Accounting Relief for Marginal Properties

SUMMARY: The Minerals Management Service (MMS) is proposing new

regulations implementing recently enacted legislation for Federal oil

and gas leases. The new regulations would explain to lessees and their

designees how to obtain royalty prepayment and accounting and auditing

relief for Federal marginal properties.

DATES: MMS must receive all comments on or before March 22, 1999. We

will begin reviewing comments then and may not fully consider comments

we receive after March 22, 1999.

ADDRESSES: Submit your written comments to David S. Guzy, Chief, Rules

and Publications Staff, Minerals Management Service, Royalty Management

Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225. Courier

address is Building 85, Denver Federal Center, Denver, Colorado 80225.

E-mail address is RMP.[email protected].

MMS will publish a separate notice in the Federal Register

indicating dates and locations of public hearings regarding this

proposed rulemaking.

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

Publications Staff, Minerals Management Service, Royalty Management

Program, telephone (303) 231-3432; fax (303) 231-3385; e-mail

David__G[email protected].

SUPPLEMENTARY INFORMATION: The principal authors of this proposed rule

are Nick E. Fadely of the Royalty Management Program, MMS, and Sarah L.

Inderbitzin of the Office of the Solicitor, Department of the Interior.

I. Introduction

On August 13, 1996, the President signed into law the Federal Oil

and Gas Royalty Simplification and Fairness Act (RSFA), Pub. L. 104-

185, as corrected by Pub. L. 104-200. RSFA amends the Federal Oil and

Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C. 1711 et seq., in

many respects. Section 7 of RSFA allows MMS and the State concerned

(defined under RSFA as ``a State which receives a portion of royalties

or other payments under the mineral leasing laws from [a Federal

onshore or OCS oil and gas lease],'' 30 U.S.C. 1701(31)) to provide

royalty prepayment and regulatory relief for marginal properties for

Federal onshore and Outer Continental Shelf (OCS) oil and gas leases.

30 U.S.C. 1727. The stated purpose of granting relief to marginal

properties under RSFA is to promote production, reduce administrative

costs, and increase net receipts to the United States and the States.

30 U.S.C. 1727(a).

Under RSFA, the State concerned must consent to any prepayment or

auditing relief. 30 U.S.C. 1727(a). In addition, MMS and the State

concerned must jointly determine, on a case-by-case basis, the amount

of marginal production that may be subject to either a prepayment of

royalty or accounting and auditing relief. Id. Although RSFA does not

define marginal properties for purposes of Section 7, it does define

marginal properties under section 6(d)(4), 30 U.S.C. 1726(d)(4), as a

``lease that produces on average the combined equivalent of less than

15 barrels of oil equivalents per well per day or 90 thousand cubic

feet of gas per well per day, or a combination thereof.'' In addition,

under section 6(d)(4), the production level is calculated ``by dividing

the average daily production of crude oil and natural gas from

producing wells on such leases by the number of such wells, unless the

Secretary, together with the State concerned, determine that a

different production is more appropriate.''

RSFA also requires MMS and the States to ``provide accounting,

reporting and auditing relief'' for marginal properties. 30 U.S.C.

1727(c). However, such relief may only be granted in a State that

concurs with this relief. Id.

In response to the RSFA section 7 amendments, MMS conducted three

workshops to receive input from a wide variety of constituent groups to

develop the proposed rule. The workshops were held at MMS offices in

Denver, Colorado, on October 31, 1996, January 23, 1997, and November

5, 1997. Representatives from several Federal and State government

organizations participated along with industry trade organizations

representing both small and large Federal oil and gas lessees. The

input received during these workshops was instrumental in developing

the proposed rule.

The proposed rule implements sections 7(a) and 7(c) of RSFA. 30

U.S.C. 1727(a) and 1727(c). Although section 7 of RSFA provides two

alternatives for marginal properties, one for prepayment of royalty

under section 7(b), and another for accounting and auditing relief

under section 7(c), this proposed rule only implements the general

provisions for marginal properties and the accounting and auditing

relief provisions. MMS will publish a proposed rule covering prepayment

of royalty under section 7(b) of RSFA at a later date.

The Department of the Interior's (Department) practice is to give

the public an opportunity to participate in the rulemaking process. You

may send written comments to the location cited in the ADDRESSES

section of this preamble. We will post public comments after the

comment period closes on the Internet at http://www.rmp.mms.gov or you

may contact David S. Guzy, Chief, Rules and Publications Staff, MMS,

telephone (303) 231-3432; fax (303) 231-3385; e-mail

David__G[email protected].

II. Section-by-Section Analysis

30 CFR Part 204--Alternatives For Marginal Properties

MMS proposes to include a new part 204 in its regulations. This

part would implement the new requirements of section 7 of RSFA.

However, as noted above, the substantive rules for prepayment of

royalty are not included in this proposed rule. We would reserve

subpart B for a later rulemaking.

Part 204, Subpart A--General Provisions

This subpart would provide general requirements for both prepayment

of royalty under section 7(b) of RSFA and accounting and auditing

relief under section 7(c) of RSFA. However, as noted above, the

substantive rules for prepayment of royalty are not included in this

proposed rule. We would reserve subpart B for a later rulemaking.

Section 204.1 What is the Purpose of this Part?

This part would explain how a lessee or its designee, of a Federal

onshore or OCS lease may obtain prepayment or accounting and auditing

relief for certain marginal properties. The prepayment portions of this

rule would be proposed in a later rulemaking. Under RSFA, the lessee's

``designee'' is a person the lessee designates in writing to MMS to

report and pay royalties on its behalf. RSFA section 6(g) (codified as

corrected at 30 U.S.C. 1712(a)). MMS has addressed the procedure to

designate a designee in another rulemaking. 62 FR 42062 (1997)

(Codified at 30 CFR 218.52).

Section 204.2 Definitions

This section would define terms applicable to this part.

[[Page 3361]]

``Agreement'' would mean a federally approved communitization

agreement or unit participating area.

``Barrels of oil equivalents'' would mean the ``combined equivalent

production'' of oil and gas stated in barrels of oil. Under this

definition, each barrel of oil production would be equal to one barrel

of oil equivalents. Each six thousand cubic feet of gas production at

standard temperature and pressure also would be equal to one barrel of

oil equivalents. This definition also is consistent with the use of

this term in the definition of ``marginal properties'' under section

6(d)(4) of RSFA.

``Base period'' would mean the 12-month period from October 1

through September 30 immediately preceding the applicable calendar year

in which you take or request marginal property relief. The term ``base

period'' is used throughout the rule to calculate whether a property

qualifies for certain relief during the current calendar year. For

example, if you want to qualify for relief beginning in calendar year

2000, the base period for that calendar year would be from October 1,

1998, through September 30, 1999.

``Combined equivalent production'' would mean the total of all oil

and gas production for the marginal property, stated in barrels of oil

equivalents. This definition is consistent with the use of that term in

the definition of ``marginal properties'' under section 6(d)(4) of RSFA

discussed in the introduction.

``Designee'' would mean the person designated by a lessee under 30

CFR 218.52 to make all or part of the royalty or other payments due on

a lease on the lessee's behalf. This definition is essentially the same

as that under RSFA Sec. 2(1), FOGRMA, 30 U.S.C. 1702(24). Accordingly,

the definition would cite the rule implementing the requirements of

RSFA Sec. 6(g), FOGRMA Sec. 102(a), 30 U.S.C. 1712(a), which allows

lessees to designate another person to pay royalties on their behalf by

written notice filed with MMS.

``Producing wells'' would mean only those producing oil or gas

wells that contribute to the sum of barrels of oil equivalents used in

the calculation under Sec. 204.004(c) of this part. This definition

would not include injection and water wells.

``State concerned'' (State) would mean the State which receives a

statutorily prescribed portion of the royalties from a Federal onshore

or OCS lease. For example, this includes States that receive revenues

from onshore leasing under the Mineral Leasing Act, 30 U.S.C. 191, or

from the OCS under 43 U.S.C. 1337(g). This definition is the same as

that under RSFA, 30 U.S.C. 1701(31).

Section 204.3 What Alternatives Are Available for Marginal Properties?

This section would explain what alternatives are available to a

lessee or its designee if they have production from a marginal

property.

Paragraph (a) would explain the prepayment of royalty alternative.

For this alternative, MMS and the State may allow you to make a lump-

sum advance payment of royalties instead of monthly royalty payments

for the remainder of the lease term. Although MMS is not including the

RSFA section 7(b) prepayment of royalty requirements in this proposed

rulemaking, it will do so at a later date under subpart B. However, the

general requirements in subpart A would apply to the prepayment of

royalty alternative under subpart B when that subpart is published.

Paragraph (b) would explain the accounting and auditing relief

alternative. For this alternative, MMS and the State may allow various

accounting and auditing relief options intended to encourage you to

continue to produce and develop your marginal property. The

requirements for taking accounting and auditing relief would be under

subpart C.

Section 204.4 What Is a Marginal Property Under This Part?

This section would explain what properties qualify as ``marginal''

under this part. As explained further below, property does not just

mean a lease for purposes of this rule.

Only properties that qualify under this section could obtain

royalty prepayment or accounting and auditing relief under this part.

However, you must meet additional qualifications under Secs. 204.203,

204.204, and 204.205 to obtain some of the accounting and auditing

relief options.

Paragraph (a) would explain what kinds of properties may qualify as

``marginal'' under this part. To qualify as a marginal property

eligible for royalty prepayment or accounting and auditing relief under

this part, your production must be from, or attributable to, a Federal

onshore or OCS lease. Indian leases would not be eligible for the

marginal property alternatives under this part even though production

from a qualifying marginal property may be attributable to an Indian

lease.

Under paragraph (a)(1), if your lease is not in an Agreement, then

your entire lease is a property that must qualify as a marginal

property under paragraph (b) of this section. In other words, these are

``stand alone'' Federal leases and the entire lease would have to

qualify under this part.

Under paragraph (a)(2), if all or a portion of your lease is in one

Agreement, then the entire Agreement must qualify as a marginal

property under paragraph (b) of this section. For example, even if

other leases in the participating area are not Federal leases, you must

use the production attributable to those leases, as well as your lease,

in order to make the calculation under paragraphs (b) and (c) of this

section to determine whether the Agreement meets the production level

limits under paragraph (b) of this section. If your Agreement does

qualify, then only the production attributable to your lease may be

separately eligible for relief under this part. However, any production

from your lease that is not in the Agreement also may be eligible for

relief under paragraph (a)(4) of this section.

Under paragraph (a)(3), if all or a portion of your lease is in

more than one Agreement, then each Agreement must qualify separately as

a marginal property under paragraph (b) of this section. In addition,

for each Agreement that qualifies, only the production attributable to

your lease would be eligible for relief under this part. For example,

if 50 percent of your lease is included in Agreement ``A'', and 50

percent of your lease is included in Agreement ``B'', then Agreement

``A'' must qualify as marginal in order for the 50 percent of your

lease included in Agreement ``A'' to be eligible for relief. Likewise,

in order for the 50 percent of your lease included in Agreement ``B''

to be eligible for relief, Agreement ``B'' must qualify as marginal.

Under paragraph (a)(4), if a portion of your lease is in an

Agreement and you have production from the portion of the lease that is

not in the Agreement, then the portion of the lease that is not in the

Agreement must qualify separately as a marginal property under

paragraph (b) of this section. For example, if 50 percent of your lease

is included in an Agreement and 50 percent is not, if the 50 percent

that is not included in the Agreement qualifies as marginal under

paragraph (b) of this section, then that 50 percent may be eligible for

relief under this part. This would be true even if the 50 percent that

is included in the Agreement does not qualify as marginal under this

part.

Paragraph (b) would provide that to qualify as a marginal property

for a calendar year, the combined equivalent production of the property

during the base period must equal an average daily well production of

less than 15 barrels

[[Page 3362]]

of oil equivalents per well per day calculated under paragraph (c) of

this section.

As stated above, section 7 of RSFA provides for two alternatives

without specifically defining a marginal property under that section.

However, subsection 6(d)(4) of RSFA defines a marginal property as a

lease which produces on average the combined equivalent of less than 15

barrels of oil per well per day or 90 thousand cubic feet of gas per

well per day.

Several participants at the October 31, 1996, workshop for marginal

properties stated that MMS should use State incentive program

production levels to qualify as a marginal property. However, upon

review of the various State incentive programs and the unique nature of

each, MMS determined that using State incentive program production

levels would require MMS to develop different production levels for

each State with incentive programs, for States without incentive

programs, and for offshore production if it adopted this approach.

Therefore, MMS determined that using State incentive program production

levels would be too onerous for use under this part.

At the January 23, 1997, workshop for marginal properties, several

participants stated that MMS should consider using the RSFA production

levels for marginal properties under section 6(d)(4) to determine

marginal properties under this part. Other participants stated that

using RSFA section 6(d)(4) production levels would qualify too many

properties as marginal, and result in an unmanageable workload for MMS

and States. However, MMS considers using the production levels set

forth in RSFA less onerous than varying production levels based on

where a lease is located as would result if MMS used State incentive

program production for qualification purposes. Moreover, the States and

industry participated in the legislative process which culminated in

the production levels under section 6(d)(4) of RSFA.

Thus, in order to be consistent with other sections of RSFA, as

well as to apply a consistent standard nationwide, MMS proposes to use

the production levels in the definition of ``marginal properties'' in

section 6(d)(4), together with other requirements, as a basis for what

amount of marginal production qualifies a property as ``marginal''

under this part. MMS shares the concerns expressed in the workshop

about the administrative burden for it and States under these proposed

production levels and invites specific comments concerning those

levels. Because RSFA section 7(a) requires that MMS and the State

``jointly determine, on a case-by-case basis, the amount of what

marginal production from a lease or leases or well or wells, or parts

thereof'' may obtain royalty prepayment or accounting and auditing

relief, MMS specifically requests that States comment on these

production levels. Any State that does not concur with the production

levels MMS ultimately adopts under a final rule may decline to offer

alternatives under Sec. 204.214 of this part. MMS also invites comments

on whether separate levels should be established for offshore leases.

Paragraph (c) would explain how to calculate the production levels

for your property to determine whether it qualifies as ``marginal''

under paragraph (b). This calculation would also be based, in part, on

the definition of marginal properties under RSFA section (6)(d)(4). To

determine the average daily well production for a property, you would

divide the sum of the barrels of oil equivalents for all producing

wells on the property by the sum of the number of days each of those

wells actually produced during the base period. If the result obtained

is less than 15 barrels of oil equivalents per well per day, your

property would qualify as a marginal property under this part.

Paragraph (c) also would provide that if the property is an Agreement,

this calculation would have to include all wells in the Agreement even

if they are not on a Federal onshore or OCS lease.

Only producing oil and/or gas wells that contribute to the sum of

barrels of oil equivalents are used in the calculation. Injection and

water wells are not used in the calculation. For example, assume the

marginal property has 5 wells. Well #1 produced 250 days in the base

period, Well #2 produced 300 days, Well #3 produced 275 days, Well #4

produced 325 days, and Well #5 produced 350 days in the base period.

This equals 1,500 production days. Assume also that 15,000 barrels of

oil equivalents were produced from these five wells in the base period.

This equals 10 barrels per well per day (15,000 barrels/1,500 days),

and the property would qualify as a marginal property.

Section 204.5 What Statutory Requirements Must I Meet To Obtain

Royalty Prepayment or Accounting and Auditing Relief?

Paragraph (a) would state the three statutory conditions under RSFA

that MMS and the State concerned will consider prior to approving any

marginal property alternative under this part. Thus, the rule would

provide that MMS and the State may allow royalty prepayment or

accounting and auditing relief for your marginal property under this

part if MMS and the State jointly determine that the prepayment or

relief is in the best interests of the Federal Government and the State

to: (1) promote production; (2) reduce administrative costs; and (3)

increase net receipts to the United States and the State. 30 U.S.C.

1726(a).

Paragraph (b) would state that MMS and the State may discontinue

any royalty prepayment or accounting and auditing relief options

granted for your marginal property under this part if MMS and the State

jointly determine that the prepayment or relief option is no longer in

the best interests of the Federal Government and the State to

accomplish the objectives identified in paragraph (a).

Section 204.6 May I Appeal if MMS Denies My Request for Prepayment or

Accounting and Auditing Relief?

This section would explain how you may appeal if MMS denies your

request for prepayment or accounting and auditing relief. If MMS denies

your request for prepayment or accounting and auditing relief under

this part because the State denied your request, you could not appeal

MMS's decision under 30 CFR part 290 or 43 CFR part 4, subpart J. This

is because RSFA section 7(a) provides the State with unconditional veto

authority over such requests. Accordingly, MMS believes that it does

not have authority, and Congress did not intend for it, to change a

State's decision through the administrative appeal process. Thus, you

only could challenge a State's denial of your request directly in

Federal district court. However, under paragraph (b), you could appeal

any other MMS action on your request under 30 CFR part 290 or 43 CFR

part 4, subpart J.

Subpart B--Prepayment of Royalty [Reserved]

Subpart C--Accounting and Auditing Relief

Section 204.200 What Is the Purpose of This Subpart?

This subpart would explain how a lessee or its designee may obtain

the accounting and auditing relief required under section 117(c) of

FOGRMA for production from a marginal property.

Section 204.201 Who May Obtain Accounting and Auditing Relief Under

This Subpart?

Paragraph (a) would explain that you may obtain accounting and

auditing relief under this subpart if you are a

[[Page 3363]]

lessee or its designee for a Federal lease with production from a

property that qualifies as a marginal property under Sec. 204.4 of this

part.

For some relief options, greater forms of relief would be available

for marginal properties that produce less than other marginal

properties. Therefore, paragraph (b) would explain that you also must

meet any additional requirements for specific types of relief under

this subpart. In addition, all options would be subject to a State

disallowing that relief option under Sec. 204.214 of this subpart.

Under paragraph (c), you could only request and obtain accounting

and auditing relief for your individual fractional interest in a

marginal property. However, the rule would not require all lessees or

designees in a marginal property to seek relief. It also would not

require all lessees or designees in a marginal property to seek the

same form of relief.

MMS believes that this approach implements Congress' intent under

RSFA section 7(c) of providing accounting and auditing relief for

marginal properties to encourage lessees or their designees to produce

and develop properties. Moreover, requiring all interest owners of a

marginal property to unanimously seek one agreed-upon form of relief

would be an unnecessary burden.

Section 204.202 What Accounting and Auditing Relief Options Are

Available to Me?

This section would show you the six accounting and auditing relief

options you may take for properties that qualify as marginal under

Sec. 204.4 and where in this subpart you can obtain more information.

Section 204.203 What Is the Cumulative Royalty Reports and Payments

Relief Option?

This section would explain the ``cumulative royalty reports and

payments relief option.'' Under this relief option, you would be

allowed to submit royalty reports and payments less often than monthly.

This relief option would reduce administrative costs by decreasing the

total number of reports and payments you must submit and MMS must

process.

Paragraph (a) would explain how to determine whether you may submit

royalty reports and payments less often than monthly based on the

production levels from your lease during the base period. Less

production would allow you to report and pay your royalties to MMS less

often. Thus, for a qualifying marginal property, you could submit your

royalty reports and payments as follows:

(1) First, you would multiply the current royalty rate for each

Federal lease in the marginal property by the combined equivalent

production of oil and gas from or allocable to each lease during the

base period;

(2) You would total the volumes calculated under subparagraph

(a)(1) of this section; and

(3) You would determine your level of relief according to the

following table:

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

If the total volume calculated under paragraph (a)(2) of this

section is Then you may report and pay your royalties

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

(i) 125 or fewer barrels of oil equivalents...................... Annually, Semi-annually, or Quarterly.

(ii) More than 125, but not more than 250 barrels of oil Semi-annually or Quarterly.

equivalents.

(iii) More than 250, but not more than 500 barrels of oil Quarterly.

equivalents.

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

For example, assume the qualifying marginal property was an

Agreement consisting of three leases each with combined equivalent

production of 1,000 barrels of oil during the base period, and your

lease ``A'' was Federal with a \1/8\ royalty rate, and lease ``B'' was

Federal with a \1/8\ royalty rate, and lease ``C'' was a fee lease.

Under paragraph (a)(1), if you wanted relief under this option, you

would multiply 1,000 times \1/8\ for leases ``A'' and ``B'', which

equals 125 barrels each. Under paragraph (a)(2), you would add 125 plus

125 for a total of 250 barrels of oil. The 250 barrels is the number

you would then use to determine what level of relief you could take

under paragraph (a)(3). In this example, you would be eligible to

report and pay your royalties semi-annually or quarterly.

Paragraph (b) would explain that you must notify MMS under

Sec. 204.210(a) before taking relief under this option. However, you

would not be required to submit a processing fee under this option.

Paragraph (c) would explain that you must submit your report and

payment by the end of the month following the end of the applicable

quarterly, semi-annual, or annual reporting period. This paragraph

would also explain that you must report one line of cumulative royalty

information on the Report of Sales and Royalty Remittance, Form MMS-

2014, for the reporting period, the same as you would on a monthly

basis. In addition, you would be required to use the last sales month

of the reporting period to report the royalty information for that

entire period.

Paragraph (d) would explain that if you do not pay your royalty by

the date due in paragraph (c)(1) of this section, you would owe late

payment interest determined under part 218 of this title from the date

your payment was due under this section until the date MMS receives it.

For example, if you notify MMS under Sec. 204.210(a) that you qualify

to report and pay royalties quarterly, and MMS receives your payment on

May 15 for the first calendar quarter, instead of April 30, as required

under paragraph (c) of this section, you will owe late payment interest

from May 1 through May 15 on that late payment.

Under paragraph (e), if you qualify for relief under paragraph (a)

of this section, but you take more relief than you are entitled to

under that paragraph, you would owe late payment interest determined

under part 218 of this title from the date your payment was due under

this section until the date MMS receives it. For example, if you

qualify to report and pay royalties quarterly, and, instead you report

and pay semi-annually, you would owe late payment interest from the

date your quarterly payment was due until MMS receives your semi-annual

payment. MMS also will require you to amend your Form MMS-2014 to

reflect the proper reporting frequency. MMS will then assess you for

any resulting late payment interest.

Paragraph (f) would provide that you must report allowances on the

same quarterly, semi-annual, or annual basis as the royalties for your

marginal property on Form MMS-2014. This is necessary for MMS to

properly associate the allowances you are deducting on Form MMS-2014

with the royalties that you pay.

Paragraph (g) would explain when during the calendar year you must

report and pay royalties. Thus, under this relief option:

(1) Quarterly reporting periods would begin on the first day of

January, April, July, or October;

(2) Semi-annual reporting periods would begin on the first day of

January or July;

[[Page 3364]]

(3) Annual reporting periods would begin on the first day of

January.

Paragraph (h) would refer you to MMS's Marginal Property Guidelines

for additional reporting instructions for this relief option. These

guidelines are being developed.

Section 204.204 What is the Net Adjustment Reporting Relief Option?

This section would explain the ``net adjustment reporting relief

option.'' Under this relief option, you could adjust previously

reported royalty lines to MMS as a one-line net entry on the Form MMS-

2014, instead of the required two-line adjustment process. Under the

two-line adjustment process, you must reverse the original report line

and report a corrected line on Form MMS-2014. MMS proposes to allow

this relief option based on the volume of production from the marginal

property. This relief option would reduce administrative costs by

decreasing the total number of lines you must report and MMS must

process.

Paragraph (a) would explain how to determine whether your

qualifying marginal property is eligible for relief under this option

as follows:

(1) First, you would multiply the current royalty rate for each

Federal lease in the marginal property by the combined equivalent

production of oil and gas from or attributable to each lease during the

base period;

(2) You would total the volumes calculated under subparagraph

(a)(1) of this section;

(3) If the total volume you calculated under paragraph (a)(2) is

equal to or less than 2,500 barrels of oil equivalents, then your

property would be eligible for relief under this option. Using the same

example as that under Sec. 204.203(a), where the total volume

calculated for the qualifying marginal property was 250 barrels of oil

equivalents, your property would be eligible for this relief option.

Paragraph (b) would explain that you must notify MMS under

Sec. 204.210(a) before taking relief under this option. However, you

would not be required to submit a processing fee under this option.

Under paragraph (c), you could not net adjustments for royalties

due with adjustments for allowances on Form MMS-2014. Thus, you would

have to report an adjustment to a previously reported royalty due line

as a one-line net entry and report any corresponding adjustment to your

previously reported allowance line as a separate one-line net entry.

For example, if you originally reported $1,000 royalty due with an

allowance of $100 and needed to adjust them to $1,200 and $120,

respectively, you would report two separate adjustment lines--one line

reporting additional royalty due of $200 and another line claiming an

additional allowance of $20.

Paragraph (d) would refer you to MMS's Marginal Property Guidelines

for additional reporting instructions for this relief option.

Section 204.205 What Is the Rolled-up Reporting Relief Option?

This section would explain the ``rolled-up reporting relief

option.'' Under this relief option, you could report all selling

arrangements for a revenue source to MMS under a single selling

arrangement line on Form MMS-2014. MMS proposes to allow this relief

option based on the volume of production from the marginal property.

This relief option would reduce administrative costs by decreasing the

total number of lines you must report and MMS must process. For

example, if you currently report royalties under 3 separate selling

arrangement lines for a lease and revenue source, you could combine

them into a single report line under any one of your existing selling

arrangements.

Paragraph (a) would explain how to determine whether your

qualifying marginal property is eligible for relief under this option

as follows:

(1) First, you would multiply the current royalty rate for each

Federal lease in the marginal property by the combined equivalent

production of oil and gas from or attributable to each lease during the

base period;

(2) You would total the volumes calculated under paragraph (a)(1)

of this section;

(3) If the total volume you calculated under paragraph (a)(2) is

equal to or less than 1,000 barrels of oil equivalents, then your

property would be eligible for relief under this option. Using the same

example as that under Sec. 204.203(a), where the total volume

calculated for the qualifying marginal property was 250 barrels of oil

equivalents, your property would be eligible for this relief option.

Paragraph (b) would explain that you must notify MMS under

Sec. 204.210(a) before taking relief under this option. However, you

would not be required to submit a processing fee under this option.

Paragraph (c) would refer you to MMS's Marginal Property Guidelines

for additional reporting instructions for this relief option.

Section 204.206 What Is the Alternate Valuation Relief Option?

This section would explain the ``alternate valuation relief

option.'' Under this relief option, you could request to report and pay

royalties using a valuation method other than that required under 30

CFR part 206. MMS anticipates that you would propose a simplified

valuation method because it would reduce administrative costs.

Paragraph (a) would state that any alternate valuation method that

you propose:

(1) Must be readily determinable and certain; and

(2) Must approximate royalties payable under the valuation

regulations in 30 CFR part 206.

An example that MMS and the State might find acceptable is when the

marginal property is located in an area with an active spot market that

has reliable, published index prices. The use of the index price along

with a reasonably based location differential could be acceptable based

on the particular circumstances of the property if MMS's economic

analysis showed that royalties paid using the location-adjusted index

price would remain relatively unchanged from those paid under 30 CFR

part 206.

Paragraph (b) would explain that you must obtain approval from MMS

and the State under Sec. 204.210(b) before taking alternate valuation

relief. Thus, unlike relief options provided in Secs. 204.203, 204.204,

and 204.205 above, you may not merely notify MMS that you are taking

this relief option. This paragraph would also explain that you must

submit a processing fee under this option as provided for in

Sec. 204.210(b)(3).

Paragraph (c) would explain that if MMS and the State approve your

request, the valuation method you requested would be the value for

royalty purposes for production from or attributable to your lease

interest in the marginal property. Thus, you would no longer value your

production under 30 CFR part 206 and any underpayment would be

determined based on the approved alternative valuation method.

Paragraph (d) would refer you to MMS's Marginal Property Guidelines

for reporting instructions for this relief option.

Section 204.207 What Is the Audit Relief Option?

This section would explain the ``audit relief option.'' Under this

relief option, you could request a reduced royalty audit burden.

However, MMS would not consider any request that eliminates

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MMS's or the State's right to audit. The reduced audit burden would

reduce the administrative costs associated with audits.

(a) Audit relief may include:

(1) Audits of limited scope. For example, MMS and the State may

accept, under certain conditions, that an audit of a particular

marginal property would not occur more frequently than once in every 6-

year period unless previous audits have resulted in royalty

underpayments;

(2) Coordinated royalty and severance tax audits. For example, MMS

and the State may accept, under certain conditions, that the State will

perform audits of royalty records for a marginal property at the same

time as the State's audit of severance taxes;

(3) Reliance by MMS on independent certified audits. For example,

the MMS and the State, under certain conditions may accept an

affirmative statement in the audit report of the company's independent

certified auditors that they have reviewed the company's royalty

accounting practices with respect to marginal properties and found them

to be in compliance with Federal lease terms, laws, and regulations.

MMS may retain the right to review the support for such certification;

(4) Any other audit relief which may be appropriate. MMS and the

State will determine on a case by case basis whether the audit relief

you request is appropriate.

Paragraph (b) would explain that you must obtain prior approval

from MMS and the State under Sec. 204.210(b) before receiving audit

relief. Thus, unlike relief options provided in Secs. 204.203, 204.204,

and 204.205 above, you could not merely notify MMS that you are taking

this relief option. This paragraph would also explain that you must

submit a processing fee under this option as provided for in

Sec. 204.210(b)(3).

Paragraph (c) would refer you to MMS's Marginal Property Guidelines

for reporting instructions for this relief option.

Section 204.208 What Is the Other Relief Option?

This section would explain the ``other relief option.'' Under this

relief option, you could request any type of accounting and auditing

relief that is appropriate for your marginal property, provided it is

not specifically prohibited under Sec. 204.209 of this subpart. MMS

proposes this ``other relief option'' because it recognizes that no one

kind of relief is appropriate for every marginal property. MMS and the

State would determine on a case by case basis whether the other relief

option you request is appropriate.

Paragraph (a) would explain that you must obtain prior approval

from MMS and the State under Sec. 204.210(b) before taking relief under

this option. Thus, unlike relief options provided in Secs. 204.203,

204.204, and 204.205 above, you could not merely notify MMS that you

are taking this relief option. This paragraph would also explain that

you must submit a processing fee under this option as provided for in

Sec. 204.210(b)(3).

Paragraph (b) would refer you to MMS's Marginal Property Guidelines

for reporting instructions for this relief option.

Section 204.209 What Accounting and Auditing Relief Will MMS Not

Allow?

This section would explain that MMS will not approve your request

for accounting and auditing relief under this subpart if your request:

(a) Prohibits MMS or the State from conducting any form of audit.

MMS developed an audit strategy to assure compliance with laws,

regulations, and lease terms. To administer this strategy, MMS and the

States must audit a sample of leases consisting of a wide range of

conditions. Therefore, MMS proposes to deny any relief requested under

this subpart that prevents it or a State from conducting an audit of a

marginal property. However, as provided in Sec. 204.207, we would

consider applications that provide for reduced or streamlined audit

coverage under appropriate circumstances;

(b) Permanently relieves you from making future royalty reports or

payments. MMS believes that RSFA's requirement that any relief option

must increase net receipts to the United States and the States

prohibits this as a relief option. Applicants who wish to alter their

monthly royalty payments should explore the cumulative royalty report

and payment relief option under Sec. 204.203 or the prepayment of

royalty alternative under subpart B of this part;

(c) Provides for less frequent royalty reports and payments than

annually. Annual royalty information is necessary to monitor the

continuing eligibility of marginal properties;

(d) Provides for you to submit royalty reports and payments at

separate times. MMS must disburse the royalty revenues it receives on a

timely basis. Therefore, the royalty payment and the royalty report

must be submitted together under any relief proposal;

(e) Impairs MMS's ability to properly or efficiently account for or

disburse royalties. MMS must have sufficient royalty information to

effect disbursement to the States and other revenue recipients. Thus,

it would reject any proposal that lacks that information;

(f) Requests relief for a lease under which the Federal Government

takes its royalties in-kind. Because the royalty obligation is

satisfied by the Federal Government taking its royalty in-kind,

accounting or auditing relief to the lessee or its designee is not

necessary;

(g) Alters production reporting requirements. Although MMS proposes

to allow fractional interest owners of qualifying marginal properties

to seek individual relief under this subpart, we believe production

information must be submitted on a monthly basis for the entire

marginal property. This is necessary so that MMS and other agencies can

continue to monitor production from the property;

(h) Alters lease operation or safety requirements. MMS does not

believe RSFA contemplated relief of this nature;

(i) Conflicts with rent, minimum royalty, or lease requirements.

The lessee or its designee must satisfy the rent, minimum royalty, and

other lease obligations regardless of any marginal property relief.

Therefore, any relief option which would reduce or eliminate the lease

obligations will not be allowed;

(j) Requests relief for a marginal property located in a State that

has determined in advance that it will not allow such relief under

Sec. 204.214 of this subpart.

Section 204.210 How Do I Obtain Accounting and Auditing Relief?

This section would explain how to notify MMS that you are taking,

or request from MMS authorization to take, the relief options under

this subpart.

Paragraph (a) would explain that to take accounting relief under

Secs. 204.203, 204.204, and 204.205, you must notify MMS in writing

prior to the first day of the sales month for which you begin taking

your relief. MMS believes that the notification required under

paragraph (a) of this section allows MMS and the State to jointly

determine whether to grant relief on a ``case-by-case'' basis, as

required under RSFA section 7(a), for three reasons.

First, the rule itself would set forth which ``cases'' are eligible

for relief under Secs. 204.203, 204.204, and 204.205. Second, States

have the opportunity to comment on the proposed eligibility

requirements in this proposed rulemaking, and MMS will work with the

States to develop the eligibility requirements in the final rule.

Finally, States who disagree with the eligibility requirements may

decide not to grant

[[Page 3366]]

any relief under Sec. 204.214 of this subpart.

MMS requires notification prior to taking relief under paragraph

(a) of this section in order to enter the information into MMS's

accounting system. This will prevent MMS's automated systems from

generating spurious exceptions on marginal properties for which relief

is being taken.

MMS would like comments on whether the relief options under

Secs. 204.203, 204.204, and 204.205 should be automatic, i.e. not

require prior approval based on production levels, as proposed in the

notification requirement under paragraph (a) of this section.

Paragraph (a)(1) would list the information that must be supplied

in the notification.

Paragraph (a)(2) would explain that you may file a single

notification for multiple marginal properties if you are taking the

same relief option with the same effective date for all the properties.

As an example, assume that a lessee or its designee's marginal property

``A'' qualifies under the Sec. 204.203 ``cumulative royalty reports and

payments option'' for semi-annual reporting and payment, and its

marginal property ``B'' qualifies under the Sec. 204.203 ``cumulative

royalty reports and payments option'' for annual reporting and payment

as well as the ``net adjustment reporting relief option'' under

Sec. 204.204. The lessee or its designee could submit a single notice

to MMS that it is taking the ``cumulative royalty reports and payments

option'' for both properties ``A'' and ``B'' if the effective date for

the relief were the same for both properties. However, the lessee or

its designee would have to submit a separate notice to MMS that it is

taking the ``net adjustment reporting relief option'' for property

``B''.

Paragraph (b) would explain that if you wish to obtain accounting

or auditing relief under Secs. 204.206, 204.207, and 204.208, you must

file a written request for relief with MMS. Accordingly, you must

obtain MMS's prior approval before taking relief under these sections.

MMS believes that the requests required under Sec. 204.210(b) allow MMS

and the State to jointly determine whether to grant relief on a ``case-

by-case'' basis, as required under RSFA, for four reasons.

First, MMS and the State, if applicable, would consider each

request to determine whether you are eligible for the relief options

under Secs. 204.206, 204.207, and 204.208. Second, States have the

opportunity to comment on the proposed request requirements in this

proposed rulemaking, and MMS will work with the States to develop the

request requirements in the final rule. Third, under the proposed

rulemaking, MMS and the State, if applicable, would jointly determine

whether a property is eligible for the relief options under

Secs. 204.206, 204.207, and 204.208. Finally, States who disagree with

the request requirements or relief option(s) may decide not to grant

any relief under Sec. 204.214 of this subpart.

Paragraph (b)(1) would list the information that must be supplied

in your request.

Under paragraph (b)(2) you could file a single request for multiple

marginal properties if you are requesting the same relief for all

properties. As an example, assume that a lessee or its designee's

marginal property ``A'' qualifies for the ``alternate valuation relief

option'' under Sec. 204.206, and marginal property ``B'' qualifies for

the ``alternate valuation relief option'' under Sec. 204.206 as well as

the ``audit relief option'' under Sec. 204.207. The lessee or its

designee could submit a single request to MMS asking to take the

``alternate valuation relief option'' for both properties ``A'' and

``B''. However, the lessee or its designee would have to submit a

separate request to MMS to ask to take the ``audit relief option'' for

property ``B''.

Paragraph (b)(3) would explain that you must remit a processing fee

in the amount of $50 for requests for accounting or auditing relief

under Secs. 204.206, 204.207, and 204.208. MMS is recovering its costs

under the Independent Offices Appropriations Act of 1952, 31 U.S.C.

9701 et seq. (IOAA), for Federal offshore leases, and the Federal Land

Policy and Management Act of 1976, 43 U.S.C. 1701 (FLPMA), for Federal

onshore leases. Thus, as part of this proposed rulemaking, we analyzed

the proposed marginal property relief's cost recovery fees for

reasonableness according to the factors in FLPMA Section 304(b).

Although the IOAA does not contain the same ``reasonableness factors''

as FLPMA Section 304(b), the factors MMS considered under the IOAA to

determine reasonable fees led it to conclude that the fees for offshore

leases should be the same as that for onshore leases.

The ``reasonableness factors'' which FLPMA requires to be

considered are: (a) actual costs (exclusive of management overhead);

(b) the monetary value of the rights or privileges sought by the

applicant; (c) the efficiency to the Government processing involved;

(d) that portion of the cost incurred for the benefit of the general

public interest rather than for the exclusive benefit of the applicant;

(e) the public service provided; and (f) other factors relevant to

determining the reasonableness of the costs.

For marginal property relief taken or requested under Sec. 204.210,

the method used to evaluate the factors is twofold. First, actual costs

are estimated and each of the remaining FLPMA reasonableness factors

(b) through (f) is evaluated individually to decide whether the factor

might reasonably lead to an adjustment in actual costs. If so, that

factor is then weighed against the remaining factors to determine

whether another factor might reasonably increase, decrease, or

eliminate the contemplated reduction. On the basis of this twofold

analysis, MMS determined what final fee is reasonable for the marginal

property relief sought. MMS cannot recover an amount greater than its

actual costs, so any final adjustment cannot result in a fee greater

than actual costs.

For processing a notice that a lessee or its designee is taking

marginal property relief under Sec. 204.210(a), we concluded that we

would not charge fees because it is exempted from cost recovery under

the Department of the Interior Manual (DM). Under the Departmental

Manual, agencies may exempt activities from cost recovery if ``[t]he

incremental cost of collecting the charges would be an unduly large

part of the receipts from the activity.'' 346 DM 1.2 C (2). Based on

our analysis, we estimated that our actual costs for processing these

notices would be less than $5.00. However, the increased cost to MMS

for billing and collecting a processing fee would be $8.00 (estimated

by the Department of the Interior Director of Financial Management in

1991). Therefore, for processing a lessee's or its designee's notice to

take marginal property relief under Sec. 204.210(a), we concluded that

this is an activity exempt from cost recovery under the Departmental

Manual. 346 DM 1.2 C(2). Because we do not propose to recover costs to

process notifications under Sec. 204.210(a), the balance of the

discussion on cost recovery will focus on processing fees for requests

under Sec. 204.210(b).

Factor (a)--Actual Costs. Actual costs means the financial measure

of resources expended or used by MMS in processing a notice that a

lessee or its designee is requesting to take marginal property relief

under Sec. 204.210(b), including, but not limited to, the costs of

special studies, monitoring compliance with this part, termination of

relief authorized under this part, or any other relevant action. Actual

costs include both direct and indirect costs,

[[Page 3367]]

exclusive of management overhead. Management overhead costs means costs

associated with the MMS directorate, which means the entire Washington

office staff, except where a member of such staff is required to

perform work on a specific case. Section 304(b) of FLPMA requires that

we exclude management overhead from chargeable costs.

Direct costs include agency expenditures for labor, material,

stores, and equipment usage connected with the performance of

processing responsibilities. MMS's indirect costs include program

support such as systems, appeals, enforcement, and rulemaking. Indirect

costs are allocated to specific projects on a pro rata basis. MMS

calculated its indirect cost rate of 18.5 percent by dividing the

support costs described above by the total program costs. This method

of calculating costs is a generally accepted practice in both the

private and public sectors.

MMS's method of establishing actual costs involved measuring the

cost of an individual transaction within a relief category. MMS

concluded that measuring the cost of an individual transaction within a

relief category is reasonable because the actual costs will not vary

substantially from one individual transaction to another within the

same relief category, making the average cost of an individual

transaction a reliable measure. In this proposed rulemaking, MMS

determined that the above characteristic is exhibited by all relief

categories. Each of these is discussed below.

The costs to process a lessee or its designee's request to take the

``alternative valuation relief option,'' the ``audit relief option,''

and the ``other relief option,'' under Sec. 204.210(b), would include

the cost to process the request. This consists of several phases. The

first phase is the review and analysis of the proposed relief by MMS

personnel and our preliminary approval, modification, or denial of the

proposed relief. The second phase involves the coordination with the

affected State. The third phase consists of communicating the decision

to the lessee or its designee. MMS has determined that the average

burden hour estimate to the Federal Government for these phases is 40

hours per request. This estimate is based on current MMS time

requirements for completing similar tasks. Using an estimate of $50 per

hour based on an average of MMS's personnel costs, we estimate the

average direct cost burden for these requests is $2,000 ($50/hour x 40

hours). MMS's indirect costs for the requests is $370 per request (18.5

percent indirect cost rate x $2,000) resulting in total estimated

actual costs of $2,370 per average request.

If a request is approved, additional phases are necessary. In the

data entry phase, MMS personnel enter the approval information the

lessee or its designee submits with its request into MMS's automated

systems. MMS personnel then file the original request for future

reference. In the monitoring phase, MMS would monitor the marginal

property annually to ensure that it continues to qualify for the relief

granted. MMS estimates that the time necessary to complete both of

these phases is negligible. Therefore, we have not included any

additional costs from these phases into our actual cost estimate.

Factor (b)--Monetary Value of the Rights and Privileges Sought. The

monetary value of rights and privileges sought means the objective

worth of the marginal property relief sought or taken, in financial

terms, to the lessee or its designee. MMS rejected the idea of trying

to calculate monetary value on a case-by-case basis as too time-

consuming, wasteful of resources, and subject to endless disputes.

Instead, MMS has attempted to calculate an actual figure to represent

the monetary value of rights for transactions in this rulemaking. In

addition, MMS took into account equitable considerations involving the

costs to process relative to the monetary value of the relief sought.

MMS determined that the ``alternative valuation relief option'' and

``audit relief option'' would benefit lessees and their designees by

decreasing the total number of hours they must devote to calculating

royalty payments and responding to MMS audits. MMS estimated the

maximum average monetary benefit of these relief options could be as

high as $1,200 annually (2 hours per month savings x 12 months x $50/

hour labor cost). However, MMS did not upwardly adjust its actual costs

for this factor. As discussed under factor (f) below, if MMS increased

its costs due to this factor, it would frustrate Congress' intent under

RSFA to promote continued production. This is because lessees and their

designees would not request relief if MMS's recovery costs are

excessive.

Second, the lessee or its designee receives the value of continued

production and the resultant continued income from the property.

However, any MMS estimate of the average life of a marginal property

and the average monetary benefit from continued production to the

lessee or its designee would be purely speculative. In addition, this

equitable factor would be offset by the increased royalties the public

would receive as discussed under factor (e) below. Therefore, MMS did

not upwardly adjust its actual costs based on this factor.

MMS has reviewed the request-based relief options proposed in this

rulemaking and found them to have significantly higher processing

costs/fees than the monetary value of the right being provided to the

customer. MMS has determined that consideration of this factor should

also include an examination of equitable considerations related to

monetary value, rather than precise figures, which would be very

difficult or impossible to calculate. A major equitable consideration

is whether the level of cost reimbursement could, as a result of the

expense required to process the fee itself for example, burden the

applicant to such an extent that the proposed relief would actually

grant no relief at all. Relief with a small value to the applicant, but

which triggers higher processing costs, would be an example of an

instance where the fee might reasonably be set at a figure less than

the actual cost of processing due to this factor.

Factor (c)--Efficiency to the Government Processing Involved.

Efficiency to the Government processing means the ability of the United

States to process a request to take marginal property relief under

Sec. 204.210(b) with a minimum of waste, expense, and effort. Implicit

in this factor is the establishment of a cost recovery process that

does not cost more to operate than MMS would collect and does not

unduly increase the costs to be recovered. As noted in the above

section on actual costs, MMS has determined that for the relief options

proposed in this rulemaking, it would be inefficient to determine

actual cost data on a case-by-case basis. Estimates based on MMS

experience indicate that the cost of maintaining actual cost data on

specific cases is unreasonably high where the amount potentially

collectible is relatively small. This is principally because MMS's

automated accounting system would have to be extensively reprogrammed

to add a relatively few items of information. MMS has thus used cost

estimates derived from collected data.

Because RSFA requires that any relief granted be in the best

interests of the United States and the State concerned, MMS must

perform sufficient review of the unique circumstances involving each

individual marginal property for which relief is being requested. MMS

believes the 40-hour actual cost estimate from factor (a) above

anticipates an

[[Page 3368]]

efficient process that provides for the necessary technical review and

State coordination functions. The procedures that MMS will use in

processing the data would be based on standardized steps for similar

MMS transactions in order to eliminate duplication and extraneous

procedures. Therefore, MMS believes this would be the most efficient

processing method. Accordingly, because this is an efficient processing

method, MMS has made no adjustment to actual costs as a result of this

factor.

Factor (d)--Cost Incurred for the Benefit of the General Public

Interest. The cost incurred for the benefit of the general public

interest (public benefit) means funds the United States expends in

connection with the processing of a request to take marginal property

relief under Sec. 204.210(b), for studies and/or data collection

determined to have value or utility to the United States or the general

public separate and apart from the document processing. It is important

to note that this definition addresses funds expended in connection

with a request. There is another level of public benefit that includes

studies which MMS is required, by statute or regulation, to perform

regardless of whether a request is received. The costs of such studies

are excluded from any cost recovery calculations from the outset.

Therefore, no additional reduction from costs recovered is necessary in

relation to these studies.

MMS analysts concluded that the processing of requests for relief

included in this proposed rulemaking did not as a rule produce studies

or data collection that might benefit the public to any appreciable

degree. Therefore, any possible benefits of such studies to the public

are balanced by their possible benefits to the applicant. Accordingly,

MMS made no adjustment to the fee recovered based on this factor.

Factor (e)--Public Service Provided. Public service provided means

tangible improvements or other direct benefits, such as increased

royalty and prolonged production, and reduced administrative costs,

with significant public value that are expected in connection with the

granting of marginal property relief. Data collection that MMS needs to

monitor marginal property relief granted or taken does not constitute a

public service. The definition specifically notes that negative

factors, such as an adverse impact on royalty or MMS's audit ability,

may preclude considering an improvement as a public service and that

data collection MMS needs to monitor a relief option does not

constitute a public service. This definition distinguishes the factor

of ``public service provided'' (a benefit resulting from activities

associated with the underlying relief) from the factor of ``costs

incurred for the benefit of the general public interest'' (which

relates to benefits of the document processing itself). MMS has

determined that the relief options under this rule provide several

public services.

First, for the ``alternative valuation relief option'' and ``audit

relief option,'' MMS receives the benefit of reducing its costs by

decreasing the total number of hours it must devote to auditing. MMS

anticipates approving simpler valuation and audit methods under this

rule. Therefore, MMS has determined that the Government would benefit

under this factor to some extent.

Most audits of marginal properties performed by MMS or State

auditors are conducted in conjunction with audits of larger producing

leases that the lessee or designee reports and pays royalties on. MMS

and State auditors do not spend significant resources on conducting

audits of the marginal properties, instead concentrating the audit

effort on the larger leases. Therefore, MMS has determined that the

audit savings would be relatively minor along with the resulting public

benefit. Because the following reasonableness factor already reduces

the fee charged well below MMS's actual costs, MMS has not further

reduced actual costs as a result of these minor audit savings.

Second, it is possible that the granting of marginal property

relief may extend the life of a lease, and thereby extend the United

States' receipt of royalties from those properties. As discussed below,

that was one of Congress' goals when enacting RSFA. However, any

increased receipts are purely speculative. Moreover, any such continued

royalty payments from such a property would most likely be nominal, and

thus outweighed by the costs of processing and auditing such payments.

Therefore, MMS concluded that the benefit to the Government would be

too remote and speculative to warrant any reduction in the fee charged.

Factor (f)--Other Factors. The final reasonableness factor is other

factors relevant to determining the reasonableness of the costs. MMS

examined the relief options to determine whether other factors

warranted a reduction in the proposed fee.

MMS's primary consideration under this factor was RSFA's purpose

with respect to marginal properties. Congress enacted RSFA to ``promote

production,'' RSFA section 7(a), by ``encourag[ing] lessees to continue

to produce and develop marginal properties.'' S. Rep. 260, 104th Cong.,

2d Sess. 20 (1996); H.R. 667, 104th Cong., 2d Sess. 20 (1996). Congress

stated that ``certain regulatory * * * obligations should be waived if

it can be demonstrated such a waiver could aid in maintaining

production that might otherwise be abandoned.'' H.R. 667, 104th Cong.,

2d Sess. 20 (1996). However, RSFA also mandated that any relief should

``reduce administrative costs, and increase net receipts to the United

States and the States.'' RSFA section 7(a). Congress stated that

granting relief for marginal properties should ``result in additional

receipts from oil and gas production that would otherwise be abandoned,

and would * * * increase oil and gas production on Federal lands by

creating economic efficiencies to make Federal leases more competitive

with private leases.'' Id. at 20-21. Thus, as part of its FLPMA

reasonableness analysis, MMS was required to consider whether the

benefit from the increase in royalties to be gained from continued

production from marginal properties and the decreased administrative

burden to MMS from granting such relief merited a reduction in fee

charges.

The relief options proposed in this rulemaking were therefore

reviewed by MMS personnel with expertise and program management

responsibilities in the particular area of the transaction, who weighed

the proposed processing fee against their knowledge of the value of

similar transactions. In the case of the relief options proposed in

this rulemaking, the MMS analysts concluded that the value of the

rights was clearly so far below the expected processing cost that a fee

set at actual costs would preclude lessees or their designees from

seeking those relief options. In fact, at MMS's marginal property

workshops, industry representatives indicated that significant

processing fees would likely result in requests for relief not being

submitted. Representatives of independent oil and gas producers stated

that processing fees would likely discriminate against the small

producers because larger oil and gas producers often sell properties

that approach marginal status to the smaller producers. Thus, setting a

fee at actual costs would frustrate Congress' stated purpose under RSFA

to promote continued production and increase administrative efficiency

because lessees and their designees would decline to request such

relief. Accordingly, MMS placed the greatest weight on this factor when

considering the reasonableness of charging actual costs. As a result,

MMS has determined

[[Page 3369]]

that a processing cost of $50 would meet the reasonableness factors of

FLPMA for onshore leases and further Congressional intent to provide

marginal property relief for requests under Secs. 204.206, 204.207, and

204.208.

MMS invites specific comments concerning the proposed processing

fees. MMS further requests input concerning the value to marginal

property lessees and designees of the relief options under

Secs. 204.206, 204.207, and 204.208 of this subpart.

Paragraph (b)(3) would require you to remit a processing fee in the

amount of $50 for each request for marginal property relief. If you

file a single request for multiple marginal properties as provided in

paragraph (b)(2), your processing fee is $50 for the entire request.

Thus, under the example in paragraph (b)(2) of this section, for the

single request filed to request the ``alternate valuation relief

option'' for both properties ``A'' and ``B'', you must remit a total of

$50.

Paragraph (b)(3)(i) would explain that if you do not remit the

processing fee with your request for relief, MMS will return your

request for relief unprocessed. If MMS returns your request unprocessed

it is not considered an appealable denial of your request.

Paragraph (b)(3)(ii) would explain that if you remit a partial

processing fee, your request for relief will not be processed until you

pay the processing fee in full. Thus, under the example in paragraph

(b)(3) of this section, if you remit $30 with your request for both

properties ``A'' and ``B'', rather than the $50 required under that

section, MMS will not process your request until you remit the

additional $20. This paragraph would also provide that MMS will notify

you in writing that your processing fee is insufficient. You would have

30 days from your receipt of MMS's notice to remit the balance. If you

did not remit the balance within the 30-day period, MMS would return

your request for relief unprocessed. If MMS returned your request

unprocessed, it would not be considered an appealable denial of your

request.

Paragraph (b)(3)(iii) would provide that processing fees, including

partial processing fees, are not refundable for any reason.

Accordingly, under the example in paragraph (b)(3)(ii), if you did not

remit the additional $20 within the 30-day period, MMS would not refund

the $30 partial payment you remitted.

Paragraph (b)(3)(iv) would refer you to MMS's Marginal Property

Guidelines for additional instructions on submitting processing fees.

Paragraph (c) would provide that you must submit notifications,

requests, or processing fees required under this section to the address

specified in MMS's Marginal Properties Guidelines.

Section 204.211 What Will MMS Do When It Receives My Request for

Accounting and Auditing Relief?

The section would explain that when MMS receives your request for

accounting and auditing relief under Sec. 204.210(b), it will notify

you as follows:

Paragraph (a) would provide that if your request for relief is

complete, MMS and the State may either approve, deny, or modify your

request. MMS would notify you of the decision in writing under

Sec. 204.215 of this subpart.

Paragraph (b) would provide that if your request for relief is not

complete, MMS would notify you in writing that your request is

incomplete and identify any missing information. You would have to

submit the missing information within 30 days of your receipt of MMS's

notice that your request is incomplete.

Under paragraph (1), if you submit the missing information within

30 days of MMS's notification, MMS and the State could either approve,

deny, or modify your request for relief under Sec. 204.213 of this

subpart.

Under paragraph (2), if you do not submit the missing information

within 30 days, MMS would return your request for relief as incomplete.

If MMS returns your request because it is incomplete, MMS would not

return any processing fee you submitted with your request. You could

submit a new request for relief under this subpart, including another

processing fee, at any time following MMS return of your incomplete

request. If MMS returns your request unprocessed, it would not be

considered an appealable denial of your request.

Section 204.212 Who Will Decide Whether To Approve, Deny, or Modify My

Request for Accounting and Auditing Relief?

Because RSFA requires MMS to determine whether to approve relief

for marginal properties jointly with a State concerned, the section

would explain who will decide your request for relief depending on

whether there is a State concerned.

Paragraph (a) would provide that if there is not a State concerned

for your marginal property, only MMS would decide whether to approve,

deny, or modify your relief request.

Paragraph (b) would provide that if there is a State concerned for

your marginal property, the highest State official having ultimate

authority over the collection of royalties or the State official to

whom that authority has been delegated would have to jointly determine

with MMS whether to approve, deny, or modify your relief request. Also,

the State would be required to provide MMS with the identity of the

State official with this authority.

Paragraph (c) would provide that MMS will not approve your request

to use an alternate valuation method until the Assistant Secretary for

Land and Minerals Management approves the request.

Section 204.213 How Will MMS and the State Jointly Determine Whether

To Approve, Deny, or Modify My Request for Accounting and Auditing

Relief?

This section would explain the process MMS and the State will use

to jointly decide whether to approve, deny, or modify your request for

relief under Sec. 204.210(b).

If a State determines in advance that it may grant one or more of

your relief options under this subpart:

Paragraph (a) would provide that MMS will preliminarily determine

whether to approve, deny, or modify your relief request and send its

preliminary determination to the State. RSFA provides that the State

must consent to accounting and auditing relief granted under section

117(c) of FOGRMA. Thus, RSFA requires the involvement of the State in

the approval process for a marginal property relief alternative under

this subpart. Accordingly, MMS proposes that after its preliminary

approval, denial, or modification(s) of a relief request, it would

forward the request and its preliminary determination to the

appropriate State for concurrence;

Paragraph (b) would provide that after the State receives MMS's

preliminary determination, it must notify MMS in writing within 30

days, or such longer period as MMS may allow, of its recommendation to

approve, deny, or modify your relief request under Sec. 204.210(b);

Under paragraph (1), if the State approved your relief request:

(i) MMS would approve your relief request if its preliminary

determination was to approve your request;

(ii) MMS could either approve or deny your relief request if its

preliminary determination was to deny your request. This would give MMS

the flexibility to revise its preliminary determination to deny your

request if, after consultation with the State, it agreed with the State

that your request should be approved;

[[Page 3370]]

Under paragraph (2), if the State denied your relief request, then

MMS would deny your relief request because RSFA provides that States

must consent to any relief;

Under paragraph (3), if the State approved MMS's modification(s) to

your relief request, MMS would modify your relief request;

Under paragraph (4), if the State denied MMS's modification(s) to

your relief request, MMS would deny your relief request, because RSFA

provides that States must consent to any relief;

Under paragraph (5), if the State modified your relief request, MMS

would consider the modification(s) and would:

(i) Modify your request if it approves the State's modification(s);

or

(ii) Deny your request if it disagrees with the State's

modification(s);

Paragraph (c) would provide that if the State does not notify MMS

of its decision within the time period allowed under paragraph (b) of

this section, then the State would be deemed to have agreed with MMS's

preliminary determination. Because MMS could allow States additional

time to decide whether to approve, deny, or modify your request under

paragraph (b) of this section, MMS believes that this provision is

reasonable and necessary in order to assure timely processing of

requests.

Section 204.214 May a State Decide in Advance That It Will Not Allow

Certain Relief Options Under This Subpart?

Paragraph (a) would provide that a State may decide in advance that

it will not allow any one or more of the relief options specified in

this subpart. MMS proposes to allow States to deny some or all of the

relief options under this subpart in advance because RSFA provides that

States must consent to any relief requested. MMS is also allowing

States to deny relief in advance because some State government

organizations who participated in the meetings of October 31, 1996, and

January 23, 1997, regarding this proposed rule expressed concerns about

granting relief for marginal properties. Finally, MMS believes this is

the most efficient means to prevent you from submitting requests, and

MMS and the State from processing requests, which States will

automatically deny.

If a State decides it wants to deny relief in advance, the highest

State official having royalty collection authority would be required

to:

(1) Notify MMS in writing no later than 90 days prior to the

beginning of the applicable calendar year of the State's intent to

disallow one or more of the relief options under this subpart; and

(2) Specify in its notice of intent to MMS which relief option(s)

it will not allow.

Paragraph (b) would provide that a State that had previously

decided to not allow some or all relief under this subpart, may later

allow such relief. The State would have to:

(1) Notify MMS in writing no later than 90 days prior to the

beginning of the applicable calendar year of its intent to allow one or

more of the relief options under this subpart; and

(2) Specify in its notice of intent to MMS which relief option(s)

it will allow.

Paragraph (c) would provide that MMS would publish the State's

notice of intent to disallow or to allow certain relief options under

this section in the Federal Register no later than 60 days prior to the

beginning of the applicable calendar year. This would notify lessees or

their designees whether or not they should submit the notices or

requests required under Sec. 204.210 for relief the State has denied in

advance.

Section 204.215 How Will MMS Notify Me of the Decision To Approve,

Deny, or Modify My Request for Accounting and Auditing Relief?

This section would explain that MMS will notify you in writing of

the decision on your request for accounting and auditing relief under

Sec. 204.210(b).

Under paragraph (a), if MMS and the State approve your request for

relief, MMS would notify you of the effective date of your accounting

or auditing relief and other specifics of the relief approved.

Under paragraph (b), if MMS and the State deny your relief request,

MMS would state the reasons for denial in its notice informing you of

its decision and explain your appeal rights under Sec. 204.6.

Under paragraph (c), if MMS and the State modify your relief

request, you would have 30 days from your receipt of MMS's modification

notice to either accept or reject any modification(s) in writing. If

you reject the modification(s) or fail to respond to MMS's notice, MMS

and the State would deny your relief request. MMS would state the

reasons for denial in its notice informing you of its decision and

explain your appeal rights under Sec. 204.6.

Section 204.216 What Other Guidance Is Available for Accounting and

Auditing Relief Obtained Under This Subpart?

This section would explain that MMS will provide additional

guidance for accounting and auditing relief in MMS's Marginal Property

Guidelines. MMS anticipates using these Marginal Property Guidelines to

provide detailed reporting instructions, such as unique adjustment

reason codes and transaction codes, for marginal property reporting on

Form MMS-2014. The Marginal Property Guidelines would also provide

addresses for submitting notifications, requests, processing fees,

reports, and payments for marginal properties.

Section 204.217 What If My Property Ceases To Qualify for Relief

Obtained Under This Subpart?

This section would explain what happens if your property no longer

qualifies for relief under this subpart because your production

increased during the base period.

Paragraph (a) would provide that you must qualify for relief under

this subpart for each calendar year based on production during the base

period. The notice or request you provided to MMS under Sec. 204.210

for the first calendar year that you qualified for relief will remain

effective for successive calendar years if you continue to qualify. For

example, if you qualified for relief beginning in calendar year 2000,

and if you continue to qualify in calendar year 2001, based on the

period from October 1, 1999, through September 30, 2000, you need not

submit a new notice or request for calendar year 2001.

Paragraph (b) would provide that if you find you are no longer

eligible for relief because your production increased in the most

recent base period, your relief terminates as of December 31 of that

calendar year. By December 31, you would have to notify MMS in writing

at the address provided in MMS's Marginal Property Guidelines that your

relief has terminated. For example, if you qualified for relief

beginning in calendar year 2000, but no longer continue to qualify in

calendar year 2001 because your production increased during the base

period, you must notify MMS by December 31, 2000, that your relief has

terminated.

Paragraph (c) would provide that MMS may retroactively rescind your

relief, if MMS determines that your lease was not eligible for the

relief you obtained under this subpart because:

(1) You did not submit a notice or request for relief under

Sec. 204.210;

(2) You submitted erroneous information in the notice or request

for

[[Page 3371]]

relief you provided to MMS under Sec. 204.210 or in your royalty or

production reports; or

(3) Your property is no longer eligible for relief because

production increased, but you failed to provide the notice required

under paragraph (b) of this section.

Paragraph (d) would provide that you may owe additional royalties

and will owe late payment interest determined under part 218 of this

title from the date your payment was due until the date MMS receives

it.

Section 204.218 May I Obtain Accounting and Auditing Relief for a

Marginal Property That Benefits From Other Federal or State Incentive

Programs?

This section would provide that you may obtain accounting and

auditing relief for your marginal property under this subpart even if

the property benefits from other Federal or State production incentive

programs. There is no evidence in RSFA or the legislative history that

Congress intended for the marginal property relief provisions of FOGRMA

section 117(c) to subrogate other relief programs.

III. Procedural Matters

The Regulatory Flexibility Act

The Department certifies that this proposed rule will not have

significant economic effect on a substantial number of small entities

under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This

proposed rule implements the alternatives for marginal properties as

required under sections 117(a) and 117(c) of the Federal Oil and Gas

Royalty Management Act of 1982, as amended by the Federal Oil and Gas

Royalty Simplification and Fairness Act of 1996.

This proposed rule provides significant potential savings to all

Federal oil and gas lessees and designees, regardless of size, by

providing optional accounting and auditing relief. If a small entity

does not wish to avail itself of the optional relief, it will incur no

expense or burden under the proposed rule. If a small entity does seek

to avail itself of accounting or auditing relief provided for in the

proposed rule, it will incur nominal expenses. The benefit that would

be obtained by the small entity would outweigh these nominal expenses.

The analysis of both savings and expenses is provided in the Paperwork

Reduction Act section below.

Small entities are encouraged to comment on this proposed rule.

Unfunded Mandates Reform Act of 1995

The Department of the Interior has determined and certifies

according to the Unfunded Mandates Reform Act, 2 U.S.C. 1502 et seq.,

that this proposed rule will not impose a cost of $100 million or more

in any given year on local, Tribal, or State governments, or the

private sector. MMS has determined that first year impacts to all

States under this proposed rule would be $52,600 with subsequent year

impacts of $2,800 per year. MMS anticipates that these impacts will be

at least partially offset by administrative savings and/or increased

revenues realized by the relief granted under this proposed rule.

Executive Order 12630

The Department certifies that the proposed 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, ``Governmental Actions and

Interference with Constitutionally Protected Property Rights.''

Executive Order 12988

The Department has certified to the Office of Management and Budget

that this proposed rule meets the applicable civil justice reform

standards provided in sections 3(a) and 3(b)(2) of this Executive

Order.

Executive Order 12866

The Office of Management and Budget has determined this proposed

rule is not a significant rule under this Executive Order 12866. The

Department's analysis indicates this proposed regulation will result in

a net benefit for industry, the Federal government, and the State and

local royalty recipients through reduced administrative burden and

enhanced revenues.

Paperwork Reduction Act

This proposed rule contains new information collection requirements

and revises information collection requirements that are approved by

the Office of Management and Budget (OMB) for Form MMS-2014 (OMB

Control Number 1010-0022). Therefore, we have submitted information

collection requests to OMB for review and approval under section

3507(d) of the Paperwork Reduction Act of 1995. As part of our

continuing effort to reduce paperwork and respondent burden, we invite

the public and other Federal agencies to comment on any aspect of the

reporting burden. Submit your comments to the Office of Information and

Regulatory Affairs, OMB, Attention Desk Officer for the Department of

the Interior (OMB Control Number 1010-NEW), Washington, D.C. 20503.

Send copies of your comments to Minerals Management Service, Royalty

Management Program, Rules and Publications Staff, P.O. Box 25165, MS

3021, Denver, Colorado, 80225-0165; courier address is Building 85,

Denver Federal Center, Denver, Colorado 80225; e-Mail address is

RMP.[email protected]. We will consider all comments received during the

comment period for this notice of proposed rulemaking.

OMB has up to 60 days to approve or disapprove this collection of

information but may respond after 30 days. Therefore, public comments

should be submitted to OMB within 30 days in order to assure their

maximum consideration. However, we will consider all comments received

during the comment period for this notice of proposed rulemaking.

RSFA requires that MMS provide accounting and auditing relief for

marginal properties on a case-by-case basis when in the best interests

of the Federal Government and the State concerned.

We require that a lessee or designee submit either a notification

or a request to obtain marginal property relief. This will allow us to

determine what relief is being taken or is being sought.

Notifications or requests are only required of lessees or designees

who wish to obtain accounting or auditing relief under RSFA. Therefore,

your submission is strictly voluntary. RSFA provides that both MMS and

the State concerned must consent to the relief before it can be taken.

Industry applicants, the States concerned, and the Federal

Government will have information collection costs. An applicant must

submit its company name, address, phone number, contact name, MMS-

assigned Payor Code Number, Accounting Identification Number for the

marginal property, and a detailed description of the specific

accounting or auditing relief sought. In addition, depending on the

relief sought, the lessee or designee must provide the single selling

arrangement it will report royalties under or the new reporting

frequency. The information is readily available to the lessee or

designee taking the specific relief option being sought.

We anticipate that applicants may file as many as 10,500

notifications under Sec. 204.210(a) and 143 requests under

Sec. 204.210(b) in the first year of implementation. We estimate that

each request on average may contain about

[[Page 3372]]

five qualifying marginal properties. Because the relief for a marginal

property is for the life of the property, as long as the property

remains marginal, a lessee or designee need only file an application

one time. Thereafter, we expect approximately 1,050 notifications and

14 requests filed each year. Each notification is expected to take

approximately one-half hour to complete, and each request is expected

to take 4 hours to complete.

We determined that the burden hour estimate to industry in the

first year for preparing and filing the marginal property applications

is 5,822 burden hours (10,500 notifications x \1/2\ hour per

notification) + (143 requests x 4 hours per request). Using an

estimate of $50 per hour for industry cost, we estimate the cost burden

is $291,100 (5,822 burden hours x $50 per hour). This burden is

offset by 514,000 fewer royalty lines of information per year that are

no longer required. We project that the total hour burden reduction for

manual and electronic reporting is 25,700 hours, resulting in an

estimated dollar savings to industry of $1,285,000 (25,700 hours x

$50 per hour). In subsequent years, the annual burden hour estimate is

581 burden hours ((1,050 notifications x \1/2\ hour per notification)

+ (14 requests x 4 hours per request), and the annual cost burden

estimate is $29,050 (581 burden hours x $50 per hour). This annual

cost burden is offset by $1,285,000. This is the dollar amount in cost

savings to industry associated with a reduction of 514,000 fewer

royalty lines of data that are no longer required.

In addition, lessees and designees must submit a processing fee of

$50 per request for marginal property relief. This fee is required

under the Independent Offices Appropriations Act of 1952 (IOAA), 31

U.S.C. 9701, and the Federal Land Policy and Management Act of 1976

(FLPMA), 43 U.S.C. 1701. The fee is not required for notifications

because the cost of collection of the fee is a significant portion of

the total costs of processing. Therefore, the additional cost burden to

industry is $7,150 ($50 fee x 143 requests) in the first year and

$700 ($50 fee x 14 requests) for subsequent years.

We determined that the burden hour estimate to the Federal

Government in the first year, for processing, input, review, approval,

and handling is 5,720 burden hours (143 requests x 40 hours per

request). Using an estimate of $50 per hour for direct labor cost, we

estimate the cost burden is $286,000 (5,720 burden hours x $50 per

hour). This burden is partially offset by $7,150 ($50 fee x 143

requests) in processing fee collections. In addition, we estimate that

annually 514,000 fewer lines of royalty information will be processed

for an administrative savings of $303,260 (514,000 x $.59 per line).

In subsequent years, the annual burden hour estimate is 560 burden

hours (14 requests x 40 hours per request). The annual cost burden

estimate is $28,000 (560 burden hours x $50 per hour). This burden is

offset by $700 ($50 fee x 14 requests) in processing fees and

$303,260 in administrative savings from processing fewer royalty lines.

The State concerned will also have information collection and

processing costs. We estimate that the first year burden is 1,052

hours. RSFA requires State approval for all marginal property relief

granted under RSFA. Therefore, State burden is unavoidable. First year

burden hour estimates for review and development of a State-blanket

acceptance policy for the three notification-based relief options under

Sec. 204.210 (a) is 40 hours per relief option x 3 relief options x

4 primary States = 480 hours. In addition, first year burden hour

estimates for property-by-property review and determination for the

three request-based relief options is 4 hours per individual property

relief request x 143 first year requests = 572 hours. We anticipate

that the State's review is significantly more limited than MMS's review

of each request and that, in most cases, the State will rely on the

review effort and recommendation by MMS. Therefore, the total estimate

for first year State burden is 480 hours + 572 hours = 1,052 hours x

$50 cost per hour = $52,600.

We estimate that the combined annual burden to all States is 56

hours after the first year. The burden to the States for the review and

development of a State-blanket acceptance policy for the three

notification-based relief options is a one-time effort accomplished

during the first year. Subsequent year burden hours for property-by-

property review and determination for the three request-based relief

options is estimated at no more than 10 percent of the first year's

request level. Relief approval for a property is granted for as long as

the property qualifies as marginal. By nature, production from a

marginal property will tend to decline over time. Therefore, most

marginal properties will continue to qualify as marginal. We estimate

an additional 10 percent of requests for subsequent years based on

newly-qualifying marginal properties--properties which previously

qualified but for which no relief had been sought and resubmitted

requests which had been previously denied. Therefore, the subsequent

years' burden to the States is estimated as 4 hours per individual

property relief request x 14 annual requests x $50 per hour =

$2,800.

In accordance with section 3506(c)(2)(A) of the Paperwork Reduction

Act (PRA) of 1995, we are providing notice and consulting with members

of the public and affected agencies to solicit comment to (a) evaluate

whether this expanded collection of information is necessary for the

proper performance of the functions of the agency, including whether

the information shall have practical utility; (b) evaluate the accuracy

of the agency's estimate of the burden of the proposed collection of

information; (c) enhance the quality, utility, and clarity of the

information to be collected; and (d) minimize the burden of the

collection of information on those who are to respond, including

through the use of automated collection techniques or other forms of

information technology.

The PRA provides that an agency may not conduct or sponsor, and a

person is not required to respond to, a collection of information

unless it displays a currently valid OMB control number.

Your comments are important. The Small Business and Agriculture

Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were

established to receive comments from small businesses about Federal

agency enforcement actions. The Ombudsman will annually evaluate the

enforcement activities and rate each agency's responsiveness to small

business. If you wish to comment on the enforcement actions in this

proposed rule, call 1-888-734-3247.

National Environmental Policy Act of 1969

We have determined that this proposed rulemaking is not a major

Federal action significantly affecting the quality of the human

environment, and a detailed statement under section 102(2)(C) of the

National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not

required.

List of Subjects in 30 CFR Part 204

Continental shelf, Government contracts, Mineral royalties, Natural

gas, Petroleum, Public lands--mineral resources, Reporting and

recordkeeping requirements.

Dated: January 6, 1999.

Sylvia V. Baca,

Assistant Secretary--Land and Minerals Management.

For the reasons set out in the preamble, MMS proposes to add part

[[Page 3373]]

204 to title 30 of the Code of Federal Regulations, as follows:

PART 204--ALTERNATIVES FOR MARGINAL PROPERTIES

Subpart A--General Provisions

Sec.

204.1 What is the purpose of this part?

204.2 Definitions.

204.3 What alternatives are available for marginal properties?

204.4 What is a marginal property under this part?

204.5 What statutory requirements must I meet to obtain royalty

prepayment or accounting and auditing relief?

204.6 May I appeal if MMS denies my request for prepayment or

accounting and auditing relief?

Subpart B--Prepayment of Royalty [Reserved]

Subpart C--Accounting and Auditing Relief

204.200 What is the purpose of this subpart?

204.201 Who may obtain accounting and auditing relief under this

subpart?

204.202 What accounting and auditing relief options are available

to me?

204.203 What is the cumulative royalty reports and payments relief

option?

204.204 What is the net adjustment reporting relief option?

204.205 What is the rolled-up reporting relief option?

204.206 What is the alternate valuation relief option?

204.207 What is the audit relief option?

204.208 What is the other relief option?

204.209 What accounting and auditing relief will MMS not allow?

204.210 How do I obtain accounting and auditing relief?

204.211 What will MMS do when it receives my request for accounting

and auditing relief?

206.212 Who will decide whether to approve, deny, or modify my

request for accounting and auditing relief?

204.213 How will MMS and the State jointly determine whether to

approve, deny, or modify my request for accounting and auditing

relief?

204.214 May a State decide in advance that it will not allow

certain relief options under this subpart?

204.215 How will MMS notify me of the decision to approve, deny, or

modify my request for accounting and auditing relief?

204.216 What other guidance is available for accounting and

auditing relief obtained under this subpart?

204.217 What if my property ceases to qualify for relief obtained

under this subpart?

204.218 May I obtain accounting and auditing relief for a marginal

property that benefits from other Federal or State incentive

programs?

Authority: 5 U.S.C. 301 et seq.; 30 U.S.C. 181 et seq., 351 et

seq., 1001 et seq., 1701 et seq., 1721 et seq.,1726 et seq.; 31

U.S.C. 9701 et seq.; 43 U.S.C. 1701 et seq., 1331 et seq., and 1801

et seq.

Subpart A--General Provisions

Sec. 204.1 What is the purpose of this part?

This part explains how a lessee or its designee of a Federal

onshore or Outer Continental Shelf (OCS) oil and gas lease may obtain

prepayment or accounting and auditing relief for certain marginal

properties.

Sec. 204.2 Definitions.

Agreement means a federally approved communitization agreement or

unit participating area.

Barrels of oil equivalents means the combined equivalent production

of oil and gas stated in barrels of oil. Each barrel of oil production

is equal to one barrel of oil equivalents. Also, each six thousand

cubic feet of gas production is equal to one barrel of oil equivalents.

Base period means the 12-month period from October 1 through

September 30 immediately preceding the calendar year in which you take

or request marginal property relief.

Combined equivalent production means the total of all oil and gas

production for the marginal property, stated in barrels of oil

equivalents.

Designee means the person designated by a lessee under 30 CFR

218.52 to make all or part of the royalty or other payments due on a

lease on the lessee's behalf.

Producing wells means only those producing oil or gas wells that

contribute to the sum of barrels of oil equivalents used in the

calculation under Sec. 204.4(c). Producing wells do not include

injection and water wells.

State concerned (State) means the State which receives a

statutorily prescribed portion of the royalties from a Federal onshore

or OCS lease.

Sec. 204.3 What alternatives are available for marginal properties?

If you have production from a marginal property you may:

(a) Prepay royalty. MMS and the State may allow you to make a lump-

sum advance payment of royalties instead of monthly royalty payments

for the remainder of the lease term.

(b) Take accounting and auditing relief. MMS and the State may

allow various accounting and auditing relief options to encourage you

to continue to produce and develop your marginal property. See subpart

C for accounting and auditing relief requirements.

Sec. 204.4 What is a marginal property under this part?

To qualify as a marginal property eligible for royalty prepayment

or accounting and auditing relief under this part, your property must

meet the following requirements:

(a) Production must be from, or attributable to, a Federal onshore

or OCS lease. Indian leases are not eligible for the marginal property

alternatives under this part, even though production from a qualifying

marginal property may be attributable to an Indian lease. You must also

meet the criteria shown in the following table:

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

If your lease is . . . Then . . . And . . .

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

(1) Not in an Agreement..... The entire lease ....................

must qualify as a

marginal property

under paragraph (b)

of this section.

(2) Entirely or partly in The entire Agreement Agreement production

one Agreement. must qualify as a allocable to your

marginal property lease may be

under paragraph (b) eligible for relief

of this section. under this part.

Any production from

your lease that is

not in the

Agreement also

separately may be

eligible for relief

under (a)(4) of

this table.

(3) Entirely or partly in Each Agreement must Only the qualifying

more than one Agreement. qualify separately Agreement's

as a marginal production

property under allocable to your

paragraph (b) of lease may be

this section. eligible for

separate relief

under this part.

(4) Partly in an Agreement The part of the

and you have production lease that is not

from the part of the lease in the Agreement

that is not in the must qualify

Agreement. separately as a

marginal property

under paragraph (b)

of this section.

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

[[Page 3374]]

(b) To qualify as a marginal property for a calendar year, the

combined equivalent production of the property during the base period

must equal an average daily well production of less than 15 barrels of

oil equivalents per well per day calculated under paragraph (c) of this

section.

(c) To determine the average daily well production on or

attributable to your property, divide the sum of the barrels of oil

equivalents for all producing wells on the property by the sum of the

number of days each of those wells actually produced during the base

period. If your property is in an Agreement, your calculation under

this section must include all wells included in the Agreement, even if

they are not on a Federal onshore or OCS lease.

Sec. 204.5 What statutory requirements must I meet to obtain royalty

prepayment or accounting and auditing relief?

(a) MMS and the State may allow royalty prepayment or accounting

and auditing relief for your marginal property under this part if MMS

and the State jointly determine that the prepayment or relief is in the

best interests of the Federal Government and the State to:

(1) Promote production;

(2) Reduce the administrative costs of MMS and the State; and

(3) Increase net receipts to the Federal Government and the State.

(b) MMS and the State may discontinue to allow any royalty

prepayment or accounting and auditing relief options granted for your

marginal property if MMS and the State jointly determine that the

prepayment or relief option is no longer in the best interests of the

Federal Government and the State under the standards in paragraph (a)

of this section.

Sec. 204.6 May I appeal if MMS denies my request for prepayment or

accounting and auditing relief?

(a) If MMS denies your request for prepayment or accounting and

auditing relief under this part because the State denied your request,

MMS's decision is the final decision for the Department of the Interior

and is not subject to administrative appeal.

(b) You may appeal any other MMS action on your request under 30

CFR parts 243 or 290.

Subpart B--Prepayment of Royalty [Reserved]

Subpart C--Accounting and Auditing Relief

Sec. 204.200 What is the purpose of this subpart?

This subpart explains how a lessee or its designee may obtain

accounting and auditing relief for production from a marginal property.

Sec. 204.201 Who may obtain accounting and auditing relief under this

subpart?

You may obtain accounting and auditing relief under this subpart:

(a) If you are a lessee or its designee for a Federal lease with

production from a property that qualifies as a marginal property under

Sec. 204.4;

(b) If you meet any additional requirements for specific types of

relief under this subpart; and

(c) Only for your fractional interest in the marginal property.

Sec. 204.202 What accounting and auditing relief options are available

to me?

The following table shows the six relief options that you may take

for properties that qualify as marginal under Sec. 202.4 and tells you

where in this subpart you can obtain more information:

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

For . . . See . . .

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

Cumulative royalty reports and payments relief.............. Sec. 204.

203

Net adjustment reporting relief............................. 204.204

Rolled-up reporting relief.................................. 204.205

Alternate valuation relief.................................. 204.206

Audit relief................................................ 204.207

Other relief................................................ 204.208

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

Sec. 204.203 What is the cumulative royalty reports and payments

relief option?

Under this relief option, you may submit royalty reports and

payments less frequently than monthly.

(a) To determine whether your marginal property is eligible for

relief under this relief option, you must:

(1) Multiply the current royalty rate for each Federal lease (your

leases as well as others' leases) in the marginal property by the

combined equivalent production of oil and gas from or allocable to that

lease during the base period;

(2) Total the volumes calculated under paragraph (a)(1) of this

section; and

(3) Report your royalties as shown in the following table:

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

If the total volume calculated for the marginal property under Then you may report and pay royalties for

paragraph (a)(2) of this section is your lease

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

(i) 125 or fewer barrels of oil equivalents...................... Annually, semi-annually, or quarterly.

(ii) More than 125, but not more than 250 barrels of oil Semi-annually or quarterly.

equivalents.

(iii) More than 250, but not more than 500 barrels of oil Quarterly.

equivalents.

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

(b) You must notify MMS under Sec. 204.210(a) before taking relief

under this option. You are not required to remit a processing fee for

this option.

(c) You must:

(1) Submit your royalty report and payment in accordance with

Sec. 218.51(g) of this chapter by the end of the month following the

end of the applicable quarterly, semi-annual, or annual reporting

period;

(2) Report one line of cumulative royalty information on the Report

of Sales and Royalty Remittance, Form MMS-2014, for the reporting

period, the same as if it were a monthly report; and

(3) Use the last sales month of the reporting period to report the

royalty information for the entire period.

(d) If you do not pay your royalty by the date due in paragraph

(c)(1) of this section, you will owe late payment interest determined

under part 218 of this chapter from the date your payment was due under

this section until the date MMS receives it.

(e) If you qualify for relief under paragraph (a) of this section,

but you take more relief than you are entitled to under that paragraph,

you will owe late payment interest determined under part 218 of this

title from the date your payment was due under this section until the

date MMS receives it. You must also amend your Form MMS-2014 to reflect

the allowable reporting frequency.

(f) You must report allowances on Form MMS-2014 on the same

quarterly, semi-annual, or annual basis as the royalties for your

marginal property.

(g) Under this relief option:

(1) Quarterly reporting periods begin on the first day of January,

April, July, or October;

(2) Semi-annual reporting periods begin on the first day of January

or July; and

(3) Annual reporting periods begin on the first day of January.

[[Page 3375]]

(h) See MMS's Marginal Property Guidelines for additional reporting

instructions for this relief option.

Sec. 204.204 What is the net adjustment reporting relief option?

Under this relief option, you may adjust previously reported

royalty lines to MMS as a one-line net entry on Form MMS-2014, instead

of the two-line adjustment process.

(a) To determine your eligibility for relief under this option, you

must:

(1) First, multiply the current royalty rate for each Federal lease

(your leases as well as others' leases) in the marginal property by the

combined equivalent production of oil and gas from or attributable to

that lease during the base period;

(2) Total the volumes that you calculated under paragraph (a)(1) of

this section;

(3) If the total volume calculated under paragraph (a)(2) of this

section is less than or equal to 2,500 barrels of oil equivalents, then

your property is eligible for relief under this option.

(b) You must notify MMS under Sec. 204.210(a) before taking relief

under this option. You are not required to remit a processing fee for

this option.

(c) You may not net your adjustments for royalties due with

adjustments for allowances on Form MMS-2014.

(1) You must report your adjustment to a previously reported

royalty due line as a one-line net entry; and

(2) You must report any corresponding adjustment to your previously

reported allowance line as a separate one-line net entry.

(d) See MMS's Marginal Property Guidelines for additional reporting

instructions for this relief option.

Sec. 204.205 What is the rolled-up reporting relief option?

Under this relief option, you may report all selling arrangements

for a revenue source to MMS under a single selling arrangement on Form

MMS-2014.

(a) To determine your eligibility for relief under this option, you

must:

(1) First, multiply the current royalty rate for each Federal lease

(your leases as well as others' leases) in the marginal property by the

combined equivalent production of oil and gas from or attributable to

that lease during the base period;

(2) Total the volumes that you calculated under paragraph (a)(1) of

this section;

(3) If the total volume calculated under paragraph (a)(2) of this

section is less than or equal to 1,000 barrels of oil equivalents, then

your property is eligible for relief under this option.

(b) You must notify MMS under Sec. 204.210(a) before taking relief

under this option. You are not required to remit a processing fee for

this option.

(c) See MMS's Marginal Property Guidelines for additional reporting

instructions for this relief option.

Sec. 204.206 What is the alternate valuation relief option?

Under this relief option, you may request to report and pay

royalties using a valuation method other than that required under part

206 of this chapter.

(a) Any alternate valuation method that you propose:

(1) Must be readily determinable and certain; and

(2) Must approximate royalties payable under the valuation

regulations in part 206 of this chapter.

(b) You must obtain approval from MMS and the State under

Sec. 204.210(b) before taking alternate valuation relief. You must also

submit a processing fee under Sec. 204.210(b)(3).

(c) If MMS and the State approve your request, the valuation method

you requested will be the value for royalty purposes for production

from or attributable to your lease interest in the marginal property.

(d) See MMS's Marginal Property Guidelines for reporting

instructions for this relief option.

Sec. 204.207 What is the audit relief option?

Under this relief option, you may request a reduced royalty audit

burden. However, MMS will not consider any request that eliminates

MMS's or the State's right to audit.

(a) Audit relief may include:

(1) Audits of limited scope, including audits based on a

statistical sampling of leases;

(2) Coordinated royalty and severance tax audits;

(3) Reliance by MMS on independent certified audits; and

(4) Any other audit relief that may be appropriate.

(b) You must obtain approval from MMS and the State under

Sec. 204.210(b) before receiving audit relief. You must also submit a

processing fee under Sec. 204.210(b)(3).

(c) See MMS's Marginal Property Guidelines for reporting

instructions for this relief option.

Sec. 204.208 What is the other relief option?

Under this relief option, you may request any type of accounting

and auditing relief that is appropriate for your marginal property,

provided it is not specifically prohibited under Sec. 204.209.

(a) You must obtain approval from MMS and the State under

Sec. 204.210(b) before taking relief under this option. You must also

submit a processing fee under Sec. 204.210(b)(3).

(b) See MMS's Marginal Property Guidelines for reporting

instructions for this relief option.

Sec. 204.209 What accounting and auditing relief will MMS not allow?

MMS will not approve your request for accounting and auditing

relief under this subpart if your request:

(a) Prohibits MMS or the State from conducting any form of audit;

(b) Permanently relieves you from making future royalty reports or

payments;

(c) Provides for less frequent royalty reports and payments than

annually;

(d) Provides for you to submit royalty reports and payments at

separate times;

(e) Impairs MMS's ability to properly or efficiently account for or

distribute royalties;

(f) Requests relief for a lease under which the Federal Government

takes its royalties in-kind;

(g) Alters production reporting requirements;

(h) Alters lease operation or safety requirements;

(i) Conflicts with rent, minimum royalty, or lease requirements; or

(j) Requests relief for a marginal property located in a State that

has determined in advance that it will not allow such relief under

Sec. 204.214.

Sec. 204.210 How do I obtain accounting and auditing relief?

(a) To take accounting relief under Secs. 204.203, 204.204, and

204.205, you must notify MMS in writing before the first day of the

sales month for which you begin taking your relief.

(1) Your notification must contain:

(i) Your company name, MMS-assigned Payor Code, address, phone

number, and contact name;

(ii) The specific Accounting Identification Number(s) (MMS lease

number and revenue source);

(iii) The specific relief option under Secs. 204.203, 204.204, and

204.205 that you are taking;

(iv) The first sales month that your relief is effective for;

(v) The frequency of your cumulative reports and payments if you

are taking relief under Sec. 204.203; and

(vi) The single selling arrangement you will use to report

royalties and allowances for your marginal property if you are taking

relief under Sec. 204.205.

(2) You may file a single notification for multiple marginal

properties if you are taking the same relief with the same effective

date for all the properties.

(3) You do not need to remit a processing fee with your

notification.

[[Page 3376]]

(b) To obtain accounting or auditing relief under Secs. 204.206,

204.207, and 204.208, you must file a written request for relief with

MMS.

(1) Your request must contain:

(i) Your company name, MMS-assigned Payor Code, address, phone

number, and contact name;

(ii) The specific Accounting Identification Number(s) (MMS lease

number and Revenue Source); and

(iii) A complete and detailed description of the specific

accounting or auditing relief you seek under Secs. 204.206, 204.207,

and 204.208.

(2) You may file a single request for multiple marginal properties

if you are requesting the same relief for all properties.

(3) You must remit a processing fee in the amount of $50 for each

request for marginal property relief under Secs. 204.206, 204.207, and

204.208. If you file a single request for multiple marginal properties

as provided in paragraph (b)(2) of this section, your processing fee is

$50 for the entire request.

(i) If you do not remit the processing fee with your request for

relief, MMS will return your request for relief unprocessed.

(ii) If you remit a partial processing fee, your request for relief

will not be processed until you pay the processing fee in full. MMS

will notify you in writing that your processing fee is insufficient.

You will have 30 days to remit the balance. If you do not remit the

balance within the 30-day period, MMS will return your request for

relief unprocessed.

(iii) Processing fees, including partial processing fees, are not

refundable for any reason.

(iv) See MMS's Marginal Property Guidelines for additional

instructions on submitting processing fees.

(c) You must submit notifications, requests, or processing fees

required under this section to the address specified in MMS's Marginal

Properties Guidelines.

Sec. 204.211 What will MMS do when it receives my request for

accounting and auditing relief?

When MMS receives your request for accounting and auditing relief

under Sec. 204.210(b), it will notify you as follows:

(a) If your request for relief is complete, MMS and the State may

either approve, deny, or modify your request in writing.

(b) If your request for relief is not complete, MMS will notify you

in writing that your request is incomplete and identify any missing

information. You must submit the missing information within 30 days of

your receipt of MMS's notice that your request is incomplete.

(1) If you submit all required information, MMS and the State may

approve, deny, or modify your request for relief;

(2) If you do not submit the missing information within 30 days,

MMS will return your request for relief as incomplete.

(i) If MMS returns your request because it is incomplete, MMS will

not return any processing fee you submitted with your request.

(ii) You may submit a new request for relief under this subpart at

any time after MMS returns your incomplete request. You must also

submit another processing fee.

Sec. 204.212 Who will decide whether to approve, deny, or modify my

request for accounting and auditing relief?

(a) If there is not a State concerned for your marginal property,

only MMS will decide whether to approve, deny, or modify your relief

request.

(b) If there is a State concerned for your marginal property, the

highest State official having ultimate authority over the collection of

royalties or the State official to whom that authority has been

delegated must jointly determine with MMS whether to approve, deny, or

modify your relief request. States must submit the following minimum

information to MMS in writing within 30 days of the effective date of

this rule:

(1) The name and title of the State official authorized to jointly

determine with MMS whether to approve, deny, or modify relief requests;

and

(2) The name, address, and telephone number of the State contact

for processing relief requests.

(c) MMS will not approve your request to use an alternate valuation

method until the Assistant Secretary for Land and Minerals Management

approves the request.

Sec. 204.213 How will MMS and the State jointly determine whether to

approve, deny, or modify my request for accounting and auditing relief?

If a State determines in advance that it may grant one or more of

the relief options under this subpart:

(a) MMS will preliminarily determine whether to approve, deny, or

modify your relief request and send its preliminary determination to

the State;

(b) After the State receives MMS's preliminary determination, it

must notify MMS in writing within 30 days, or such longer period as MMS

may allow, of its recommendation to approve, deny, or modify your

relief request.

(1) If the State approves your relief request:

(i) MMS will approve your relief request if MMS's preliminary

determination was to approve your request;

(ii) MMS may either approve or deny your relief request if MMS's

preliminary determination was to deny your request.

(2) If the State denies your relief request, then MMS will deny

your relief request.

(3) If the State approves MMS's modification(s) to your relief

request, MMS will modify your relief request.

(4) If the State denies MMS's modification(s) to your relief

request, MMS will deny your relief request.

(5) If the State modifies your relief request, MMS will consider

the modification(s) and will either:

(i) Modify your request if it approves the State's modification(s);

or

(ii) Deny your request if it denies the State's modification(s).

(c) If the State does not notify MMS of its decision within the

time period allowed under paragraph (b) of this section, then the State

is deemed to have agreed with MMS's preliminary determination.

Sec. 204.214 May a State decide in advance that it will not allow

certain relief options under this subpart?

(a) A State may decide in advance that it will not allow some or

all of the relief options specified in this subpart. If it so decides,

the State must:

(1) Notify the Associate Director for Royalty Management, MMS, in

writing, no later than 90 days before the beginning of the applicable

calendar year, of its intent to disallow one or more of the relief

options under this subpart; and

(2) Specify in its notice of intent to MMS which relief option(s)

it will not allow.

(b) If a State decides in advance under paragraph (a) of this

section that it will not allow some or all of the relief options

specified in this subpart, it may later decide that it will allow some

or all of the relief options in this subpart. If it so decides, the

State must:

(1) Notify the Associate Director for Royalty Management, MMS, in

writing, no later than 90 days before the beginning of the applicable

calendar year, of its intent to allow one or more of the relief options

under Sec. 204.202; and

(2) Specify in its notice of intent to MMS which relief option(s)

it will allow.

(c) MMS will publish a notice of the State's intent to disallow or

to allow

[[Page 3377]]

certain relief options under this section in the Federal Register no

later than 60 days before the beginning of the applicable calendar

year.

Sec. 204.215 How will MMS notify me of the decision to approve, deny,

or modify my request for accounting and auditing relief?

MMS will notify you in writing of the decision on your request for

accounting and auditing relief.

(a) If MMS and the State approve your request for relief, MMS will

notify you of the effective date of your accounting or auditing relief

and other specifics of the relief approved.

(b) If MMS and the State deny your relief request, MMS will notify

you of the reasons for denial and your appeal rights under Sec. 204.6.

(c) If MMS and the State modify your relief request, MMS will

notify you of the modifications.

(1) You have 30 days from your receipt of MMS's notice to either

accept or reject any modification(s) in writing.

(2) If you reject the modification(s) or fail to respond to MMS's

notice, MMS and the State will deny your relief request. MMS will

notify you in writing of the reasons for denial and your appeal rights

under Sec. 204.6.

Sec. 204.216 What other guidance is available for accounting and

auditing relief obtained under this subpart?

MMS will provide additional guidance for accounting and auditing

relief in MMS's Marginal Property Guidelines.

Sec. 204.217 What if my property ceases to qualify for relief obtained

under this subpart?

(a) Your property must qualify for relief under this subpart for

each calendar year based on production during the base period. The

notice or request you provided to MMS under Sec. 204.210 for the first

calendar year that your property qualified for relief remains effective

for successive calendar years if you continue to qualify.

(b) If you find your property is no longer eligible for relief

because production increased in the most recent Base Period, the relief

for your property terminates as of December 31 of that calendar year.

By December 31, you must notify MMS in writing at the address provided

in MMS's Marginal Property Guidelines that the relief for your property

has terminated.

(c) MMS may retroactively rescind the relief for your property if

MMS determines that your property was not eligible for the relief

obtained under this subpart because:

(1) You did not submit a notice or request for relief under

Sec. 204.210;

(2) You submitted erroneous information in the notice or request

for relief you provided to MMS under Sec. 204.210 or in your royalty or

production reports; or

(3) Your property is no longer eligible for relief because

production increased, but you failed to provide the notice required

under paragraph (b) of this section.

(d) If you took relief under this subpart for a period for which

you were not eligible, you may owe additional royalties and late

payment interest determined under part 218 of this title from the date

your payment was due until the date MMS receives it.

Sec. 204.218 May I obtain accounting and auditing relief for a

marginal property that benefits from other Federal or State incentive

programs?

You may obtain accounting and auditing relief for your marginal

property under this subpart even if the property benefits from other

Federal or State production incentive programs.

[FR Doc. 99-1219 Filed 1-20-99; 8:45 am]

BILLING CODE 4310-MR-P