[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Proposed Rules]
[Pages 65610-65611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30767]



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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC09


Valuation of Oil From Federal and Indian Leases

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Advance notice of proposed rulemaking.

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Summary: In response to changes in the oil and gas industry and the 
marketplace, the Minerals Management Service (MMS) is considering 
amending its regulations regarding the valuation of crude oil produced 
from or allocated to Federal and Indian leases.
    Most Federal and Indian leases provide that the value of production 
for royalty purposes be determined by the Secretary. This notice is 
intended to solicit comments on new methodologies to establish the 
royalty value of oil produced from Federal and Indian leases. MMS 
specifically seeks comments on the use of crude oil posted prices as a 
means to value oil not sold under arm's-length conditions, and the 
meaning and application of the term ``significant quantities''.

DATES: Comments must be received on or before March 19, 1996.

ADDRESSES: Written comments, suggestions, or objections regarding 
valuation issues 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, fax 
(303) 231-3194.

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Procedures Staff, MMS Royalty Management Program, at telephone (303) 
231-3432, fax (303) 231-3491, e-mail David__G[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    All Federal and Indian oil and gas leases contain provisions for 
the determination of royalty obligations.
    Most of these Federal and Indian 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 to establish value for crude oil production from 
Federal and Indian leases. Comments received in response to this 
Advance Notice will be considered in the development of a proposed 
rulemaking that MMS will publish in the Federal Register.
    In conjunction with the lease terms, the valuation of oil 
production from Federal and Indian leases is subject to the regulations 
at 30 CFR Part 206, Subpart C--Federal and Indian Oil. 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). MMS believes it could provide an improved 
regulatory framework in which lease terms could be strictly enforced 
while requiring little or no extra information from lessees.
    MMS may issue separate regulations to value oil from Indian leases 
because of the Secretary's trust obligation in the administration of 
Indian oil and gas leases. In view of this obligation, the Secretary 
must ensure that Indians receive the maximum benefits from mineral 
resources on their lands. Thus, the value of production for royalty 
purposes from an Indian lease should be determined considering the 
higher reasonable values provided by the terms of the standard lease. 
MMS believes this goal is consistent with: the terms of these Indian 
oil and gas leases, the statutes governing Indian oil and gas leases, 
and court decisions providing judicial guidance in the interpretation 
and administration of Indian oil and gas leases. Specific comments are 
requested on issuing separate regulations for valuing oil from Indian 
leases.

II. Discussion of Alternatives

    The Secretary's responsibility to determine the royalty value of 
oil produced from Federal and Indian lands has not changed, although 
the industry and marketplace have changed dramatically over the years. 
Specifically, oil posted prices may no longer represent the price a 
purchaser is willing to pay for a particular crude oil. MMS plans to 
develop a set of regulations to permit the Secretary to discharge the 
Department's royalty valuation responsibility in an environment of 
continuing and accelerating change in the industry and the marketplace. 
Given the ever-changing marketplace, the Secretary's responsibilities 
regarding oil production from Federal and Indian leases require 
development of flexible valuation methodologies that lessees can comply 
with accurately and timely. MMS specifically seeks to improve oil 
valuation regarding the use of oil posted prices, including methods of 
determining ``significant quantities.'' A discussion of these areas 
follows:

(a) Oil Posted Prices, Including Effects on Existing Valuation 
Benchmarks for Oil Not Sold Under Arm's-Length Contract

    MMS is considering modifying or replacing the current benchmark 
system at 30 CFR 206.102(c) used to value oil not sold under arm's-
length contracts. MMS believes that the current regulations may place 
too much emphasis on posted prices--the lessee's and others'. The first 
two of the five benchmarks rely on postings if a significant quantity 
of like-quality crude is purchased or sold at such postings in a field 
or area. Likewise, the third benchmark relies at least partly on 
postings because it applies the average of arm's-length contract 
prices, which often are tied to postings, for purchases or sales of 
significant quantities of oil in the area. (The fourth benchmark relies 
on spot sales and other relevant matters, and the fifth relies on a 
net-back or any other reasonable method to determine value.)
    MMS recently has received information indicating that oil posted 
prices don't always reflect market value and in fact may often be no 
more than a beginning point for negotiation.
    MMS has found numerous examples where crude oil purchasers pay 
premiums over the posted price. Further, consultation with private 
consultants, various State government personnel, and other non-Federal 

[[Page 65611]]
royalty-owners indicates a consistent belief that oil posted prices may 
not represent market value. And, while posted prices historically were 
presumed to represent actual prices offered for a particular crude oil, 
postings no longer necessarily represent an offer to buy at that price.
    Revising the benchmark system in the regulations could remove some 
of the current heavy reliance on posted oil prices and provide MMS more 
flexibility in determining proper royalty value.
    MMS is soliciting comments on the continued applicability of oil 
posted prices as a fair and reasonable indicator of royalty value. 
Specifically, MMS seeks input on how oil marketing takes place today 
and whether and how oil posted prices typically factor into oil sales/
purchases/exchanges.
    MMS invites specific comments on various aspects of posted prices 
as applied to crude oil sales and royalty value for Federal and Indian 
leases, including the option of separate oil valuation regulations for 
Indian leases. MMS would like examples demonstrating whether crude oil 
price postings form the true basis for oil values in given fields or 
areas--and, to the extent possible, nationwide. And, if the commenter 
feels postings don't reflect market value for the field or area, MMS 
would like specific suggested alternative royalty valuation 
methodologies for oil not sold under arm's-length conditions. That is, 
if postings don't reflect market value and because the existing 
benchmarks for oil not sold under arm's-length conditions rely heavily 
on posted prices, what are some suggested alternative valuation 
benchmarks? For example:
     Are there indices or other published prices that better 
reflect actual market value than oil postings?
     Where prices posted by individual companies differ 
considerably within the same field or area, how are these differences 
best reconciled?
     Are there fixed ``reference'' prices against which 
quality, transportation, and other adjustments can be made to develop 
reasonable royalty values (e.g., West Texas Intermediate)?
     Are spot prices of sufficient reliability and do they 
cover wide enough geographic areas to use as value bases?
     Do oil ``futures'' prices provide meaningful bases for 
royalty valuation?
     What alternative valuation method(s) best balance the 
needs to (a) reflect the market value of the oil as sold, exchanged, or 
otherwise disposed of; and (b) maximize administrative efficiency for 
all concerned? (Please consider the amount of information needed by the 
lessee and MMS, and the overall administrative costs of all parties.)
    For royalty valuation involving arm's-length transactions, MMS 
generally accepts the contractual terms, which may include postings. 
MMS further requests comments on whether the use of alternative methods 
for valuing oil not sold under arm's-length conditions would impact the 
acceptability of posted prices for valuing oil sold at arm's-length.

(b) Quantifying ``Significant Quantities'' of Oil

    The current MMS royalty valuation benchmarks for oil not sold under 
arm's-length contract rely on ``significant quantity'' determinations. 
Under the benchmarks, the lessee's or others' posted or contract prices 
used in arm's-length purchases or sales of ``significant quantities'' 
of like-quality oil from the same field or area establish royalty 
value. The first applicable of the five benchmarks is to be used, and 
the first four rely on ``significant quantity'' determinations. For 
example, if the lessee sells ``significant quantities'' of its field 
production at arm's-length, the arm's-length contract sales price may 
apply to the lessee's other, internally-transferred crude oil from the 
same field. But the existing regulations contain no fixed definition of 
``significant quantities,'' either on an absolute or relative basis. 
Thus, MMS would like comments on the best ways to determine what 
constitutes ``significant quantities.'' For example:
     Is there an absolute volume measure (barrels per day/
month/year, etc.) that would allow MMS to determine whether specific 
arm's-length sales involve ``significant quantities''? If so, should 
this volume vary by field or area?
     Is there a fixed percentage of field or area production 
that MMS can use as a comparison basis to determine whether specific 
arm's-length sales represent ``significant quantities''?
     What should be the comparative basis for ``significant 
quantity'' determinations? Should individual arm's-length transactions 
be related to all field production, or should some volumes such as 
internal company transfers of production or exchanges or buy/sell 
exchanges with other oil companies first be excluded from field 
production?
     Are there measures other than ``significant quantities'' 
that may better apply given alternative valuation scenarios?
    In providing comments on (a) and (b) above, please consider not 
only current oil marketing practices, but also any changes that may be 
foreseen. MMS intends for any oil valuation rule changes to be flexible 
enough to accommodate future oil marketing changes as much as possible 
to avoid ongoing rule modification.
    In addition to comments on (a) and (b) above, MMS would like 
comments on the process to use and make potential changes to the oil 
valuation rules. Specifically, MMS would like comments on whether any 
oil valuation regulatory changes should be subject to negotiated 
rulemaking procedures or other consensual mechanisms for developing 
regulations.

    Dated: December 8, 1995.
Bob Armstrong,
Assistant Secretary for Land and Minerals Management.
[FR Doc. 95-30767 Filed 12-19-95; 8:45 am]
BILLING CODE 4310-MR-P