Reopening Public Comment Period and Establishing Workshops on Proposed RuleEstablishing Oil Value for Royalty Due on Federal Leases

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC09

Reopening Public Comment Period and Establishing Workshops on

Proposed Rule--Establishing Oil Value for Royalty Due on Federal Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of reopening of public comment period and notice of

workshops.

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SUMMARY: The Minerals Management Service (MMS) is reopening the public

comment period on a further supplementary proposed rule amending the

royalty valuation regulations for crude oil produced from Federal

leases.

During the comment period, MMS will hold three workshops. The

primary purpose of these workshops is to receive new comments not

previously submitted in this rulemaking record. MMS also seeks written

comments focusing on new comments.

We are particularly interested in ideas that would help move the

rulemaking process forward while still ensuring that the public

receives fair value for its resources. There is no need to resubmit

previously submitted comments since comments on previous proposals

already are included in the rulemaking record.

Interested parties are invited to attend and participate in these

workshops. MMS would welcome written comments submitted prior to the

workshops to help identify the most important issues for discussion.

DATES: Comments must be submitted on or before April 12, 1999. The

workshops will be held as follows:

Workshop 1--Houston, Texas, on March 24, 1999, beginning at 9 a.m. and

ending at 5 p.m., Central time

Workshop 2--Albuquerque, New Mexico, on March 25, 1999, beginning at 9

a.m. and ending at 5 p.m., Mountain time

Workshop 3--Washington, D.C., on April 6, 1999, beginning at 9 a.m. and

ending at 5 p.m., Eastern time

ADDRESSES: Workshop 1 will be held at the Houston Compliance Division

Office, Minerals Management Service, 4141 North Sam Houston Parkway

East, Houston, Texas 77032. Phone: (281) 987-6802.

Workshop 2 will be held at the Bureau of Land Management District

Office, 435 Montano Road, NE, Albuquerque, New Mexico 87107. Phone:

(505) 761-8700.

Workshop 3 will be held at the Main Interior Building, 1849 C Street,

NW, Washington, D.C. 20240 (large buffet room adjacent to the cafeteria

in the basement). Phone: (202) 208-3512.

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

Publications Staff, Minerals Management Service, Royalty Management

Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225-0165,

telephone (303) 231-3432, fax number (303) 231-3385, e-Mail

David__G[email protected].

SUPPLEMENTARY INFORMATION: MMS published an advance notice of its

intent to amend the current Federal oil valuation regulations in 30 CFR

parts 202 and 206 on December 20, 1995 (60 FR 65610). The purpose of

that notice was to solicit comments on new methodologies to establish

the royalty value of Federal (and Indian) crude oil production in view

of the changes in the domestic petroleum market, particularly the

market's move away from posted prices as an indicator of market value.

Based on comments received on the advance notice, together with

information gained from a number of presentations by experts in the oil

marketing business, MMS published its initial notice of proposed

rulemaking on January 24, 1997 (62 FR 3742), applicable to Federal

leases only. MMS held public meetings in Lakewood, Colorado, and

Houston, Texas, to hear comments on the proposal.

In response to the variety of comments received on the initial

proposal, MMS published a supplementary proposed rule on July 3, 1997

(62 FR 36030). This proposal expanded the eligibility requirements for

valuing oil disposed of under arm's-length transactions.

Because of the substantial comments received on both proposals, MMS

reopened the rulemaking to public comment on September 22, 1997 (62 FR

49460). MMS specifically requested comments on five valuation

alternatives arising from the public comments. MMS held seven public

workshops to discuss valuation alternatives.

As a result of comments received on the proposed alternatives and

comments made at the public workshops, MMS published a second

supplementary proposed rule on February 6, 1998 (63 FR 6113). The

comment period for this second supplementary proposed rule was to close

on March 23, 1998, but was extended to April 7, 1998 (63 FR 14057). MMS

held five public workshops (63 FR 6887) on this second supplementary

proposed rule: in Houston, Texas, on February 18, 1998; Washington,

D.C., on February 25, 1998; Lakewood, Colorado, on March 2, 1998;

Bakersfield, California, on March 11, 1998; and Casper, Wyoming, on

March 12, 1998.

By Federal Register notice dated July 8, 1998 (63 FR 36868), MMS

reopened the comment period for the February 6, 1998, second

supplementary proposed rule from July 9, 1998, until July 24, 1998, to

receive further comment on the proposed rule. Meetings involving MMS,

industry representatives, and Members of Congress were held in

Washington, D.C., on July 9 and July 22, 1998. Another meeting

involving Members of Congress and various other interested groups was

held in Washington, D.C., on July 21, 1998. By Federal Register notice

dated July 27, 1998 (63 FR 40073), MMS extended the comment period

until July 31, 1998.

On August 31, 1998, the Assistant Secretary, Land and Minerals

Management, sent to Members of Congress a letter outlining the

direction the Department of the Interior might take on the major issues

in the final rulemaking. This letter can be accessed at http://

www.rmp.mms.gov/library/readroom/pubcomm/FCCont.htm. A copy of the

letter also is attached as an appendix to the notice, and MMS would

like comments on the matters addressed in the letter that relate to the

proposed rule.

MMS is reopening the comment period on the second supplementary

proposed rule in response to many requests from Members of Congress and

other parties interested in moving the

[[Page 12268]]

process forward to publish a final rule. MMS is seeking new, not-

previously-considered ideas that will help move the process forward

while still ensuring that the public receives fair value for production

of its resources. MMS would prefer written comments submitted prior to

the workshops to help identify the most important issues for

discussion. Commenters will be able to supplement these written

comments, if necessary, after the workshops.

It is not necessary to resubmit comments already provided. MMS will

consider comments submitted during previous comment periods as well as

comments submitted during this new comment period when it prepares a

final rule.

The workshops will be open to the public without advance

registration. Public attendance may be limited to the space available.

We encourage a workshop atmosphere; members of the public are

encouraged to participate in a discussion of the alternatives. For

building security measures, each person may be required to present a

picture identification to gain entry to the meetings.

Dated: March 9, 1999.

Harold Corley,

Acting Associate Director for Royalty Management.

United States Department of the Interior

August 31, 1998.

Honorable John Breaux,

United States Senate,

Washington, DC 20510

Dear Senator Breaux: In accordance with the commitment contained

in my August 11, 1998, letter to you, enclosed is an outline of the

direction the Department of the Interior plans to take on the major

issues in the final Federal oil valuation rule. The purpose of this

outline is to advise you of the progress on the final rule. An

identical letter has been sent to Senators Hutchison, Murkowski,

Nickles, and Domenici.

After thoroughly reviewing and considering all of the comments

received on the several proposed rules, including the July 16, 1998,

further supplementary proposed rule, we are in the process of

developing a final rulemaking consistent with the enclosed outline.

I believe that you will see that we intend to make changes in

response to comments from the oil and gas industry and other

commenters while at the same time assure that we achieve fair market

value for the public's mineral resources. This outline reflects our

current state of decisions, but there may be changes as the final

rule proceeds through the review process in the Department and at

the Office of Management and Budget.

Recognizing that each company has individual marketing

circumstances and accounting capabilities, in the final rule, we

would allow companies a number of options. For example, if the

lessee sells its oil at arm's length after one or more arm's-length

exchanges, we would allow the lessee the option of either tracing

the production to the arm's length sale after the exchanges or

paying on an index price. For the Rocky Mountain Region, lessees

would use a series of benchmarks instead of the index price if they

choose not to trace the production to the arm's-length sale. We

would offer the same option if the lessee sells or transfers its oil

to an affiliate that resells the oil under an arm's length contract.

Further, the final rule would provide that the Assistant Secretary

for Land and Mineral's Management or his/her delegate may issue

binding valuation determinations.

I again call upon you and your colleagues to remove the rider,

currently in the Interior Appropriations Bill, that would prohibit

finalizing the rule for another year. As I indicated in my earlier

letter, we have worked very hard over the past 3 years to

accommodate the interests of all affected stakeholders in this

rulemaking. We believe that we have developed the very best

rulemaking possible, recognizing that the industry that pays the

royalties and the Federal Government and States that receives the

royalties, are simply never going to agree on certain issues.

Delaying the rule for a year will not resolve these differences but

rather assure continued disputes over the existing regulations and

the loss of millions of dollars to Federal and State treasuries

because such regulations are outdated.

As you may know, the comment period on the rulemaking is closed.

Therefore, we are not accepting any comments in response to the

decision reflected in the enclosed outline.

Thank you again for your continued involvement in this issue.

Sincerely,

Bob Armstrong,

Assistant Secretary, Land and Minerals Management

Enclosure:

Outline for Federal Oil Valuation Final Rulemaking

Note: The following outline reflects the direction in which the

Minerals Management Service (MMS) and the Department of the Interior

(Department) are headed in developing a final oil rule after

reviewing all of the comments received on the several proposed

rulemakings, including the July 16, 1998, further supplementary

proposed rulemaking. The decisions reflected in this outline are

subject to modification when the draft final rule proceeds through

review in the Department and the Office of Management and Budget.

Because the comment period on the rulemaking is closed, we are not

accepting any comments in response to the decisions reflected in

this outline.

Definitions

Affiliate

We would define the term ``affiliate'' separately from the term

``arm's length,'' as suggested by many commenters. The term

``affiliate'' will use the same criteria for determining control as the

existing regulations (less than 10 percent ownership representing non-

control, 10-50 percent representing a presumption of control, and

greater than 50 percent representing control). Following publication of

the final rule, MMS intends to develop specific guidelines for lessees

to follow when attempting to rebut the presumption of control when

ownership is between 10 and 50 percent.

Gross Proceeds

We would maintain the definition of the term ``gross proceeds''

proposed in the February 6, 1998, second supplementary proposed rule.

That is, the term ``gross proceeds'' would include payments for

marketing services which the lessee must perform at no cost to the

Federal Government and for payments made to reduce or buy down the

purchase price of oil to be produced in later periods.

Valuation of Oil Sold by the Lessee at Arm's Length

We would provide that value is the gross proceeds received by the

lessees under an arm's-length sales contract with three exceptions, the

first two of which are contained in the existing regulations:

1. The sales contract does not reflect total consideration actually

transferred either directly or indirectly from the buyer to the seller.

2. The value is not reasonable due to either:

a. Misconduct by or between the parties to the arm's-length

contract; or

b. Breach of the lessee's duty to market the oil for the mutual

benefit of the lessee and the lessor. In response to comments received

from industry and others about the revised language in the July 16,

1998, proposal being ambiguous, in the final rule MMS is moving in the

direction of not including the July 16 language in the rule, but

stating in the preamble that MMS will not second-guess a company's

marketing decisions.

3. The oil is disposed of under a non-competitive call that is

exercise by the purchaser.

If any one of these exceptions applies, then the lessee must value

its oil based on the method used to value oil not sold at arm's-length

(Alaska North Slope (ANS) spot price in California and Alaska,

benchmarks in the Rocky Mountains, and applicable spot prices for the

rest of the country).

[[Page 12269]]

Valuation of Oil Sold After Arm's-length Exchange Agreements or Sold by

an Affiliate at Arm's Length

If the lessees sells its oil at arm's length after one or more

arm's-length exchanges, we would allow the lessee the option of valuing

its production on either the sale after the exchange(s) or index

prices. For the Rocky Mountain Region, lessees would use a series of

benchmarks instead of index prices if they choose not to trace the

production to the arm's-length sale.

Similarly, if the lessee sells or transfers its oil to an affiliate

that resells the oil under an arm's-length contract, we would allow the

lessee the option of valuing the production on either the gross

proceeds received by the affiliate under the arm's-length resale

contract, subject to the above stated exceptions for oil sold by the

lessee at arm's length, or index prices. Again, for the Rocky Mountain

Region, a series of prescribed benchmarks would be used instead of

index prices.

The lessee could make separate elections for oil that it exchanges

at arm's length and oil that it transfers to an affiliate that resells

the oil. However, each of these elections must be for a 2-year period,

and the lessee would value all oil in each of these categories in the

same manner.

Valuation of Oil Not Sold at Arm's Length

For California and Alaska: ANS spot price less a location/quality

differential would apply.

For the Rocky Mountain Region: (Utah, Colorado, Wyoming, Montana,

North Dakota, and South Dakota): The first applicable of the following

benchmarks would apply:

1. The highest bid under an MMS-approved tendering program in which

the lessee:

a. Offers and sells at least 30 percent of its production from both

Federal and non-Federal leases in the area, and

b. Receives at least three bids for the tendered volumes from

bidders who do not have their own tendering programs that cover some or

all of the same area.

2. The volume-weighted average of the lessee's and its affiliate's

arm's-length contract prices for the purchase or sale of oil from the

field or area. The total volume purchased or sold under those contracts

must exceed 50 percent of the lessee's and its affiliate's production

from both Federal and non-Federal leases in the same field or area.

3. The spot price for West Texas Intermediate crude at Cushing,

Oklahoma, adjusted for location and quality.

4. If all of the first three benchmarks result in an unreasonable

value, the MMS Director could establish an alternative valuation

method.

For the OCS and Mid-Continent (other than California, Alaska, and

the six-State Rocky Mountain Region): A market center spot price less a

location/quality differential from the market center to the lease would

apply.

Location/Quality Adjustments to Index Prices

If the lessee used index pricing to value its production, it would

adjust the index price for location/quality differentials using:

1. A location/quality differential contained in the lessee's own

arm's-length exchange agreement, or

2. An MMS-calculated location/quality differential. MMS would

publish annually a series of differentials based on data MMS would

collect on Form MMS-4415.

The lessee could also claim a transportation allowance when valuing

oil based on either index or arm's-length gross proceeds as discussed

below. Quality bank adjustments based on applicable pipeline quality

bank specifications could also be taken if they did not duplicate the

differentials above.

Transportation Allowances

Arm's-length transportation contracts

If the lessee or its affiliate transports its oil under an arm's-

length transportation contract, the lessee could claim a transportation

allowance for the actual costs incurred under that contract.

Non-arm's-length transportation contracts

If the lessee or its affiliate transports its oil under a non-

arm's-length transportation contract, the lessee could claim a

transportation allowance based on its reasonable, actual costs

including operating and maintenance expenses, overhead, depreciation,

and a return on investment using a rate of return equal to the

industrial bond yield index for Standard and Poor's BBB rating. We

would not allow Federal Energy Regulatory Commission tariffs as an

exception to computing actual costs.

Subsea Gathering

We would include language in the preamble stating that MMS will

review movement of bulk production from subsea completions to a

platform on the ocean surface on a case-by-case basis to determine

whether it is gathering or qualifies as transportation. Recognizing

that this issue is primarily a gas issue, MMS intends to resolve it by

issuing separate regulations or policy guidance.

Non-Binding Valuation Guidance

We would provide that the Assistant Secretary for Land and Minerals

Management or his/her delegate may issue binding valuation

determinations.

[FR Doc. 99-6147 Filed 3-11-99; 8:45 am]

BILLING CODE 4310-MR-P