# Revision of Valuation Regulations Governing Oil and Gas Transportation and Processing Allowances, and Coal Washing and Transportation Allowances > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A96-2641 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** February 12, 1996 - **Citation:** 61 FR 5448 ## Text 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 proposa [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-2641. Public record. Not legal advice.