement that has been

arrived at in the marketplace between independent, nonaffiliated

persons with opposing economic interests regarding that contract. For

purposes of this subpart, two persons are affiliated if one person

controls, is controlled by, or is pursuant to common control with

another person. For purposes of this subpart, based on the instruments

of ownership of the voting securities of an entity, or based on other

forms of ownership: ownership in excess of 50 percent constitutes

control; ownership of 10 through 50 percent creates a presumption of

control; and ownership of less than 10 percent creates a presumption of

noncontrol which MMS may rebut if it demonstrates actual or legal

control, including the existence of interlocking directorates.

Notwithstanding any other provisions of this subpart, contracts between

relatives, either by blood or by marriage, are not arm's-length

contracts. MMS may require the lessee to certify ownership control. To

be considered arm's-length for any production month, a contract must

meet the requirements of this definition for that production month, as

well as when the contract was executed.

Audit means a review, conducted in accordance with generally

accepted accounting and auditing standards, of royalty payment

compliance activities of lessees or other interest holders who pay

royalties, rents, or bonuses on Indian leases.

BIA means the Bureau of Indian Affairs of the Department of the

Interior.

BLM means the Bureau of Land Management of the Department of the

Interior.

Compression means the process of raising the pressure of gas.

Condensate means liquid hydrocarbons (normally exceeding 40 degrees

of API gravity) recovered at the surface without resorting to

processing. Condensate is the mixture of liquid hydrocarbons that

results from condensation of petroleum hydrocarbons existing initially

in a gaseous phase in an underground reservoir.

Contract means any oral or written agreement, including amendments

or revisions thereto, between two or more persons and enforceable by

law that with due consideration creates an obligation.

Field means a geographic region situated over one or more

subsurface oil and gas reservoirs encompassing at least the outermost

boundaries of all oil and gas accumulations known to be within those

reservoirs vertically projected to the land surface. Onshore fields are

usually given names and their official boundaries are often designated

by oil and gas regulatory agencies in the respective States in which

the fields are located.

Gas means any fluid, either combustible or noncombustible,

hydrocarbon or nonhydrocarbon, which is extracted from a reservoir and

which has neither independent shape nor volume, but tends to expand

indefinitely. It is a substance that exists in a gaseous or rarefied

state pursuant to standard temperature and pressure conditions.

Gas plant products means separate marketable elements, compounds,

or mixtures, whether in liquid, gaseous, or solid form, resulting from

processing gas, excluding residue gas.

Gathering means the movement of lease production to a central

accumulation and/or treatment point on the lease, unit or communitized

area, or to a central accumulation or treatment point off the lease,

unit or communitized area as approved by BLM operations personnel for

onshore leases.

Gross proceeds (for royalty payment purposes) means the total

monies and other consideration accruing to an oil and gas lessee for

the disposition of unprocessed gas, residue gas, or gas plant products

produced. Gross proceeds includes, but is not limited to, payments to

the lessee for certain services such as compression, dehydration,

measurement, and/or field gathering to the extent that the lessee is

obligated to perform them at no cost to the Indian lessor, and payments

for gas processing rights. Gross proceeds, as applied to gas, also

includes but is not limited to reimbursements for severance taxes and

other reimbursements. Tax reimbursements are part of the gross proceeds

accruing to a lessee even though the Indian royalty interest may be

exempt from taxation. Monies and other consideration, including the

forms of consideration identified in this paragraph, to which a lessee

is contractually or legally entitled but which it does not seek to

collect through reasonable efforts are also part of gross proceeds.

Indian allottee means any Indian for whom land or an interest in

land is held in trust by the United States or who holds title subject

to Federal restriction against alienation.

Indian Tribe means any Indian Tribe, band, nation, pueblo,

community, rancheria, colony, or other group of Indians for which any

land or interest in land is held in trust by the United States or which

is subject to Federal restriction against alienation.

Lease means any contract, profit-share arrangement, joint venture,

or other agreement issued or approved by the United States pursuant to

a mineral leasing law that authorizes exploration for, development or

extraction of, or removal of lease products--or the land area covered

by that authorization, whichever is required by the context.

Lease products means any leased minerals attributable to,

originating from, or allocated to Indian leases.

Lessee means any person to whom an Indian Tribe, or an Indian

allottee issues a lease, and any person who has been assigned an

obligation to make royalty or other payments required by the lease.

This includes any person who has an interest in a lease as well as an

operator or payor who has no interest in the lease but who has assumed

the royalty payment responsibility.

Like-quality lease products means lease products which have similar

chemical, physical, and legal characteristics.

Marketable condition means lease products which are sufficiently

free from impurities and otherwise in a condition that they will be

accepted by a purchaser pursuant to a sales contract typical for the

field or area.

Marketing affiliate means an affiliate of the lessee whose function

is to acquire only the lessee's production and to market that

production.

Minimum royalty means that minimum amount of annual royalty that

the lessee must pay as specified in the lease or in applicable leasing

regulations.

MMS means the Minerals Management Service of the Department of the

Interior.

Net-back method (or work-back method) means a method for

calculating market value of gas at the lease.

[[Page 5469]]

Pursuant to this method, costs of transportation, processing, or

manufacturing are deducted from the proceeds received for the gas,

residue gas or gas plant products, and any extracted, processed, or

manufactured products, or from the value of the gas, residue gas or gas

plant products, and any extracted, processed, or manufactured products,

at the first point at which reasonable values for any such products may

be determined by a sale pursuant to an arm's-length contract or

comparison to other sales of such products, to ascertain value at the

lease.

Net output means the quantity of residue gas and each gas plant

product that a processing plant produces.

Net profit share (for applicable Indian leases) means the specified

share of the net profit from production of oil and gas as provided in

the agreement.

Person means any individual, firm, corporation, association,

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

separate entity).

Posted price means the price, net of all adjustments for quality

and location, specified in publicly available price bulletins or other

price notices available as part of normal business operations for

quantities of unprocessed gas, residue gas, or gas plant products in

marketable condition.

Processing means any process designed to remove elements or

compounds (hydrocarbon and nonhydrocarbon) from gas, including

absorption, adsorption, or refrigeration. Field processes which

normally take place on or near the lease, such as natural pressure

reduction, mechanical separation, heating, cooling, dehydration, and

compression, are not considered processing. The changing of pressures

and/or temperatures in a reservoir is not considered processing.

Residue gas means that hydrocarbon gas consisting principally of

methane resulting from processing gas.

Selling arrangement means the individual contractual arrangements

pursuant to which sales or dispositions of gas, residue gas and gas

plant products are made. Selling arrangements are described by

illustration in the MMS Royalty Management Program Oil and Gas Payor

Handbook.

Spot sales agreement means a contract wherein a seller agrees to

sell to a buyer a specified amount of unprocessed gas, residue gas, or

gas plant products at a specified price over a fixed period, usually of

short duration, which does not normally require a cancellation notice

to terminate, and which does not contain an obligation, nor imply an

intent, to continue in subsequent periods.

Warranty contract means a long-term contract entered into prior to

1970, including any amendments thereto, for the sale of gas wherein the

producer agrees to sell a specific amount of gas and the gas delivered

in satisfaction of this obligation may come from fields or sources

outside of the designated fields.

Sec. 206.172 Valuation standards--unprocessed gas.

(a) (1) This section applies to the valuation of all gas that is

not processed and all gas that is processed but is sold or otherwise

disposed of by the lessee pursuant to an arm's-length contract prior to

processing (including all gas where the lessee's arm's-length contract

for the sale of that gas prior to processing provides for the value to

be determined on the basis of a percentage of the purchaser's proceeds

resulting from processing the gas). This section also applies to

processed gas that must be valued prior to processing in accordance

with Sec. 206.175 of this subpart. Where the lessee's contract includes

a reservation of the right to process the gas and the lessee exercises

that right, Sec. 206.173 of this subpart shall apply instead of this

section.

(2) The value of production, for royalty purposes, of gas subject

to this subpart shall be the value of gas determined pursuant to this

section less applicable allowances determined pursuant to this subpart.

(3) (i) For any Indian leases which provide that the Secretary may

consider the highest price paid or offered for a major portion of

production (major portion) in determining value of production for

royalty purposes, if data are available to compute a major portion MMS

will, where practicable, compare the value determined in accordance

with this section with the major portion. The value to be used in

determining the value of production for royalty purposes shall be the

higher of those two values.

(ii) For purposes of this paragraph, major portion means the

highest price paid or offered at the time of production for the major

portion of gas production from the same field. The major portion will

be calculated using like-quality gas sold pursuant to arm's-length

contracts from the same field (or, if necessary to obtain a reasonable

sample, from the same area) for each month. All such sales will be

arrayed from highest price to lowest price (at the bottom). The major

portion is that price at which 50 percent (by volume) plus 1 mcf of the

gas (starting from the bottom) is sold.

(b)(1) (i) The value of gas which is sold pursuant to an arm's-

length contract shall be the gross proceeds accruing to the lessee,

except as provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of this

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

contract is arm's-length. The value which the lessee reports, for

royalty purposes, is subject to monitoring, review, and audit. For

purposes of this section, gas which is sold or otherwise transferred to

the lessee's marketing affiliate and then sold by the marketing

affiliate pursuant to an arm's-length contract shall be valued in

accordance with this paragraph based upon the sale by the marketing

affiliate. Also, where the lessee's arm's-length contract for the sale

of gas prior to processing provides for the value to be determined

based upon a percentage of the purchaser's proceeds resulting from

processing the gas, the value of production, for royalty purposes,

shall never be less than a value equivalent to 100 percent of the value

of the residue gas attributable to the processing of the lessee's gas.

(ii) In conducting reviews and audits, MMS will examine whether the

contract reflects the total consideration actually transferred either

directly or indirectly from the buyer to the seller for the gas. If the

contract does not reflect the total consideration, then MMS may require

that the gas sold pursuant to that contract be valued in accordance

with paragraph (c) of this section. Value may not be less than the

gross proceeds accruing to the lessee, including the additional

consideration.

(iii) If MMS determines that the gross proceeds accruing to the

lessee pursuant to an arm's-length contract do not reflect the

reasonable value of the production because of misconduct by or between

the contracting parties, or because the lessee otherwise has breached

its duty to the lessor to market the production for the mutual benefit

of the lessee and the lessor, then MMS shall require that the gas

production be valued pursuant to paragraphs (c)(2) or (c)(3) of this

section, and in accordance with the notification requirements of

paragraph (e) of this section. When MMS determines that the value may

be unreasonable, MMS will notify the lessee and give the lessee an

opportunity to provide written information justifying the lessee's

value.

(2) Notwithstanding the provisions of paragraph (b)(1) of this

section, the value of gas sold pursuant to a warranty contract shall be

determined by MMS, and due consideration will be given to all valuation

criteria specified in this section. The lessee must request a value

determination in accordance with paragraph (g) of this section for gas

sold pursuant to a warranty contract;

[[Page 5470]]

provided, however, that any value determination for a warranty contract

in effect on the effective date of these regulations shall remain in

effect until modified by MMS.

(3) MMS may require a lessee to certify that its arm's-length

contract provisions include all of the consideration to be paid by the

buyer, either directly or indirectly, for the gas.

(c) The value of gas subject to this section which is not sold

pursuant to an arm's-length contract shall be the reasonable value

determined in accordance with the first applicable of the following

methods:

(1) The gross proceeds accruing to the lessee pursuant to a sale

pursuant to its non-arm's-length contract (or other disposition other

than by an arm's-length contract), provided that those gross proceeds

are equivalent to the gross proceeds derived from, or paid pursuant to,

comparable arm's-length contracts for purchases, sales, or other

dispositions of like-quality gas in the same field (or, if necessary to

obtain a reasonable sample, from the same area). In evaluating the

comparability of arm's-length contracts for the purposes of these

regulations, the following factors shall be considered: price, time of

execution, duration, market or markets served, terms, quality of gas,

volume, and such other factors as may be appropriate to reflect the

value of the gas;

(2) A value determined by consideration of other information

relevant in valuing like-quality gas, including gross proceeds pursuant

to arm's-length contracts for like-quality gas in the same field or

nearby fields or areas, posted prices for gas, prices received in

arm's-length spot sales of gas, other reliable public sources of price

or market information, and other information as to the particular lease

operation or the salability of the gas; or

(3) A net-back method or any other reasonable method to determine

value.

(d) (1) Notwithstanding any other provisions of this section,

except paragraph (h) of this section, if the maximum price permitted by

Federal law at which gas may be sold is less than the value determined

pursuant to this section, then MMS shall accept such maximum price as

the value. For purposes of this section, price limitations set by any

State or local government shall not be considered as a maximum price

permitted by Federal law.

(2) The limitation prescribed in paragraph (d)(1) of this section

shall not apply to gas sold pursuant to a warranty contract and valued

pursuant to paragraph (b)(2) of this section.

(e) (1) Where the value is determined pursuant to paragraph (c) of

this section, the lessee shall retain all data relevant to the

determination of royalty value. Such data shall be subject to review

and audit, and MMS will direct a lessee to use a different value if it

determines that the reported value is inconsistent with the

requirements of these regulations.

(2) Any Indian lessee will make available upon request to the

authorized MMS or Indian representatives, to the Office of the

Inspector General of the Department of the Interior, or other person

authorized to receive such information, arm's-length sales and volume

data for like-quality production sold, purchased or otherwise obtained

by the lessee from the field or area or from nearby fields or areas.

(3) A lessee shall notify MMS if it has determined value pursuant

to paragraph (c)(2) or (c)(3) of this section. The notification shall

be by letter to MMS Associate Director for Royalty Management or his/

her designee. The letter shall identify the valuation method to be used

and contain a brief description of the procedure to be followed. The

notification required by this paragraph is a one-time notification due

no later than the end of the month following the month the lessee first

reports royalties on a Form MMS-2014 using a valuation method

authorized by paragraph (c)(2) or (c)(3) of this section, and each time

there is a change in a method pursuant to paragraph (c)(2) or (c)(3) of

this section.

(f) If MMS determines that a lessee has not properly determined

value, the lessee shall pay the difference, if any, between royalty

payments made based upon the value it has used and the royalty payments

that are due based upon the value establish

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