[Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19053]
[[Page Unknown]]
[Federal Register: August 4, 1994]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 206
RIN 1010-AB57
Valuation of Oil and Gas From Indian Leases
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Minerals Management Service (MMS) is considering amending
its regulations regarding the valuation of gas produced from Indian
leases to ensure that Indian mineral lessors receive the maximum
revenues from mineral resources on their land consistent with the
Secretary of the Interior's (Secretary) trust responsibility and lease
terms.
Most Indian leases provide that the value of production for royalty
purposes be determined by the Secretary. In making this determination,
the Secretary must consider his trust responsibility. In the exercise
of this responsibility, value in the discretion of the Secretary may be
determined by taking the highest of several values. This notice
describes several alternatives to establish these values and solicits
comments before publishing proposed new regulations governing the value
of gas production from Indian lands.
The MMS is not currently proposing changes to the oil valuation
regulations for Indian leases. The MMS may consider changes following
study of oil valuation for Indian leases.
DATES: Comments must be received on or before October 3, 1994.
ADDRESSES: Written comments, suggestions, or objections regarding
alternative valuation methods should be mailed to the Minerals
Management Service, Royalty Management Program, Rules and Procedures
Staff, Denver Federal Center, Building 85, P.O. Box 25165, Mail Stop
3101, Denver, Colorado 80225-0165, Attention: David S. Guzy, telephone
(303) 231-3432.
FOR FURTHER INFORMATION CONTACT:
David S. Guzy, Chief, Rules and Procedures Staff, MMS Royalty
Management Program at (303) 231-3432.
SUPPLEMENTARY INFORMATION:
I. Background
All Indian leases contain provisions for the determination of
royalty obligations. Some Indian leases or agreements negotiated under
the 1982 Indian Mineral Development Act contain explicit methodologies
for determining royalty obligations. The MMS does not intend to alter
these express valuation methodologies.
Most Indian leases were entered into under the authority of earlier
statutes, and these leases reserve to the Secretary considerable
discretion in determining value for royalty purposes. This Advance
Notice of Proposed Rulemaking is intended to solicit comments on new
methodologies being considered to establish value for these leases.
Comments that are received in response to this Advance Notice will be
considered in the development of a proposed rulemaking that will be
published in the Federal Register at a future date.
Most Indian leases also provide that royalty obligations be based
on the value of hydrocarbon substances produced and saved. A royalty
obligation is incurred when hydrocarbon substances are produced and
saved and not solely as the result of a sale.
Section 3(c) of a standard Indian lease covers leasee rental and
royalty payment requirements and states:
(c) Rental and royalty. To pay, beginning with the date of
approval of the lease by the Secretary of the Interior or his duly
authorized representative, a rental of $1.25 per acre per annum in
advance during the continuance hereof, the rental so paid for any
one year to be credited on the royalty for that year, together with
a royalty of 16\2/3\ percent of the value or amount of all oil, gas,
and/or natural gasoline, and/or all other hydrocarbon substances
produced and saved from the land leased herein, save and except oil,
and/or gas used by the lessee for development and operation purposes
on said lease, which oil or gas shall be royalty free. During the
period of supervision, ``value'' for the purposes hereof may, in the
discretion of the Secretary, be calculated on the basis of the
highest price paid or offered (whether calculated on the basis of
short or actual volume) at the time of production for the major
portion of the oil of the same gravity, and gas, and/or natural
gasoline, and/or all other hydrocarbon substances produced and sold
from the field where the leased lands are situated, and the actual
volume of the marketable product less the content of foreign
substances as determined by the oil and gas supervisor. The actual
amount realized by the lessee from the sale of said products may, in
the discretion of the Secretary, be deemed mere evidence of or
conclusive evidence of such value. When paid in value, such
royalties shall be due and payable monthly on the last day of the
calendar month following the calendar month in which produced; when
royalty on oil produced is paid in kind, such royalty oil shall be
delivered in tanks provided by the lessee on the premises where
produced without cost to the lessor unless otherwise agreed to by
the parties thereto, at such time as may be required by the lessor:
Provided, that the lessee shall not be required to hold such royalty
oil in storage longer than 30 days after the end of the calendar
month in which said oil is produced: And provided further, that the
lessee shall be in no manner responsible or held liable for loss or
destruction of such oil in storage caused by acts of God. All rental
and royalty payments, except as provided in section 4(c) shall be
made by check or draft drawn on a solvent bank, open for the
transaction of business on the day the check or draft is issued, to
the payee designated by the Area Director. All such rental and
royalty payments shall be mailed to the oil and gas supervisor for
transmittal to the payee designated by the Area Director. It is
understood that in determining the value for royalty purposes of
products, such as natural gasoline, that are derived from treatment
of gas, a reasonable allowance for the cost of manufacture shall be
made, such allowance to be two-thirds of the value of the marketable
product unless otherwise determined by the Secretary of the Interior
on application of the lessee or on his own initiative, and that
royalty will be computed on the value of gas or casinghead gas, or
on the products thereof (such as residue gas, natural gasoline,
propane, butane, etc.), whichever is the greater.
In conjunction with the lease terms, the valuation of gas
production from Indian leases is subject to the regulations at 30 CFR
Part 206. The present regulations govern the valuation of production
from both Federal and Indian (Tribal and allotted) leases (except
leases on the Osage Indian Reservation, Oklahoma) (Revision of Gas
Royalty Valuation Regulations and Related Topics; Final Rule, published
in the Federal Register on January 15, 1988 (53 FR 1230).
MMS now believes that it may be able to better perform the trust
responsibilities of the United States with respect to the
administration of Indian oil and gas leases by issuing separate
regulations for the valuation of gas from these leases. Also, MMS
believes that it could provide an improved regulatory framework in
which these lease terms can be strictly enforced while economizing on
the information needed by a lessee. MMS is seeking to adopt valuation
procedures that could be compiled with by the lessee in a timely
manner.
The Secretary is obligated to act as a fiduciary in the
administration of Indian oil and gas leases. As a fiduciary, charged
with supervising the disposition of nonrenewable resources from Indian
lands, the Secretary must ensure that Indians receive the maximum
revenues from mineral resources on their lands. To ensure maximum
revenues, the value of production for royalty purposes from an Indian
lease should be determined considering the highest values provided by
the terms of the standard lease, quoted above. MMS believes this is
consistent with the terms of these Indian oil and gas leases, with
statutes delegating to the Secretary the administration of Indian
affairs, with the statutes governing Indian oil and gas leases, with
the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), with
court decisions providing judicial guidance in the interpretation and
administration of Indian oil and gas leases, and with the law of trusts
and fiduciary operations.
MMS has considered that maximizing royalty revenues from Indian
leases might affect the economics of mineral resource development and
believes that this should not result in the reduction of the value of
production for royalty purposes. This issue should be examined in the
context of an adjustment of lease terms by the Bureau of Indian Affairs
and the Indian lessor.
II. Current Regulations
The current valuation regulations incorporate the terms of the
standard Indian leases in the ways listed below.
(a) The value of production is never less than the gross proceeds
accruing to the lessee. This provision is contained in valuation
regulations at 30 CFR 206.102(h), 206.152(h), and 206.153(h), which
state:
Notwithstanding any other provision of this section, under no
circumstances shall the value of production, for royalty purposes,
be less than the gross proceeds accruing to the lessee for lease
production, less applicable allowances determined pursuant to this
subpart.
(b) The value of production will be the higher of the major portion
value and the otherwise applicable value. This provision is contained
in valuation regulations at 30 CFR 206.102(a)(2)(i), 206.152(a)(3)(i),
and 206.153(a)(3)(i), which state:
For any Indian leases which provide that the Secretary may
consider the highest price paid or offered for a major portion of
production (major portion) in determining value for royalty
purposes, if data are available to compute a major portion, MMS
will, where practicable, compare the value determined in accordance
with this section with the major portion. The value to be used in
determining the value of production, for royalty purposes, shall be
the higher of those two values.
(c) The value of production will be the greater of (1) the combined
value, for royalty purposes, of the residue gas and gas plant products
resulting from processing the gas, or (2) the value, for royalty
purposes, of the gas prior to processing determined in accordance with
30 CFR Secs. 206.152 and 206.155.
III. Discussion
The Secretary's responsibility to determine value for royalty
purposes of production from Indian lands has not changed, although the
industry and marketplace have changed dramatically over the years. One
of the objectives MMS hopes to achieve is to develop a set of
regulations to permit the Secretary to discharge this responsibility in
an environment of continuing and accelerating change in the industry
and the marketplace. The trust responsibility of the Secretary and the
changing marketplace require that the Secretary develop flexible
valuation methodologies for Indian production that can be complied with
accuracy and on time. MMS seeks to improve several areas of Indian gas
valuation including: major portion analysis, accounting for comparison
(dual accounting), and Percentage-of-Proceeds (POP) contracts.
Following is a discussion of each of these areas.
(a) Major Portion Value
Section 3(c) of most Indian leases provides that value may be based
on the highest price paid or offered for a major portion of oil or gas
or similar substances. Many lessees have stated that there are
difficulties encountered in complying with major portion valuation
requirements and the timeliness of major portion analyses performed by
MMS.
Indian mineral owners assert the median pricing methodology in the
present regulations does not always achieve the highest price paid for
a major portion of production provided by the lease terms. Since the
Secretary has considerable discretion in establishing value for royalty
purposes, the Secretary has been urged to be more flexible in
establishing major portion methodologies.
(b) Dual Accounting
Section 3(c) of most Indian leases provides for ``dual
accounting''--the requirement to pay royalties on the greater of the
combined value of the residue gas and plant products resulting from
processing the gas or the value of the gas prior to processing. Dual
accounting is required whether gas is sold prior to processing or after
processing. In either case, the lessees may have difficulty in
gathering the data necessary to comply, which delays the proper payment
of royalties to the Indian lessors. Improvement in the regulations that
will permit lessees to timely and completely comply with the lease's
dual accounting requirement is desirable.
(c) Percentage-of-Proceeds (POP) Contracts
This class of contracts for the sale of gas from Indian leases
presents a different problem in determining value for royalty purposes.
Under a POP contract, the seller is paid based upon a value determined
after processing. As the name given to this class of contract suggests,
the seller is paid an agreed-upon percentage of the purchaser's
proceeds from the sale of residue gas and usually a different and much
smaller percentage of the proceeds from the sale of gas plant products.
Lessees have objected to the dual accounting requirement for gas sold
pursuant to a POP contract because of a lack of wellhead sales.
Regulations that permit lessees to timely and accurately comply with
POP contract valuation requirements are desirable.
In summary MMS's goal is to develop simplified methods for
determining the highest price paid or offered for a major portion of
like-quality production from the field or area, for determining the
greater of the processed value or the unprocessed value, and for
properly valuing POP contract production, on a more contemporaneous
basis. This would simplify the accounting and enhance the
administrative workability for both Tribal and MMS royalty personnel as
well as the oil and gas industry. It would allow more contemporaneous
automated accounting comparisons and reduce the reliance on audits
conducted years after production occurs to verify royalty compliance.
IV. Description of Alternatives and Solicitation of Comments
MMS invites specific comments on the following alternatives that is
currently considering for valuation under the major portion and dual
accounting requirements for gas produced, saved, or sold from tribal
and allotted Indian Lands.
(a) Major Portion Scenarios
(1) Use of Gas Price Indices
MMS is considering using published indices of natural gas prices as
a means to determine the price at which a major portion of gas is sold
from a given field or area. It is contemplated that any index or
indices used would be widely used by industry, have a history of
publication, and generally be expected to continue to be published. It
is likewise contemplated that any regulation that uses published
indices would provide for the use of substitute indices if necessary.
MMS is aware that gas-index-price-based major portion systems are
currently being successfully utilized.
MMS is soliciting comments on what publications are most widely
used by industry for gas price indices. MMS also seeks input from
companies that are successfully using gas price index-based formulas to
determine the major portion value, and the ways the gas price indices
are used to arrive at a value. MMS is also particularly interested in
perspectives regarding the extent to which published prices reflect
actual values of production, and perspectives regarding the accuracy of
published prices and indices.
MMS would also appreciate comments on the extent to which the use
of published prices would promote: The certainty and reliability of
payments, the timeliness of royalty reporting, ease of compliance,
enforceability, and the reduction of costs to both industry and
government.
(2) Major Portion Analysis Using Price Data Reported to Indian Tribes
and States.
MMS has used gas prices obtained from the Oklahoma Tax Commission
severance tax report to do a major portion calculation for allotted
Indian leases in the Anadarko area of Oklahoma. MMS requests comments
on the feasibility of MMS doing the major portion calculation using
pricing data obtained from Tribes, States, or other outside sources
(that have information available).
(3) Major Portion Analysis Using Price Data Reported on the Report of
Sales and Royalty Remittance (Form MMS-2014).
Information reported on Form MMS-2014 has been used to do major
portion calculations for gas produced from the Southern Ute Tribal and
Allotted Indian leases. MMS requests comments on the feasibility of MMS
calculating the major portion price from data on Form MMS-2014.
(4) Requirement That All Purchasers Provide Sales Data to MMS
MMS is considering implementing a new regulation (under the
authority of FOGRMA) that would require all purchasers of Federal and/
or Indian gas in fields or areas in which Indian production occurs to
provide volume and pricing data to MMS. MMS would then calculate major
portion prices and provide these to the lessees. MMS seeks comments on
the feasibility of such an approach.
(5) Flexibility To Negotiate a Method to do a Major Portion Analysis on
a Case-By-Case Basis
MMS is considering adding new regulatory language that would allow
lessees the flexibility to negotiate with Indian Tribes and allottees a
method of fulfilling the value of a major portion of production from a
field or area. MMS seeks comments on the feasibility of such an
approach.
(b) Dual Accounting Scenarios
(1) Wellhead Sale of Gas and the Gas Is Processed (Seller Not Owner in
Gas Plant)
Under this scenario, the lessee typically sells gas prior to
processing in a gas plant. The lessee should know the gross proceeds
accruing under the sale of gas at the wellhead. To fulfill the dual
accounting requirement, the lessee is also required to obtain the
actual sales values of the residue gas and gas plant products after
processing. Lessees have made MMS aware of the difficulty, in some
instances, in obtaining all of the information necessary to determine
accurately the value of production. On July 27, 1992, MMS issued a
letter to payors describing a theoretical dual accounting method that
can be used to approximate the value of gas after processing. Although
this method has helped, MMS has been made aware that there are still
problems in obtaining information that is both timely and accurate.
To facilitate the process of obtaining all of the information (such
as gas plant efficiencies, processing charges, plant fuel and flare
volumes, and fractionation costs) necessary to accurately do dual
accounting, MMS is considering the following alternatives:
MMS could draft regulations requiring owners of plants
that process Federal and/or Indian gas to report the processing
information directly either to MMS, the lessee, or both.
MMS could attempt to obtain information on plants that
process Indian gas from State agencies.
MMS requests comments on the feasibility of requiring plant owners
to make processing information available to lessees or MMS. MMS also
welcomes suggestions for any other possible alternatives for obtaining
this information.
MMS is also considering establishing a single basin-wide processing
allowance that would be used by all lessees or could be used when the
lessee does not have actual processing plant information. MMS requests
comments on using basin-wide allowances that the MMS would periodically
calculate and publish.
(2) Gas Is Sold at the Tailgate of a Gas Plant
In this situation, the lessee should have all of the data
pertaining to the sale of the processed gas. To fulfill the dual
accounting requirement, the lessee must determine the value of the
unprocessed gas at the wellhead. When there is no sale of gas at the
wellhead, the wellhead unit value ($/MMBtu) of the gas for royalty
purposes could be determined by using: (1) Gross proceeds under arm's-
length contracts for like-quality gas in the same field or nearby
fields or areas; (2) the unit value of the residue gas; (3) gas price
indices posted in publicly available national publications; or (4) the
price arrived at by performing a major portion analysis.
MMS seeks comments on the availability of information and the
accuracy of the above methods in determining the value for royalty
purposes of unprocessed gas at the wellhead. MMS further seeks comments
on what specific publications are used by industry for index prices.
MMS also seeks comments on using the highest price in the range, the
index price, the average price, or some combination of prices if index
pricing were used in dual accounting.
(3) Gas Is Sold Under a POP Contract
MMS requests comments on the following methods of determining value
of gas at the wellhead under a POP contract when doing dual accounting:
(i) Gross proceeds under the POP contract,
(ii) The unit value of the residue gas,
(iii) Gas price indices posted in publicly available national
publications,
(iv) The price arrived at by performing a major portion analysis;
and
(v) Prices received under arm's-length wellhead sales in the field
or area.
MMS also seeks suggestions on other possible methods to arrive at a
value of unprocessed gas at the wellhead for comparison purposes under
dual accounting.
(4) Percentage Increase to Value in Lieu of Dual Accounting
In situations where lessees have made a reasonable effort to do
dual accounting but nonetheless cannot establish an accurate comparison
of values, MMS is considering allowing a percentage increase to the
otherwise determined value of production in lieu of dual accounting.
Analysis has shown that the difference between the greater of the
combined value of the residue gas and plant products resulting from
processing the gas or the value of the gas prior to processing has
exceeded 40 percent of the lower value in some cases. MMS seeks
comments on the feasibility of applying a percentage increase and the
amount of such an increase to comply with dual accounting requirements.
(c) Integration of Major Portion Scenarios and Dual Accounting
Scenarios
MMS seeks comments on how to integrate any selected scenarios on
major portion with the scenarios on dual accounting. For example, one
way to integrate these is the following:
If the index scenario is selected for major portion analysis and
the percentage increase is selected for dual accounting, then a way to
integrate these concepts is to apply the percentage increase to the
higher of index or gross proceeds.
Dated: July 18, 1994.
Bob Armstrong,
Assistant Secretary for Land and Minerals Management.
[FR Doc. 94-19053 Filed 8-3-94; 8:45 am]
BILLING CODE 4310-MR-M