[Federal Register Volume 60, Number 151 (Monday, August 7, 1995)]
[Proposed Rules]
[Pages 40127-40138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19295]



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DEPARTMENT OF THE INTERIOR
30 CFR Part 206

RIN 1010-AB94


Revision of Valuation Regulations Governing Oil and Gas 
Transportation and Processing Allowances

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rulemaking.

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SUMMARY: The Minerals Management Service (MMS) proposes to amend its 
Royalty Management Program (RMP) valuation regulations governing oil 
and gas transportation and processing allowances regarding the timely 
filing of required forms.

DATES: Comments must be submitted on or before October 6, 1995.

ADDRESSES: Written comments regarding the proposed rule should be 
mailed or delivered to: 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.

FOR FURTHER INFORMATION CONTACT: David Guzy, Chief, Rules and 
Procedures Staff, Telephone (303) 231-3432, Fax (303) 231-3194.

SUPPLEMENTARY INFORMATION: The principal author of this proposed 
rulemaking is Janet Chichester, Compliance Verification Division, MMS, 
RMP.

I. Background

    On January 15, 1988, MMS published a final rule in the Federal 
Register amending and clarifying regulations governing the valuation of 
oil and gas for royalty computation purposes (53 FR 1184). The 
rulemaking provided comprehensive procedures for valuation of minerals 
produced from Federal and Indian lands including regulations governing 
certain allowances considered in calculating and reporting royalties. 
The regulations provided for transportation allowances for oil (30 CFR 
Secs. 206.104 and 206.105); transportation allowances for gas (30 CFR 
Secs. 206.156 and 206.157); and processing allowances for gas (30 CFR 
Secs. 206.158 and 206.159).
    The rulemaking distinctly changed the historical administrative 
practice of MMS and its predecessor agency, the U.S. Geological Survey, 
regarding allowances. Prior to the 1988 rule, MMS required royalty 
payors to obtain the agency's written approval before taking an 
allowance deduction in reporting and paying royalties. With the new 
rule, MMS adopted a self-implementing concept for allowances. Instead 
of requiring agency preapproval, the regulations provided for the 
royalty payor to file timely certain required forms as a condition for 
the taking of an allowance on the Report of Sales and Royalty 
Remittance (Form MMS-2014).
    The allowance forms filing requirements of the current oil and gas 
valuation regulations provide for an annual cycle for providing 
information to MMS. Before the beginning of each calendar year, or 
during the year but before the taking of an allowance on the Form MMS-
2014, payors must submit the required form for any oil transportation, 
gas transportation, or gas processing allowances that they expect to 
take during the year. The forms ask for information sufficient to 
identify the payor, the lease/revenue source/product 

[[Page 40128]]
code/selling arrangement, and an estimate of the allowance rate per 
unit that is anticipated for the year.
    By the end of March following the allowance year, the payor must to 
submit the same forms as before but with additional data fields 
completed to indicate the actual costs experienced and the allowances 
actually taken on Forms MMS-2014 during the year. Also, several 
supplementary schedules representing details of actual costs must be 
submitted for non-arm's-length allowances.
    The filing of the actual cost forms serves several purposes for MMS 
and the payor. The forms provide the actual costs incurred in 
transporting and/or processing production for the allowance year, 
together with the actual allowance deductions taken on the Form MMS-
2014. The forms also satisfy the regulatory requirement to have an 
estimated cost allowance form on file for the succeeding allowance 
year.
    The consequences of a payor's noncompliance with the forms filing 
requirements of the regulations are monetarily significant. Simply 
stated, if a payor takes an allowance deduction against royalty value 
on the Form MMS-2014 without a required allowance form on file, the 
payor is subject to loss of allowance and to late payment interest 
charges. The concept of the regulations is that a required form must be 
on file before the taking of an allowance; if a payor does not meet 
this requirement MMS considers the allowance to be lost by the payor. 
Consequently, the payor is directed to pay back the allowance and, 
after payback, is charged late payment interest associated with the 
lost allowance.
    The current regulations provide for a grace period of three months 
that gives payors a window of time to comply with the forms filing 
requirements of the regulations without losing an allowance. The grace 
period permits lessees to retain allowances reported on a Form MMS-2014 
for up to three months prior to the month that a required allowance 
form is filed with MMS. Though a payor will not experience a loss of 
allowance for the grace period, MMS will assess the payor a late 
payment interest charge from the Form MMS-2014 receipt date or due date 
(whichever is later) to the allowance form receipt date. By regulation, 
MMS may approve a grace period longer than three months upon a showing 
of good cause by the lessee.
    In evaluating the effectiveness of its rules, particularly as they 
related to product valuation, MMS published in the June 17, 1992, 
Federal Register, a ``Request for Information for Improvements to 
Regulation'' (57 FR 27008). MMS' request stated that the rules for 
product valuation were substantially modified in 1988 based on an 
effort started in January 1985 with the creation of the Royalty 
Management Advisory Committee. The request further stated that it had 
been several years since most of the regulations in 30 CFR Parts 201 
through 243 were published, and public comments were requested to help 
MMS assess where improvements to rules could be made. The comment 
period closed August 17, 1992.
    Many commenters felt that the allowance form filing requirements of 
the valuation regulations needed significant commentary as being in 
need of improvement. They expressed concerns about both the allowance 
form filing requirements and the regulatory sanctions for failure to 
comply with the allowance reporting requirements. Suggested 
recommendations ranged from refinements of existing forms to a 
wholesale elimination of allowance form filings because they serve no 
useful purpose. Regarding penalties for failure to timely file required 
allowance forms, commenters stated that the existing penalties were 
unduly harsh and that the ``punishment'' is not reflective of the 
``crime.''

II. Findings and Conclusions of Allowance Study Group

    Based on public comments and the over four years of experience MMS 
gained in administering the allowance requirement of the oil and gas 
valuation regulations, MMS formed a study group in April 1993, to 
evaluate the existing regulatory requirements for oil and gas 
allowances and formulate recommendations for improvement. The study 
group was comprised of participants from the Council of Petroleum 
Accounting Societies, the State and Tribal Royalty Audit Committee, and 
MMS. Consistent with its charter, the study group addressed the current 
regulatory requirements and practices of MMS related to oil and gas 
transportation and processing allowances. More specifically, the study 
group addressed the following topics as key aspects of the review:
     The need for and usefulness of the current regulatory 
requirements for allowance forms submission, including the information 
required on each form.
     The need for and equity of allowance payback and late 
payment interest charges for untimely filed forms.
     The need for regulatory approval thresholds; e.g., 50 
percent (transportation) and 66\2/3\ percent (processing).
     Alternative approaches to administering allowances. The 
study group report was issued December 3, 1993. The report was 
subsequently endorsed by the Royalty Management Advisory Committee at 
its December 14, 1993, public meeting in Lakewood, Colorado. A copy of 
the study group report may be obtained by contacting the person 
identified in the ``For Further Information Contact'' section of this 
Notice.
    The principal ``Findings and Conclusions'' of the study group are, 
by topic, as follows:

a. The Need for and Usefulness of the Current Regulatory Requirement 
for Allowance Forms Submission, Including the Information on Each Form

    The study group found that the concept of requiring the filing of 
forms that contain information supplementary to that presented on the 
Form MMS-2014 was reasonable. However, the study group also found that 
the current approach to information filings is flawed in terms of the 
information on which the regulatory requirements focus. Although the 
current approach places substantial focus on ``estimated'' allowance 
filings that payors are required to submit to MMS prior to taking an 
allowance deduction on the Form MMS-2014, the most useful and accurate 
information is the actual cost information payors provide on required 
forms after the end of the allowance year. The study group concluded 
that MMS should maintain allowance information filing requirements to 
the extent that MMS, States, and Tribes use the information.
    Furthermore, the study group concluded that MMS' administration of 
allowances should focus on actual data reported annually to MMS rather 
than the current focus on estimated allowance rates reported at the 
beginning of the allowance year. The study group concluded that it was 
necessary for MMS to continue its practice under current regulations of 
requiring the submission of an annual form notifying the agency of the 
payor's intent to take an allowance deduction from royalty value but 
that estimated allowance rates should not be required as a part of the 
information filing.
b. The Need for and Equity of Allowance Payback and Late Payment 
Interest Charges for Failure To File Forms

    The study group found that while substantial compliance with forms 
filing requirements does exist, the penalty of 

[[Page 40129]]
a complete loss of allowance due to the untimely filing of required 
forms ``was not consistent with the crime.'' The study group addressed 
several alternatives to a payback penalty under the current concept of 
requiring a form to be on file prior to the taking of an allowance. The 
group observed that the payback penalty was rooted in the concept that 
qualification for an allowance deduction was subject to the filing of a 
form. While the study group did not reject this concept, it concluded 
that the penalty of a loss of allowance was not necessarily consistent 
with the agency's objectives.
    The group observed that the agency's primary interest is 
effectively administering allowances through a regulatory information 
gathering and notice process. The objective is to gather timely and 
accurate actual cost information to assess the legitimacy of allowance 
deductions as opposed to generating a revenue stream by focusing 
sanctions on the filing dates of forms containing estimated cost 
information. The group was able to reach agreement that the current 
payback sanction was excessive after considering a number of 
alternatives. The study group reached an agreement on the option of 
``Federal Oil and Gas Royalty Management Act (FOGRMA) Late Payment 
Interest plus a Fixed Percentage of the Amount of the Allowance'' as 
the preferred alternative to the payback. However, the group was not 
able to reach agreement on the specific fixed percentage of the 
allowance amount.

c. The Need for Regulatory Approval Thresholds

    The study group concluded that the current thresholds should remain 
in place. Their conclusion was based on the relatively low activity 
level of requests to exceed the current thresholds of 50 percent for 
transportation allowances and 66\2/3\ percent for processing 
allowances. It also was based on the reasonableness of providing 
increased agency scrutiny to those instances involving allowance costs 
that consume an unusually large amount of the royalty value.

d. Alternative Approaches to Administer Allowances

    The study group formulated a proposed alternative approach to 
information gathering for allowance administration. This approach is 
further discussed later in the preamble.

III. Recommendations of the Study Group

    The study group recommended that MMS:
    a. On a prospective basis, pursue changing its current regulatory 
reporting requirements in several respects. These changes should reduce 
the focus on the submittal of estimated allowance information that has 
little value to the agency and increase the focus on the actual 
information that has substantive value to the agency. Complete 
implementation of this recommendation could involve changes in 
regulations, forms, and systems software over a period of several 
years. In the near term, MMS should expedite those changes that do not 
require regulatory action; e.g., changes to the current allowance 
forms.
    b. On a prospective basis, pursue changing, consistent with the 
first recommendation, the current regulatory sanctions for failure to 
timely file required allowance forms. Sanctions should be changed to 
create meaningful incentives for payors to file actual cost allowance 
forms. Existing sanctions in the form of allowance payback and late 
payment interest for the ``estimated'' cost information should be 
changed consistent with the proposed alternative approach to 
administering allowances.
    c. Retain the existing regulatory requirements that payors receive 
annual agency approval prior to taking transportation and processing 
allowances that exceed 50 percent and 66\2/3\ percent, respectively, of 
the royalty value of the product subject to the allowance deduction.
    d. Publish the results of the public commentary received in 
response to the Federal Register Notice dated November 28, 1988, 
regarding extraordinary cost allowances. Further comment should also be 
solicited to identify circumstances that may have developed in the 
interim that MMS should consider.
    e. Pursue establishing automated data bases to capture the detailed 
actual allowance cost information payors submit and develop and 
implement edits and exception processing routines to monitor actual 
allowance costs reported on allowance forms and the Form MMS-2014.

IV. Alternative Approach Suggested by Study Group

    The study group's report provided an alternative approach to 
administering allowances based on its conclusions that:
     MMS should continue to focus on the administration of 
allowances through information gathering methods that supplement the 
Form MMS-2014.
     MMS should focus its allowance administration efforts on 
actual costs instead of estimated costs.
     The current penalty structure for failing to file required 
forms not only places undue focus on estimated allowance information 
but also results in penalties ``inappropriate for the crime.''
    The study group believed that the alternative approach would 
provide MMS with the necessary notice and information that it needs to 
properly administer allowances, reduce current information reporting 
requirements, and possess sufficient incentives for payors to comply 
with the reporting requirements of the regulations. Prototype forms 
were also developed that could be used in the process of implementing 
the alternative approach.
    The framework of the alternative approach the study group developed 
is described below:
    a. Royalty payors would continue to be required to submit a Notice 
of Intent to Take Transportation and Processing Allowances prior to the 
beginning of each allowance year or within the allowance year. One 
form, instead of three, would be used for all allowance types and would 
be filed at the payor code/lease level rather than the payor code/lease 
number/revenue source/product code/selling arrangement level. The 
report would not include an estimated rate. Failure to file this notice 
would constitute a missing report with the payor being assessed $10 per 
allowance line required on the Notice of Intent To Take Transportation 
and Processing Allowances.
    b. Three months following the end of each allowance year, the payor 
would continue to file an actual cost allowance report. For arm's-
length allowances, the report would show the payor code/lease number/
revenue source/product code/selling arrangement on which allowances 
were taken. MMS would gather actual cost data from the AFS as needed. 
For non-arm's-length allowances, the detailed cost breakouts currently 
required would continue to be provided. MMS would continue to grant, 
upon request, extensions of up to three months to file actual cost 
reports.
    Payors failing to timely file required forms would be assessed an 
amount equal to a fixed percent, to be determined through rulemaking, 
of the total allowance amount deducted on Forms MMS-2014 during the 
year plus an amount calculated as equal to late payment interest from 
the date the actual cost form was due until the date the form is 
actually received.
    MMS concludes that the recommendations of the study group will 
serve to improve its administration of oil and gas allowances, 
particularly as related to forms filing requirements and 

[[Page 40130]]
associated sanctions. Therefore, MMS proposes to change its current 
regulatory requirements consistent with the substance of the 
alternative approach the study group presented.

V. Additional Changes by MMS

    The majority of the changes reflected in this proposed rulemaking 
are contained in the study group report. Aditionally, MMS included 
several clarifications and additional changes based on MMS' experiences 
in administering allowances.

a. Failure To File Assessment

    The study group did not specify in its alternative approach a fixed 
percentage assessment for payors' failure to timely file actual cost 
forms. For purposes of this rulemaking, MMS included a percentage rate 
of 10 percent. MMS specifically requests comments on this rate or an 
alternative rate. MMS also requests specific comments on whether or not 
an upper limit, or cap, should be established for such assessments, and 
how the upper limit should be constructed; e.g., absolute dollar amount 
per occurrence, etc.

b. Improper Netting Assessment

    One of several changes involves the introduction of an assessment 
for the ``improper netting'' of allowances against royalty value when 
reporting royalties on the Form MMS-2014. ``Improper netting'' is a 
circumstance where two arm's-length transactions, one representing a 
sale and the other representing transportation and/or processing, 
supported by two separate invoices, are improperly reported on the 
payor's Form MMS-2014 as a one-line transaction. The proposed 
assessment is 20 percent, or twice the assessment (10 percent) that is 
proposed for failure to timely file required allowance forms. MMS 
believes that improper netting should carry an increased assessment 
because the practice represents, in effect, concealment of information 
with adverse impacts on MMS' efforts to monitor the accuracy of royalty 
payments. MMS specifically requests comments on the 20 percent rate 
proposed and whether an upper limit or cap should be established and 
how it should be constructed.
c. Unauthorized Allowance Assessment and Interest Requirement

    Another change involves the introduction of an assessment and an 
interest requirement for certain circumstances where an oil or gas 
transportation or processing allowance in excess of regulatory 
thresholds is taken on Form MMS-2014 without the required prior MMS 
approval. Specifically, the current oil and gas regulations require 
prior MMS approval before a transportation or processing allowance that 
is in excess of 50 percent or 66\2/3\ percent, respectively, of the 
value of production may be taken on Form MMS-2014. An assessment of $10 
per line is proposed for each reported allowance line taken in excess 
of the regulatory thresholds without obtaining the required prior 
approval from MMS.
    Furthermore, an interest-based additional assessment is proposed 
for the period of time that the royalty payor has had the monetary 
benefit of the allowance in excess of the administrative threshold 
without having received MMS approval. MMS considered requiring the 
royalty payor to pay back an allowance taken in excess of the threshold 
but determined that an interest charge approach based on the amount in 
excess of the threshold would be a reasonable deterrent. MMS requests 
specific comment on the construction of this proposal and alternative 
approaches that should be considered.

d. Erroneous Reporting Assessment

    MMS also proposes an assessment for reporting erroneous information 
on required allowance forms. MMS continues to experience significant 
additional workload caused by erroneously reported information on 
allowance forms. MMS seeks to establish an erroneous reporting 
assessment to encourage more accurate reporting. This proposed 
assessment authority currently exists for monthly production and 
royalty reports. An assessment has proven to be an effective tool to 
improve the accuracy of reported information.

e. Transportation Factors

    MMS is considering the elimination of the current treatment of 
transportation factors in arm's-length contracts as reductions in 
value. Instead, MMS would treat such costs as transportation 
allowances. In the March 1988 valuation rulemaking, the concept of the 
transportation factor was adopted to reduce administrative burden for 
MMS and the industry. MMS has found through experience that 
transportation factors have created some confusion between MMS and the 
industry. Numerous instances have been encountered where disagreement 
existed between MMS and industry as to whether a transportation element 
of a sales arrangement was an allowance or a transportation factor 
under the regulations. In many of these cases, it was determined that 
the transportation cost should be treated as an allowance rather than a 
factor. In these cases, the payor had not filed required allowance 
forms and, consequently, was subject to substantial sanctions. Rather 
than proposing the elimination of transportation factors in the 
rulemaking, MMS is seeking specific comments on the extent to which 
royalty payors are now using transportation factors and what impacts 
would be caused if transportation factors were eliminated from the 
current regulations.

f. Technical Corrections

    MMS proposes several technical corrections and clarifications 
including a lessee's option to use a depreciation or a return on 
depreciable capital investment basis in calculating actual allowance 
costs.

VI. Proposed Amendments

    For the reasons discussed above, MMS proposes to amend its 
valuation regulations to change the allowance forms filing requirements 
for oil and gas. Furthermore, MMS is amending its valuation regulations 
to change the existing sanctions for not timely filing required 
allowance forms. MMS is also introducing new assessments for (1) 
failure to properly report allowances as separate lines on the Form 
MMS-2014, a practice commonly referred to as ``netting''; (2) 
noncompliance with regulatory requirements to obtain prior approval 
from MMS before taking oil and gas transportation allowances that 
exceed 50 percent of the value of the production, or gas processing 
allowances that exceed 66\2/3\ percent of the value of gas plant 
products; and (3) reporting erroneous information on required allowance 
forms. MMS also proposes several minor technical corrections and 
clarifications.
    MMS is also proposing similar amendments to coal allowance 
regulations at 30 CFR 206 which are being published separately.

a. Oil Transportation Allowances

    MMS proposes to amend Sec. 206.105 by deleting the fourth and fifth 
sentences of paragraph (a)(1)(i) that state:

    Before any deduction may be taken, the lessee must submit a 
completed page one of Form MMS-4110 (and Schedule 1), Oil 
Transportation Allowance Report, in accordance with paragraph (c)(1) 
of this section. A transportation allowance may be claimed 
retroactively for a period of not more than 3 months prior to the 
first day of the month that Form MMS-4110 is filed with MMS, unless 
MMS approves a longer period upon a showing of good cause by the 
lessee.

    MMS proposes replacing the deleted sentences with the following 
sentences:


[[Page 40131]]

    Before any transportation allowance deduction may be taken on 
Form MMS-2014, Report of Sales and Royalty Remittance, the lessee 
must file a Form MMS-4398, Notice of Intent To Take Oil and Gas 
Transportation and Processing Allowances, in accordance with 
paragraph (c)(1) of this section. For the actual transportation 
allowance calculated for the reporting period, the lessee must file 
a Form MMS-4110, Oil Transportation Allowance Report, in accordance 
with paragraph (c)(1) of this section.

    MMS proposes to amend Sec. 206.105(b)(1) by deleting the third and 
fourth sentences of paragraph (b)(1) that state:

    Before any estimated or actual deduction may be taken, the 
lessee must submit a completed Form MMS-4110 in its entirety in 
accordance with paragraph (c)(2) of this section. A transportation 
allowance may be claimed retroactively for a period of not more than 
three months prior to the first day of the month that Form MMS-4110 
is filed with MMS, unless MMS approves a longer period upon a 
showing of good cause by the lessee.

    MMS proposes replacing the deleted sentences with the two following 
sentences:

    Before any transportation allowance deduction may be taken on 
Form MMS-2014, the lessee must file a Form MMS-4398, Notice of 
Intent to Take Oil and Gas Transportation and Processing Allowances, 
in accordance with paragraph (c)(2) of this section. After the Form 
MMS-4398 reporting period, the lessee must file a Form MMS-4110 in 
accordance with paragraph (c)(2) of this section.

    These changes remove the retroactive three-month limit for oil 
transportation allowances and incorporate the new reporting form. The 
Form MMS-4398 would be a new form that implements the recommendations 
of the study team report. A Notice of Proposed Information Collection 
will be published separately in the Federal Register for this form.
    MMS proposes to further amend Sec. 206.105(b)(1) by deleting from 
the sixth sentence the phrase ``* * * estimated or * * *'' The sixth 
sentence would read:

    When necessary or appropriate, MMS may direct a lessee to modify 
its actual transportation allowance deduction.

    These changes would be technical corrections that improve the 
clarity of the language.
    MMS proposes to amend Sec. 206.105(c)(1) by deleting existing 
paragraphs (i), (ii), (iii), and (iv) and replacing them with new 
paragraphs that read:

    (i) With the exception of those transportation allowances 
specified in paragraphs (c)(1)(v) and (vi) of this section, the 
lessee must file a Form MMS-4398 for transportation allowances for 
each calendar year. The lessee must file the Form MMS-4398 by the 
due date of the first sales month in which a transportation 
allowance is reported on Form MMS-2014. A Form MMS-4398 received by 
the end of the month that Form MMS-2014 is due will be considered 
timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one of Form MMS-4110 for the actual transportation 
allowance calculated. This form is due within 3 months after the end 
of the reporting period, unless MMS approves a longer period.
    (iv) MMS may require that a lessee submit arm's-length 
transportation contracts and related documents. Documents must be 
submitted within a reasonable period of time, as determined by MMS.

    These changes would incorporate the new reporting form for oil 
transportation allowances, Notice of Intent to Take Oil and Gas 
Transportation and Processing Allowances, Form MMS-4398.
    MMS proposes to amend Sec. 206.105(c)(2) by deleting existing 
paragraphs (i), (ii), (iii), and (iv), and replacing them with new 
paragraphs that read:

    (i) With the exception of those transportation allowances 
specified in paragraph (c)(2)(iv), (vi) and (vii) of this section, 
the lessee must file a Form MMS-4398 for transportation allowances 
for each calendar year. The lessee must file the Form MMS-4398 by 
the due date of the first sales month in which a transportation 
allowance is reported on Form MMS-2014. A Form MMS-4398 received by 
the end of the month that Form MMS-2014 is due will be considered 
timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file a page one and all supporting schedules of Form MMS-4110 which 
show actual transportation costs within three months after the end 
of the reporting period, unless MMS approves a longer period.

    Consistent with this amendment, paragraphs (c)(2)(v), (vi), (vii), 
and (viii) would be redesignated (c)(2)(iv), (v), (vi), and (vii).
    These changes would incorporate the new reporting form for oil 
transportation allowances, Notice of Intent to Take Oil and Gas 
Transportation and Processing Allowances, Form MMS-4398.
    MMS proposes to amend Sec. 206.105(c) by adding paragraph (5) 
stating:

    A lessee is required to file a new Form MMS-4110 if adjustments 
are made to actual non-arm's-length transportation allowances on 
Form MMS-2014.

    MMS proposes to amend Sec. 206.105(d) and revise the title to read:

b. Interest Charges and Assessments for Incorrect or Late Reports and 
Failure To Report

    This change to the title would be necessary to reflect the changes 
in the content of the section.
    MMS proposes to further amend Sec. 206.105(d) by deleting 
paragraphs (1), (2), and (3) and replacing them with the following 
schedule:
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report MMS shall levy assessments and interest charges 
in accordance with the table below. MMS will determine interest rates 
in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------
                 If a lessee * * *                     The assessment is * * *      Plus interest calculated * *
-------------------------------------------------------------------------------------------------*--------------
Files an inaccurate or Late Form MMS-4398.........  $10 per allowance line                                      
                                                     required on Form MMS-4398.                                 
Deducts a transportation allowance on Form MMS-     An amount equal to 10 percent  From the date that Form MMS- 
 2014 without complying with requirements for        of the total allowance         4398 was due until the date 
 actual cost reporting on Form MMS-4295.             amount deducted on Forms MMS-  that the form was received. 
                                                     2014 during the year.                                      

[[Page 40132]]
                                                                                                                
Takes a transportation allowance on Form MMS-2014   An amount equal to 20 percent  From the end of the month in 
 by improperly netting the allowance against the     of the total allowance         which Form MMS-2014         
 sales value of the coal oil instead of reporting    amount netted on Form MMS-     containing the netted       
 the allowance as a separate line item on Form MMS-  2014.                          allowance was submitted to  
 2014 as required by paragraph (c)(4) of this                                       the date MMS discovers the  
 section.                                                                           netted amount.              
Erroneously reports a transportation allowance      .............................  Payment of interest on the   
 that results in an underpayment of royalties.                                      amount of the underpayment. 
----------------------------------------------------------------------------------------------------------------


    These changes would adopt the study group's recommendations 
concerning the need for and equity for failure to file allowance forms. 
The study group also determined that the current payback sanction is 
excessive. However, MMS' objective is to gather timely and accurate 
actual cost information to assess the legitimacy of allowance 
deductions. Accordingly, the study group recommend that payors failing 
to timely file required forms would be assessed an amount equal to a 
fixed paercent of the total allowance amount deducted during the year 
plus an amount calculated as equal to late-payment interest from the 
date the actual cost was due until the date the form was actually 
received.
    These changes would add specific language for assessments for 
incorrect or late reports and for failure to report. These changes 
implement the recommendation of the study group report on sanctions.

c. Gas Transportation Allowances

    MMS proposes to amend Sec. 206.157 by deleting the fourth and fifth 
sentences of paragraph (a)(1)(i) that state:

    Before any deduction may be taken, the lessee must submit a 
completed page one of Form MMS-4295 (and Schedule 1), Gas 
Transportation Allowance Report, in accordance with paragraph (c)(1) 
of this section. A transportation allowance may be claimed 
retroactively for a period of not more than 3 months prior to the 
first day of the month that Form MMS-4295 is filed with MMS, unless 
MMS approves a longer period upon a showing of good cause by the 
lessee.

    MMS proposes adding in place of the deleted sentences the following 
sentences:

    Before any transportation allowance deduction may be taken on 
Form MMS-2014, Report of Sales and Royalty Remittance, the lessee 
must file a Form MMS-4398, Notice of Intent To Take Oil And Gas 
Transportation and Processing Allowances, in accordance with 
paragraph (c)(1) of this section. After the Form MMS-4398 reporting 
period, the lessee must file a Form MMS-4295, Gas Transportation 
Allowance Report, in accordance with paragraph (c)(1) of this 
section.

    These changes would remove the retroactive three-month limit for 
gas transportation and incorporate the new reporting form, Notice of 
Intent to Take Oil and Gas Transportation and Processing Allowance, 
Form MMS-4398. MMS further proposes to remove Sec. 206.157(a)(5) as 
follows:

    (5) Where an arm's-length sales contract price or a posted price 
includes a provision whereby the listed price is reduced by a 
transportation factor, MMS will not consider the transportation 
factor to be a transportation allowance. The transportation factor 
may be used in determining the lessee's gross proceeds for the sale 
of the product. The transportation factor may not exceed 50 percent 
of the base price of the product without MMS approval.

    MMS proposes to amend Sec. 206.157(b)(1) by deleting the third and 
fourth sentences that state:

    Before any estimated or actual deduction may be taken, the 
lessee must submit a completed Form MMS-4295 in accordance with 
paragraph (c)(2) of this section. A transportation allowance may be 
claimed retroactively for a period of not more than 3 months prior 
to the first day of the month that Form MMS-4295 is filed with MMS, 
unless MMS approves a longer period upon a showing of good cause by 
the lessee.

    MMS proposes replacing the two deleted sentences with the following 
sentences:

    Before any transportation deduction may be taken on Form MMS-
2014, the lessee must file a Form MMS-4398, Notice of Intent to Take 
Oil and Gas Transportation and Processing Allowances, in accordance 
with paragraph (c)(2) of this section. For the actual transportation 
allowance incurred after the Form MMS-4398 reporting period, the 
lessee must file a Form MMS-4295 in accordance with paragraph (c)(2) 
of this section.

    These changes would remove the retroactive 3-month limit for gas 
transportation and incorporate the new reporting form, Notice of Intent 
to Take Oil and Gas Transportation and Processing Allowances, Form MMS-
4398.
    MMS proposes to further amend Sec. 206.157(b)(1) by deleting from 
the sixth sentence the phrase `` * * * estimated or * * * ''
    The sixth sentence would read:

    When necessary or appropriate, MMS may direct a lessee to modify 
its actual transportation allowance deduction.

    These changes would be technical corrections that improve the 
clarity of the language.
    MMS proposes to amend Sec. 206.157(c)(1) by deleting existing 
paragraphs (i), (ii), (iii), and (iv) and replacing them with new 
paragraphs that read:

    (i) With the exception of those transportation allowances 
specified in paragraph (c)(1) (v) and (vi) of this section, the 
lessee must file a Form MMS-4398 for transportation allowances for 
each calendar year by the due date of the first sales month in which 
a transportation allowance is reported on Form MMS-2014. A Form MMS-
4398 received by the end of the month that Form MMS-2014 is due will 
be considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one of Form MMS-4295 for transportation allowance actuals 
within 3 months after the end of the reporting period, unless MMS 
approves a longer period.
    (iv) MMS may require that a lessee submit arm's-length 
transportation contracts and related documents. Documents will be 
submitted within a reasonable period of time, as determined by MMS.

    These changes incorporate the new reporting form for gas 
transportation allowances, Form MMS-4398.
    MMS proposes to amend Sec. 206.157(c)(2) by deleting existing 
paragraphs (i), (ii), (iii), and (iv), and adding new paragraphs that 
read:

    (i) With the exception of those transportation allowances 
specified in paragraphs (c)(2) (iv), (vi) and (vii) of this section, 
the lessee must file a Form MMS-4398 for transportation allowances 
for each calendar year by the due date of the first sales month in 
which a transportation allowance is reported on Form MMS-2014. A 
Form MMS-4398 received by the end of the month that Form MMS-2014 is 
due will be considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file a page one and all supporting schedules of Form MMS-4295 

[[Page 40133]]
which show actual transportation costs within three months after the 
end of the reporting period, unless MMS approves a longer period.

    Consistent with this amendment, paragraphs (c)(2) (v), (vi), (vii), 
and (viii) of Sec. 206.157 are redesignated (c)(2) (iv), (v), and (vi), 
and (vii).
    These changes would incorporate the new reporting form for gas 
transportation allowances, Form MMS-4398.
    MMS proposes to amend Sec. 206.157(c) by adding paragraph (5) 
stating:

    A lessee is required to file a new Form MMS-4295 if adjustments 
are made to actual non-arm's-length transportation allowances on 
Form MMS-2014.

    MMS proposes to amend Sec. 206.157(d) and add the words `` * * * 
charges and * * * '' to the title that will read:
    d. Interest charges and assessments for incorrect or late reports 
and failure to report.
    This change to the title would be necessary to reflect the changes 
in the content of the section.
    MMS proposes to amend Sec. 206.157(d) by deleting paragraphs (1), 
(2) and (3) and replacing them with the following schedule:
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report MMS shall levy assessments and interest charges 
in accordance with the table below. MMS will determine interest rates 
in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------
                 If a lessee * * *                     The assessment is * * *      Plus interest calculated * *
-------------------------------------------------------------------------------------------------*--------------
Files an inaccurate or Late Form MMS-4398.........  $10 per allowance line         .............................
                                                     required on Form MMS-4402.                                 
Deducts a transportation allowance on Form MMS-     An amount equal to 10 percent  From the date that Form MMS- 
 2014 without complying with requirements for        of the total allowance         4295 was due until the date 
 actual cost reporting on Form MMS-4295.             amount deducted on Forms MMS-  that the form was received. 
                                                     2014 during the year.                                      
Takes a transportation allowance on Form MMS-2014   An amount equal to 20 percent  From the end of the month in 
 by improperly netting the allowance against the     of the total allowance         which Form MMS-2014         
 sales value of the gas instead of reporting the     amount netted on Form MMS-     containing the netted       
 allowance as a separate line item on Form MMS-      2014.                          allowance was submitted to  
 2014 as required by paragraph (c)(4) of this                                       the date MMS discovers the  
 section.                                                                           netted amount.              
Erroneously reports a transportation allowance      .............................  Payment of interest on the   
 that results in an underpayment of royalties.                                      amount of the underpayment. 
----------------------------------------------------------------------------------------------------------------

    These changes would adopt the study group's recommendations 
concerning the need for and equity of allowance payback and late-
payment interest charges for failure to file allowance forms. The study 
group also determined that the current payback sanction is excessive. 
However, MMS' objective is to gather timely and accurate actual cost 
information to assess the legitimacy of allowance deductions. 
Accordingly, the study group recommended that payors failing to timely 
file required forms would be assessed an amount equal to a fixed 
percent of the total allowance amount deducted during the year plus an 
amount calculated as equal to late-payment interest from the date the 
actual cost was due until the date the form was actually received.
    These changes would add specific language for interest and 
assessments for incorrect or late reports and for failure to report. 
These changes would implement recommendations of the study group report 
on sanctions.''

e. Gas Processing Allowances

    MMS proposes to amend Sec. 206.159 by deleting the third and fourth 
sentences of paragraph (a)(1)(i) that state:

    Before any deduction may be taken, the lessee must submit a 
completed page one of Form MMS-4109, Gas Processing Allowance 
Summary Report, in accordance with paragraph (c)(1) of this section. 
A processing allowance may be claimed retroactively for a period of 
not more than three months prior to the first day of the month that 
Form MMS-4109 is filed with MMS, unless MMS approves a longer period 
upon a showing of good cause by the lessee.

    MMS proposes replacing the two deleted sentences with the two 
following sentences:

    Before any processing allowance deduction may be taken on Form 
MMS-2014, Report of Sales and Royalty Remittance, the lessee must 
file a Form MMS-4398, Notice of Intent To Take Oil And Gas 
Transportation and Processing Allowances, in accordance with 
paragraph (c)(1) of this section. After the Form MMS-4398 reporting 
period, the lessee must file a Form MMS-4109, Gas Processing 
Allowance Summary Report, in accordance with paragraph (c)(1) of 
this section.

    MMS proposes amending Sec. 206.159(b)(1) by deleting the third and 
fourth sentences that state:

    Before any estimated or actual deduction may be taken, the 
lessee must submit a completed Form MMS-4109 in accordance with 
paragraph (c)(2) of this section. A processing allowance may be 
claimed retroactively for a period of not more than 3 months prior 
to the first day of the month that Form MMS-4109 is filed with MMS, 
unless MMS approves a longer period upon a showing of good cause by 
the lessee.

    MMS proposes replacing the two deleted sentences with the two 
following sentences:

    Before any processing allowance deduction may be taken on Form 
MMS-2014, the lessee must file a Form MMS-4398, Notice of Intent To 
Take Transportation and Processing Allowances, in accordance with 
paragraph (c)(2) of this section. After the Form MMS-4398 reporting 
period, the lessee must file a Form MMS-4109 in accordance with 
paragraph (c)(2) of this section.

    These changes would remove the retroactive three-month limit for 
gas processing and incorporate the new reporting form, Form MMS-4398.
    MMS proposes to further amend Sec. 206.159(b)(1) by deleting from 
the seventh sentence the phrase `` * * * estimated or * * * '' The 
revised seventh sentence would read:

    When necessary or appropriate, MMS may direct a lessee to modify 
its actual processing allowance.

    These changes would be technical corrections and language 
clarification.
    MMS proposes to amend Sec. 206.159(c)(1) by deleting existing 
paragraphs (i), (ii), and (iii) and replacing them with new paragraphs 
that read:

    (i) With the exception of those processing allowances specified 
in paragraph (c)(1)(v) of this section, the lessee must file a Form 
MMS-4398 for processing allowances for each calendar year by the due 
date of the first sales month in which a processing allowance is 
reported on Form MMS-2014. A Form MMS-4398 received by the end of 
the month that Form MMS-2014 is due will be considered timely 
received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
processing allowance and will continue until the end of the calendar 
year. 

[[Page 40134]]

    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one of Form MMS-4109 for processing allowances within 
three months after the end of the reporting period, unless MMS 
approves a longer period.

    MMS proposes to amend Sec. 206.159(c)(2) by deleting existing 
paragraphs (i), (ii), (iii), (iv), and (vi) and replacing them with new 
paragraphs that read:

    (i) With the exception of those processing allowances specified 
in paragraph (c)(2) (v) and (vi) of this section, the lessee must 
file a Form MMS-4398 for processing allowances for each calendar 
year by the due date of the first sales month in which a processing 
allowance is reported on Form MMS-2014. A Form MMS-4398 received by 
the end of the month that Form MMS-2014 is due will be considered 
timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
processing allowance and will continue until the end of the calendar 
year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one and all supporting schedules of Form MMS-4109 which 
show actual processing costs within 3 months after the end of the 
reporting period, unless MMS approves a longer period.
    (iv) MMS may require that a lessee submit all data used by the 
lessee to prepare the actual costs submitted on its Form MMS-4109. 
The data must be provided within a reasonable period of time, as 
determined by MMS.
    Consistent with this change, paragraphs (vii) and (viii) would 
be redesignated paragraphs (vi) and (vii).

    These changes would incorporate the new reporting form for gas 
processing allowances, Form MMS-4398.
    MMS proposes to amend Sec. 206.159(c) by adding paragraph (5) to 
state:

    A lessee is required to file a new Form MMS-4109 if adjustments 
are made to actual non-arm's-length processing allowances on Form 
MMS-2014.

    MMS proposes to amend Sec. 206.159(d) and add the words ``* * * 
charges and * * *'' to the title so it reads:
    f. Interest charges and assessments for incorrect or late reports 
and failure to report
    This change to the title would be necessary to reflect the changes 
in the content of the section.
    MMS proposes to further amend Sec. 206.159(d) by deleting paragraph 
(1), (2) and (3) and replacing them with the following schedule:
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report MMS shall levy assessments and interest charges 
in accordance with the table below. MMS will determine interest rates 
in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------
                 If a lessee * * *                     The assessment is * * *      Plus interest calculated * *
-------------------------------------------------------------------------------------------------*--------------
Files an inaccurate or Late Form MMS-4398.........  $10 per allowance line         .............................
                                                     required on Form MMS-4398.                                 
Deducts a processing allowance on Form MMS-2014     An amount equal to 10 percent  From the date that Form MMS- 
 without complying with requirements for actual      of the total allowance         4109 was due until the date 
 cost reporting on Form MMS-4109.                    amount deducted on Forms MMS-  that the form was received. 
                                                     2014 during the year.                                      
Takes a processing allowance on Form MMS-2014 by    An amount equal to 20 percent  From the end of the month in 
 improperly netting the allowance against the        of the total allowance         which Form MMS-2014         
 sales value of the gas instead of reporting the     amount netted on Form MMS-     containing the netted       
 allowance as a separate line item on Form MMS-      2014.                          allowance was submitted to  
 2014 as required by paragraph (c)(4) of this                                       the date MMS discovers the  
 section.                                                                           netted amount.              
Erroneously reports a processing allowance that     .............................  On the amount of the         
 results in an underpayment of royalties.                                           underpayment.               
----------------------------------------------------------------------------------------------------------------

    These changes would adopt the study group's recommendations 
concerning the need for and equity of allowance payback and late-
payment interest charges for failure to file allowance forms. The study 
group also determined that the current payback sanction is excessive. 
However, MMS' objective is to gather timely and accurate actual cost 
information to assess the legitimacy of allowance deductions. 
Accordingly, the study group recommended that payors failing to timely 
file required froms would be assessed an amount equal to a fixed 
percent of the total allowance amount deducted during the year plus an 
amount calculated as equal to late-payment interest from the date the 
actual cost was due until the date the form was actually received.
    These changes would add specific language for interest charges and 
assessments for incorrect or late reports and for failure to report. 
These changes would implement the recommendations in the study group 
report for sanctions.
VII. Other Matters

    Separate regulations concerning valuation of natural gas for 
royalty purposes are currently being developed for Federal leases and 
for Indian leases through two separate negotiated rulemaking 
committees. These committees are addressing both natural gas valuation 
and transportation and processing allowance issues.
    The committee addressing natural gas valuation for Federal leases 
recommended in its March 1995 report that transportation and processing 
allowance forms no longer be required. This recommendation is one of 
numerous recommendations for broad changes to existing regulations 
governing the valuation of natural gas produced from Federal leases. 
The future rulemaking to be prepared considering the recommendations of 
the Federal negotiated rulemaking committee will include the proposal 
for eliminating the requirement for allowance forms. Thus the 
amendments being proposed today to change the oil and gas valuation 
regulations governing transportation and processing allowances may be 
impacted by the results of the future rulemaking. Similar impacts may 
occur for natural gas produced from Indian leases depending on the 
outcome of the negotiated rulemaking committee addressing the valuation 
of natural gas production from Indian lands.
    MMS also would like comment on the effective date for the final 
rule. One option is to make any final rule effective as of January 1, 
1995, the beginning of the current allowance year. Another option is to 
make the rule effective as of the date of publication of this proposed 
rule since royalty payors are on notice of the possible rule change on 
that date. Commenters should address this issue in their comments.

VIII. Procedural Matters

The Regulatory Flexibility Act

    The Department has determined that this rulemaking will not have a 
significant economic effect on a substantial number of small entities 
under the Regulatory Flexibility Act (5 

[[Page 40135]]
U.S.C. 601 et seq.). The proposed rule will streamline and improve 
existing regulatory reporting requirements related to allowances that 
are used to calculate royalty payments on oil and gas produced from 
Federal and Indian lands.

Executive Order 12630

    The Department certifies that the rule does not represent a 
governmental action capable of interference with constitutionally 
protected property rights. Thus, a Takings Implication Assessment need 
not be prepared under Executive Order 12630, ``Government Action and 
Interference with Constitutionally Protected Property Rights.''

Executive Order 12778

    The Department has certified to the Office of Management and Budget 
that these final regulations meet the applicable standards provided in 
Sections 2(a) and 2(b)(2) of Executive Order 12778.

Executive Order 12866

    This document has been reviewed under Executive Order 12866 and is 
not a significant regulatory action.

Paperwork Reduction Act of 1980

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget under 44 U.S.C. 
3501 et seq., and assigned Clearance Numbers 1010-0022, 1010-0061, and 
1010-0075. Form MMS-4398 has been submitted to OMB for approval.

National Environmental Policy Act of 1969

    We have determined that this rulemaking is not a major Federal 
action significantly affecting the quality of the human environment, 
and a detailed statement under section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not 
required.

List of Subjects in 30 CFR Part 206

    Coal, Continental shelf, Geothermal energy, Government contracts, 
Indian lands, Mineral royalties, Natural gas, Petroleum, Public lands--
mineral resources, Reporting and recordkeeping requirements.

    Dated: May 19, 1995.
Bob Armstrong,
Assistant Secretary--Land and Minerals Management.

    For the reasons set out in the preamble, 30 CFR part 206 is 
proposed to be amended as set forth below:

PART 206--PRODUCT VALUATION

    1. The authority citation for Part 206 is revised to read as 
follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 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.

Subpart C--Federal and Indian Oil

    2. Section 206.105 is proposed to be amended by revising paragraphs 
(a)(1)(i), (b)(1), (c)(1)(i) through (iv), (c)(2)(i) through (iii), 
removing paragraph (c)(2)(iv), redesignating paragraphs (c)(2)(v), 
(vi), (vii), and (viii) as paragraphs (c)(2)(iv), (v), (vi), and (vii), 
revising newly redesignated paragraphs (c)(2)(iv) through (vii) adding 
new paragraph (c)(5) and revising paragraph (d) to read as follows:


Sec. 206.105  Determination of transportation allowances.

    (a) * * *
    (1)(i) For transportation costs incurred by a lessee pursuant to an 
arm's-length contract, the transportation allowance shall be the 
reasonable, actual costs incurred by the lessee for transporting oil 
under that contract, except as provided in paragraphs (a)(1) (ii) and 
(iii) of this section, subject to monitoring, review, audit, and 
adjustment. The lessee shall have the burden of demonstrating that its 
contract is arm's-length. Such allowances shall be subject to the 
provisions of paragraph (f) of this section. Before any transportation 
allowance deduction may be taken on Form MMS-2014, Report of Sales and 
Royalty Remittance, the lessee must file a Form MMS-4398, Notice of 
Intent To Take Oil And Gas Transportation and Processing Allowances, in 
accordance with paragraph (c)(1) of this section. For the actual 
transportation allowance calculated for the reporting period, the 
lessee must file a Form MMS-4110, Oil Transportation Allowance Report, 
in accordance with paragraph (c)(1) of this section.
* * * * *
    (b) * * *
    (1) If a lessee has a non-arm's-length transportation contract or 
has no contract, including those situations where the lessee performs 
transportation services for itself, the transportation allowance will 
be based upon the lessee's reasonable, actual costs as provided in this 
paragraph. All transportation allowances deducted under a non-arms-
length or no-contract situation are subject to monitoring, review, 
audit, and adjustment. Before any transportation allowance deduction 
may be taken on Form MMS-2014, the lessee must file a Form MMS-4398, 
Notice of Intent to Take Oil and Gas Transportation and Processing 
Allowances, in accordance with paragraph (c)(2) of this section. After 
the Form MMS-4398 reporting period, the lessee must file a Form MMS-
4110 in accordance with paragraph (c)(2) of this section. MMS will 
monitor the allowance deductions to determine whether lessees are 
taking deductions that are reasonable and allowable. When necessary or 
appropriate, MMS may direct a lessee to modify its actual 
transportation allowance deduction.
* * * * *
    (c) * * *
    (1) * * *
    (i) With the exception of those transportation allowances specified 
in paragraphs (c)(1)(v) and (vi) of this section, the lessee must file 
a Form MMS-4398 for transportation allowances for each calendar year. 
The lessee must file the Form MMS-4398 by the due date of the first 
sales month in which a transportation allowance is reported on Form 
MMS-2014. A Form MMS-4398 received by the end of the month that the 
Form MMS-2014 is due will be considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one of Form MMS-4110 for the actual transportation allowance 
calculated. This Form is due within 3 months after the end of the 
reporting period, unless MMS approves a longer period.
    (iv) MMS may require that a lessee submit arm's-length 
transportation contracts and related documents. Documents must be 
submitted within a reasonable period of time, as determined by MMS.
* * * * *
    (2) * * *
    (i) With the exception of those transportation allowances specified 
in paragraphs (c)(2)(iv), (vi) and (vii) of this section, the lessee 
must file a Form MMS-4398 for transportation allowances for each 
calendar year. The lessee must file the Form MMS-4398 by the due date 
of the first sales month in which a transportation allowance is 
reported on Form MMS-2014. A Form MMS-4398 received by the end of the 
month that MMS-2014 is due will be considered timely received. 

[[Page 40136]]

    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file a page one and all supporting schedules of Form MMS-4110 which 
show actual transportation costs within 3 months after the end of the 
reporting period, unless MMS approves a longer period.
    (iv) Non-arm's-length contract or no-contract transportation 
allowances which are in effect at the time these regulations become 
effective will be allowed to continue until such allowances terminate. 
For the purposes of this section, only those allowances that have been 
approved by MMS in writing shall qualify as being in effect at the time 
these regulations become effective.
    (v) Upon request by MMS, the lessee shall submit all data used to 
prepare its Form MMS-4110. The data shall be provided within a 
reasonable period of time, as determined by MMS.
    (vi) MMS may establish, in appropriate circumstances, reporting 
requirements which are different from the requirements of this section.
    (vii) If the lessee is authorized to use its FERC-approved or State 
regulatory agency-approved tariff as its transportation cost in 
accordance with paragraph (b)(5) of this section, it shall follow the 
reporting requirements of paragraph (c)(1) of this section.
* * * * *
    (5) A lessee is required to file a new Form MMS-4110 if adjustments 
are made to actual non-arm's-length transportation allowances on Form 
MMS-2014.
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report. MMS shall levy assessments and interest charges 
in accordance with the table below. MMS will determine interest rates 
in accordance wit 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------
                 If a lessee * * *                     The assessment is * * *      Plus interest calculated * *
-------------------------------------------------------------------------------------------------*--------------
Files an inaccurate or Late Form MMS-4398.........  $10 per allowance line                                      
                                                     required on Form MMS-4398.                                 
Deducts a transportation allowance on Form MMS-     An amount equal to 10 percent  From the date that Form MMS- 
 2014 without complying with requirements for        of the total allowance         4398 was due until the date 
 actual cost reporting on Form MMS-4292.             amount deducted on Forms MMS-  that the form was received. 
                                                     2014 during the year.                                      
Takes a transportation allowance on Form MMS-2014   An amount equal to 20 percent  From the end of the month in 
 by improperly netting the allowance against the     of the total allowance         which Form MMS-2014         
 sales value of the product instead of reporting     amount netted on Form MMS-     containing the netted       
 the allowance as a separate line item on Form MMS-  2014.                          allowance was submitted to  
 2014 as required by paragraph (c)(4) of this                                       the date MMS discovers the  
 section.                                                                           netted amount.              
Erroneously reports a transportation allowance      .............................  On the amount of the         
 that results in an underpayment of royalties.                                      underpayment.               
----------------------------------------------------------------------------------------------------------------

* * * * *

Subpart D--Federal and Indian Gas

    3. Section 206.157 is proposed to be amended by revising paragraphs 
(a)(1)(i), removing paragraph (a)(5), revising paragraphs (b)(1), 
(c)(1)(i) through (iv), (c)(2)(i), (ii), and (iii), removing paragraph 
(c)(2)(iv), redesignating paragraphs (c)(2)(v) through (viii) as 
paragraphs (c)(2)(iv) through (vii), revising newly designated 
paragraphs (c)(2) (iv) through (vii), adding paragraph (c)(5) and 
revising paragraph (d) to read as follows:


Sec. 206.157  Determination of transportation allowances.

    (a) * * *
    (1)(i) For transportation costs incurred by a lessee pursuant to an 
arm's-length contract, the transportation allowance shall be the 
reasonable, actual costs incurred by the lessee for transporting the 
unprocessed gas, residue gas and/or gas plant products under that 
contract, except as provided in paragraphs (a)(1)(ii) and (iii) of this 
section, subject to monitoring, review, audit, and adjustment. The 
lessee will have the burden of demonstrating that its contract is 
arm's-length. Such allowances shall be subject to the provisions of 
paragraph (f) of this section. Before any transportation allowance 
deduction may be taken on Form MMS-2014, Report of Sales and Royalty 
Remittance, the lessee must file a Form MMS-4398, Notice of Intent To 
Take Oil and Gas Transportation and Processing Allowances, in 
accordance with paragraph (c)(1) of this section. After the Form MMS-
4398 reporting period, the lessee must file a Form MMS-4295, Gas 
Transportation Allowance Report, in accordance with paragraph (c)(1) of 
this section.
* * * * *
    (b) * * *
    (1) If a lessee has a non-arm's-length transportation contract or 
has no contract, including those situations where the lessee performs 
transportation services for itself, the transportation allowance will 
be based upon the lessee's reasonable actual costs as provided in this 
paragraph. All transportation allowances deducted under a non-arm's-
length or no contract situation are subject to monitoring, review, 
audit, and adjustment. Before any transportation deduction may be taken 
on Form MMS-2014, the lessee must file a Form MMS-4398, Notice of 
Intent To Take Oil and Gas Transportation and Processing Allowances, in 
accordance with paragraph (c)(2) of this section. For the actual 
transportation allowance incurred after the Form MMS-4398 reporting 
period, the lessee must file a Form MMS-4295 in accordance with 
paragraph (c)(2) of this section. MMS will monitor the allowance 
deductions to ensure that deductions are reasonable and allowable. When 
necessary or appropriate, MMS may direct a lessee to modify its actual 
transportation allowance deduction.
* * * * *
    (c) * * *
    (1) * * *
    (i) With the exception of those transportation allowances specified 
in paragraph (c)(1)(v) and (vi) of this section, the lessee must file a 
Form MMS-4398 for transportation allowances for each calendar year by 
the due date of the first sales month in which a transportation 
allowance is reported on Form MMS-2014. A Form MMS-4398 received by the 
end of the month that Form MMS-2014 is due will be considered timely 
received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will 

[[Page 40137]]
continue until the end of the calendar year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one of Form MMS-4295 for transportation allowance actuals 
within 3 months after the end of the reporting period, unless MMS 
approves a longer period.
    (iv) MMS may require that a lessee submit arm's-length 
transportation contracts and related documents. Documents will 
submitted within a reasonable period of time, as determined by MMS.
* * * * *
    (2) * * *
    (i) With the exception of those transportation allowances specified 
in paragraphs (c)(2)(iv), (vi) and (vii) of this section, the lessee 
must file a Form MMS-4398 for transportation allowances for each 
calendar year by the due date of the first sales month in which a 
transportation allowance is reported on Form MMS-2014. A Form MMS-4398 
received by the end of the month that Form MMS-2014 is due will be 
considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
transportation allowance and will continue until the end of the 
calendar year.
    (iii) After Form MMS-4398 reporting period, lessees must file a 
page one and all supporting schedules of Form MMS-4295 which show 
actual transportation costs within three months after the end of the 
reporting period, unless MMS approves a longer period.
    (iv) Non-arm's-length contract or no-contract based transportation 
allowances which are in effect at the time these regulations become 
effective will be allowed to continue until such allowances terminate. 
For the purposes of this section, only those allowances that have been 
approved by MMS in writing shall qualify as being in effect at the time 
these regulations become effective.
    (v) Upon request by MMS, the lessee shall submit all data used to 
prepare its Form MMS-4295. The data shall be provided within a 
reasonable period of time, as determined by MMS.
    (vi) MMS may establish in appropriate circumstances, reporting 
requirements which are different from the requirements of this section.
    (vii) If the lessee is authorized to use its FERC-approved or State 
regulatory agency-approved tariff as its transportation cost in 
accordance with paragraph (b)(5) of this section, it shall follow the 
reporting requirements of paragraph (c)(1) of this section.
 * * * * *
    (5) A lessee is required to file a new Form MMS-4295 if adjustments 
are made to actual non-arm's-length transportation allowances on Form 
MMS-2014.
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report.
    (5) Interest required to be paid by this section shall be 
determined in accordance with 30 CFR 218.54.
* * * * *
    4. Section 206.159 is proposed to be amended by revising paragraphs 
(a)(1)(i), (b)(1), (b)(2)(iv), (c)(1)(i), (ii), (iii), 
(c)(2)(i),(ii),(iii) and (iv), removing paragraph (c)(2)(vi), 
redesignating paragraphs (c)(2)(vii) and (viii) as paragraphs 
(c)(2)(vi) and (vii), revising newly redesignated paragraphs (c)(2)(vi) 
and (c)(2)(vii) adding paragraph (c)(5), and revising paragraphs (d) to 
read as follows:


Sec. 206.159  Determination of processing allowances.

    (a) * * *
    (1)(i) For processing costs incurred by a lessee pursuant to an 
arm's-length contract, the processing allowance shall be the reasonable 
actual costs incurred by the lessee for processing the gas under that 
contract, except as provided in paragraphs (a)(1) (ii) and (iii) of 
this section, subject to monitoring, review, audit, and adjustment. The 
lessee shall have the burden of demonstrating that its contract is 
arm's-length. Before any processing allowance deduction may be taken on 
Form MMS-2014, Report of Sales and Royalty Remittance, the lessee must 
file a Form MMS-4398, Notice of Intent To Take Oil And Gas 
Transportation and Processing Allowances, in accordance with paragraph 
(c)(1) of this section. After the Form MMS-4398 reporting period, the 
lessee must file a Form MMS-4109, Gas Processing Allowance Summary 
Report, in accordance with paragraph (c)(1) of this section.
* * * * *
    (b) * * *
    (1) If a lessee has a non-arm's-length processing contract or has 
no contract, including those situations where the lessee performs 
processing for itself, the processing allowance will be based upon the 
lessee's reasonable actual costs as provided in this paragraph. All 
processing allowances deducted under a non-arm's-length or no-contract 
situation are subject to monitoring, review, audit, and adjustment. 
Before any processing allowance deduction may be taken on Form MMS-
2014, the lessee must file a Form MMS-4398, Notice of Intent to take 
Oil and Gas Transportation and Processing Allowances, in accordance 
with paragraph (c)(2) of this section. After the Form MMS-4398 
reporting period, the lessee must file a Form MMS-4109 in accordance 
with paragraph (c)(2) of this section. MMS will monitor the allowance 
deduction to ensure that deductions are reasonable and allowable. When 
necessary or appropriate, MMS may direct a lessee to modify its actual 
processing allowance.
    (2) * * *
    (iv) A lessee may use either depreciation and a return on 
undepreciated capital investment in accordance with paragraph 
(b)(2)(iv)(A) of this section, or a cost equal to the initial capital 
investment in the processing plant multiplied by a rate of return in 
accordance with paragraph (b)(2)(iv)(B) of this section. When a lessee 
has elected to use either method for a processing plant, the lessee may 
not later elect to change to the other alternative without approval of 
MMS.
* * * * *
    (c) * * *
    (1) * * *
    (i) With the exception of those processing allowances specified in 
paragraph (c)(1)(v) and (vi) of this section, the lessee must file a 
Form MMS-4398 for processing allowances for each calendar year by the 
due date of the first sales month in which a processing allowance is 
reported on Form MMS-2014. A Form MMS-4398 received by the end of the 
month that Form MMS-2014 is due will be considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
processing allowance and will continue until the end of the calendar 
year.
    (iii) After Form MMS-4398 reporting period, the lessee must file 
page one of Form MMS-4109 for processing allowances within 3 months 
after the end of the reporting period, unless MMS approves a longer 
period.
* * * * *
    (2) * * *
    (i) With the exception of those processing allowances specified in 
paragraphs (c)(2)(v) and (vi) of this section, the lessee must file a 
Form MMS-4398 for processing allowances for each calendar year by the 
due date of the first sales month in which a processing allowance is 
reported on Form MMS-2014. A Form MMS-4398 received by the end of the 
month that 

[[Page 40138]]
Form MMS-2014 is due will be considered timely received.
    (ii) The Form MMS-4398 will be effective for a reporting period 
beginning the month that the lessee is first authorized to deduct a 
processing allowance and will continue until the end of the calendar 
year.
    (iii) After the Form MMS-4398 reporting period, the lessee must 
file page one and all supporting schedules of Form MMS-4109 which show 
actual processing costs within 3 months after the end of the reporting 
period, unless MMS approves a longer period.
    (iv) MMS may require that a lessee submit all data used by the 
lessee to prepare the actual costs submitted on its Form MMS-4109. The 
data must be provided within a reasonable period of time, as determined 
by MMS.
    (v) * * *
    (vi) MMS may establish, in appropriate circumstances, reporting 
requirements which are different from the requirements of this section.
    (vii) If the lessee is authorized to use the volume weighted 
average prices charged other persons as its processing allowance in 
accordance with paragraph (b)(4) of this section, it shall follow the 
reporting requirements of paragraph (c)(1) of this section.
 * * * * *
    (5) A lessee is required to file a new Form MMS-4109 if adjustments 
are made to actual non-arm's-length processing allowances on Form MMS-
2014.
    (d) Interest charges and assessments for incorrect or late reports 
and failure to report.
    (1) If a lessee fails to timely or accurately file a Form MMS-4398 
for processing allowances, the lessee may be assessed $10 per allowance 
line required on Form MMS-4398.
    (2) If a lessee deducts a processing allowance on its Form MMS-2014 
without complying with the requirements of this section for Form MMS-
4109 actual cost reporting, the lessee may be assessed an amount equal 
to 10 percent of the total allowance amount deducted on Forms MMS-2014 
during the year plus interest calculated from the date the actual cost 
Form MMS-4109 was due until the date the form was received.
    (3) If a lessee takes a processing allowance on its Form MMS-2014 
by improperly netting the allowance against the value of the gas 
instead of reporting the allowance as a separate line item on Form MMS-
2014 as required by paragraph (c)(4) of this section, the lessee may be 
assessed an amount equal to 20 percent of the total allowance amount 
netted on Form MMS-2014 plus interest calculated from the end of the 
month in which Form MMS-2014 containing the netted allowance was 
submitted to the date MMS discovers the netted amount.
    (4) If a lessee erroneously reports a processing allowance which 
results in an underpayment of royalties, interest shall be paid on the 
amount of that underpayment.
    (5) Interest required to be paid by this section shall be 
determined in accordance with 30 CFR 218.54.
* * * * *
[FR Doc. 95-19295 Filed 8-4-95; 8:45 am]
BILLING CODE 4310-MR-P