[Federal Register: December 17, 2007 (Volume 72, Number 241)]
[Rules and Regulations]
[Page 71231-71245]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17de07-12]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 206
RIN 1010-AD00
Indian Oil Valuation
AGENCY: Minerals Management Service, Interior.
ACTION: Final rule.
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SUMMARY: The Minerals Management Service (MMS) is amending the existing
regulations regarding valuation, for royalty purposes, of oil produced
from Indian leases. These amendments will clarify and update the
existing regulations.
DATES: Effective February 1, 2008.
FOR FURTHER INFORMATION CONTACT: Sharron L. Gebhardt, Lead Regulatory
Specialist, Minerals Management Service, Minerals Revenue Management,
P.O. Box 25165, MS 302B2, Denver, Colorado 80225, telephone (303) 231-
3211, fax (303) 231-3781, or e-mail Sharron.Gebhardt@mms.gov. The
principal authors of this final rule are John Barder of Minerals
Revenue Management, MMS, Department of the Interior, and Geoffrey Heath
of the Office of the Solicitor, Department of the Interior, Washington,
DC.
SUPPLEMENTARY INFORMATION:
I. Background
The MMS published a proposed rule in the Federal Register on
February 13, 2006 (71 FR 7453), referred to in this rule as the 2006
Indian Oil Proposed Rule or, simply, the proposed rule, that would
amend the regulations governing the valuation for royalty purposes of
crude oil produced from Indian leases. Before developing the proposed
rule, MMS held a series of eight public meetings in March and June 2005
to consult with Indian tribes and individual Indian mineral owners and
to obtain information from interested parties. The intent of the
proposed rulemaking was to add more certainty to the valuation of oil
produced from Indian lands, eliminate reliance on oil posted prices,
and address the unique terms of Indian tribal and allotted leases--in
particular, the major portion provision. Because of the response from
Indian tribes and industry to the proposed rule, MMS plans to convene a
negotiated rulemaking committee that will make recommendations
regarding the major portion provision in Indian tribal and allotted
leases.
For clarification, relevant rulemaking activity is listed below.
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Publication date Federal Register reference Publication title Referred to in this final rule as
--------------------------------------------------------------------------------------------------------------------------------------------------------
July 7, 2006.......................... 71 FR 38545................... Reporting Amendments Proposed Rule..... 2006 Reporting Amendments Proposed
Rule.
February 13, 2006..................... 71 FR 7453.................... Indian Oil Valuation Proposed Rule..... 2006 Indian Oil Proposed Rule.
March 10, 2005........................ 70 FR 11869................... Federal Gas Valuation Final Rule....... 2005 Federal Gas Final Rule.
Public Workshop on Proposed Rule--
Establishing Oil Value for Royalty Due
on Indian Leases.
February 22, 2005..................... 70 FR 8556.................... (Proposed Rule of February 12, 1998 (63 2005 Establishing Oil Value for Royalty
FR 7089) and Supplementary Proposed Due on Indian Leases--Workshop.
Rule of January 5, 2000 (65 FR 403 are
withdrawn).
May 24, 2004 Effective August 1, 2004. 69 FR 29432................... Federal Oil Valuation.................. 2004 Federal Oil Final Rule Technical
Final Rule Technical Amendment......... Amendment.
May 5, 2004 Effective August 1, 2004.. 69 FR 24959................... Federal Oil Valuation.................. 2004 Federal Oil Final Rule.
Final Rule.............................
September 28, 2000.................... 65 FR 58237................... Establishing Oil Value for Royalty Due 2000 Indian Oil Proposed Rule.
on Indian Leases: Proposed Rule.
March 15, 2000 Effective June 1, 2000-- 65 FR 14022................... Establishing Oil Value for Royalty Due 2000 Federal Oil Final Rule.
Amended 2004. on Federal Leases: Final Rule.
February 28, 2000..................... 65 FR 10436................... Establishing Oil Value for Royalty Due 2000 Indian Oil Revised Supplementary
on Indian Leases. Proposed Rule.
Supplementary Proposed Rule and Notice
of Extension of Comment Period.
January 5, 2000....................... 65 FR 403..................... Establishing Oil Value for Royalty Due 2000 Indian Oil Supplementary Proposed
on Indian Leases. Rule.
Supplementary Proposed Rule............
August 10, 1999: Effective January 1, 64 FR 43506................... Amendments to Gas Valuation Regulations 1999 Indian Gas Final Rule.
2000. for Indian Leases.
Final Rule.............................
April 9, 1998......................... 63 FR 17349................... Establishing Oil Value for Royalty Due 1998 Indian Oil Proposed Rule Comment
on Indian Leases: Proposed Rule. Period Extension.
Extension of Public Comment Period.....
February 12, 1998..................... 63 FR 7089.................... Establishing Oil Value for Royalty Due 1998 Indian Oil Proposed Rule.
on Indian Leases.
Proposed Rule..........................
January 15, 1988...................... 53 FR 1184.................... Part 3--Revision of Oil Product 1988 Oil Valuation Final Rule.
Valuation Regulations and Related
Topics.
Final Rule.............................
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[[Page 71232]]
II. Comments on the Proposed Rule
The MMS received comments from the following entities: Two Indian
tribes, three industry trade associations, eight oil and gas producers,
and one individual. The comments were generally not supportive of the
changes outlined in the 2006 Indian Oil Proposed Rule. The most
controversial topics were the proposed modification of Form MMS-2014,
Report of Sales and Royalty Remittance, as part of the proposed major
portion calculations, and the proposed transportation allowance
changes.
A. Definitions
The following chart summarizes the changes to definitions adopted
in this final rule. The comments addressing the specific issues are
summarized in the discussion that follows the chart.
Changes to Definitions at 30 CFR 206.51
----------------------------------------------------------------------------------------------------------------
Change proposed in 2006 Indian
Definition Oil Proposed Rule This final rule
----------------------------------------------------------------------------------------------------------------
Affiliate...................... Add new definition.............. Adds new definition as proposed.
Area........................... Revise definition............... Not adopted as proposed.
Arm's-length contract.......... Revise definition............... Adopts as proposed.
Designated area................ Add new definition.............. Not adopted as proposed.
Exchange agreement............. Add new definition.............. Adds new definition as proposed.
Gross proceeds................. Revise definition............... Revises as proposed.
Indian tribe................... Revise definition............... Revises as proposed.
Individual Indian mineral owner Add new definition.............. Adds new definition as proposed.
Lessee......................... Revise definition............... Revises proposed definition.
Lessor......................... Add new definition.............. Adds new definition as proposed.
Like-quality lease products.... Eliminate....................... Eliminates as proposed.
Like-quality oil............... Replace and modify existing Adds new definition as proposed.
definition of Like-Quality
Lease Products.
Load oil....................... Eliminate....................... Eliminates as proposed.
Location differential.......... Add new definition.............. Adds new definition as proposed.
Marketable condition........... Revise definition............... Revises proposed definition in light of
comments.
Marketing affiliate............ Eliminate....................... Eliminates as proposed.
Minimum royalty................ Eliminate....................... Eliminates as proposed.
Net profit share............... Eliminate....................... Eliminates as proposed.
Net-back method................ Eliminate....................... Eliminates as proposed.
Oil............................ Revise definition............... Revises as proposed.
Oil shale...................... Eliminate....................... Eliminates as proposed.
Oil type....................... Add new definition.............. Not adopted as proposed.
Operating rights owner......... Add new definition.............. Adds new definition as proposed.
Posted price................... Eliminate....................... Eliminates as proposed.
Quality differential........... Add new definition.............. Adds new definition as proposed.
Selling arrangement............ Eliminate....................... Not eliminated as proposed.
Tar sands...................... Eliminate....................... Eliminates as proposed.
----------------------------------------------------------------------------------------------------------------
In the 2006 Indian Oil Proposed Rule, MMS proposed to add a
definition of the term affiliate and revise the definition of arm's-
length contract in Sec. 206.51 to conform to the 2004 Federal Oil
Final Rule and to align the rule with the court's decision in National
Mining Association v. Department of the Interior, 177 F.3d 1 (DC Cir.
1999).
Comment: The MMS received one comment regarding the proposed change
to the definition of affiliate. The industry association commenter
stated that ``[o]pposing economic interest is not a defined term, and
MMS does not state any factors that will be considered in determining
whether parties to a contract have opposing economic interest. MMS
should define the term `opposing economic interests' and incorporate
determining factors from the Vastar decision in the definition.''
MMS Response: The MMS examines whether two parties have opposing
economic interests on a case-by-case basis under existing precedents.
We have included the undefined phrase ``opposing economic interest'' in
our definition of ``arm's-length contract'' since the oil royalty
valuation rules were first issued in 1988.
The definition of ``arm's-length contract'' as originally proposed
in 1987 did not include the requirement for ``opposing economic
interests.'' Our 1987 proposal defined ``arm's-length contract'' simply
to include ``a contract or agreement between independent, nonaffiliated
persons.'' 52 FR 1858 (January 15, 1987). However, at the urging of a
state commenter, MMS included the ``opposing economic interest''
concept in the final rule in 1988. The state commenter stressed that
even though the inclusion of additional criteria such as ``adverse
economic interest'' would increase subjectivity, ``the appeals process
is in place to provide protection against arbitrary decisions.''
The 1988 rule established the basic principles of MMS royalty
valuation that have not changed over time. See Revision of Oil Product
Valuation Regulations and Related Topics, 53 FR 1184 (Jan. 15, 1988)
(``Although the parties may have common interests elsewhere, their
interests must be opposing with respect to the contract in issue. The
general presumption is that persons buying or selling products from
Federal and Indian leases are willing, knowledgeable, and not obligated
to buy or sell.'') We affirm those principles today.
As was predicted by the commenter in 1988, the appeals process has
not only provided protection against arbitrary decisions, but it has
also resulted in administrative precedent interpreting the phrase
``opposing economic interest.'' For example, through appeals such as
Vastar Resources, Inc., 167 IBLA 17 (2005), the Department of the
Interior has determined that ``opposing economic interests'' need not
be absolute in order to meet the definition of an ``arm's-length
contract.'' Accordingly, MMS will focus on the parties' economic
interests in the specific contract at issue,
[[Page 71233]]
and the fact that the parties may have common interests elsewhere does
not necessarily negate their ability to have opposing economic
interests with respect to the contract under view. Further, opposing
economic interests are rarely absolute even within a single contract.
For example, between two parties to an oil and gas lease, some economic
interests are common and some are opposed. When oil is taken in kind,
the common economic interest of production may appear to outweigh the
remaining opposing economic interests. In Vastar, the Interior Board of
Land Appeals considered objective factors such as the contentious
negotiations leading to the execution of the contract, the terms of the
contract, and the parties' subsequent conduct as evidence of the
parties' opposing economic interests regarding the particular sales
contract.
For purposes of interpreting the definition of ``opposing economic
interests,'' MMS will follow the decisions of the Interior Board of
Land Appeals until further rulemaking prescribes otherwise.
This final rule adopts the proposed definitions of affiliate and
arm's-length contract. The MMS believes the existing definitions at
Sec. 206.51, should be amended to be consistent with the DC Circuit's
decision in National Mining Association v. Department of the Interior,
177 F.3d 1 (DC Cir. 1999). The new definition of affiliate and the
clarification to the definition of arm's-length contract will also make
the definitions consistent with the 2004 Federal Oil Final Rule.
As we explained in amending the definition of ``affiliate'' in the
Federal crude oil valuation rule promulgated on March 15, 2000
(effective June 1, 2000):
In National Mining Association v. Department of the Interior,
177 F.3d 1 (DC Cir. 1999) (decided May 28, 1999), the United States
Court of Appeals for the District of Columbia Circuit addressed the
Office of Surface Mining Reclamation and Enforcement's (OSM's) so-
called ``ownership and control'' rule at 30 CFR 773.5(b). That rule
presumed ownership or control under six identified circumstances.
One of those circumstances was where one entity owned between 10 and
50 percent of another entity. The court found that OSM had not
offered any basis to support the rule's presumption ``that an owner
of as little as ten per cent of a company's stock controls it.'' 177
F.3d at 5. The court continued, ``While ten percent ownership may,
under specific circumstances, confer control, OSM has cited no
authority for the proposition that it is ordinarily likely to do
so.'' Id. * * *
In the final rule, MMS is revising the definition of
``affiliate'' in light of the National Mining Association decision.
In the event of ownership or common ownership of between 10 and 50
percent, paragraph (2) of the definition in the final rule, instead
of creating a presumption of control, identifies a number of factors
that MMS will consider in determining whether there is control under
the circumstances of a particular case.
65 FR 14022, 14039 (Mar. 15, 2000). We adopt the same amendment
here for Indian leases. Thus, the final rule replaces the presumption
of control (and the consequent presumption of a non-arm's-length
relationship) in the current rule, in the event of ownership or common
ownership of 10 through 50 percent of the voting stock, with a case-by-
case examination of the circumstances.
We emphasize that MMS will not presume control in the event of
ownership or common ownership of 10 through 50 percent. MMS anticipates
that in considering the factors identified in paragraph (2) of the
definition, the facts of a particular case would demonstrate control
(and therefore affiliation) only in exceptional circumstances. MMS
anticipates that the facts will show that the relationship between
corporate entities with minority ownership or common ownership is an
arm's-length relationship in the vast majority of cases. MMS presumes
in the absence of other evidence that transactions between corporate
entities with minority ownership or common ownership are undertaken in
good faith. The applicable rule is generally expressed in State Public
Utilities Commission ex rel. Springfield v. Springfield Gas and
Electric Company, 291 Ill. 209, 234.
Whether a contract or arrangement between the lessee and its
purchaser should be regarded as arm's length or non-arm's length does
not depend on whether the lease is a Federal lease or an Indian lease.
The MMS proposed to change the definition of area as part of the
proposed major portion value calculation changes. This final rule does
not include the proposed change to the definition of area. That term is
still used in the major portion valuation provisions, which remain
unchanged in this final rule for the reasons explained below.
Therefore, the definition of area at Sec. 206.51 is retained.
This final rule does not include the proposed definition of
designated area because, as explained below, this final rule does not
adopt the proposed major portion valuation provisions.
This final rule adopts the proposed definition of exchange
agreement, which is used in the new valuation provisions at Sec.
206.52(e).
This final rule includes the proposed changes to the definition of
gross proceeds. This change is consistent with the 2004 Federal Oil
Final Rule and makes helpful technical clarifications. There were no
comments on this proposed change.
This final rule adopts the proposed definitions of Indian tribe and
individual Indian mineral owner. The new wording clarifies that this
rule applies to Indian tribes for whom the U.S. holds a mineral in
trust or to individual Indians who hold title to a mineral subject to a
restriction against alienation. This is more specific than the former
reference to lands held in trust or subject to a restriction against
alienation.
This final rule adopts the proposed definitions of lessee and
operating rights owner, except that the final rule does not adopt
clause (3) of the proposed definition of ``lessee.'' With one
exception, the changes in wording that are adopted are technical
corrections and clarifications.
As the Court noted in Fina Oil and Chemical Corp. v. Norton, 332
F.3d 672 (DC Cir. 2003), regarding gross proceeds and the definition of
``lessee,'' the term ``lessee'' was defined by Federal statute as ``any
person to whom the United States, an Indian tribe, or an Indian
allottee issues a lease, or any person who has been assigned an
obligation to make royalty or other payments required by the lease.''
Public Law No. 97-451 Sec. 3(7), 96 Stat. 2447, 2449 (amended in 1996
to read ``any person to whom the United States issues an oil and gas
lease or any person to whom operating rights in a lease have been
assigned''), codified at 30 U.S.C. 1702(7). The 1988 regulations
followed this statutory definition. In the Fina case, the court found
that MMS improperly sought to use a wholly-owned subsidiary's arm's-
length resale proceeds as the measure of the lessee's gross proceeds in
conflict with the regulation's plain language. (Under the 1988
valuation rules, the affiliate's resale proceeds were used as value
only if the affiliate was a ``marketing affiliate,'' defined as an
affiliate of the lessee whose function was to acquire only the lessee's
production and market that production. The royalty value of oil
transferred non-arm's length to the marketing affiliate was the
affiliate's gross proceeds, provided the marketing affiliate sold the
oil at arm's length.) The Fina court suggested that if MMS believes
that basing value on the intra-corporate transfer is too favorable to
producers, it should amend the regulations through notice-and-comment
rulemaking, not under the
[[Page 71234]]
guise of interpretation. MMS is doing so in this final rule in the
revised 30 CFR 206.52(a).
In this respect, this rule is making the same change made in the
Federal crude oil valuation rule in 2004 at 30 CFR 206.102(a). In many
respects, this final Indian oil valuation rule follows the same
organization and structure as the Federal oil valuation rule
promulgated on March 15, 2000, as amended May 5, 2004. The final
Federal oil valuation rule adopted in March 2000 did not distinguish
between ``marketing affiliates,'' as defined in 1998, and other
affiliates, because MMS adopted an altogether new valuation approach.
That is, the value of oil produced from a Federal lease and transferred
to any affiliate is now determined by the affiliate's ultimate
disposition of that oil or, at the lessee's option under certain
conditions, at an index-based value or other applicable measure. The
definition of ``marketing affiliate'' therefore was removed from the
Federal oil valuation rule.
In the Indian lease context, MMS did not propose, and this final
rule does not include, an index-based valuation option because for the
vast majority of Indian leases, it is either impractical or impossible
to derive reliable adjustments for location and quality between the
lease and a market center with reliable published index prices.
Further, in view of the lower volumes and number of transactions
involved for most Indian leases, such an option would serve little
purpose. As explained elsewhere in this preamble, the final rule simply
adopts the proposal to replace the ``benchmarks'' originally
promulgated in 1988, which have proven to be difficult to apply in
practice, with the first arm's-length sale (minus any transportation
costs) as the basis of value in the event of a non-arm's-length
transfer by the lessee, and where the oil is sold at arm's-length
before refining--a rare circumstance in the context of Indian leases
that produce crude oil.
Since the general valuation approach adopted today eliminates the
``marketing affiliate'' distinction by focusing on the first arm's-
length sale, it is appropriate that the definition of ``marketing
affiliate'' be removed from these regulations. However, it does not
follow that the definition of ``lessee'' needs to be amended. Moreover,
MMS has written this rule in plain English format, using the term
``you'' to mean a lessee, operator, or other person who pays royalties
under this subpart. In all, particularly in light of the removal of the
definition of ``marketing affiliate,'' MMS is adopting the definition
of ``lessee'' as proposed without proposed clause (3) incorporating
affiliates. As the term ``lessee'' is used throughout the final rule,
it either refers to the royalty payor or is specifically distinguished
from the term ``affiliate.'' This change continues to support the
general valuation approach adopted today and is consistent with
statutory interpretation principles set out in United States v.
Bestfoods, 524 U.S. 51, 61 (1998).
Currently, there is no definition of the term lessor in any of the
Indian valuation regulations. Because this term is used in numerous
places in the regulations, MMS proposed to add a definition in the 2006
Indian Oil Proposed Rule. This final rule adopts the proposed
definition of lessor.
This final rule does not include the proposed definition of oil
type because the final rule does not adopt the proposed major portion
provisions. As explained further below, MMS plans to refer the major
portion issue to a negotiated rulemaking committee. In this final rule,
the term like-quality lease products will be changed to like-quality
oil, and the reference to similar legal characteristics in the current
definition of like-quality lease products will be deleted. The term
like-quality lease products is not used in the regulations governing
Indian oil valuation at Sec. Sec. 206.50 through 206.55. The
definition at Sec. 206.51 is identical to the definitions in the 2005
Federal Gas Final Rule and 1999 Indian Gas Final Rule (see Sec. Sec.
206.151 and 206.171). The existing regulations at Sec. 206.51 and the
changes made in this final rule, however, refer to like-quality oil;
and this final rule therefore will define that term. The existing
definition refers to ``similar chemical, physical, and legal
characteristics.'' Crude oil has not been price-controlled in the last
25 years, and there are no legal classifications of crude oil that have
any bearing on royalty valuation issues. We therefore have deleted the
reference to similar legal characteristics.
This final rule includes the proposed definitions of location
differential and quality differential because those terms are used in
the provisions governing valuation of oil disposed of under arm's-
length exchange agreements.
In the 2006 Indian Oil Proposed Rule, MMS proposed to change the
definition of the term marketable condition in Sec. 206.51 to mean
lease products
that are sufficiently free from impurities and otherwise in a
condition that they will be accepted by a purchaser under a sales
contract or transportation contract typical for disposition of
production from the field or area.
The current definition refers to lease products
that are sufficiently free from impurities and otherwise in a
condition that they will be accepted by a purchaser under a sales
contract typical for the field or area.
Summary of Comments: Three industry associations commented on this
proposed change. With respect to the proposed change in the definition
of marketable condition to add a reference to transportation contracts,
one industry association said:
We do accept that MMS has the authority to require the lessee to
put the oil in the condition that contracts for the sale and
purchase of oil typical in a field or area require, or to pay MMS on
the value that oil in such condition would realize. * * *
We believe it is clear that it would not be reasonable for a
producer of sour oil on the outer continental shelf to be required
to sweeten oil simply because the pipeline in the area happens to be
unwilling to transport any sour oil. Similarly, if oil is of a
viscosity that allows it to be transported by truck, but which is
too viscous to be transported by the local pipeline without
blending, blending is not needed to put the oil in marketable
condition. The oil is marketable in exactly the form it is in. It is
acceptable to the party who will ultimately use it. * * *
* * * * *
[W]e strongly disagree with the proposal to require a lessee to
meet the requirements of transportation contracts at no cost to the
lessor. MMS has given no reasons for this proposed change and we
believe that it is clear that the requirements of transportation
contracts are different in kind from the requirements of sales
contracts and that such costs are costs associated with
transportation and should be deductible.
Another industry association opposes the proposed change to the
definition of marketable condition because, in the association's view,
it arbitrarily classifies certain deductible transportation costs as
nondeductible costs of placing production in marketable condition. The
third commenting industry association stated that it did not understand
the proposed change.
MMS Response: The marketable condition rule has always required
lessees to remove basic sediment and water to the level required for
the relevant pipeline. There appears to be no controversy in this
respect. It is not our intention to require a lessee to sweeten sour
oil at its own expense simply because a particular pipeline does not
accept sour oil and the marketable condition rule has never been
interpreted to impose such a requirement.
MMS is not adopting the proposed change to the definition of
``marketable condition'' in this final rule because it
[[Page 71235]]
is not necessary to do so, particularly in the context of crude oil
production and sales. MMS will continue to use the existing definition,
which is the same as the definition used in the Federal oil valuation
rule. MMS continues to follow the marketable condition principle set
out in United States v. General Petroleum Corp. of California, 73
F.Supp. 225, aff'd, Continental Oil Co. v. United States, 184 F.2d 802
(9th Cir. 1950).
This final rule eliminates the definitions of the terms load oil,
minimum royalty, net profit share, oil shale, and tar sands because
none of those terms is used either in the existing regulations
governing Indian oil valuation at Sec. Sec. 206.51 through 206.55 or
in this final rule. This final rule also deletes the last sentence of
the existing definition of oil, because neither the existing Sec.
206.51 definition nor this final rule refers to or uses the term tar
sands.
This final rule also eliminates the definitions of marketing
affiliate, net-back method, and posted price because the regulations no
longer contain those terms.
This final rule retains the definition of selling arrangement in
the existing Sec. 206.51, which the 2006 Indian Oil Proposed Rule
would have eliminated, because the transportation allowance provisions
of the existing regulations at Sec. 206.55 are not changed in this
final rule, as explained below. Those provisions use the term selling
arrangement. The MMS recognizes that payors no longer report royalties
or allowances by selling arrangement. The MMS published the 2006
Reporting Amendments Proposed Rule that would amend the transportation
allowance rules and eliminate that term. However, a final rule has not
been published. Therefore, MMS has not eliminated the term selling
arrangement in this final rule.
B. General Valuation Approach
The 2006 Indian Oil Proposed Rule first analyzed where oil is
produced from Indian leases and how it is marketed. Among other things,
the discussion in the preamble to the 2006 Indian Oil Proposed Rule
noted that the overwhelming majority of crude oil produced from Indian
leases is reported as being sold at arm's length at the lease. There
are relatively few non-arm's-length dispositions of oil reported and
only one situation in which the lessee or its affiliate refines oil
produced from the lessee's leases. In all other instances, it appears
that oil is sold at arm's length at some point before it is refined.
There are also very few instances in which lessees are reporting
transportation allowances. At the present time, only two lessees of
Indian leases are reporting transportation allowances for crude oil.
One of those involves a non-arm's-length transportation arrangement.
Currently, one of the major producing tribes takes more than 90 percent
of its royalty oil in-kind.
In addition, Indian tribal and allotted leases are distributed
geographically much differently than Federal leases, and oil produced
from Indian leases is marketed much differently than oil produced from
Federal leases. Except for the possibility of some oil sold in
Oklahoma, which accounts for only about 10 percent of the oil sold from
Indian leases, oil produced from Indian leases apparently does not flow
to, and is not exchanged to, Cushing, Oklahoma, where New York
Mercantile Exchange (NYMEX) prices are published. Thus, with the
exception of Oklahoma and possibly one type of oil produced in Wyoming,
it is extremely difficult to obtain reliable location and quality
differentials between Cushing and areas where the large majority of the
oil is produced from Indian leases, including the San Juan Basin,
northeastern Utah, Wyoming (for other oil types), and Montana. Even in
Oklahoma, almost all the oil sold from Indian leases is reported to MMS
as sold at arm's length.
In light of these facts, and in contrast to the earlier 1998 Indian
Oil Proposed Rule Comment Period Extension and the 2000 Indian Oil
Supplementary Proposed Rule, in the 2006 Indian Oil Proposed Rule, MMS
proposed not to use either NYMEX or spot market index pricing as
primary measures of value for oil produced from Indian leases. Because
of the environment in which Indian oil is produced and marketed, MMS
proposed in the 2006 Indian Oil Proposed Rule to value oil at the gross
proceeds the lessee or its affiliate receives in an arm's-length sale.
In the event a lessee first transfers its oil to an affiliate and the
oil is sold at arm's length before being refined, MMS proposed to use
the arm's-length sale by the affiliate as the basis for royalty
valuation. In addition to the fact that the first arm's-length sale is
the best measure of the value of the oil, the proposed approach also
would resolve the issue created by the DC Circuit's interpretation of
the gross proceeds rule and the term lessee in the Federal gas royalty
valuation rules in Fina Oil and Chemical Corp. v. Norton, supra.
In the rare situations in which the sale occurs away from the
lease, the 2006 Indian Oil Proposed Rule provided for transportation
allowances. The MMS also proposed to specify that if a lessee sells oil
produced from a lease under multiple arm's-length contracts instead of
just one contract, the value of the oil would be the volume-weighted
average of the total consideration for all contracts for the sale of
oil produced from that lease.
Further, in the event that the lessee or its affiliate enters into
one or more arm's-length exchanges, and, if the lessee or its affiliate
ultimately sells the oil received in exchange, the value would be the
gross proceeds for the oil received in exchange, adjusted for location
and quality differentials derived from the exchange agreement(s). If
the lessee exchanges oil produced from Indian leases to Cushing,
Oklahoma, value would be the NYMEX price, adjusted for location and
quality differentials derived from the exchange agreements. If the
lessee does not ultimately sell the oil received in exchange and does
not exchange oil to Cushing, the lessee must ask MMS to establish a
value based on relevant matters.
Finally, if the lessee transports the oil produced from the lease
to its own or its affiliate's refinery, the 2006 Indian Oil Proposed
Rule would require the lessee to value the oil at the volume-weighted
average of the gross proceeds paid or received by the lessee or its
affiliate, including the refining affiliate, for purchases and sales
under arm's-length contracts of other like-quality oil produced from
the same field (or the same area if the lessee does not have sufficient
arm's-length purchases and sales from the field) during the production
month, adjusted for transportation costs. If the lessee purchases oil
away from the field(s) and if it cannot calculate a price in the
field(s) because it cannot determine the seller's cost of
transportation, it would not include those purchases in the weighted-
average price calculation.
Comment: The principal comment received regarding the general
valuation approach described above was from an Indian tribe. The tribe
would prefer that MMS adopt the 2000 Indian Oil Supplementary Proposed
Rule that MMS withdrew in February 2005 in the 2005 Establishing Oil
Value for Royalty Due on Indian Leases--Workshop Federal Register
notice. Failing that, the tribe would prefer that MMS continue to value
its oil under the existing regulations at Sec. Sec. 206.50 through
206.55. The tribe's comments focus on the unreliability of posted
prices and the consequent prior proposals to look to NYMEX or spot
market index values. The tribe argued that ``MMS does not describe the
`environment' that it
[[Page 71236]]
believes justifies continuing its gross proceeds/posted prices
methodology. It provides absolutely no findings of how the environment
has changed from the year 2000 to the present year, and how this change
justifies its policy reversal.'' The tribe further asks, ``Why does MMS
cite a high percentage of arm's-length transactions as a justification
for never using market pricing benchmarks?'' None of the industry
commenters expressed any objection to using the gross proceeds derived
from the affiliate's arm's-length resale as the measure of value if the
lessee first transfers oil to an affiliate.
MMS Response: The MMS agrees that posted prices are not a reliable
measure of value in the current market environment. Contrary to these
comments, the 2006 Indian Oil Proposed Rule does not rely on posted
prices. Whether a sales price happens to be established with reference
to a posted price in any particular case is irrelevant if the contract
was negotiated at arm's length. The 2006 Indian Oil Proposed Rule would
not establish value with reference to posted prices independent of
actual gross proceeds. The tribe appears to object to using arm's-
length gross proceeds if the price set in an arm's-length contract
happens to refer to or be based on a posted price. However, it does not
explain why the negotiated arm's-length gross proceeds derived by a
lessee or its affiliate is an improper or insufficient measure of
value.
Further, the tribe's apparent preference for use of NYMEX or spot
market index prices overlooks the fact that oil produced from Indian
leases in the San Juan Basin is not generally transported or exchanged
to Cushing, Oklahoma, or to another market center with an established
spot market price. The tribe's comments thus overlook the consequent
difficulty in determining reliable location and quality differentials
that would be essential in using NYMEX or spot market index prices as a
basis for valuation.
Comment: With respect to oil that is exchanged for other oil under
exchange agreements, the tribe commented:
Under the law [i.e., the 1988 rules], the Nation's royalty is to
be a share of the gross proceeds from the sale of oil from Navajo
leases. In the 1988 Rule, MMS determined that the value of tribal
oil for royalty purposes could reasonably be calculated using a
company's actual gross proceeds based on posted prices. * * *
Instead the companies entered into elaborate transfer and exchange
agreements with affiliates, which allowed the companies to sell oil
produced from Navajo leases for prices that were significantly
higher than a company's posted price * * * the Nation's royalty
share did not reflect the premium prices the companies received for
Navajo oil.
The tribe further comments:
Simply put, MMS has forgotten why it sought to amend its
valuation policies beginning with its draft rule in 1997. And those
reasons are as valid today as they were in 1997: To eliminate the
practices of the oil and gas industry to undervalue production
through artificially posted prices for oil at the wellhead, when oil
is actually exchanged/ transferred and/or valued at other locations
to the benefit of oil companies.
MMS Response: The 2006 Indian Oil Proposed Rule addresses the
commenter's concern regarding exchange agreements. Under the proposed
rule, any ``premium'' realized through an arm's-length exchange would
be captured in the royalty value because value would be based on the
gross proceeds derived from an arm's-length sale of the oil received in
exchange (unless the oil is exchanged to Cushing, Oklahoma). If oil is
first exchanged not at arm's length, i.e., with an affiliate, the
proposed rule would require valuing the oil on the basis of the
affiliate's arm's-length resale price in any event.
Comment: One industry association said that it ``supports the use
of comparable purchases and sales from the same field or area in the
situation where the lessee refines its own oil, and the exclusion of
off-lease purchases that cannot be normalized.''
MMS Response: No commenter expressed objections to using the
volume-weighted average of the gross proceeds paid or received by the
lessee or its affiliate, including the refining affiliate, for
purchases and sales under arm's-length contracts of other like-quality
oil produced from the same field or area, adjusted for transportation
costs, if the lessee or the lessee's affiliate refines the lessee's
oil.
This final rule therefore adopts the 2006 Indian Oil Proposed Rule
approach to replace the ``benchmarks'' currently outlined at Sec.
206.52(c) for valuing oil not sold at arm's length. If such oil is sold
before being refined, value will be based on the affiliate's arm's-
length resale price. If the lessee or its affiliate refines the oil
without an arm's-length sale, value will be based on the volume-
weighted average of the gross proceeds paid or received for arm's-
length purchases and sales of other like-quality oil produced from the
same field or area.
Further, by adopting the proposed provisions for valuing production
disposed of through arm's-length exchange agreements, this final rule
ensures that any ``premium'' realized in the sale of oil received in
exchange will be included in the royalty value. This final rule
therefore addresses the tribe's comment that MMS should ``close a
loophole that allows the oil companies to circumvent congressional
intent and MMS's rules.''
C. Major Portion Valuation
The 2006 Indian Oil Proposed Rule would have made a number of
changes to the major portion valuation provisions of the rule. The
proposed rule would have used values reported on Form MMS-2014 for
arm's-length sales (and affiliate's arm's-length resales) of Indian
oil, and values reported for oil taken in kind, produced from a
designated area that MMS would identify. Values reported for oil that
is refined without being sold at arm's length would not have been
included in the calculation. The proposed rule would not have changed
the percentile at which the major portion value is determined, i.e.,
the 50th percentile by volume plus one barrel of oil.
Under the 2006 Indian Oil Proposed Rule, to normalize reported
values for each oil type produced from the designated area to a common
quality basis, MMS would have adjusted for API gravity using applicable
posted price gravity adjustment tables. The MMS would have calculated
separate major portion values for different oil types because the lease
provision expressly refers to ``like-quality'' oil. The MMS would have
designated oil types that are produced from each designated area.
To obtain the information necessary to make these calculations and
adjustments, the 2006 Indian Oil Proposed Rule would have required the
royalty payors to report API gravity and oil type on Form MMS-2014. The
MMS then would have arrayed the normalized and adjusted (for
transportation costs) values in order from the highest to the lowest,
together with the corresponding volumes reported at those values. The
major portion value would be the normalized and adjusted price in the
array that corresponds to the 50th percentile by volume plus one barrel
of oil, starting from the bottom.
Under the 2006 Indian Oil Proposed Rule, lessees initially would
have reported on Form MMS-2014 the value of production at the value
determined under the other provisions of the rule and would pay royalty
on that value. The MMS then would have calculated the major portion
values and notified lessees of the major portion values by publishing a
notice in the Federal Register and making them available on the MMS Web
site, together with the normalized gravity and the adjustment
[[Page 71237]]
tables. The lessee then would have compared the major portion value to
the value initially reported on Form MMS-2014, normalized and adjusted
for gravity and transportation. If the major portion value were higher
than the value initially reported, normalized and adjusted for gravity
and transportation, the lessee would have had to submit an amended Form
MMS-2014, reporting the value as the major portion value, and pay any
additional royalty owed.
Comments: The majority of the comments MMS received on the 2006
Indian Oil Proposed Rule addressed the major portion issue. Both of the
Indian tribal commenters and all the industry commenters opposed the
proposed changes, but for different reasons.
In general, the tribal commenters believed that the percentile at
which the major portion should be measured should be consistent with
the Indian gas royalty valuation provisions (i.e., the 25th percentile
starting from the top of the array, rather than the 50th percentile
plus one unit of production starting from the bottom of the array). The
tribal commenters also argued that the major portion calculation should
not be limited to Indian leases in a ``designated area.'' One tribal
commenter argued that MMS should retain the existing reference to a
``field,'' and include all Indian, Federal, state, and private leases
that may be within the field. The other tribal commenter argued that
the calculation either should be expanded to include at least Federal
leases outside the designated area or that the designated area should
be expanded to include Federal leases in the area. The tribal
commenters supported the concept of normalizing oil prices to a uniform
quality before calculating the major portion value.
Industry commenters vigorously opposed the proposed requirements to
report oil gravity and type. They also opposed any expansion of a
designated area to include Federal leases, particularly because the
requirement to report oil gravity and type would extend to those
Federal leases identified as being within a designated area. The
industry commenters asserted that the systems changes that these
requirements would necessitate, including both programming changes and
the development of different reporting systems for Federal and Indian
leases, would be prohibitively expensive and out of proportion to any
difference in royalty value that might result. One industry association
also argued that including Federal leases in the major portion
calculation would result in application to those Federal leases certain
records retention requirements that now apply only to Indian leases,
causing further disruptions to lessees' recordkeeping and systems
operations. Industry commenters agreed with retaining the 50th
percentile by volume plus one barrel of oil as the measure of what
constitutes the major portion and opposed any suggestion to change that
measure to a higher level.
MMS Response: There appears to be almost no issue regarding major
portion valuation on which the tribal and industry commenters agree,
and none of the commenters support the major portion provisions of the
proposed rule. As a consequence, MMS has decided not to promulgate any
amendment to the current major portion provisions at the existing Sec.
206.52(a)(2) in this final rule and to convene a negotiated rulemaking
committee to consider all aspects of major portion valuation.
Because of the way the amended valuation provisions for arm's-
length sales and non-arm's-length dispositions are codified, paragraphs
(a)(2)(i) and (ii) of the existing Sec. 206.52 are redesignated in
this final rule as a new Sec. 206.54(a) and (b).
D. Transportation Allowances
The MMS made several proposals regarding transportation allowances
in the 2006 Indian Oil Proposed Rule. If the transportation arrangement
is at arm's length, the proposed rule would incorporate the provisions
of the 2000 Federal Oil Final Rule, as amended in 2004, in calculating
that allowance. That allowance is based on the actual cost paid to an
unaffiliated transportation provider. For arm's-length transportation
allowances, MMS also proposed to eliminate the requirement at Sec.
206.55(c)(1), to file Form MMS-4110, Oil Transportation Allowance
Report. Instead of Form MMS-4110, the lessee would have to submit
copies of its transportation contract(s) and any amendments thereto
within 2 months after the lessee reported the transportation allowance
on Form MMS-2014. This proposed change mirrors the elimination of the
requirement to file the analogous Form MMS-4295 for arm's-length
transportation allowances under the 1999 Indian Gas Final Rule.
For non-arm's-length transportation arrangements, the lessee would
have to calculate its actual costs. Under the 2006 Indian Oil Proposed
Rule, Form MMS-4110 would still be required, but the requirement to
submit a Form MMS-4110 in advance with estimated information would be
eliminated. Instead, the lessee would submit the actual cost
information to support the allowance on Form MMS-4110 within 3 months
after the end of the 12-month period to which the allowance applies.
This proposal also mirrors the change made in the 1999 Indian Gas Final
Rule at Sec. 206.178(b)(1)(ii).
The MMS also proposed that the non-arm's-length allowance
calculation, and the costs that would be allowable and non-allowable
under the non-arm's-length transportation allowance provisions, be
revised to incorporate the provisions of the 2004 Federal Oil Final
Rule.
The 2000 Federal Oil Final Rule provides that the lessee must base
its transportation allowance in a non-arm's-length or no-contract
situation, on the lessee's actual costs. These include (1) operating
and maintenance expenses; (2) overhead; (3) depreciation; (4) a return
on undepreciated capital investment; and (5) a return on 10 percent of
total capital investment once the transportation system has been
depreciated below 10 percent of total capital investment (Sec.
206.111(b)). The MMS proposed to incorporate the same cost allowance
structure into the 2006 Indian Oil Proposed Rule, as discussed in more
detail below.
Before June 1, 2000, the regulations for Federal oil valuation
provided (as do current Indian oil valuation regulations) that, in the
case of transportation facilities placed in service after March 1,
1988, actual costs could include either depreciation and a return on
undepreciated capital investment or a cost equal to the initial
investment in the transportation system multiplied by the allowed rate
of return. The regulations before June 1, 2000, did not provide for a
return on 10 percent of total capital investment once the system has
been depreciated below 10 percent of total capital investment. The 2000
Federal Oil Final Rule eliminated the alternative of a cost equal to
the initial investment in the transportation system multiplied by the
allowed rate of return because it became unnecessary in view of the
other changes made in the rule and because it had been used in very
few, if any, situations.
The 2000 Federal Oil Final Rule also set forth the basis for the
depreciation schedule to be used in the depreciation calculation. See
Sec. 206.111(h). The MMS proposed to adopt identical provisions for
this rule through incorporation, except that the relevant date would
have been the effective date of a final rule that adopted those
provisions.
In the 2000 Federal Oil Final Rule, the depreciation schedule for a
transportation system depended on whether the lessee owned the system
on, or acquired the system after, the effective date of the final rule.
The MMS
[[Page 71238]]
proposed to apply the same principle in the context of Indian leases.
Finally, the 2004 Federal Oil Final Rule, which amended Sec.
206.111(i)(2), changed the allowed rate of return used in the non-
arm's-length actual cost calculations from the Standard & Poor's BBB
bond rate to 1.3 times the BBB bond rate. In March 2005, MMS
promulgated an identical change to the allowed rate of return used in
the calculation of actual costs under non-arm's-length transportation
arrangements in the 2005 Federal Gas Final Rule, which amended Sec.
206.157(b)(2)(v). The proposed change to this rule would incorporate
this same change, for the same reasons the rate of return was changed
in the 2004 Federal Oil Final Rule and 2005 Federal Gas Final Rules
(i.e., 1.3 times the BBB bond rate more accurately reflects the
lessees' cost of capital).
Comments: One of the two tribal commenters offered specific
comments on the transportation allowance provisions of the proposed
rule. The tribe expressed concern ``that the MMS would ultimately apply
transportation allowance criteria established for Federal leases upon
Indian leases, without due consideration for certain Indian lease
provisions and policies.'' However, the tribe did not explain which
cost elements it believed to be improper and did not identify any
difference in relevant lease terms between Indian and Federal leases.
The tribe opposes eliminating the Form MMS-4110 filing requirement. The
tribe ``believes that Indian lessors should and must receive prior
notification of all allowance deductions from its [sic] royalty and, if
MMS is correct in that transportation allowances are limited for Indian
leases, then it should not be burdensome for the few royalty reporters
to continue to submit Form MMS-4110.'' The tribe opposes changing rate
of return used in calculating actual transportation costs under non-
arm's-length transportation arrangements and wants MMS to retain the
BBB rate in the existing rule at Sec. 206.55(v).
The other tribal commenter appears to oppose the transportation
allowance provisions as part of its general opposition to the entire
proposed rule.
One of the industry association commenters supports using the same
transportation cost elements for Indian and Federal leases. The
commenter agrees with the proposed elimination of Form MMS-4110 and
supports the proposed change in the rate of return used in calculating
actual transportation costs to 1.3 times the BBB bond rate. However,
the commenter expresses concerns about the accessibility of that rate
and wants MMS to post the rate.
Another industry association commenter says that there is no reason
to treat oil pipeline costs differently depending on lessor ownership.
That commenter also supports changing the rate of return to 1.3 times
the BBB bond rate for the same reason that the rate was changed in the
2004 Federal Oil Final Rule and 2005 Federal Gas Final Rule. This
commenter further suggests (presumably referring to non-arm's-length
situations) that reporting actual transportation costs in the
production month in which they occur is burdensome. The commenter notes
that the Royalty Reporting Subcommittee of the Royalty Policy Committee
(an MMS advisory committee) developed several options for making prior-
period adjustments, but none of the options were adopted because the
stakeholders couldn't reach consensus. This commenter also supports
eliminating the requirement to pre-file Form MMS-4110 for non-arm's-
length transportation arrangements and eliminating any form filing for
arm's-length transportation arrangements. The commenter also opposes
having to file arm's-length transportation contracts and amendments
with MMS as unnecessarily burdensome because lessees have to retain
those documents and provide them on request in any event.
MMS Response: At the present, lessees are reporting only three
transportation allowances on Indian leases. Two are arm's-length
transportation arrangements on certain Ute tribal leases and the other
is a non-arm's-length transportation arrangement for production from
certain Shoshone and Arapaho leases on the Wind River Reservation.
The issues involved in the proposed amendments to the
transportation allowance provisions are difficult and have generated an
unusual degree of controversy relative to the very limited number of
transactions to which they apply. The MMS believes that further
analysis of these questions is appropriate and has decided to reserve
the transportation allowance issue for a possible future supplemental
final rulemaking. If MMS decides to seek further comment on the
transportation allowance provisions of the proposed rule, it will
publish an appropriate notice.
In view of the change to the structure of the codified sections of
the rule resulting from the changes to the valuation provisions, the
existing transportation allowance rules (Sec. Sec. 206.54 and 206.55
of the existing rule) are redesignated in this final rule as Sec. Sec.
206.56 and 206.57. Certain conforming amendments are also made to
correct cross-references to other sections. Otherwise, the existing
rules remain unchanged.
E. Other Issues
In proposed Sec. 206.50, MMS proposed adding a provision that, if
the regulations are inconsistent with a Federal statute, a settlement
agreement or written agreement, or an express provision of a lease,
then the statute, settlement agreement, written agreement, or lease
provision would govern to the extent of the inconsistency. A ``written
agreement'' would mean a written agreement between the lessee and the
MMS Director, and approved by the tribal lessor for tribal leases,
establishing a method to determine the value of production from any
lease that MMS expects at least would approximate the value established
under the regulations. The MMS received no comments opposed to this
provision, and this final rule adopts it.
Regarding records retention, the proposed rule explained that
proposed Sec. 206.64 is adapted from Sec. 206.105, and that the time
for which records must be maintained is governed by Sec. 103(b) of the
Federal Oil and Gas Royalty Management Act, 30 U.S.C. 1713(b), as
originally enacted. That requirement is not affected by the change in
30 U.S.C. 1724(f), which was enacted as part of the Federal Oil and Gas
Royalty Simplification and Fairness Act of 1996 and applies only to
Federal leases. The referenced regulations in proposed Sec. 206.64
reflect this difference. The MMS received no comments opposed to this
provision, and this final rule adopts it.
III. Procedural Matters
1. Summary Cost and Royalty Impact Data
There will be no additional administrative costs/savings or royalty
impacts as a result of this final rule. There will be no change in
royalties or administrative burdens to industry, state and local
governments, Indian tribes, individual Indian mineral owners, or the
Federal Government.
All administrative costs/savings and royalty impacts listed in the
2006 Indian Oil Proposed Rule were the result of the proposed major
portion provision, the additional information collection required by
that provision, and the transportation allowance provision. The
majority of the costs under the 2006 Indian Oil Proposed Rule were
[[Page 71239]]
associated with the proposed major portion provision. Neither the
proposed major portion provision nor the proposed transportation
allowance provision is adopted under this final rule. As a result, the
existing provisions at Sec. 206.50 through 206.55 will be retained. In
Section II, Comments on the Proposed Rule, MMS explains plans to
convene a negotiated rulemaking committee that will make
recommendations regarding the implementation of the major portion
provision found in most Indian tribal and allotted leases. Also, under
Section II D, Transportation Allowance, MMS is reserving the
transportation allowances issues for a possible future supplemental
final rulemaking.
There are no administrative costs and royalty impacts of this final
rule to industry, state and local governments, Indian tribes and
individual Indian mineral owners, or the Federal Government.
2. Regulatory Planning and Review, Executive Order 12866
This final rule is not a significant regulatory action. However, in
view of the subject matter of the regulation, the Office of Management
and Budget has reviewed this rule under Executive Order 12866.
1. This rule will not have an effect of $100 million or more on the
economy. It would not adversely affect in a material way the economy,
productivity, competition, jobs, the environment, public health or
safety, or state, local, or tribal governments or communities.
2. This rule will not create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency.
3. This rule will not materially affect entitlements, grants, user
fees, loan programs, or the rights and obligations of their recipients.
4. This rule does not raise novel legal or policy issues.
3. Regulatory Flexibility Act
The Department of the Interior certifies that this final rule will
not have a significant economic effect on a substantial number of small
entities as defined under the Regulatory Flexibility Act (5 U.S.C. 601
et seq.). An initial Regulatory Flexibility Analysis is not required.
Accordingly, a Small Entity Compliance Guide is not required.
Your comments are important. The Small Business and Agricultural
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
rule, call 1-800-734-3247. You may comment to the Small Business
Administration without fear of retaliation. Disciplinary action for
retaliation by an MMS employee may include suspension or termination
from employment with the Department of the Interior.
4. Small Business Regulatory Enforcement Fairness Act (SBREFA)
This final rule is not a major rule under 5 U.S.C. 804(2), the
Small Business Regulatory Enforcement Fairness Act. This final rule:
1. Will not have an annual effect on the economy of $100 million or
more.
2. Will not cause a major increase in costs or prices for
consumers, individual industries, Federal, state, Indian, or local
government agencies, or geographic regions.
3. Will not have significant adverse effects on competition,
employment, investment, productivity, innovation, or the ability of
United States-based enterprises to compete with foreign-based
enterprises.
5. Unfunded Mandates Reform Act
In accordance with the Unfunded Mandates Reform Act (2 U.S.C. 1501
et seq.):
1. This final rule will not significantly or uniquely affect small
governments. Therefore, a Small Government Agency Plan is not required.
2. This final rule will not produce a Federal mandate of $100
million or greater in any year; i.e., it is not a significant
regulatory action under the Unfunded Mandates Reform Act. An analysis
was prepared for the 2006 Indian Oil Proposed Rule; however, because
certain provisions of the proposed rule were not adopted under this
final rule, there are no apparent cost and royalty impacts to industry,
state and local governments, Indian tribes and individual Indian
mineral owners, and the Federal Government. Therefore, an analysis for
this final rule was not necessary under Executive Order 12866. See
Section III, Procedural Matters, Summary Cost and Royalty Impact Data.
6. Governmental Actions and Interference With Constitutionally
Protected Property Rights (Takings), Executive Order 12630
In accordance with Executive Order 12630, this final rule will not
have significant takings implications. A takings implication assessment
is not required.
7. Federalism, Executive Order 13132
In accordance with Executive Order 13132, this final rule will not
have significant federalism implications. A federalism assessment is
not required. It will not substantially and directly affect the
relationship between Federal and state governments. The management of
Indian leases is the responsibility of the Secretary of the Interior,
and all royalties collected from Indian leases are distributed to
tribes and individual Indian mineral owners. This final rule will not
alter that relationship.
8. Civil Justice Reform, Executive Order 12988
In accordance with Executive Order 12988, the Office of the
Solicitor has determined that this final rule will not unduly burden
the judicial system and meets the requirements of sections 3(a) and
3(b)(2) of the Order.
9. Paperwork Reduction Act of 1995 (PRA)
Based on comments received on the proposed rule, MMS is not
revising major portion provisions in the current regulations at 30 CFR
206.50 through 206.55. We have deleted from the final rule all proposed
changes to the major portion provisions. We also have revised sections
in the proposed rule containing changes to transportation allowances
that would have necessitated additional information collections.
During the proposed rulemaking stage, we submitted an information
collection request to OMB; OMB did not approve the collection at that
time. Because there are no longer any new information collection
requirements in the final rule, no further submission to OMB is
required. Any information collections remaining in the rulemaking have
already been approved under the following OMB Control Numbers:
1010-0103 regarding the MMS Indian oil and gas program--
current burden hours are 1,276 (expires June 30, 2009); and
1010-0140 regarding MMS's primary financial form, the Form
MMS-2014, Report of Sales and Royalty Remittance--current burden hours
are 158,821 (expires November 30, 2009).
We received comments on the proposed changes to Form MMS-2014 and
filing requirements. Commenters primarily objected to the cost of
system changes that the proposed changes would have required. These
comments are addressed in the preamble of this final rule, and none of
the proposed changes are included in the final rulemaking.
[[Page 71240]]
The PRA (44 U.S.C. 3501, et seq.) provides that an agency may not
conduct or sponsor a collection of information unless it displays a
currently valid OMB control number. Until OMB approves a collection of
information, you are not obligated to respond.
10. National Environmental Policy Act (NEPA)
This final rule deals with financial matters and has no direct
effect on MMS decisions on environmental activities. Pursuant to 516 DM
2.3A (2), Section 1.10 of 516 DM 2, Appendix 1, excludes from
documentation in an environmental assessment or impact statement
``policies, directives, regulations and guidelines of an
administrative, financial, legal, technical or procedural nature; or
the environmental effects of which are too broad, speculative, or
conjectural to lend themselves to meaningful analysis and will be
subject later to the NEPA process, either collectively or case-by-
case.'' Section 1.3 of the same appendix clarifies that royalties and
audits are considered to be routine financial transactions that are
subject to categorical exclusion from the NEPA process. None of the
exceptions to the categorical exclusion applies.
11. Government-to-Government Relationship With Tribes
In accordance with the President's memorandum of April 29, 1994,
``Government-to-Government Relations with Native American Tribal
Governments'' (59 FR 22951) and 512 DM 2, we have evaluated potential
effects on federally recognized Indian tribes and have determined that
the changes we are promulgating will not have any apparent impact on
tribes and individual Indian mineral owners. During the writing of this
final rule, we have consulted extensively with tribal representatives
and individual Indian mineral owners regarding the regulatory changes
affecting tribes and individual Indian mineral owners in this final
rule. See Section I, Background, for additional information regarding
public meetings and consultation with tribes and individual Indian
mineral owners. Also see Section III, 13, below.
12. Effects on the Nation's Energy Supply, Executive Order 13211
In accordance with Executive Order 13211, this regulation will not
have a significant effect on the Nation's energy supply, distribution,
or use. The changes better reflect the way industry accounts internally
for its oil valuation and provides a number of technical
clarifications. None of these changes will affect significantly the way
industry does business and, accordingly, will not affect industry's
approach to energy development or marketing. Nor will the rule
otherwise impact energy supply, distribution, or use.
13. Consultation and Coordination With Indian Tribal Governments,
Executive Order 13175
This final rule does not have tribal implications that will impose
substantial direct compliance costs on Indian tribal governments. In
accordance with Executive Order 13175, and with the Department's policy
to consult with individual Indian mineral owners on all policy changes
that may affect them, MMS scheduled public meetings in three different
locations, announced in the 2005 Establishing Oil Value for Royalty Due
on Federal Leases--Workshop, for the purpose of consulting with Indian
tribes and individual Indian mineral owners and to obtain public
comments from other interested parties. The public meetings were held
on March 8, 2005, in Oklahoma City, Oklahoma; on March 9, 2005, in
Albuquerque, New Mexico; and on March 16, 2005, in Billings, Montana.
The MMS also held five additional consultation sessions with tribes and
individual Indian mineral owners to hear and discuss comments,
including sessions in Window Rock, Arizona, on June 7, 2005; Fort
Duchesne, Utah, on June 9, 2005; Fort Washakie, Wyoming, on June 15,
2005; Muskogee, Oklahoma, on June 16, 2005; and Anadarko, Oklahoma, on
June 17, 2005.
14. Clarity of This Regulation
Executive Order 12866 requires each agency to write regulations
that are easy to understand. We invite your comments on how to make
this rule easier to understand, including answers to questions such as
the following:
(1) Are the requirements in the rule clearly stated?
(2) Does the rule contain technical language or jargon that
interferes with its clarity?
(3) Does the format of the rule (grouping and order of sections,
use of headings, paragraphing, etc.) aid or reduce its clarity?
(4) Would the rule be easier to understand if it were divided into
more (but shorter) sections? A ``section'' appears in bold type and is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 204.200.
(5) What is the purpose of this part?
(6) Is the description of the rule in the ``Supplementary
Information'' section of the preamble helpful in understanding the
rule?
(7) What else could we do to make the rule easier to understand?
Send a copy of any comments that concern how we could make this
rule easier to understand to: Office of Regulatory Affairs, Department
of the Interior, Room 7229, 1849 C Street, NW., Washington, DC 20240.
You may also e-mail the comments to this address: Exsec@ios.doi.gov.
List of Subjects in 30 CFR Part 206
Continental shelf, Government contracts, Mineral royalties, Natural
gas, Petroleum, Public lands--mineral resources.
Dated: November 27, 2007.
C. Stephen Allred,
Assistant Secretary for Land and Minerals Management.
0
For the reasons set forth in the preamble, MMS amends 30 CFR part 206
as follows:
PART 206--PRODUCT VALUATION
0
1. The authority citation for part 206 continues to read as follows:
Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396, 396a et seq.,
2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et seq., 1701
et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq., 1331 et seq., and
1801 et seq.
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2. The table of contents for Subpart B--Indian Oil is revised to read
as follows:
Subpart B--Indian Oil
Sec.
206.50 What is the purpose of this subpart?
206.51 What definitions apply to this subpart?
206.52 How do I calculate royalty value for oil that I or my
affiliate sell(s) or exchange(s) under an arm's-length contract?
206.53 How do I determine value for oil that I or my affiliate
do(es) not sell under an arm's-length contract?
206.54 How do I fulfill the lease provision regarding valuing
production on the basis of the major portion of like-quality oil?
206.55 What are my responsibilities to place production into
marketable condition and to market the production?
206.56 Transportation allowances--general.
206.57 Determination of transportation allowances.
206.58 What must I do if MMS finds that I have not properly
determined value?
206.59 May I ask MMS for valuation guidance?
206.60 What are the quantity and quality bases for royalty
settlement?
206.61 What records must I keep and produce?
[[Page 71241]]
206.62 Does MMS protect information I provide?
Sec. Sec. 206.54 and 206.55 [Redesignated]
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3. Sections 206.54 and 206.55 are redesignated as Sec. Sec. 206.56 and
206.57.
0
4. In redesignated Sec. 206.56, the reference to ``Section 206.52'' in
paragraph (a) and the reference to ``Sec. 206.52'' in paragraph (b)(1)
are revised to read ``Sec. 206.52 or Sec. 206.53.'' The reference to
``Sec. 206.55'' in paragraph (c) is revised to read ``Sec. 206.57.''
0
5. Sections 206.50 through 206.53 are revised, and Sec. Sec. 206.54
and 206.55 are added, to read as follows:
Sec. 206.50 What is the purpose of this subpart?
(a) This subpart applies to all oil produced from Indian (tribal
and allotted) oil and gas leases (except leases on the Osage Indian
Reservation, Osage County, Oklahoma). This subpart does not apply to
Federal leases, including Federal leases for which revenues are shared
with Alaska Native Corporations. This subpart:
(1) Establishes the value of production for royalty purposes
consistent with the Indian mineral leasing laws, other applicable laws,
and lease terms;
(2) Explains how you as a lessee must calculate the value of
production for royalty purposes consistent with applicable statutes and
lease terms; and
(3) Is intended to ensure that the United States discharges its
trust responsibilities for administering Indian oil and gas leases
under the governing Indian mineral leasing laws, treaties, and lease
terms.
(b) If the regulations in this subpart are inconsistent with a
Federal statute, a settlement agreement or written agreement as these
terms are defined in this paragraph, or an express provision of an oil
and gas lease subject to this subpart, then the statute, settlement
agreement, written agreement, or lease provision will govern to the
extent of the inconsistency. For purposes of this paragraph:
(1) Settlement agreement means a settlement agreement that is
between the United States and a lessee, or between an individual Indian
mineral owner and a lessee and is approved by the United States,
resulting from administrative or judicial litigation; and
(2) Written agreement means a written agreement between the lessee
and the MMS Director (and approved by the tribal lessor for tribal
leases) establishing a method to determine the value of production from
any lease that MMS expects at least would approximate the value
established under this subpart.
(c) The MMS or Indian tribes may audit, or perform other compliance
reviews, and require a lessee to adjust royalty payments and reports.
Sec. 206.51 What definitions apply to this subpart?
For purposes of this subpart:
Affiliate means a person who controls, is controlled by, or is
under common control with another person.
(1) Ownership or common ownership of more than 50 percent of the
voting securities, or instruments of ownership, or other forms of
ownership, of another person constitutes control. Ownership of less
than 10 percent constitutes a presumption of noncontrol that MMS may
rebut.
(2) If there is ownership or common ownership of 10 through 50
percent of the voting securities or instruments of ownership, or other
forms of ownership, of another person, MMS will consider the following
factors in determining whether there is control in a particular case:
(i) The extent to which there are common officers or directors;
(ii) With respect to the voting securities, or instruments of
ownership, or other forms of ownership:
(A) The percentage of ownership or common ownership;
(B) The relative percentage of ownership or common ownership
compared to the percentage(s) of ownership by other persons;
(C) Whether a person is the greatest single owner; and
(D) Whether there is an opposing voting bloc of greater ownership;
(iii) Operation of a lease, plant, or other facility;
(iv) The extent of participation by other owners in operations and
day-to-day management of a lease, plant, or other facility; and
(v) Other evidence of power to exercise control over or common
control with another person.
(3) Regardless of any percentage of ownership or common ownership,
relatives, either by blood or marriage, are affiliates.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field in which oil and/or gas lease
products have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement between
independent persons who are not affiliates and who have opposing
economic interests regarding that contract. To be considered arm's
length for any production month, a contract must satisfy this
definition for that month, as well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BLM means the Bureau of Land Management of the Department of the
Interior.
Condensate means liquid hydrocarbons (generally exceeding 40
degrees of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by
law that with due consideration creates an obligation.
Exchange agreement means an agreement where one person agrees to
deliver oil to another person at a specified location in exchange for
oil deliveries at another location, and other consideration. Exchange
agreements:
(1) May or may not specify prices for the oil involved;
(2) Frequently specify dollar amounts reflecting location, quality,
or other differentials;
(3) Include buy/sell agreements, which specify prices to be paid at
each exchange point and may appear to be two separate sales within the
same agreement, or in separate agreements; and
(4) May include, but are not limited to, exchanges of produced oil
for specific types of oil (e.g., WTI); exchanges of produced oil for
other oil at other locations (location trades); exchanges of produced
oil for other grades of oil (grade trades); and multi-party exchanges.
Field means a geographic region situated over one or more
subsurface oil and gas reservoirs encompassing at least the outermost
boundaries of all oil and gas accumulations known to be within those
reservoirs vertically projected to the land surface. Onshore fields
usually are given names, and their official boundaries are often
designated by oil and gas regulatory agencies in the respective states
in which the fields are located.
Gathering means the movement of lease production to a central
accumulation or treatment point on the
[[Page 71242]]
lease, unit, or communitized area, or to a central accumulation or
treatment point off the lease, unit, or communitized area as approved
by BLM operations personnel.
Gross proceeds means the total monies and other consideration
accruing for the disposition of oil produced. Gross proceeds also
include, but are not limited to, the following examples:
(1) Payments for services, such as dehydration, marketing,
measurement, or gathering that the lessee must perform at no cost to
the lessor in order to put the production into marketable condition;
(2) The value of services to put the production into marketable
condition, such as salt water disposal, that the lessee normally
performs but that the buyer performs on the lessee's behalf;
(3) Reimbursements for harboring or terminaling fees;
(4) Tax reimbursements, even though the Indian royalty interest may
be exempt from taxation;
(5) Payments made to reduce or buy down the purchase price of oil
to be produced in later periods, by allocating those payments over the
production whose price the payment reduces and including the allocated
amounts as proceeds for the production as it occurs; and
(6) Monies and all other consideration to which a seller is
contractually or legally entitled, but does not seek to collect through
reasonable efforts.
Indian tribe means any Indian tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
minerals or interest in minerals is held in trust by the United States
or that is subject to Federal restriction against alienation.
Individual Indian mineral owner means any Indian for whom minerals
or an interest in minerals is held in trust by the United States or who
holds title subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under an
Indian mineral leasing law that authorizes exploration for, development
or extraction of, or removal of lease products. Depending on the
context, lease may also refer to the land area covered by that
authorization.
Lease products means any leased minerals attributable to,
originating from, or allocated to Indian leases.
Lessee means any person to whom the United States, a tribe, or
individual Indian mineral owner issues a lease, and any person who has
been assigned an obligation to make royalty or other payments required
by the lease. Lessee includes:
(1) Any person who has an interest in a lease (including operating
rights owners); and
(2) An operator, purchaser, or other person with no lease interest
who makes royalty payments to MMS or the lessor on the lessee's behalf
Lessor means an Indian tribe or individual Indian mineral owner who
has entered into a lease.
Like-quality oil means oil that has similar chemical and physical
characteristics.
Location differential means an amount paid or received (whether in
money or in barrels of oil) under an exchange agreement that results
from differences in location between oil delivered in exchange and oil
received in the exchange. A location differential may represent all or
part of the difference between the price received for oil delivered and
the price paid for oil received under a buy/sell exchange agreement.
Marketable condition means lease products that are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser under a sales contract typical for the field or
area.
MMS means the Minerals Management Service of the Department of the
Interior.
Net means to reduce the reported sales value to account for
transportation instead of reporting a transportation allowance as a
separate entry on Form MMS-2014.
NYMEX price means the average of the New York Mercantile Exchange
(NYMEX) settlement prices for light sweet oil delivered at Cushing,
Oklahoma, calculated as follows:
(1) Sum the prices published for each day during the calendar month
of production (excluding weekends and holidays) for oil to be delivered
in the nearest month of delivery for which NYMEX futures prices are
published corresponding to each such day; and
(2) Divide the sum by the number of days on which those prices are
published (excluding weekends and holidays).
Oil means a mixture of hydrocarbons that existed in the liquid
phase in natural underground reservoirs and remains liquid at
atmospheric pressure after passing through surface separating
facilities and is marketed or used as such. Condensate recovered in
lease separators or field facilities is considered to be oil.
Operating rights owner, also known as a working interest owner,
means any person who owns operating rights in a lease subject to this
subpart. A record title owner is the owner of operating rights under a
lease until the operating rights have been transferred from record
title (see Bureau of Land Management regulations at 43 CFR 3100.0-
5(d)).
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes that normally
take place on or near the lease, such as natural pressure reduction,
mechanical separation, heating, cooling, dehydration, and compression,
are not considered processing. The changing of pressures and/or
temperatures in a reservoir is not considered processing.
Quality differential means an amount paid or received under an
exchange agreement (whether in money or in barrels of oil) that results
from differences in API gravity, sulfur content, viscosity, metals
content, and other quality factors between oil delivered and oil
received in the exchange. A quality differential may represent all or
part of the difference between the price received for oil delivered and
the price paid for oil received under a buy/sell agreement.
Sale means a contract between two persons where:
(1) The seller unconditionally transfers title to the oil to the
buyer and does not retain any related rights such as the right to buy
back similar quantities of oil from the buyer elsewhere;
(2) The buyer pays money or other consideration for the oil; and
(3) The parties' intent is for a sale of the oil to occur.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of oil are made. Selling arrangements
are described by illustration in the MMS Oil and Gas Payor Handbook,
Volume III--Product Valuation.
Transportation allowance means a deduction in determining royalty
value for the reasonable, actual costs of moving oil to a point of sale
or delivery off the lease, unit area, or communitized area. The
transportation allowance does not include gathering costs.
WTI means West Texas Intermediate.
You means a lessee, operator, or other person who pays royalties
under this subpart.
[[Page 71243]]
Sec. 206.52 How do I calculate royalty value for oil that I or my
affiliate sell(s) or exchange(s) under an arm's-length contract?
(a) The value of oil under this section is the gross proceeds
accruing to the seller under the arm's-length contract, less applicable
allowances determined under Sec. Sec. 206.56 and 206.57. If the arm's-
length sales contract does not reflect the total consideration actually
transferred either directly or indirectly from the buyer to the seller,
you must value the oil sold as the total consideration accruing to the
seller. Use this section to value oil that:
(1) You sell under an arm's-length sales contract; or
(2) You sell or transfer to your affiliate or another person under
a non-arm's-length contract and that affiliate or person, or another
affiliate of either of them, then sells the oil under an arm's-length
contract.
(b) If you have multiple arm's-length contracts to sell oil
produced from a lease that is valued under paragraph (a) of this
section, the value of the oil is the volume-weighted average of the
total consideration established under this section for all contracts
for the sale of oil produced from that lease.
(c) If MMS determines that the value under paragraph (a) of this
section does not reflect the reasonable value of the production due to
either:
(1) Misconduct by or between the parties to the arm's-length
contract; or
(2) Breach of your duty to market the oil for the mutual benefit of
yourself and the lessor, MMS will establish a value based on other
relevant matters.
(i) The MMS will not use this provision to simply substitute its
judgment of the market value of the oil for the proceeds received by
the seller under an arm's-length sales contract.
(ii) The fact that the price received by the seller under an arm's-
length contract is less than other measures of market price is
insufficient to establish breach of the duty to market unless MMS finds
additional evidence that the seller acted unreasonably or in bad faith
in the sale of oil produced from the lease.
(d) You must base value on the highest price that the seller can
receive through legally enforceable claims under the oil sales
contract. If the seller fails to take proper or timely action to
receive prices or benefits to which it is entitled, you must base value
on that obtainable price or benefit.
(1) In some cases the seller may apply timely for a price increase
or benefit allowed under the oil sales contract, but the purchaser
refuses the seller's request. If this occurs, and the seller takes
reasonable documented measures to force purchaser compliance, you will
owe no additional royalties unless or until the seller receives monies
or consideration resulting from the price increase or additional
benefits. This paragraph (d)(1) does not permit you to avoid your
royalty payment obligation if a purchaser fails to pay, pays only in
part, or pays late.
(2) Any contract revisions or amendments that reduce prices or
benefits to which the seller is entitled must be in writing and signed
by all parties to the arm's-length contract.
(e) If you or your affiliate enter(s) into an arm's-length exchange
agreement, or multiple sequential arm's-length exchange agreements,
then you must value your oil under this paragraph.
(1) If you or your affiliate exchange(s) oil at arm's length for
WTI or equivalent oil at Cushing, Oklahoma, you must value the oil
using the NYMEX price, adjusted for applicable location and quality
differentials under paragraph (e)(3) of this section and any
transportation costs under paragraph (e)(4) of this section and
Sec. Sec. 206.56 and 206.57.
(2) If you do not exchange oil for WTI or equivalent oil at
Cushing, but exchange it at arm's length for oil at another location
and following the arm's-length exchange(s) you or your affiliate
sell(s) the oil received in the exchange(s) under an arm's-length
contract, then you must use the gross proceeds under your or your
affiliate's arm's-length sales contract after the exchange(s) occur(s),
adjusted for applicable location and quality differentials under
paragraph (e)(3) of this section and any transportation costs under
paragraph (e)(4) of this section and Sec. Sec. 206.56 and 206.57.
(3) You must adjust your gross proceeds for any location or quality
differential, or other adjustments, you received or paid under the
arm's-length exchange agreement(s). If MMS determines that any exchange
agreement does not reflect reasonable location or quality
differentials, MMS may adjust the differentials you used based on
relevant information. You may not otherwise use the price or
differential specified in an arm's-length exchange agreement to value
your production.
(4) If you value oil under this paragraph, MMS will allow a
deduction, under Sec. Sec. 206.56 and 206.57, for the reasonable,
actual costs to transport the oil:
(i) From the lease to a point where oil is given in exchange; and
(ii) If oil is not exchanged to Cushing, Oklahoma, from the point
where oil is received in exchange to the point where the oil received
in exchange is sold.
(5) If you or your affiliate exchange(s) your oil at arm's length,
and neither paragraph (e)(1) nor (e)(2) of this section applies, MMS
will establish a value for the oil based on relevant matters. After MMS
establishes the value, you must report and pay royalties and any late
payment interest owed based on that value.
(f) You may not deduct any costs of gathering as part of a
transportation deduction or allowance.
(g) You must also comply with Sec. 206.54.
Sec. 206.53 How do I determine value for oil that I or my affiliate
do(es) not sell under an arm's-length contract?
(a) The unit value of your oil not sold under an arm's-length
contract is the volume-weighted average of the gross proceeds paid or
received by you or your affiliate, including your refining affiliate,
for purchases or sales under arm's-length contracts.
(1) When calculating that unit value, use only purchases or sales
of other like-quality oil produced from the field (or the same area if
you do not have sufficient arm's-length purchases or sales of oil
produced from the field) during the production month.
(2) You may adjust the gross proceeds determined under paragraph
(a) of this section for transportation costs under paragraph (c) of
this section and Sec. Sec. 206.56 and 206.57 before including those
proceeds in the volume-weighted average calculation.
(3) If you have purchases away from the field(s) and cannot
calculate a price in the field because you cannot determine the
seller's cost of transportation that would be allowed under paragraph
(c) of this section and Sec. Sec. 206.56 and 206.57, you must not
include those purchases in your weighted-average calculation.
(b) Before calculating the volume-weighted average, you must
normalize the quality of the oil in your or your affiliate's arm's-
length purchases or sales to the same gravity as that of the oil
produced from the lease. Use applicable gravity adjustment tables for
the field (or the same general area for like-quality oil if you do not
have gravity adjustment tables for the specific field) to normalize for
gravity.
Example to paragraph (b): 1. Assume that a lessee, who owns a
refinery and refines the oil produced from the lease at that
refinery, purchases like-quality oil from other producers in the
same field at arm's length for use as feedstock in its refinery.
Further assume that the oil produced from the lease that is being
valued under this section is Wyoming general sour with an API
gravity of 23.5[deg]. Assume that the refinery purchases at arm's
length oil (all of which must be
[[Page 71244]]
Wyoming general sour) in the following volumes of the API gravities
stated at the prices and locations indicated:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
10,000 bbl.................... 24.5[deg]........ $34.70/bbl....... Purchased in the field.
8,000 bbl..................... 24.0[deg]........ 34.00/bbl........ Purchased at the refinery after the third-
party producer transported it to the
refinery, and the lessee does not know
the transportation costs.
9,000 bbl..................... 23.0[deg]........ 33.25/bbl........ Purchased in the field.
4,000 bbl..................... 22.0[deg]........ 33.00/bbl........ Purchased in the field.
----------------------------------------------------------------------------------------------------------------
2. Because the lessee does not know the costs that the seller of
the 8,000 bbl incurred to transport that volume to the refinery,
that volume will not be included in the volume-weighted average
price calculation. Further assume that the gravity adjustment scale
provides for a deduction of $0.02 per \1/10\ degree API gravity
below 34[deg]. Normalized to 23.5[deg] (the gravity of the oil being
valued under this section), the prices of each of the volumes that
the refiner purchased that are included in the volume-weighted
average calculation are as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
10,000 bbl......................... 24.5[deg]............. $34.50................ (1.0[deg] difference over 23.5[deg] = $0.20 deducted).
9,000 bbl.......................... 23.0[deg]............. 33.35................. (0.5[deg] difference under 23.5[deg] = $0.10 added).
4,000 bbl.......................... 22.0[deg]............. 33.30................. (1.5[deg] difference under 23.5[deg] = $0.30 added).
--------------------------------------------------------------------------------------------------------------------------------------------------------
3. The volume-weighted average price is ((10,000 bbl x $34.50/
bbl) + (9,000 bbl x $33.35/bbl) + (4,000 bbl x $33.30/bbl)) / 23,000
bbl = $33.84/bbl. That price will be the value of the oil produced
from the lease and refined prior to an arm's-length sale, under this
section.
(c) If you value oil under this section, MMS will allow a
deduction, under Sec. Sec. 206.56 and 206.57, for the reasonable,
actual costs:
(1) That you incur to transport oil that you or your affiliate
sell(s), which is included in the weighted-average price calculation,
from the lease to the point where the oil is sold; and
(2) That the seller incurs to transport oil that you or your
affiliate purchase(s), which is included in the weighted-average cost
calculation, from the property where it is produced to the point where
you or your affiliate purchase(s) it. You may not deduct any costs of
gathering as part of a transportation deduction or allowance.
(d) If paragraphs (a) and (b) of this section result in an
unreasonable value for your production as a result of circumstances
regarding that production, the MMS Director may establish an
alternative valuation method.
(e) You must also comply with Sec. 206.54.
Sec. 206.54 How do I fulfill the lease provision regarding valuing
production on the basis of the major portion of like-quality oil?
(a) For any Indian leases that provide that the Secretary may
consider the highest price paid or offered for a major portion of
production (major portion) in determining value for royalty purposes,
if data are available to compute a major portion, MMS will, where
practicable, compare the value determined in accordance with this
section with the major portion. The value to be used in determining the
value of production, for royalty purposes, will be the higher of those
two values.
(b) For purposes of this paragraph, major portion means the highest
price paid or offered at the time of production for the major portion
of oil production from the same field. The major portion will be
calculated using like-quality oil sold under arm's-length contracts
from the same field (or, if necessary to obtain a reasonable sample,
from the same area) for each month. All such oil production will be
arrayed from highest price to lowest price (at the bottom). The major
portion is that price at which 50 percent by volume plus one barrel of
oil (starting from the bottom) is sold.
Sec. 206.55 What are my responsibilities to place production into
marketable condition and to market the production?
You must place oil in marketable condition and market the oil for
the mutual benefit of yourself and the Indian lessor at no cost to the
lessor, unless the lease agreement provides otherwise. If, in the
process of marketing the oil or placing it in marketable condition,
your gross proceeds are reduced because services are performed on your
behalf that would be your responsibility, and if you valued the oil
using your or your affiliate's gross proceeds (or gross proceeds
received in the sale of oil received in exchange) under Sec. 206.52,
you must increase value to the extent that your gross proceeds are
reduced.
0
6. Sections 206.58 through 206.62 are added to read as follows:
Sec. 206.58 What must I do if MMS finds that I have not properly
determined value?
(a) If MMS finds that you have not properly determined value, you
must:
(1) Pay the difference, if any, between the royalty payments you
made and those that are due, based upon the value MMS establishes; and
(2) Pay interest on the difference computed under Sec. 218.54 of
this chapter.
(b) If you are entitled to a credit due to overpayment on Indian
leases, see Sec. 218.53 of this chapter. The credit will be without
interest.
Sec. 206.59 May I ask MMS for valuation guidance?
You may ask MMS for guidance in determining value. You may propose
a value method to MMS. Submit all available data related to your
proposal and any additional information MMS deems necessary. We will
promptly review your proposal and provide you with non-binding
guidance.
Sec. 206.60 What are the quantity and quality bases for royalty
settlement?
(a) You must compute royalties on the quantity and quality of oil
as measured at the point of settlement approved by BLM for the lease.
(b) If you determine the value of oil under Sec. Sec. 206.52,
206.53, or 206.54 of this subpart based on a quantity or quality
different from the quantity or quality at the point of royalty
settlement approved by BLM for the lease, you must adjust the value for
those quantity or quality differences.
(c) You may not deduct from the royalty volume or royalty value
actual or theoretical losses incurred before the royalty settlement
point unless BLM determines that any actual loss was unavoidable.
Sec. 206.61 What records must I keep and produce?
(a) On request, you must make available sales, volume, and
transportation data for production you sold, purchased, or obtained
from the field or area. You must make this data available to MMS,
Indian
[[Page 71245]]
representatives, or other authorized persons.
(b) You must retain all data relevant to the determination of
royalty value. Document retention and recordkeeping requirements are
found at Sec. Sec. 207.5, 212.50, and 212.51 of this chapter. The MMS,
Indian representatives, or other authorized persons may review and
audit such data you possess, and MMS will direct you to use a different
value if it determines that the reported value is inconsistent with the
requirements of this subpart or the lease.
Sec. 206.62 Does MMS protect information I provide?
The MMS will keep confidential, to the extent allowed under
applicable laws and regulations, any data or other information you
submit that is privileged, confidential, or otherwise exempt from
disclosure. All requests for information must be submitted under the
Freedom of Information Act regulations of the Department of the
Interior, 43 CFR part 2.
[FR Doc. E7-24318 Filed 12-14-07; 8:45 am]
BILLING CODE 4310-MR-P