[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