Amendments to Gas Valuation Regulations for Federal Leases

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 202, 206, and 211

RIN 1010-AC02

Amendments to Gas Valuation Regulations for Federal Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice withdrawing proposed rulemaking and requesting comments

on supplemental information.

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SUMMARY: The Minerals Management Service (MMS) is withdrawing its

proposed rulemaking to amend the regulations for valuing natural gas

produced from Federal leases for royalty purposes. MMS also is

requesting comments on supplemental options for valuation.

DATES: Written comments must be received on or before June 23, 1997.

ADDRESSES: Comments should be sent to: David S. Guzy, Chief, Rules and

Publications Staff, Royalty Management Program, Minerals Management

Service, P.O. Box 25165, MS 3101, Denver, Colorado 80225-0165; courier

delivery to Building 85, Denver Federal Center, Denver, Colorado 80225;

or e-Mail David__G[email protected].

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

Publications Staff, Telephone (303) 231-3432, FAX (303) 231-3194, e-

Mail David__G[email protected].

SUPPLEMENTARY INFORMATION: On November 6, 1995, MMS published a

proposed rule that would amend the regulations governing the valuation

of natural gas produced from Federal leases (60 FR 56007). The proposed

amendments reflected the consensus recommendations of the Federal Gas

Valuation Negotiated Rulemaking Committee (Committee), which the

Secretary chartered on June 27, 1994, to resolve many issues facing the

valuation of Federal gas. Through the consensus negotiated rulemaking

process, the Committee attempted to develop alternative royalty

valuation methodologies that would simplify the gas royalty valuation

process but would not have a significant impact on gas royalty

collections.

The recommendations and subsequent proposed amendments the

Committee developed would have allowed lessees to choose from several

options for valuing gas for royalty purposes, including, for example,

index prices published in natural gas newsletters, affiliated

companies' arm's-

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length resale prices, and residue gas prices applied to the wellhead.

The amendments also would have eliminated certain administrative

functions such as accounting for comparison (also known as ``dual

accounting''), and redefined specific terms such as gathering and

compression to clarify their deductibility from royalty.

While the proposed rule reflected the consensus decisions of the

Committee, MMS received many unfavorable comments in response to the

proposed rule. Many of the comments focused on the complexity of the

various valuation alternatives, while others expressed concern about

the impact on royalty revenues. On the other hand, many comments

supported the proposals to clarify terms and eliminate administrative

burdens.

Because of the comments received, in mid-1996 MMS reconvened the

Committee and reopened the public comment period asking the public and

the Committee to provide comments on five options for proceeding with

rulemaking. When the Committee reconvened, representatives from major

and independent companies who served on the Committee presented a

``Unified Option.'' However, State and MMS Committee members could not

support the industry proposal because it would have been based on data

reported to MMS but not verified for accuracy or compliance by audit.

The reopened comment period closed in August 1996.

As required by the Regulatory Flexibility Act, MMS next performed a

cost/benefit analysis of the impacts of the proposed rule. The MMS

selected data from 1994 and 1995, because it reflected the Federal

Energy Regulatory Commission (FERC) Order No. 636 marketing

environment. The analysis compared the royalties that MMS would have

received based on the proposed index price methodology to the actual

royalties MMS received based on the lessee's gross proceeds (not

verified by audit) under the current regulations. The analysis

accounted for the so-called ``safety net'' (see November 6, 1995,

proposed rule) comprising a median value of gross proceeds prices

reported by payors who MMS assumed would chose not to pay royalties

based on index prices. The results of the analysis indicated that the

proposed rule would result in a loss in revenues of approximately $20

million annually. That amount is likely understated as it is based on a

comparison to gross proceeds data not verified by audit. Details of the

analysis may be found at the Royalty Management Program Internet home

page at www.mms.gov or by calling Mr. Larry Cobb at (303) 275-7245.

MMS has decided at this time not to issue a final rule based on the

consensus recommendations of the Committee for a number of reasons:

1. The natural gas market is still undergoing dramatic change. FERC

recently published a Federal Register Notice (62 FR 10266, March 6,

1997) seeking public and industry input about ``how the industry

currently works, how the industry is changing, and how the Commission's

regulatory policies should respond to such changes in the

marketplace.'' The FERC stated that significant changes in the

structure of the natural gas industry have occurred since the issuance

of Order No. 636. These include ``the consolidation in the ownership of

interstate pipelines, the spin-off and spin-down of gathering

facilities with the potential for State regulation, the emergence of

mega-markets, and the emerging electric and gas convergence.'' The FERC

also cited issues such as increasing unbundled retail access, hourly

trading of natural gas, and increased transportation efficiencies in

calling for a need to take a step back and examine where the market is

headed.

2. MMS believes that its existing regulations are very flexible and

therefore are the most appropriate means to face the continued changes

in the natural gas market.

3. MMS does not believe that published indices for natural gas,

representing spot prices at major pipeline interconnects, less

transportation to the lease, have developed sufficiently to be

representative of the gross proceeds actually received for lease

production.

4. In the absence of published indices that accurately represent

fair market value, any rule using these indices would inevitably become

complicated because of the requirement to compare them to gross

proceeds. The comparison would have to take the form of some sort of

safety net calculation, as in the proposed rule, or an adjustment to

index based on the difference between index and gross proceeds.

Analyzing and verifying gross proceeds data to accomplish these

comparisons would place a significant administrative burden on MMS.

5. The results of the MMS cost/benefit analysis indicate that the

proposed rule does not achieve revenue neutrality, one of the primary

goals MMS and the Committee established in developing new regulations.

MMS still seeks alternative valuation methods that would simplify

the gas valuation process without significantly impacting royalty

revenues. In light of MMS's decision not to proceed with finalizing the

November 6, 1995, proposed rule, MMS solicits comments on two

additional options for valuing Federal gas. MMS also asks for ideas and

comments on other valuation options not yet presented in this

rulemaking that are not inconsistant with our reasons for not issuing a

final rule.

The first option is index-based. Payors wishing to pay on index

would be required to pay on index plus (or minus) an annual percentage

factor (known as the index +/-``X-factor'' method). The percentage X-

factor would account for any difference between the average index value

in the zone (as described in the November 6, 1995, proposed rule) and

the average arm's-length gross proceeds received by payors paying on

index in the zone. The X-factor to be applied to the current year's

index prices would be computed from the previous year's differences

between average indices and average gross proceeds. The X-factor may be

positive or negative depending on how the average gross proceeds net of

transportation costs compare to the average index value. Because

transportation costs are already accounted for in the X-factor, no

additional transportation allowance would be permitted to be deducted

from index. In evaluating arm's-length gross proceeds, MMS would

include affiliates' arm's-length resale prices.

The second option is based on the royalty collection practice in

Norway. Royalty values for crude oil produced in Norway are established

by the Petroleum Price Board (Board). The Board establishes ``norm''

prices that may be reduced by transportation tariffs, if the norm price

point is away from the producing area. (In Norway, no norm prices can

be set for gas because the royalty rate of gas was set to zero in

1992.)

The Board does not use a specific formula in deciding the norm

price. Instead, the Board considers specific information sources

including:

(1) Spot market indicators;

(2) Realized prices for external sales, gathered by the Board from

companies on all liftings of Norwegian crude and summarized into a

``Brent-Blend Equivalent,'' which is the volume-weighted average of all

Norwegian crude oils. These prices are adjusted by assessed price-

differentials to Brent Blend; and

(3) Company evaluations and recommendations.

The procedure for setting the norm price has several important

features.

[[Page 19538]]

From a timing standpoint, the prices are set quarterly and on a

retroactive basis. After the end of each quarter, companies are given 4

weeks to send information about the previous quarter. Within 2 weeks

the Board gives its preliminary evaluation in the form of a price band.

After the band is issued, companies have 3 weeks to meet with the Board

to give their views, and the Board issues its final norm price within 2

weeks thereafter.

For Federal gas (and if appropriate for other commodities), the

Department of the Interior would establish a Pricing Board to determine

prices similar to the process used by Norway. However, we would

simplify the process wherever possible, such as eliminating the aspect

of retroactive price adjustments.

Send comments on these two alternative methods to the address

contained in the ADDRESSES section.

Dated: April 17, 1997.

Cynthia L. Quarterman,

Director, Minerals Management Service.

[FR Doc. 97-10386 Filed 4-21-97; 8:45 am]

BILLING CODE 4310-MR-P