[Federal Register Volume 61, Number 29 (Monday, February 12, 1996)]
[Rules and Regulations]
[Pages 5448-5490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2641]
[[Page 5447]]
_______________________________________________________________________
Part II
Department of the Interior
_______________________________________________________________________
Minerals Management Service
_______________________________________________________________________
30 CFR Parts 202 and 206
Revision of Valuation Regulations Governing Oil and Gas Transportation
and Processing Allowances, and Coal Washing and Transportation
Allowances; Final Rule
Federal Register / Vol. 61, No. 29 / Monday, February 12, 1996 /
Rules and Regulations
[[Page 5448]]
DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Parts 202 and 206
RIN 1010-AC00
Revision of Valuation Regulations Governing Oil and Gas
Transportation and Processing Allowances, and Coal Washing and
Transportation Allowances
AGENCY: Minerals Management Service, Interior.
ACTION: Final rule.
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SUMMARY: The Royalty Management Program (RMP) of the Minerals
Management Service (MMS) is amending its valuation regulations for oil
and gas transportation and processing allowances for production from
Federal leases. It also is amending the regulations for coal washing
and transportation allowances for production from Federal leases. The
principal change is to eliminate allowance forms filing for Federal
mineral leases. These changes will affect Federal oil and gas and coal
leases only. The rule will not change the existing regulations
applicable to Indian leases at this time.
EFFECTIVE DATE: March 1, 1996.
FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and
Procedures Staff, at (303) 231-3432.
SUPPLEMENTARY INFORMATION: The principal authors of this final rule are
Thomas K. Brozovich, Financial Compliance Branch, Compliance
Verification Division, and Harold E. Corley, Solid Minerals Valuation
Branch, Valuation and Standards Division, RMP, MMS, Lakewood, Colorado.
This rule is effective March 1, 1996, because mineral royalties are
reported monthly, and a reporting change in the middle of the month
would complicate reporting for both industry and MMS. The earlier
effective date of March 1 is also preferable because the rule reduces
the administrative reporting for the minerals industry for production
from Federal mineral leases.
I. Background
This final rule consolidates two proposed rules. In the Notices of
Proposed Rulemaking, MMS explained the process by which it administers
the allowance form filing requirements and asked for input on several
related issues (60 FR 40120, August 7, 1995, and 60 FR 40127, August 7,
1995). The current valuation regulations for oil, gas, and coal require
that certain forms be filed as a prerequisite to the deduction of
allowances on Form MMS-2014, Report of Sales and Royalty Remittance for
transportation, processing, and washing costs. Failure to timely file
required forms can result in significant consequences, including loss
of the allowance. An Allowance Study Group examined this issue at
length in 1993 and made certain recommendations to improve allowance
administration. Proposed rules incorporating the Allowance Study
Group's recommendations were published in the Federal Register on
August 7, 1995.
The purpose of these final regulations is to revise the oil and gas
allowance regulations for production from Federal leases which became
effective March 1, 1988, and the coal allowance regulations for
production from Federal leases which became effective March 1, 1989.
As explained further below, MMS is not making any changes at this
time to the regulations applicable for Indian leases. Instead, we will
keep the rulemaking regarding Indian leases open and will issue amended
regulations in the near future.
II. Comments on Proposed Rules
The proposed rulemakings provided for a 60-day public comment
period, which ended October 6, 1995, and, was extended to October 20,
1995, by a subsequent notice (60 FR 51963, October 4, 1995).
The Allowance Study Group and others within MMS identified issues
for which opinions were sought from interested parties during the
comment period. Specifically, the issues addressed:
a. The need for and usefulness of the current regulatory
requirement for allowance forms submission, including the information
on each form.
b. The need for and equity of allowance payback and late payment
interest charges for failure to file forms.
c. The need for regulatory approval thresholds or limits on the
amount of allowances which could be claimed without gaining permission.
d. The need to establish an assessment when payors improperly net
their allowances when reporting on Form MMS-2014.
e. The need to eliminate the current treatment of transportation
factors in arm's-length contracts as reductions in value.
f. The need to assess payors for exceeding allowance limits in
certain circumstances prior to receiving MMS approval.
g. The need to assess payors for erroneously reporting information
on allowance forms.
Twenty commenters submitted timely comments during the comment
period. Two additional commenters submitted late comments that were
received on October 24, 1995. Twenty of the comments were from industry
while two were from representatives of Indian lessors.
Comments from industry overwhelmingly suggested that we cease using
allowance forms as a means to track allowances while comments from the
Indian community supported the need to be able to track and verify
allowances.
When the original allowance regulations were implemented in 1988,
MMS was not contemporaneous with its audit efforts and forms were
needed to properly track allowances. However, we are now keeping
contemporaneous with our audits and have a reduced need for such forms.
Also, the Federal Gas Valuation Negotiated Rulemaking Committee
recommended, among other things, in its March 1995 report, that MMS
discontinue requiring transportation and processing allowance form
filings for gas production. The Indian Gas Valuation Negotiated
Rulemaking Committee is still discussing options. Accordingly, MMS has
decided to adopt this final rule to change allowance regulations for
Federal leases only at this time and to leave the rulemaking open for
allowance regulations for Indian leases. The existing regulations are
redesignated for Indian leases and are changed to remove references to
Federal leases.
Having different allowance rules for Federal leases than for Indian
leases requires completely separate valuation regulations. Therefore,
the current subparts are redesignated as Subpart C--Federal Oil,
Subpart D--Federal Gas, and Subpart F--Federal Coal, and references to
Indian leases are removed. The new designation for Indian valuation
regulations which will be unchanged from the existing regulations, will
be Part 206-Product Valuation, Subpart B--Indian Oil, Subpart E--Indian
Gas, and Subpart J--Indian Coal.
General Comments
Most of the commenters stated that we should not implement the
proposed rule, but that we should improve it and, in fact, go several
steps beyond the proposal.
Response. MMS has determined, except for requirements on Indian
leases, that the commenters pose strong arguments for further
streamlining the
[[Page 5449]]
regulations for allowance form filing requirements. Accordingly, we
have changed the regulations for Federal leases to implement many of
the suggestions. However, the current regulations remain intact for
Indian leases, pending further evaluation and decisions.
Specific Comments
(a) Almost every industry commenter suggested that MMS adopt the
recommendation of The Federal Gas Negotiated Rulemaking Committee to
cease requiring allowance form filings for natural gas. The commenters
also suggested we cease requiring such forms for oil and coal as well
as gas.
Response. MMS agrees with the industry commenters on this issue and
has incorporated their suggestions for Federal leases.
(b) Many of the industry commenters correctly stated that
discontinuing the forms filing requirement will make the issue of
payback bills and late payment interest moot.
Response. MMS agrees with this conclusion and has deleted such
consequences for violations on Federal leases.
(c) No comments were received on the issue of requiring approval to
exceed established oil and gas allowance limits.
Response. MMS believes that allowances should have established
limits which cannot be unilaterally exceeded. However, we also
understand that, occasionally, circumstances are such that the cost of
transporting or processing may exceed the allowable percentage limits.
Therefore, we are keeping the established limits which have been
effective since March 1, 1988.
(d) Most commenters said that an assessment for improperly netting
allowances on the Form MMS-2014 was not necessary because payors do not
purposely report in that manner. Further, they stated that such
exceptions should be addressed on a case-by-case basis.
Response. MMS believes it is necessary to have a deterrent for
improper reporting, especially netting allowances. We recognize that
some reporting may be inadvertent, and therefore, have implemented an
assessment provision which allows us to bill up to 10 percent of the
allowance reported as a netted amount but not to exceed $250 per lease
selling arrangement per sales period. This provision gives us the
flexibility to work with the payor who has infrequently or never netted
its allowances while being able to more aggressively address the
situation with the payor who chronically nets allowances.
(e) Many commenters recommended that MMS retain the oil and gas
transportation factors in arm's-length contracts to ease the buying,
selling, and reporting burden.
Response. MMS agrees that transportation factors should remain as a
viable industry mechanism for buying and selling even though some
problems differentiating factors from allowances existed in the past.
Therefore we have retained transportation factors for arm's-length
contracts.
(f) Few commenters responded on the need to assess payors for
exceeding oil and gas allowance limits prior to receiving MMS approval.
Response. MMS believes that exceeding established allowance limits
without prior MMS approval unjustly benefits industry and penalizes the
Federal Government. Accordingly, we have adopted an assessment, based
on an interest calculation methodology, presented in 30 CFR 218.54 to
bill companies which exceed established allowance limits without prior
MMS approval.
(g) Few commenters responded to the proposal to assess payors for
erroneous reporting and other violations. Those who did held the
general opinion that MMS has enough assessments to encourage correct
reporting and such violations should be handled on a case-by-case
basis.
Response. MMS agrees with the commenters. We have enough
assessments in many areas to encourage correct reporting the first
time. Therefore, only the additional limited assessments for netting
and exceeding allowance limits heretofore discussed will be implemented
in this rulemaking.
For the reasons discussed above, MMS is amending its valuation
regulations to have new allowance requirements for oil, gas, and coal
production from Federal lands. Allowance form filing requirements for
production from Indian lands are not being changed pending further
evaluation and discussions.
Allowance requirements for production from Federal lands are being
changed to eliminate unnecessary regulatory burdens on industry.
However, Federal allowance requirements will also reflect an assessment
for ``improper netting'' because this concealment of information has
adverse effects on MMS' efforts to monitor the accuracy of royalty
payments.
III. Section by Section Analysis
a. Federal Oil.
1. The only change to several sections within Subpart C--Federal
Oil involves the removal of Indian references. Therefore, the changes
to these sections will not be separately discussed for the purposes of
this rulemaking. The sections which are deleted entirely or partially
revised to eliminate the reference to Indian leases are:
Sec. 206.100 Purpose and scope.
Sec. 206.101 Definitions.
The following terms are changed or removed: Audit, BIA, Gross
proceeds, Indian allottee, Indian Tribe, Lease products, Lessee, and
Net profit share.
Sec. 206.102 Valuation standards.
Section 206.102(a)(2)(i) and (ii); (d), (i), (k) and (l) are
revised or removed to eliminate the reference to Indian leases.
Sec. 206.105 Determination of transportation allowances.
Section 206.105(b)(5) and (e)(2) are revised to eliminate the
reference to Indian leases.
2. We are also amending several sections of Subpart C--Federal Oil
to reflect comments from industry for elimination of allowance forms.
Further, based on recommendations of our Allowance Study Group, we are
revising the current assessment structure to focus our efforts on
administration of allowance information provided on Form MMS-2014 by
the payor, rather than generating a revenue stream from sanctions for
the untimely submission of allowance forms.
Accordingly, we are revising the following sections:
Sec. 206.101 Definitions.
Allowance We changed the definition to remove any implication of a
forms filing requirement, or of having to seek MMS approval prior to
claiming an allowance on Form MMS-2014.
Netting We added this definition to clarify the reporting situation
which will result in an assessment for not reporting allowances as a
separate line item on Form MMS-2014.
Sec. 206.104 Transportation allowances--general.
Section 206.104(b)(2) is amended to specify that Form MMS-4393 is
the application form used to request an exception to exceed the
regulatory allowance limitation of 50 percent for oil transportation.
Section 206.104(d) is amended to add the caveat about netting to
further clarify improper reporting of allowances on Form MMS-2014.
Sec. 206.105 Determination of transportation allowances.
Section 206.105(a)(1)(i) is amended to remove the requirement to
file Form
[[Page 5450]]
MMS-4110 (and the related 3-month retroactivity period) and specify
that the lessee/payor can use a self-implementing approach to claim an
allowance under an arm's-length contract by reporting an allowance as a
separate line entry on the Form MMS-2014.
Section 206.105(a)(3) is revised to reflect a change in the cost
allocation approval process. The lessee is still required to request
and receive approval for a cost allocation method for transportation of
both gaseous and liquid products through the same delivery system.
However, that approval process will no longer be tied to allowance form
filing. Instead, the lessee must submit the proposal within 3 months of
claiming the deduction on the Form MMS-2014.
Section 206.105(b)(1) is amended to remove the requirement to file
Form MMS-4110 (and the related 3-month retroactivity period) and
specify that the lessee/payor may use a self-implementing approach to
claim an allowance under a non-arm's-length or no contract by reporting
an allowance as a separate line entry on Form MMS-2014.
Section 206.105(b)(2)(v) is amended to specify that the reporting
period will be based on a calendar year as opposed to a forms filing
reporting period. We retained the use of the Standard and Poor's BBB
rating.
Section 206.105(b)(4) is amended to reflect a change in the cost
allocation approval process. The lessee is still required to request
and receive approval for a cost allocation method for transportation of
both gaseous and liquid products through the same delivery system.
However, that approval process will no longer be tied to allowance form
filing; instead, the lessee must submit the proposal within 3 months of
claiming the deduction on Form MMS-2014. Section 206.105(c)(1)(i) is
amended for sales under arm's-length contracts to specify that the
lessee must take the transportation allowance by reporting a separate
line item on the Form MMS-2014. Submitting the Form MMS-4110 is no
longer applicable.
Sections 206.105(c)(1) (ii) and (iii) these paragraphs are removed
because of the elimination of allowance forms.
Section 206.105(c)(1)(iv) is redesignated as Section
206.105(c)(1)(ii) because of paragraph renumbering. We will still
require the lessee to document its transportation costs and to make
that data available upon MMS request. Sections 206.105(c)(1)(v) and
(vi) are removed because of the elimination of allowance forms.
Section 206.105(c)(2)(i) is amended for sales under non-arm's-
length or no contracts to specify that the lessee takes the
transportation allowance by reporting a separate line item on the Form
MMS-2014. Submitting the Form MMS-4110 is no longer applicable.
Sections 206.105(c)(2) (ii) and (iii) are removed because of the
elimination of allowance forms.
Section 206.105(c)(2)(iv) is redesignated Sec. 206.105(c)(2)(ii)
because of paragraph renumbering. We are removing reference to Form
MMS-4110 and are retaining the lessee's use of cost estimates for the
current calendar year until such time as actual cost data becomes
available. Section 206.105(c)(2)(v) is removed because of the
elimination of allowance forms.
Section 206.105(c)(2)(vi) is redesigned as Sec. 206.105(c)(2)(iii)
to conform with the change in paragraph numbering. We will still
require the lessee to document its transportation costs and to make
that data available upon MMS request. We are removing reference to Form
MMS-4110.
Section 206.105(c)(2)(vii) is removed because of the elimination of
allowance forms.
Section 206.105(c)(2)(viii) is redesignated as
Sec. 206.105(c)(2)(iv) to conform with paragraph renumbering. The
lessee may use a FERC-approved or State regulatory agency-approved
tariff as its transportation cost. Section 206.105(c)(3) is removed
because of the elimination of allowance forms.
Section 206.105(c)(4) is removed because it duplicates the
requirement to report a separate line entry on the Form MMS-2014 when
claiming an allowance.
Section 206.105(d)(1)-(2) is amended to remove the sanction
language associated with untimely filing of allowance forms, and
replaces it with an assessment for improper netting. We have imposed
this new assessment, described under Section 206.105(d)(1), because of
the impact concealing allowance information on the Form MMS-2014 has on
MMS' ability to verify the allowance taken. The new assessment
provision allows us to bill up to 10 percent of the allowance reported
as a netted amount but not to exceed $250 per lease selling arrangement
per sales period. This provision gives us the flexibility to work with
the payor who has infrequently or never netted its allowances, while
being able to more aggressively address the situation with the payor
who chronically nets its allowances (i.e., a repeat offender). Use of
this new assessment is consistent with the conclusions and
recommendations of the multiconstituent Allowance Study Group.
We also have included under new Section 206.105(d)(2) the current
policy of assessing interest on the amount of an allowance taken in
excess of the threshold (50 percent of the value of the oil
transported) from the date the excess allowance is taken to the date
the lessee files an exception request (Form MMS-4393) with MMS.
Section 206.105(d)(2) is redesignated as Sec. 206.105(d)(3) to
conform with paragraph renumbering.
Section 206.105(d)(3) is redesignated as Sec. 206.105(d)(4) due to
paragraph renumbering.
Section 206.105(e)(1) is amended to remove reference to the
allowance form filing period. This paragraph still authorizes the
lessee to make adjustments to estimated allowances based on actual cost
data for the allowance reporting period. However, it clarifies that
when such adjustments result in an underpayment of royalty, the
interest for such underpayment is computed from the date the lessee
took the deduction to the date the lessee repays the difference to MMS.
b. Federal Gas
(1) The only change to several sections within Subpart D--Federal
Gas involves the removal of references to Indian leases or lessors. The
sections which are deleted entirely or partially revised to eliminate
the reference to Indian leases or lessors are:
Sec. 206.150 Purpose and scope.
Sec. 206.151 Definitions.
The following terms are changed or removed: Audit, BIA, Gross
proceeds, Indian allottee, Indian Tribe, Lease products, Lessee, and
Net profit share
Sec. 206.152 Valuation standards--unprocessed gas.
Section 206.152 (a)(3) (i) and (ii); (e)(2), (i), (k) and (l) are
revised or removed to eliminate the reference to Indian leases or
lessors.
Sec. 206.153 Valuation standards--processed gas.
Section 206.153 (a)(3) (i) and (ii); (e)(2), (i), (k) and (l) are
revised to eliminate the reference to Indian leases or lessors.
Sec. 206.154 Determination of quantities and qualities for computing
royalties.
Section 206.154(c)(4) is revised to eliminate the reference to
Indian leases or lessors.
[[Page 5451]]
Sec. 206.155 Accounting for comparison.
Section 206.155(b) is revised to eliminate the reference to Indian
leases or lessors.
Sec. 206.157 Determination of transportation allowances.
Section 206.157(e)(2) is revised to eliminate the reference to
Indian leases or lessors.
Sec. 206.159 Determination of processing allowances.
Section 206.159(c)(2)(v) is revised to eliminate the reference to
Indian leases or lessors.
(2) We are also amending several sections of Subpart D--Federal Gas
to update the current regulations (e.g., removal of Notice to Lessees
and Operators of Federal Onshore Oil and Gas Leases (NTL)) and to
reflect comments from industry for elimination of allowance forms.
Further, based on recommendations of our Allowance Study Group, we are
revising the current assessment structure to focus our efforts on
verifying allowance information provided on Form MMS-2014 by the payor,
rather than generating a revenue stream from sanctions on the filing
and timely submission of allowance forms.
Accordingly, we are revising the following sections:
Sec. 206.150 Purpose and scope.
Section 206.150(e) is eliminated in its entirety because NTL's were
terminated by the Federal Register Notice published on January 15,
1988, (53 FR 1230).
Sec. 206.151 Definitions.
Allowance We changed the definition to remove any implication of a
forms filing requirement, or of having to seek MMS approval prior to
claiming an allowance on Form MMS-2014.
Netting We added this definition to clarify the reporting situation
which will result in an assessment for not reporting allowances as a
separate line item on Form MMS-2014.
Sec. 206.156 Transportation allowances--general.
Section 206.156(c)(3) is amended to specify that Form MMS-4393 is
the application form used to request an exception to exceed the
regulatory allowance limitation of 50 percent for gas transportation.
Section 206.156(d) is amended to add the caveat about netting to
further clarify improper reporting of allowances on Form MMS-2014.
Sec. 206.157 Determination of transportation allowances.
Section 206.157(a)(1)(i) is amended to remove the requirement to
file Form MMS-4295, Gas Transportation Allowance Report (and the
related 3-month retroactivity period) and specify that the lessee/payor
may use a self-implementing approach to claim an allowance under an
arm's-length contract by reporting a separate line entry on Form MMS-
2014.
Section 206.157(a)(3) is amended to clarify that the lessee is
still required to request and receive approval for a cost allocation
method for transportation of both gaseous and liquid products through
the same delivery system. It also will clarify that the approval
process will no longer be tied to allowance form filing; instead, the
lessee must submit the proposal within 3 months of claiming the
deduction on Form MMS-2014.
Section 206.157(b)(1) is revised to remove the requirement to file
Form MMS-4295 (and the related 3-month retroactivity period) and
specify that the lessee/payor may use a self-implementing approach to
claim an allowance under a non-arm's-length or no contract by reporting
a separate line entry on Form MMS-2014.
Section 206.157(b)(2)(v) is amended to specify that the reporting
period will be based on a calendar year basis as opposed to a forms
filing reporting period. We retained the use of the Standard and Poor's
BBB rating.
Section 206.157(b)(4) is amended to clarify the approval for cost
allocation methods. The lessee is still required to request and receive
approval for a cost allocation method for transportation of both
gaseous and liquid products through the same delivery system. The
approval process will no longer be tied to allowance form filing;
instead, the lessee must submit the proposal within 3 months of
claiming the deduction on Form MMS-2014.
Section 206.157(c)(1)(i) is amended for sales under arm's-length
contracts to specify that the lessee takes the transportation allowance
by reporting a separate line item on Form MMS-2014. Submitting Form
MMS-4295 is no longer applicable.
Sections 206.157(c)(1) (ii) and (iii) are removed because of the
elimination of allowance forms.
Section 206.157(c)(1)(iv) is redesignated as Sec. 206.157(c)(1)(ii)
due to paragraph renumbering. We will still require the lessee to
document its transportation costs and to make all documentation
available upon MMS request.
Sections 206.157(c)(1) (v) and (vi) are removed because of the
elimination of allowance forms.
Section 206.157(c)(2)(i) is amended for sales under a non-arm's-
length or no contract to specify that the lessee takes the
transportation allowance by reporting a separate line item on MMS-2014.
Submitting Form MMS-4295 is no longer applicable.
Sections 206.157(c)(2) (ii) and (iii) are removed because of the
elimination of allowance forms.
Section 206.157(c)(2)(iv) is redesignated as Sec. 206.157(c)(2)(ii)
because of paragraph renumbering. We are removing reference to Form
MMS-4295 and are retaining the lessee's use of cost estimates for the
current calendar year until such time as actual cost data become
available.
Section 206.157(c)(2)(v) is removed because of the elimination of
allowance forms.
Section 206.157(c)(2)(vi) is redesignated as
Sec. 206.157(c)(2)(iii) because of paragraph renumbering. We will still
require the lessee to document its transportation costs and to make
that data available upon MMS request. We are removing reference to Form
MMS-4295.
Section 206.157(c)(2)(vii) is removed because of the elimination of
allowance forms.
Section 206.157(c)(2)(viii) is redesignated as
Sec. 206.157(c)(2)(iv) because of paragraph renumbering. The lessee may
use a FERC-approved or State regulatory agency-approved tariff as its
transportation cost.
Section 206.157(c)(3) is removed because of the elimination of
allowance forms.
Section 206.157(c)(4) is removed because it duplicates the
requirement to report a separate line entry on Form MMS-2014 when
claiming an allowance.
Sections 206.157(d) (1)-(2) are amended to remove the sanction
language associated with timely filing of allowance forms, and replace
it with an assessment for improper netting. We have imposed this new
assessment, described under Sec. 206.157(d)(1), because of the impact
concealing allowance information on Form MMS-2014 has on MMS' ability
to verify the allowance taken. The new assessment provision allows us
to bill up to 10 percent of the allowance reported as a netted amount
but not to exceed $250 per lease selling arrangement per sales period.
This provision gives us the flexibility to work with the payor which
has infrequently or never netted its allowances while being able to
more aggressively address the situation with
[[Page 5452]]
the payor who chronically nets its allowances (i.e., a repeat
offender). Use of this new sanction is consistent with the conclusions
and recommendations of the multiconstituent Allowance Study Group.
We also have included under new Sec. 206.157(d)(2) the current
policy of assessing interest on the amount of an allowance taken in
excess of the threshold (50 percent of the value of the gas
transported) from the date the excess allowance is taken to the date
the lessee files an exception request Form MMS-4393, Request to Exceed
Regulatory Allowance Limitation with MMS.
Section 206.157(d)(2) is redesignated as Sec. 206.157(d)(3) because
of paragraph renumbering.
Section 206.157(d)(3) is redesignated as Sec. 206.157(d)(4) because
of paragraph renumbering.
Section 206.157(e)(1) is amended to remove reference to the
allowance form filing period. This paragraph still authorizes the
lessee to make adjustments to estimated allowances based on actual cost
data for the allowance reporting period. However, it clarifies that
when such adjustments result in an underpayment of royalty, the
interest for such underpayment is computed from allowance reporting
period when the lessee took the deduction to the date the lessee repays
the difference to MMS.
Sec. 206.158 Processing allowances--general.
Section 206.158(c)(3) is amended to specify that Form MMS-4393 is
the application form used to request an exception to exceed the
regulatory allowance limitation of 66\2/3\ percent for gas processing.
Section 206.158(e) is amended to add the caveat about netting to
further clarify improper reporting of allowances on Form MMS-2014.
Sec. 206.159 Determination of processing allowances.
Section 206.159(a)(1)(i) is amended to remove the requirement to
file Form MMS-4109, Gas Processing Allowance Summary Report (and the
related 3-month retroactivity period) and specify that the lessee/payor
can use a self-implementing approach to claim an allowance under an
arm's-length contract by reporting a separate line entry on Form MMS-
2014. This change implements industry's comments requesting elimination
of allowance forms.
Section 206.159(a)(3) is amended to clarify that the lessee is
still required to request and receive approval for a cost allocation
method for transportation of both gaseous and liquid products through
the same delivery system. However, that approval process will no longer
be tied to allowance form filing; instead, the lessee must submit the
proposal within 3 months of claiming the deduction on Form MMS-2014.
Section 206.159(b)(1) is revised to remove the requirement to file
Form MMS-4109 (and the related 3-month retroactivity period) and
specify that the lessee/payor can use a self-implementing approach to
claim an allowance under a non-arm's-length or no contract by reporting
a separate line entry on Form MMS-2014. This change implements
industry's comments requesting elimination of allowance forms.
Section 206.159(b)(2)(v) is amended to specify that the reporting
period will be based on a calendar year basis as opposed to a forms
filing reporting period. We retained the use of the Standard and Poor's
BBB rating.
Section 206.159(c)(1)(i) is revised for sales under arm's-length
contracts, to specify that the lessee takes the gas processing
allowance by reporting a separate line item on Form MMS-2014.
Submitting Form MMS-4109 is no longer required.
Section 206.159(c)(1) (ii)-(iii) are removed because of the
elimination of allowance forms.
Section 206.159(c)(1)(iv) is redesignated as Sec. 206.159(c)(1)(ii)
because of paragraph renumbering. We still require the lessee to
document their processing costs and to make that data available upon
MMS request.
Sections 206.159(c)(1) (v) and (vi) are removed because of the
elimination of allowance forms.
Section 206.159(c)(2)(i) is revised for sales under a non-arm's-
length or no contract to specify that the lessee takes the gas
processing allowance by reporting a separate line item on Form MMS-
2014. Submitting Form MMS-4109 is no longer required.
Sections 206.159(c)(2)(ii) and (iii) are removed because of the
elimination of allowance forms.
Section 206.159(c)(2)(iv) is redesignated as Sec. 206.159(c)(2)(ii)
because of paragraph renumbering. We are removing reference to form
MMS-4109 and are retaining the lessee's use of cost estimates for the
current calendar year until such time as actual cost data becomes
available.
Section 206.159(c)(2)(v) is removed because of the elimination of
allowance forms.
Section 206.159(c)(2)(vi) is redesignated as
Sec. 206.159(c)(2)(iii) because of paragraph renumbering. We will still
require the lessee to document its processing costs and to make that
data available upon MMS request. We are removing reference to Form MMS-
4109.
Section 206.159(c)(2)(vii) is removed because of the elimination of
allowance forms.
Section 206.159(c)(2)(viii) is redesignated as
Sec. 206.159(c)(2)(iv) due to paragraph renumbering.
Section 206.159(c)(3) is removed because of the elimination of
allowance forms.
Section 206.159(c)(4) is removed because it duplicates the
requirement to report a separate line entry on Form MMS-2014 when
claiming an allowance.
Sections 206.159(d) (1) and (2) are revised to remove the
consequences associated with untimely filing of allowance forms, and
replacing them with an assessment for improper netting. We have imposed
this new assessment language, described under Sec. 206.159(d)(1), based
on the severity of concealing allowance information on Form MMS-2014.
The new assessment provision allows us to bill up to 10 percent of the
allowance reported as a netted amount but not to exceed $250 per lease
selling arrangement per sales period. This provision gives us the
flexibility to work with the payor who has infrequently or never netted
its allowances while being able to more aggressively address the
situation with the payor who chronically nets its allowances (i.e., a
repeat offender). Use of this new assessment is consistent with the
conclusions and recommendations of the multiconstituent Allowance Study
Group.
We also have included under new Sec. 206.159(d)(2) the current
policy of assessing interest on the amount of an allowance taken in
excess of the threshold (66 \2/3\ percent of the value of the gas
processed) from the date the excess allowance is taken to the date the
lessee files an exception request (Form MMS-4393) with MMS.
Section 206.159(d)(2) is redesignated as Sec. 206.159(d)(3) because
of paragraph renumbering.
Section 206.159(d)(3) is redesignated as Sec. 206.159(d)(4) because
of paragraph renumbering.
Section 206.159(e)(1) is amended to remove reference to the
allowance form filing period. This paragraph still authorizes the
lessee to make adjustments to estimated allowances based on actual cost
data for the allowance reporting period. However, it clarifies that
when such adjustments result in an underpayment of royalty, the
interest for such underpayment is
[[Page 5453]]
computed from the allowance reporting period when the lessee took the
deduction to the date the lessee repays the difference to MMS.
c. Federal Coal
(1) The only change to several sections within Subpart F--Federal
Coal involves the removal of references to Indian leases or lessors.
The sections which are deleted entirely or partially revised, to
eliminate the reference to Indian leases or lessors are:
Sec. 206.250 Purpose and scope.
Sec. 206.251 Definitions.
The following terms are changed or removed: Audit, BIA, Gross
proceeds, Indian allottee, Indian Tribe, Lease, and Lessee.
Sec. 206.253 Coal subject to royalties--general provisions.
Section 206.253 (a) and (c) are revised to eliminate the reference
to Indian leases or lessors.
Sec. 206.255 Point of royalty determination.
Section 206.255(a) and (b) are revised to eliminate the reference
to Indian leases or lessors.
Sec. 206.256 Valuation standards for cents-per-ton leases.
Section 206.256(a) is revised to eliminate the reference to Indian
leases or lessors.
Sec. 206.257 Valuation standards for ad valorem leases.
Section 206.257 (a), (d)(2), (h), (j), and (k) are revised to
eliminate the reference to Indian leases or lessors.
Sec. 206.258 Washing allowances--general.
Section 206.258(c) is revised to eliminate the reference to Indian
leases or lessors.
Sec. 206.261 Transportation allowances--general.
Section 206.261(a)(1), (a)(2), and (e) are revised to eliminate the
reference to Indian leases or lessors.
Sec. 206.262 Determination of transportation allowances.
Section 206.262(b)(3) is revised to eliminate the reference to
Indian leases or lessors.
(2) We are revising several sections of Subpart F--Federal Coal to
reflect comments from industry for elimination of allowance forms.
Further, based on recommendations of our Allowance Study Group, we are
revising the current assessment structure to focus our efforts on
verifying allowance information provided on Form MMS-2014, by the
payor, rather than generating a revenue stream from sanctions on the
filing and timely submission of allowance forms.
Accordingly, we are revising the following sections:
Sec. 206.251 Definitions.
Allowance We changed the definition to remove any implication of a
forms filing requirement, or of having to seek MMS approval prior to
claiming an allowance on the Form MMS-2014.
Netting We added this definition to clarify the reporting situation
which will result in an assessment for not reporting allowances as a
separate line item on Form MMS-2014.
Sec. 206.259 Determination of washing allowances.
Section 206.259(a)(1) is amended to remove the requirement to file
Form MMS-4292, Coal Washing Allowance Report (and the related 3-month
retroactivity period) and specifying that the lessee/payor can use a
self-implementing approach to claim an allowance under an arm's-length
contract by reporting a separate line entry on Form MMS-2014. This
change implements industry's comments requesting elimination of
allowance forms.
Section 206.259(b)(1) is amended to remove the requirement to file
Form MMS-4292 (and the related 3-month retroactivity period) and
specify that the lessee/payor may use a self-implementing approach to
claim an allowance under a non-arm's-length or no contract by reporting
a separate line entry on the Form MMS-2014.
Section 206.259(b)(2)(v) is amended to specify that the reporting
period will be based on a calendar year basis as opposed to a forms
filing reporting period. We retained the use of the Standard and Poor's
BBB rating.
Section 206.259(c)(1)(i) is amended for sales under arm's-length
contracts to specify that the lessee takes the coal washing allowance
by reporting a separate line item on Form MMS-2014. Submitting the Form
MMS-4292 is no longer required.
Sections 206.259(c)(1) (ii) and (iii) these paragraphs are removed
because of the elimination of allowance forms. Section
206.259(c)(1)(iv) is redesignated as Sec. 206.259(c)(1)(ii). We will
still require the lessee to document its washing costs and to make all
documentation available upon request by MMS.
Section 206.259(c)(1)(v) is removed because of the elimination of
allowance forms.
Section 206.259(c)(1)(vi) is removed because of the elimination of
allowance forms.
Section 206.259(c)(2)(i) is revised for sales under a non-arm's-
length or no contract to specify that the lessee takes the coal washing
allowance by reporting a separate line item on Form MMS-2014.
Submitting Form MMS-4292 is no longer required.
Sections 206.259(c)(2) (ii)-(iii) are removed because of the
elimination of allowance forms.
Section 206.259(c)(2)(iv) is redesignated as Sec. 206.259(c)(2)(ii)
due to paragraph renumbering. We are removing reference to Form MMS-
4292 and are retaining the lessee's use of cost estimates for the
current calendar year until such time as actual cost data become
available.
Section 206.259(c)(2)(v) is removed because of the elimination of
allowance forms.
Section 206.259(c)(2)(vi) is redesignated as
Sec. 206.259(c)(2)(iii) because of paragraph renumbering. We will still
require the lessee to document its washing costs and to make that data
available upon MMS request. We are removing reference to Form MMS-4292.
Section 206.259(c)(2)(vii) is removed because of the elimination of
allowance forms.
Section 206.259(c)(3) is removed because of the elimination of
allowance forms.
Section 206.259(c)(4) is removed because it duplicates the
requirement to report a separate line entry on Form MMS-2014 when
claiming an allowance.
Section 206.259(d)(1) is amended to remove the language associated
with timely filing of allowance forms, and replaces it with an
assessment for improper netting. We have imposed this new assessment,
described under Sec. 206.259 (d)(1), because of the impact concealing
allowance information on Form MMS-2014 has on MMS' ability to verify
allowances taken. The new assessment provision allows us to bill up to
10 percent of the allowance reported as a netted amount but not to
exceed $250 per lease selling arrangement per sales period. This
provision gives us the flexibility to work with the payor which has
infrequently or never netted its allowances while being able to more
aggressively address the situation with the payor which chronically
nets its allowances (i.e., a repeat offender). Use of this new
assessment is consistent with the conclusions and recommendations of
the multiconstituent Allowance Study Group.
Section 206.259(e)(1) is amended to remove reference to the
allowance form filing period. This paragraph still authorizes the
lessee to make
[[Page 5454]]
adjustments to estimated allowances based on actual cost data for the
allowance reporting period. However, it clarifies that when such
adjustments result in an underpayment of royalty, the interest for such
underpayment is computed from the allowance reporting period when the
lessee took the deduction to the date the lessee repays the difference
to MMS.
Sec. 206.262 Determination of transportation allowances.
Section 206.262(a)(1) is amended to remove the requirement to file
Form MMS-4293, Coal Transportation Allowance Report (and the related 3-
month retroactivity period) and specify that the lessee/payor may use a
self-implementing approach to claim an allowance under an arm's-length
contract by reporting a separate line entry on Form MMS-2014.
Section 206.262(b)(1) is amended to remove the requirement to file
Form MMS-4293 (and the related 3-month retroactivity period) and
specify that the lessee/payor may use a self-implementing approach to
claim an allowance under a non-arm's-length or no contract by reporting
a separate line entry on Form MMS-2014.
Section 206.262(b)(2)(v) is amended to specify that the reporting
period will be based on a calendar year basis as opposed to a forms
filing reporting period. We retained the use of the Standard and Poor's
BBB rating.
Section 206.262(c)(1)(i) is revised for sales under arm's-length
contracts to specify that the lessee takes the coal transportation
allowance by reporting a separate line item on Form MMS-2014.
Submitting Form MMS-4293 is no longer applicable.
Section 206.262(c)(1) (ii)-(iii) are removed because of the
elimination of allowance forms.
Section 206.262(c)(1)(iv) is redesignated as Sec. 206.262(c)(1)(ii)
because of paragraph renumbering. We will still require the lessee to
document its transportation costs and to make that data available upon
request by MMS.
Section 206.262(c)(1) (v)-(vi) are removed because of the
elimination of allowance forms.
Section 206.262(c)(2)(i) is amended for sales under a non-arm's-
length or no contract to specify that the lessee takes the coal
transportation allowance by reporting a separate line item on Form MMS-
2014. Submitting Form MMS-4293 is no longer applicable.
Sections 206.262(c)(2) (ii) and (iii) are removed because of the
elimination of allowance forms.
Section 206.262(c)(2)(iv) is redesignated as Sec. 206.262(c)(2)(ii)
due to paragraph renumbering. We are removing reference to Form MMS-
4293 and are retaining the lessee's use of cost estimates for the
current calendar year until such time as actual cost data become
available. Section 206.262(c)(2)(v) is removed because of the
elimination of allowance forms.
Section 206.262(c)(2)(vi) is redesignated as
Sec. 206.262(c)(2)(iii) because of paragraph renumbering. We will still
require the lessee to document its transportation costs and to make
that data available upon MMS request. We are removing reference to Form
MMS-4293.
Section 206.262(c)(2)(vii) is removed because of the elimination of
allowance forms.
Section 206.262(c)(2)(viii) is redesignated as
Sec. 206.262(c)(2)(iv) because of paragraph renumbering. The lessee may
use a FERC-approved or State regulatory agency-approved tariff as its
transportation cost.
Section 206.262(c)(3) is removed because of the elimination of
allowance forms.
Section 206.262(c)(4) is removed since it duplicates the
requirement to report a separate line entry on Form MMS-2014 when
claiming an allowance.
Section 206.262(d)(1) is amended to remove the language associated
with timely filing of allowance forms, and replaces it with an
assessment for improper netting. We have imposed this new assessment,
described under Sec. 206.259(d)(1), because of the impact of concealing
allowance information on Form MMS-2014 has on MMS' ability to verify
allowances taken. The new assessment provision allows us to bill up to
10 percent of the allowance reported as a netted amount but not to
exceed $250 per lease selling arrangement per sales period. This
provision gives us the flexibility to work with the payor which has
infrequently or never netted its allowances while being able to more
aggressively address the situation with the payor which chronically
nets its allowances (i.e., a repeat offender). Use of this new
assessment is consistent with the conclusions and recommendations of
the multiconstituent Allowance Study Group.
Section 206.262(e)(1) is amended to remove reference to the
allowance form filing period. This paragraph still authorizes the
lessee to make adjustments to estimated allowances based on actual cost
data for the allowance reporting period. However, it clarifies that
when such adjustments result in an underpayment of royalty, the
interest for such underpayment is computed from the allowance reporting
period when the lessee took the deduction to date the lessee repays the
difference to MMS.
d. Indian Oil
(1) As stated earlier, since there will be different reporting
requirements for claiming allowance deductions for Indian and Federal
lands, we have established a new valuation subpart, designated Subpart
B--Indian Oil. This new subpart mirrors what was the old combined
Subpart C--Federal and Indian Oil.
The following changes in paragraphs involve removal of Federal
references for new Subpart B--Indian Oil, and therefore will not be
separately discussed:
Sec. 206.50 Purpose and scope.
Section 206.50 (a)-(c).
Sec. 206.51 Definitions.
Audit, Field, Gathering, Gross proceeds, Lease products, Lessee,
Net profit share, Outer Continental Shelf, Posted price, and Section 6
lease.
Sec. 206.52 Valuation standards.
Section 206.52 (d), (i), and (k).
Sec. 206.53 Point of royalty settlement.
Section 206.53 (a) (1)-(2) and (b).
Sec. 206.54 Transportation allowances-general.
Section 206.54 (a) (1)-(2).
Sec. 206.55 Determination of transportation allowances.
Section 206.55 (b)(5), (c)(2)(viii), and (e)(2)-(3).
(2) To specify the form used to request a waiver to allowance
limitations, we made the following change:
Sec. 206.54 Transportation allowances-general.
Section 206.54(b)(2).
This further clarifies that the lessee must use Form MMS-4393 as
the application form to request an exception to exceed the regulatory
allowance limitation of 50 percent for oil transportation.
e. Indian Gas.
(1) Changes to the following paragraphs involve partial or total
removal of Federal references for new Subpart E--Indian Gas, and
therefore will not be separately discussed:
Sec. 206.170 Purpose and scope.
Section 206.170 (a)-(c), (e).
Sec. 206.171 Definitions.
Audit, Field, Gathering, Gross proceeds, Lease products, Lessee,
Net
[[Page 5455]]
profit share, Outer Continental Shelf, and Section 6 lease.
Sec. 206.172 Valuation standards-unprocessed gas.
Section 206.172 (e)(2), (i), and (k).
Sec. 206.173 Valuation standards-processed gas.
Section 206.173(e)(2), (i), and (k).
Sec. 206.174 Determination of quantities and qualities for computing
royalties.
Section 206.174 (a)(1)-(2), (c)(4), and (d)(1).
Sec. 206.177 Determination of transportation allowances.
Section 206.177 (b)(5), (c)(2)(viii), and (e)(2)-(3).
Sec. 206.179 Determination of processing allowances.
Section 206.179 (c)(2)(v), (e)(2)-(3).
(2) To specify the form used to request a waiver to allowance
limitations, we made the following change:
Sec. 206.176 Transportation allowances-general.
Section 206.176(c)(3).
This further clarifies that the lessee must use Form MMS-4393 as
the application form to request an exception to exceed the regulatory
allowance limitation of 50 percent for gas transportation.
Sec. 206.178 Processing allowances-general.
Section 206.178(c)(3).
This further clarifies that the lessee must use Form MMS-4393 as
the application form to request an exception to exceed the regulatory
allowance limitation of 66\2/3\ percent for gas processing.
f. Indian Coal
Changes to the following paragraphs involve removal of Federal
references for new Subpart J--Indian Coal, and therefore will not be
separately discussed:
Sec. 206.450 Purpose and scope.
Section 206.450 (a)-(b).
Sec. 206.451 Definitions.
Audit, Gross proceeds, Lease, and Lessee.
Sec. 206.453 Coal subject to royalties-general provisions.
Section 206.453(a), (c).
Sec. 206.455 Point of royalty determination.
Section 206.455 (a)-(b).
Sec. 206.456 Valuation standards for cents-per-ton leases.
Section 206.456(a).
Sec. 206.457 Valuation standards for ad valorem leases.
Section 206.457 (a), (d)(2), (h), and (j).
Sec. 206.458 Washing allowances-general.
Section 206.458(c).
Sec. 206.461 Transportation allowances-general.
Section 206.461 (a)(1)-(2), and (e).
Sec. 206.462 Determination of transportation allowances.
Section 206.462 (b)(3) and (c)(2)(viii).
g. Part 202--Royalties
Subpart D--Federal and Indian Gas
Section 202.151(a) is amended to revise the last sentence of this
paragraph to refer to the separate subparts governing allowances for
Federal and Indian gas.
IV. 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 U.S.C. 601 et seq.). The 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
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.
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 30 CFR Parts 206 and 202
Coal, Continental shelf, Geothermal energy, Government contracts,
Indian lands, Mineral royalties, Natural gas, Petroleum, Public lands--
mineral resources, Reporting and recordkeeping requirements.
Dated: January 26, 1996.
Bob Armstrong,
Assistant Secretary--Land and Minerals Management.
For the reasons set out in the preamble, 30 CFR part 206 is 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.
2. The heading for Subpart B--Oil, Gas, and OCS Sulfur, General--
[Reserved] is removed and a new Subpart B--Indian Oil is added to read
as follows:
Subpart B--Indian Oil
Sec.
206.50 Purpose and scope.
206.51 Definitions.
206.52 Valuation standards.
206.53 Point of royalty settlement.
206.54 Transportation allowances--general.
206.55 Determination of transportation allowances.
Subpart B--Indian Oil
Sec. 206.50 Purpose and scope.
(a) This subpart is applicable to all oil production from Indian
(Tribal and allotted) oil and gas leases (except leases on the Osage
Indian Reservation, Osage County, Oklahoma). The purpose of this
subpart is to establish the value of production, for royalty purposes,
consistent with the mineral leasing laws, other applicable laws, and
lease terms.
(b) If the specific provisions of any Federal statute, treaty,
settlement
[[Page 5456]]
agreement between the Indian lessor and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation
in this subpart, then the statute, treaty, lease provision or
settlement agreement shall govern to the extent of that inconsistency.
(c) All royalty payments made to MMS or Indian Tribes are subject
to audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian oil and gas leases are discharged in
accordance with the requirements of the governing mineral leasing laws,
treaties, and lease terms.
Sec. 206.51 Definitions.
For the purposes of this subpart:
Allowance means an approved or an MMS-initially accepted deduction
in determining value for royalty purposes. Transportation allowance
means an allowance for the reasonable, actual costs incurred by the
lessee for moving oil to a point of sale or point of delivery off the
lease, unit area, or communitized area, excluding gathering, or an
approved or MMS-initially accepted deduction for costs of such
transportation, determined by this subpart.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field in which oil and/or gas lease
products have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the market place between independent, nonaffiliated
persons with opposing economic interests regarding that contract. For
purposes of this subpart, two persons are affiliated if one person
controls, is controlled by, or is under common control with another
person. For purposes of this subpart, based on the instruments of
ownership of the voting securities of an entity, or based on other
forms of ownership: ownership in excess of 50 percent constitutes
control; ownership of 10 through 50 percent creates a presumption of
control; and ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. MMS may require the lessee to certify ownership control. To
be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month, as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by
law that with due consideration creates an obligation.
Field means a geographic region situated over one or more
subsurface oil and gas reservoirs encompassing at least the outermost
boundaries of all oil and gas accumulations known to be within those
reservoirs vertically projected to the land surface. Onshore fields are
usually given names and their official boundaries are often designated
by oil and gas regulatory agencies in the respective States in which
the fields are located.
Gathering means the movement of lease production to a central
accumulation or treatment point on the lease, unit, or communitized
area, or to a central accumulation or treatment point off the lease,
unit, or communitized area as approved by BLM operations personnel for
onshore leases.
Gross proceeds (for royalty payment purposes) means the total
monies and other consideration accruing to an oil and gas lessee for
the disposition of the oil produced. Gross proceeds includes, but is
not limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the
lessee is obligated to perform them at no cost to the Indian lessor.
Gross proceeds, as applied to oil, also includes, but is not limited
to, reimbursements for harboring or terminating fees. Tax
reimbursements are part of the gross proceeds accruing to a lessee even
though the Indian royalty interest may be exempt from taxation. Monies
and other consideration, including the forms of consideration
identified in this paragraph, to which a lessee is contractually or
legally entitled but which it does not seek to collect through
reasonable efforts are also part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject
to Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under a
mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered
by that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Indian leases.
Lessee means any person to whom an Indian Tribe, or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease.
This includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Load oil means any oil which has been used with respect to the
operation of oil or gas wells for wellbore stimulation, workover,
chemical treatment, or production purposes. It does not include oil
used at the surface to place lease production in marketable condition.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser under a sales contract typical for the field or
area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that
the lessee must pay as specified in the
[[Page 5457]]
lease or in applicable leasing regulations.
MMS means the Minerals Management Service of the Department of the
Interior.
Net-back method (or workback method) means a method for calculating
market value of oil at the lease. Under this method, costs of
transportation, processing, or manufacturing are deducted from the
proceeds received for the oil and any extracted, processed, or
manufactured products, or from the value of the oil or any extracted,
processed, or manufactured products at the first point at which
reasonable values for any such products may be determined by a sale
under an arm's-length contract or comparison to other sales of such
products, to ascertain value at the lease.
Net profit share (for applicable Indian lessees) means the
specified share of the net profit from production of oil and gas as
provided in the agreement.
Oil means a mixture of hydrocarbons that existed in the liquid
phase in natural underground reservoirs and remains liquid at
atmospheric pressure after passing through surface separating
facilities and is marketed or used as such. Condensate recovered in
lease separators or field facilities is considered to be oil. For
purposes of royalty valuation, the term tar sands is defined separately
from oil.
Oil shale means a kerogen-bearing rock (i.e., fossilized,
insoluble, organic material). Separation of kerogen from oil shale may
take place in situ or in surface retorts by various processes. The
kerogen, upon distillation, will yield liquid and gaseous hydrocarbons.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Posted price means the price specified in publicly available posted
price bulletins, onshore terminal postings, or other price notices net
of all adjustments for quality (e.g., API gravity, sulfur content,
etc.) and location for oil in marketable condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which
normally take place on or near the lease, such as natural pressure
reduction, mechanical separation, heating, cooling, dehydration, and
compression are not considered processing. The changing of pressures
and/or temperatures in a reservoir is not considered processing.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of oil are made. Selling arrangements
are described by illustration in MMS Royalty Management Program Oil and
Gas Payor Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of oil at a specified price over a
fixed period, usually of short duration, which does not normally
require a cancellation notice to terminate, and which does not contain
an obligation, nor imply an intent, to continue in subsequent periods.
Tar sands means any consolidated or unconsolidated rock (other
than coal, oil shale, or gilsonite) that either contains a
hydrocarbonaceous material with a gas-free viscosity greater than
10,000 centipoise at original reservoir temperature, or contains
quarrying.
Sec. 206.52 Valuation standards.
(a)(1) The value of production, for royalty purposes, of oil from
leases subject to this subpart shall be the value determined under this
section less applicable allowances determined under this subpart.
(2) (i) 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.
(ii) For purposes of this paragraph, major portion means the
highest price paid or offered at the time of production for the major
portion of oil production from the same field. The major portion will
be calculated using like-quality oil sold under arm's-length contracts
from the same field (or, if necessary to obtain a reasonable sample,
from the same area) for each month. All such oil production will be
arrayed from highest price to lowest price (at the bottom).
The major portion is that price at which 50 percent (by volume)
plus 1 barrel of the oil (starting from the bottom) is sold.
(b)(1) (i) The value of oil which is sold under an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of this section. The
lessee shall have the burden of demonstrating that its contract is
arm's-length. The value which the lessee reports, for royalty purposes,
is subject to monitoring, review, and audit. For purposes of this
section, oil which is sold or otherwise transferred to the lessee's
marketing affiliate and then sold by the marketing affiliate under an
arm's-length contract shall be valued in accordance with this paragraph
based upon the sale by the marketing affiliate.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the oil. If the
contract does not reflect the total consideration, then MMS may require
that the oil sold under that contract be valued in accordance with
paragraph (c) of this section. Value may not be less than the gross
proceeds accruing to the lessee, including the additional
consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee under an arm's-length contract do not reflect the reasonable
value of the production because of misconduct by or between two
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the oil
production be valued under the first applicable of paragraph (c)(2),
(c)(3), (c)(4), or (c)(5) of this section. When MMS determines that the
value may be unreasonable, MMS will notify the lessee and give the
lessee an opportunity to provide written information justifying the
lessee's value. If the oil production is then valued under paragraph
(c)(4) or (c)(5) of this section, the notification requirements of
paragraph (e) of this section shall apply.
(2) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the oil.
(c) The value of oil production from leases subject to this section
which is not sold under an arm's-length contract shall be the
reasonable value determined in accordance with the first applicable of
the following paragraphs:
(1) The lessee's contemporaneous posted prices or oil sales
contract prices used in arm's-length transactions for purchases or
sales of significant quantities of like-quality oil in the same field
(or, if necessary to obtain a reasonable sample, from the same area);
provided, however, that those posted prices or oil sales contract
prices are comparable to other contemporaneous posted prices or oil
sales contract prices used in arm's-length transactions for purchases
or sales of significant quantities of like-quality oil in the same
field (or, if necessary to obtain a
[[Page 5458]]
reasonable sample, from the same area). In evaluating the comparability
of posted prices or oil sales contract prices, the following factors
shall be considered: Price, duration, market or markets served, terms,
quality of oil, volume, and other factors as may be appropriate to
reflect the value of the oil. If the lessee makes arm's-length
purchases or sales at different postings or prices, then the volume-
weighted average price for the purchases or sales for the production
month will be used;
(2) The arithmetic average of contemporaneous posted prices used in
arm's-length transactions by persons other than the lessee for
purchases or sales of significant quantities of like-quality oil in the
same field (or, if necessary to obtain a reasonable sample, from the
same area);
(3) The arithmetic average of other contemporaneous arm's-length
contract prices for purchases or sales of significant quantities of
like-quality oil in the same area or nearby areas;
(4) Prices received for arm's-length spot sales of significant
quantities of like-quality oil from the same field (or, if necessary to
obtain a reasonable sample, from the same area), and other relevant
matters, including information submitted by the lessee concerning
circumstances unique to a particular lease operation or the salability
of certain types of oil;
(5) A net-back method or any other reasonable method to determine
value;
(6) For purposes of this paragraph, the term lessee includes the
lessee's designated purchasing agent, and the term contemporaneous
means postings or contract prices in effect at the time the royalty
obligation is incurred.
(d) Any Indian lessee will make available, upon request to the
authorized MMS or Indian representatives, to the Office of the
Inspector General of the Department of the Interior, or other persons
authorized to receive such information, arm's-length sales and volume
data for like-quality production sold, purchased, or otherwise obtained
by the lessee from the field or area or from nearby fields or areas.
(e) (1) Where the value is determined under paragraph (c) of this
section, the lessee shall retain all data relevant to the determination
of royalty value. Such data shall be subject to review and audit, and
MMS will direct a lessee to use a different value if it determines that
the reported value is inconsistent with the requirements of these
regulations.
(2) A lessee shall notify MMS if it has determined value under
paragraph (c)(4) or (c)(5) of this section. The notification shall be
by letter to MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method
authorized by paragraph (c)(4) or (c)(5) of this section and each time
there is a change from one to the other of these two methods.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on the difference computed under 30 CFR 218.54. If
the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that value for royalty payment purposes until MMS issues a
value determination. The lessee shall submit all available data
relevant to its proposal. MMS shall expeditiously determine the value
based upon the lessee's proposal and any additional information MMS
deems necessary. In making a value determination, MMS may use any of
the valuation criteria authorized by this subpart. That determination
shall remain effective for the period stated therein. After MMS issues
its determination, the lessee shall make the adjustments in accordance
with paragraph (f) of this section.
(h) 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 under this subpart.
(i) The lessee is required to place oil in marketable condition at
no cost to the Indian lessor unless otherwise provided in the lease
agreement or this section. Where the value established under this
section is determined by a lessee's gross proceeds, that value shall be
increased to the extent that the gross proceeds have been reduced
because the purchaser, or any other person, is providing certain
services the cost of which ordinarily is the responsibility of the
lessee to place the oil in marketable condition.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or
benefit. Contract revisions or amendments shall be in writing and
signed by all parties to an arm's-length contract. If the lessee makes
timely application for a price increase or benefit allowed under its
contract but the purchaser refuses, and the lessee takes reasonable
measures, which are documented, to force purchaser compliance, the
lessee will owe no additional royalties unless or until monies or
consideration resulting from the price increase or additional benefits
are received. This paragraph shall not be construed to permit a lessee
to avoid its royalty payment obligation in situations where a purchaser
fails to pay, in whole or in part or timely, for a quantity of oil.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Indian Tribes or
allottees until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. Sec. 552, or other Federal law. Any data specified by law
to be privileged, confidential, or otherwise exempt, will be maintained
in a confidential manner in accordance with applicable laws and
regulations. All requests for information about determinations made
under this part are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
Part 2. Nothing in this section is intended to limit or diminish in any
manner whatsoever the right of an Indian lessor to obtain any and all
information to which such lessor may be lawfully entitled from MMS or
such lessor's lessee directly under the terms of the lease, 30 U.S.C.
1733, or other applicable law.
Sec. 206.53 Point of royalty settlement.
(a) (1) Royalties shall be computed on the quantity and quality of
oil as measured at the point of settlement approved by BLM for onshore
leases.
(2) If the value of oil determined under Sec. 206.52 of this
subpart is based
[[Page 5459]]
upon a quantity and/or quality different from the quantity and/or
quality at the point of royalty settlement approved by the BLM for
onshore leases, the value shall be adjusted for those differences in
quantity and/or quality.
(b) No deductions may be made from the royalty volume or royalty
value for actual or theoretical losses. Any actual loss that may be
sustained prior to the royalty settlement metering or measurement point
will not be subject to royalty provided that such actual loss is
determined to have been unavoidable by BLM.
(c) Except as provided in paragraph (b) of this section, royalties
are due on 100 percent of the volume measured at the approved point of
royalty settlement. There can be no reduction in that measured volume
for actual losses beyond the approved point of royalty settlement or
for theoretical losses that are claimed to have taken place either
prior to or beyond the proved point of royalty settlement. Royalties
are due on 100 percent of the value of the oil as provided in this
subpart. There can be no deduction from the value of the oil for
royalty purposes to compensate for actual losses beyond the approved
point of royalty settlement or for theoretical losses that are claimed
to have taken place either prior to or beyond the approved point of
royalty settlement.
Sec. 206.54 Transportation allowances--general.
(a) Where the value of oil has been determined under Section 206.52
of this subpart at a point (e.g., sales point or point of value
determination) off the lease, MMS shall allow a deduction for the
reasonable, actual costs incurred by the lessee to transport oil to a
point off the lease; provided, however, that no transportation
allowance will be granted for transporting oil taken as Royalty-In-Kind
(RIK); or
(b) (1) Except as provided in paragraph (b)(2) of this section, the
transportation allowance deduction on the basis of a selling
arrangement shall not exceed 50 percent of the value of the oil at the
point of sale as determined under Sec. 206.52 of this subpart.
Transportation costs cannot be transferred between selling arrangements
or to other products.
(2) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitation prescribed by paragraph
(b)(1) of this section. The lessee must demonstrate that the
transportation costs incurred in excess of the limitation prescribed in
paragraph (b)(1) of this section were reasonable, actual, and
necessary. An application for exception (using Form MMS-4393, Request
to Exceed Regulatory Allowance Limitation) shall contain all relevant
and supporting documentation necessary for MMS to make a determination.
Under no circumstances shall the value, for royalty purposes, under any
selling arrangement, be reduced to zero.
(c) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.55. Transportation
allowances for oil shall be expressed as dollars per barrel.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest.
Sec. 206.55 Determination of transportation allowances.
(a) Arm's-length transportation contracts.
(1)(i) For transportation costs incurred by a lessee under 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
(a)(1)(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 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.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for
the transportation. If the contract reflects more than the total
consideration, then MMS may require that the transportation allowance
be determined in accordance with paragraph (b) of this section.
(iii) If MMS determines that the consideration paid under an arm's-
length transportation contract does not reflect the reasonable value of
the transportation because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee
and the lessor, then MMS shall require that the transportation
allowance be determined in accordance with paragraph (b) of this
section. When MMS determines that the value of the transportation may
be unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
transportation costs.
(2)(i) If an arm's-length transportation contract includes more
than one liquid product, and the transportation costs attributable to
each product cannot be determined from the contract, then the total
transportation costs shall be allocated in a consistent and equitable
manner to each of the liquid products transported in the same
proportion as the ratio of the volume of each product (excluding waste
products which have no value) to the volume of all liquid products
(excluding waste products which have no value). Except as provided in
this paragraph, no allowance may be taken for the costs of transporting
lease production which is not royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(3) If an arm's-length transportation contract includes both
gaseous and liquid products, and the transportation costs attributable
to each product cannot be determined from the contract, the lessee
shall propose an allocation procedure to MMS. The lessee may use the
oil transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall submit all
available data to support its proposal. The initial proposal must be
submitted by June 30, 1988 or within 3 months after the last day of the
month for which the lessee requests a transportation allowance,
whichever is later (unless MMS approves a longer period). MMS shall
then determine the oil transportation allowance based upon the lessee's
proposal and any additional information MMS deems necessary.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not on a dollar-per-unit basis, the lessee shall
convert whatever
[[Page 5460]]
consideration is paid to a dollar value equivalent for the purposes of
this section.
(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.
(b) Non-arm's-length or no contract.
(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 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 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 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.
(2) The transportation allowance for non-arms-length or no-contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and 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 transportation system multiplied by a rate of return
in accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and installation of capital equipment)
which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision
and engineering; operations labor; fuel; utilities; materials; ad
valorem property taxes; rent; supplies; and any other directly
allocable and attributable operating expense which the lessee can
document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which
the lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
(iv) A lessee may use either depreciation or a return on
depreciable capital investment. After a lessee has elected to use
either method for a transportation system, the lessee may not later
elect to change to the other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services or on
a unit-of-production method. After an election is made, the lessee may
not change methods without MMS approval. A change in ownership of a
transportation system shall not alter the depreciation schedule
established by the original transporter/lessee for purposes of the
allowance calculation. With or without a change in ownership, a
transportation system shall be depreciated only once. Equipment shall
not be depreciated below a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the initial
capital investment in the transportation system multiplied by the rate
of return determined under paragraph (b)(2)(v) of this section. No
allowance shall be provided for depreciation. This alternative shall
apply only to transportation facilities first placed in service after
March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent
transportation allowance reporting period (which is determined under
paragraph (c) of this section).
(3)(i) The deduction for transportation costs shall be determined
on the basis of the lessee's cost of transporting each product through
each individual transportation system. Where more than one liquid
product is transported, allocation of costs to each of the liquid
products transported shall be in the same proportion as the ratio of
the volume of each liquid product (excluding waste products which have
no value) to the volume of all liquid products (excluding waste
products which have no value) and such allocation shall be made in a
consistent and equitable manner. Except as provided in this paragraph,
the lessee may not take an allowance for transporting lease production
which is not royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the oil transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of
the cost allocation. The lessee shall submit all available data to
support its proposal. The initial proposal must be submitted by June
30, 1988 or within 3 months after the last day of the month for which
the lessee requests a transportation allowance, whichever is later
(unless MMS approves a longer period). MMS shall then determine the oil
transportation allowance on the basis of the lessee's proposal and any
additional information MMS deems necessary.
(5) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(4) of this section. MMS will grant the exception only if
the lessee has a tariff for the transportation system approved by the
Federal Energy Regulatory Commission (FERC) for Indian leases. MMS
shall deny the exception request if it determines that the tariff is
excessive as compared to arm's-length transportation charges by
pipelines, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if:
[[Page 5461]]
(i) No FERC cost analysis exists and the FERC has declined to
investigate under MMS timely objections upon filing; and
(ii) the tariff significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements--(1) Arm's-length contracts. (i) With
the exception of those transportation allowances specified in
paragraphs (c)(1)(v) and (c)(1)(vi) of this section, the lessee shall
submit page one of the initial Form MMS-4110 (and Schedule 1), Oil
Transportation Allowance Report, prior to, or at the same time as, the
transportation allowance determined, under an arm's-length contract, is
reported on Form MMS-2014, Report of Sales and Royalty Remittance. A
Form MMS-4110 received by the end of the month that the Form MMS-2014
is due shall be considered to be timely received.
(ii) The initial Form MMS-4110 shall be effective for a reporting
period beginning the month that the lessee is first authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until the applicable contract or rate terminates
or is modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4110 (and
Schedule 1) within 3 months after the end of the calendar year, or
after the applicable contract or rate terminates or is modified or
amended, whichever is earlier, unless MMS approves a longer period
(during which period the lessee shall continue to use the allowance
from the previous reporting period).
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(v) Transportation allowances which are based on arm's-length
contracts and 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.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract.
(i) With the exception of those transportation allowances specified
in paragraphs (c)(2)(v), (c)(2)(vii) and (c)(2)(viii) of this section,
the lessee shall submit an initial Form MMS-4110 prior to, or at the
same time as, the transportation allowance determined under a non-
arm's-length contract or no-contract situation is reported on Form MMS-
2014. A Form MMS-4110 received by the end of the month that the Form
MMS-2014 is due shall be considered to be timely received. The initial
report may be based upon estimated costs.
(ii) The initial Form MMS-4110 shall be effective for a reporting
period beginning the month that the lessee first is authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until transportation under the non-arm's-length
contract or the no-contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4110
containing the actual costs for the previous reporting period. If oil
transportation is continuing, the lessee shall include on Form MMS-4110
its estimated costs for the next calendar year. The estimated oil
transportation allowance shall be based on the actual costs for the
previous reporting period plus or minus any adjustments which are based
on the lessee's knowledge of decreases or increases that will affect
the allowance. MMS must receive the Form MMS-4110 within 3 months after
the end of the previous reporting period, unless MMS approves a longer
period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new transportation facilities or arrangements, the
lessee's initial Form MMS-4110 shall include estimates of the allowable
oil transportation costs for the applicable period. Cost estimates
shall be based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(v) 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.
(vi) 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.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) If the lessee is authorized to use its FERC-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.
(3) MMS may establish reporting dates for individual lessees
different from those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and for
failure to report. (1) If a lessee deducts a transportation allowance
on its Form MMS-2014 without complying with the requirements of this
section, the lessee shall pay interest only on the amount of such
deduction until the requirements of this section are complied with. The
lessee also shall repay the amount of any allowance which is disallowed
by this section.
(2) If a lessee erroneously reports a transportation allowance
which results in an underpayment of royalties, interest shall be paid
on the amount of that underpayment.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments.
(1) If the actual transportation allowance is less than the amount
the lessee has taken on Form MMS-2014 for each month during the
allowance form reporting period, the lessee shall be required to pay
additional royalties due plus interest computed under 30 CFR 218.54,
retroactive to the first day of the first month the lessee is
authorized to deduct a transportation allowance. If the actual
transportation allowance is greater than the amount the lessee has
taken on Form MMS-2014 for each month during the allowance form
reporting period, the lessee shall be entitled to a credit without
interest.
(2) For lessees transporting production from Indian leases, the
lessee must submit a corrected Form MMS-2014 to reflect actual costs,
together with any payment, in
[[Page 5462]]
accordance with instructions provided by MMS.
(f) Actual or theoretical losses. Notwithstanding any other
provisions of this subpart, for other than arm's-length contracts, no
cost shall be allowed for oil transportation which results from
payments (either volumetric or for value) for actual or theoretical
losses. This section does not apply when the transportation allowance
is based upon a FERC or State regulatory agency approved tariff.
(g) Other transportation cost determinations. The provisions of
this section shall apply to determine transportation costs when
establishing value using a netback valuation procedure or any other
procedure that requires deduction of transportation costs.
3. Subpart C--Federal and Indian Oil is amended by revising the
heading to read as follows:
Subpart C--Federal Oil
4. Section 206.100 is amended by revising paragraphs (a), (b), and
(c) to read as follows:
Sec. 206.100 Purpose and scope.
(a) This subpart is applicable to all oil production from Federal
oil and gas leases. The purpose of this subpart is to establish the
value of production, for royalty purposes, consistent with the mineral
leasing laws, other applicable laws, and lease terms.
(b) If the specific provisions of any Federal statute, settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation
in this subpart, then the statute, lease provision or settlement
agreement shall govern to the extent of that inconsistency.
(c) All royalty payments made to MMS are subject to audit and
adjustment.
* * * * *
5. Section 206.101 is amended by adding in alphabetical order the
definition for Netting, revising the definitions for Allowance, Audit,
Gross proceeds, Lease products, Lessee, Net Profit share, and deleting
the definitions BIA, Indian allottee, Indian Tribe to read as follows:
Sec. 206.101 Definitions.
For the purposes of this subpart:
Allowance means a deduction in determining value for royalty
purposes. Transportation allowance means an allowance for the
reasonable, actual costs incurred by the lessee for moving oil to a
point of sale or point of delivery off the lease, unit area, or
communitized area, excluding gathering.
* * * * *
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
* * * * *
Gross proceeds (for royalty payment purposes) means the total
moneys and other consideration accruing to an oil and gas lessee for
the disposition of the oil produced. Gross proceeds includes, but is
not limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the
lessee is obligated to perform them at no cost to the Federal
Government. Gross proceeds, as applied to oil, also includes, but is
not limited to, reimbursements for harboring or terminaling fees. Tax
reimbursements are part of the gross proceeds accruing to a lessee even
though the Federal royalty interest may be exempt from taxation. Moneys
and other consideration, including the forms of consideration
identified in this paragraph, to which a lessee is contractually or
legally entitled but which it does not seek to collect through
reasonable efforts are also part of gross proceeds.
* * * * *
Lease products means any leased minerals attributable to,
originating from, or allocated to Outer Continental Shelf or onshore
Federal leases.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
* * * * *
Net profit share (for applicable Federal leases) means the
specified share of the net profit from production of oil and gas as
provided in the agreement.
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting
the deduction as a separate line item on the Form MMS-2014.
* * * * *
6. Section 206.102 is amended by redesignating paragraph (a)(1) as
paragraph (a), removing paragraph (a)(2), and revising paragraphs (d),
(i), (k), and (l) to read as follows:
Sec. 206.102 Valuation standards.
(a) * * *
* * * * *
(d) Any Federal lessee will make available, upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other persons authorized
to receive such information, arm's-length sales and volume data for
like-quality production sold, purchased, or otherwise obtained by the
lessee from the field or area or from nearby fields or areas.
* * * * *
(i) The lessee is required to place oil in marketable condition at
no cost to the Federal Government unless otherwise provided in the
lease agreement or this section. Where the value established under this
section is determined by a lessee's gross proceeds, that value shall be
increased to the extent that the gross proceeds have been reduced
because the purchaser, or any other person, is providing certain
services the cost of which ordinarily is the responsibility of the
lessee to place the oil in marketable condition.
* * * * *
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to
be privileged, confidential, or otherwise exempt, will be maintained in
a confidential manner in accordance with applicable laws and
regulations. All requests for information about determinations made
under this part are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
Part 2.
7. Section 206.104 is amended by revising paragraphs (b)(2), and
(d) to read as follows:
Sec. 206.104 Transportation allowances-general.
* * * * *
(b) * * *
[[Page 5463]]
(2) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitation prescribed by paragraph
(b)(1) of this section. The lessee must demonstrate that the
transportation costs incurred in excess of the limitation prescribed in
paragraph (b)(1) of this section were reasonable, actual, and
necessary. An application for exception (using Form MMS-4393, Request
to Exceed Regulatory Allowance Limitation) shall contain all relevant
and supporting documentation necessary for MMS to make a determination.
Under no circumstances shall the value, for royalty purposes, under any
selling arrangement, be reduced to zero.
* * * * *
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest. If the lessee takes a deduction
for transportation on the Form MMS-2014 by improperly netting the
allowance against the sales value of the oil instead of reporting the
allowance as a separate line item, the lessee may be assessed an amount
under Sec. 206.105(d).
8. In Sec. 206.105, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),
(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3),
and (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),
and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),
and (c)(2)(iii), and (c)(2)(iv) respectively; and revising paragraphs
(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (b)(4), (c)(1)(i), (c)(2)(i),
newly designated (c)(2)(ii), newly designated (c)(2)(iii), (d), and (e)
to read as follows:
Sec. 206.105 Determination of transportation allowances.
(a) Arm's-length transportation contracts.
(1)(i) For transportation costs incurred by a lessee under 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
(a)(1)(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. MMS' prior approval is not required before a
lessee may deduct costs incurred under an arm's-length contract. Such
allowances shall be subject to the provisions of paragraph (f) of this
section. The lessee must claim a transportation allowance by reporting
it as a separate line entry on the Form MMS-2014.
* * * * *
(3) If an arm's-length transportation contract includes both
gaseous and liquid products, and the transportation costs attributable
to each product cannot be determined from the contract, the lessee
shall propose an allocation procedure to MMS. The lessee may use the
oil transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall submit all
available data to support its proposal. The initial proposal must be
submitted within 3 months after the last day of the month for which the
lessee requests a transportation allowance. MMS shall then determine
the oil transportation allowance based upon the lessee's proposal and
any additional information MMS deems necessary.
* * * * *
(b) Non-arm's-length or no contract.
(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 to ensure that they are reasonable and allowable.
The lessee must claim a transportation allowance by reporting it as a
separate line entry on the Form MMS-2014. When necessary or
appropriate, MMS may direct a lessee to modify its estimated or actual
transportation allowance deduction.
(2) * * *
(i) * * *
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
* * * * *
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the oil transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of
the cost allocation. The lessee shall submit all available data to
support its proposal. MMS shall then determine the oil transportation
allowance on the basis of the lessee's proposal and any additional
information MMS deems necessary. The lessee must submit the allocation
proposal within 3 months of claiming the allocated deduction on the
Form MMS-2014.
* * * * *
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) The lessee must notify MMS of an allowance based on incurred
costs by using a separate line entry on the Form MMS-2014.
(ii) * * *
(2) Non-arm's-length or no contract.
(i) The lessee must notify MMS of an allowance based on the
incurred costs by using a separate line entry on the Form MMS-2014.
(ii) For new transportation facilities or arrangements, the
lessee's initial deduction shall include estimates of the allowable oil
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) * * *
(d) Interest and assessments.
(1) If a lessee nets a transportation allowance against the royalty
value on the Form MMS-2014, the lessee shall be assessed an amount of
up to 10 percent of the allowance netted not to exceed $250 per lease
selling arrangement per sales period.
(2) If a lessee deducts a transportation allowance on its Form MMS-
2014 that exceeds 50 percent of the value of the oil transported
without obtaining prior approval of MMS under 206.104 of this subpart,
the lessee shall pay interest on the excess allowance amount taken from
the date such amount is taken to the date the lessee files an exception
request with MMS.
(3) If a lessee erroneously reports a transportation allowance
which results in an underpayment of royalties, interest shall be paid
on the amount of that underpayment.
(4) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the
[[Page 5464]]
amount the lessee has taken on Form MMS-2014 for each month during the
allowance reporting period, the lessee shall pay additional royalties
due plus interest computed under 30 CFR 218.54 from the allowance
reporting period when the lessee took the deduction to the date the
lessee repays the difference to MMS. If the actual transportation
allowance is greater than the amount the lessee has taken on Form MMS-
2014 for each month during the allowance reporting period, the lessee
shall be entitled to a credit without interest.
(2) For lessees transporting production from onshore Federal
leases, the lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with
instructions provided by MMS.
* * * * *
9. Subpart D is amended by revising the heading to read as follows:
Subpart D--Federal Gas
10. Section 206.150 is revised to read as follows:
Sec. 206.150 Purpose and scope.
(a) This subpart is applicable to all gas production from Federal
oil and gas leases. The purpose of this subpart is to establish the
value of production for royalty purposes consistent with the mineral
leasing laws, other applicable laws and lease terms.
(b) If the specific provisions of any statute or settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation
in this subpart, then the lease, statute, or settlement agreement shall
govern to the extent of that inconsistency.
(c) All royalty payments made to MMS are subject to audit and
adjustment.
(d) The regulations in this subpart are intended to ensure that the
administration of oil and gas leases is discharged in accordance with
the requirements of the governing mineral leasing laws and lease terms.
11. Section 206.151 is amended by adding in alphabetical order the
definition for Netting, revising the definitions Allowance, Audit,
Gross proceeds, Lease products, Lessee, Net Profit share, and removing
the definitions BIA, Indian allottee, and Indian Tribe to read as
follows:
Sec. 206.151 Definitions.
* * * * *
Allowance means a deduction in determining value for royalty
purposes. Processing allowance means an allowance for the reasonable
costs for processing gas determined under this subpart. Transportation
allowance means an allowance for the cost of moving royalty bearing
substances (identifiable, measurable oil and gas, including gas that is
not in need of initial separation) from the point at which it is first
identifiable and measurable to the sales point or other point where
value is established under this subpart.
* * * * *
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
* * * * *
Gross proceeds (for royalty payment purposes) means the total
monies and other consideration accruing to an oil and gas lessee for
the disposition of the oil produced. Gross proceeds includes, but is
not limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the
lessee is obligated to perform them at no cost to the Federal
Government. Gross proceeds, as applied to oil, also includes, but is
not limited to, reimbursements for harboring or terminaling fees. Tax
reimbursements are part of the gross proceeds accruing to a lessee even
though the Federal royalty interest may be exempt from taxation. Monies
and other consideration, including the forms of consideration
identified in this paragraph, to which a lessee is contractually or
legally entitled but which it does not seek to collect through
reasonable efforts are also part of gross proceeds.
* * * * *
Lease products means any leased minerals attributable to,
originating from, or allocated to Outer Continental Shelf or onshore
Federal leases.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
* * * * *
Net profit share (for applicable Federal leases) means the
specified share of the net profit from production of oil and gas as
provided in the agreement.
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting
the deduction as a separate line item on the Form MMS-2014.
* * * * *
12. Section 206.152 is amended by revising paragraph (a)(2),
removing paragraph (a)(3), and revising paragraphs (e)(2), (h), (i),
(k) and (l) to read as follows:
Sec. 206.152 Valuation standards--unprocessed gas.
(a) * * *
(2) The value of production, for royalty purposes, of gas subject
to this subpart shall be the value of gas determined under this section
less applicable allowances.
* * * * *
(e) * * *
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other person authorized
to receive such information, arm's-length sales and volume data for
like-quality production sold, purchased or otherwise obtained by the
lessee from the field or area or from nearby fields or areas.
* * * * *
(h) 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.
(i) The lessee is required to place gas in marketable condition at
no cost to the Federal Government unless otherwise provided in the
lease agreement. Where the value established under this section is
determined by a lessee's gross proceeds, that value shall be increased
to the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the
gas in marketable condition.
* * * * *
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
[[Page 5465]]
(l) Certain information submitted to MMS to support valuation
proposals, including transportation or extraordinary cost allowances,
is exempted from disclosure by the Freedom of Information Act, 5 U.S.C.
Sec. 552, or other Federal Law. Any data specified by law to be
privileged, confidential, or otherwise exempt will be maintained in a
confidential manner in accordance with applicable law and regulations.
All requests for information about determinations made under this
subpart are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
Part 2.
13. Section 206.153 is amended by removing paragraph (a)(3), and
revising paragraphs (e)(2), (i), (k), and (l) to read as follows:
Sec. 206.153 Valuation standards--processed gas.
* * * * *
(e) * * *
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other persons authorized
to receive such information, arm's-length sales and volume data for
like-quality residue gas and gas plant products sold, purchased or
otherwise obtained by the lessee from the same processing plant or from
nearby processing plants.
* * * * *
(i) The lessee is required to place residue gas and gas plant
products in marketable condition at no cost to the Federal Government
unless otherwise provided in the lease agreement. Where the value
established under this section is determined by a lessee's gross
proceeds, that value shall be increased to the extent that the gross
proceeds have been reduced because the purchaser, or any other person,
is providing certain services the cost of which ordinarily is the
responsibility of the lessee to place the residue gas or gas plant
products in marketable condition.
* * * * *
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding against the Federal Government or
its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances, processing allowances
or extraordinary cost allowances, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 552, or other Federal law. Any
data specified by law to be privileged, confidential, or otherwise
exempt, will be maintained in a confidential manner in accordance with
applicable law and regulations. All requests for information about
determinations made under this Part are to be submitted in accordance
with the Freedom of Information Act regulation of the Department of the
Interior, 43 CFR Part 2.
14. Section 206.154 is amended by revising paragraph (c)(4) to read
as follows:
Sec. 206.154 Determination of quantities and qualities for computing
royalties.
* * * * *
(c) * * *
(4) A lessee may request MMS approval of other methods for
determining the quantity of residue gas and gas plant products
allocable to each lease. If approved, such method will be applicable to
all gas production from Federal leases that is processed in the same
plant.
* * * * *
15. Section 206.155 is amended by revising paragraph (b) to read as
follows:
Sec. 206.155 Accounting for comparison.
* * * * *
(b) The requirement for accounting for comparison contained in the
terms of leases will govern as provided in Section 206.150(b) of this
subpart. When accounting for comparison is required by the lease terms,
such accounting for comparison shall be determined in accordance with
paragraph (a) of this section.
16. Section 206.156 is amended by revising paragraphs (c)(3), and
(d) to read as follows:
Sec. 206.156 Transportation allowances--general.
* * * * *
(c)* * *
(3) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitations prescribed by
paragraphs (c)(1) and (c)(2) of this section. The lessee must
demonstrate that the transportation costs incurred in excess of the
limitations prescribed in paragraphs (c)(1) and (c)(2) of this section
were reasonable, actual, and necessary. An application for exception
(using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation
necessary for MMS to make a determination. Under no circumstances shall
the value for royalty purposes under any selling arrangement be reduced
to zero.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest. If the lessee takes a deduction
for transportation on the Form MMS-2014 by improperly netting the
allowance against the sales value of the oil instead of reporting the
allowance as a separate line item, he may be assessed an additional
amount under 206.157(d).
17. In Sec. 206.157, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),
(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3)
and, (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),
and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),
(c)(2)(iii), and (c)(2)(iv) respectively; and revising paragraphs
(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (b)(4), (c)(1)(i), (c)(2)(i),
newly designated (c)(2)(ii), newly designated (c)(2)(iii), (d), (e)(1)
and (e)(2) to read as follows:
Sec. 206.157 Determination of transportation allowances.
(a) Arm's-length transportation contracts. (1)(i) For
transportation costs incurred by a lessee under 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 (a)(1)(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.
MMS' prior approval is not required before a lessee may deduct costs
incurred under an arm's-length contract. Such allowances shall be
subject to the provisions of paragraph (f) of this section. The lessee
must claim a transportation allowance by reporting it as a separate
line entry on the Form MMS-2014.
* * * * *
(3) If an arm's-length transportation contract includes both
gaseous and liquid products and the transportation costs attributable
to each cannot be determined from the contract, the lessee shall
propose an allocation procedure to MMS. The lessee may use the
transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall
[[Page 5466]]
submit all relevant data to support its proposal. MMS shall then
determine the gas transportation allowance based upon the lessee's
proposal and any additional information MMS deems necessary. The lessee
must submit the allocation proposal within 3 months of claiming the
allocated deduction on the Form MMS-2014.
* * * * *
(b) Non-arm's-length or no contract.
(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. The lessee must claim a transportation allowance
by reporting it as a separate line entry on the Form MMS-2014. When
necessary or appropriate, MMS may direct a lessee to modify its
estimated or actual transportation allowance deduction.
(2)* * *
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
* * * * *
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of
the cost allocation. The lessee shall submit all relevant data to
support its proposal. MMS shall then determine the transportation
allowance based upon the lessee's proposal and any additional
information MMS deems necessary. The lessee must submit the allocation
proposal within 3 months of claiming the allocated deduction on the
Form MMS-2014.
* * * * *
(c) Reporting requirements.
(1) Arm's-length contracts. (i) The lessee must notify MMS of an
allowance based on incurred costs by using a separate line entry on the
Form MMS-2014.
* * * * *
(2) Non-arm's-length or no contract. (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on the Form MMS-2014.
(ii) For new transportation facilities or arrangements, the
lessee's initial deduction shall include estimates of the allowable gas
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
* * * * *
(d) Interest and assessments. (1) If a lessee nets a transportation
allowance against the royalty value on the Form MMS-2014, the lessee
shall be assessed an amount of up to 10 percent of the allowance netted
not to exceed $250 per lease selling arrangement per sales period.
(2) If a lessee deducts a transportation allowance on its Form MMS-
2014 that exceeds 50 percent of the value of the gas transported
without obtaining prior approval of MMS under section 206.156, the
lessee shall pay interest on the excess allowance amount taken from the
date such amount is taken to the date the lessee files an exception
request with MMS.
(3) If a lessee erroneously reports a transportation allowance
which results in an underpayment of royalties, interest shall be paid
on the amount of that underpayment.
(4) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall be required to
pay additional royalties due plus interest computed under 30 CFR 218.54
from the allowance reporting period when the lessee took the deduction
to the date the lessee repays the difference to MMS. If the actual
transportation allowance is greater than the amount the lessee has
taken on Form MMS-2014 for each month during the allowance reporting
period, the lessee shall be entitled to a credit without interest.
(2) For lessees transporting production from onshore Federal
leases, the lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with
instructions provided by MMS.
* * * * *
18. Section 206.158 is amended by revising paragraphs (c)(3) and
(e) to read as follows:
Sec. 206.158 Processing allowances--general.
* * * * *
(c)* * *
(3) Upon request of a lessee, MMS may approve a processing
allowance in excess of the limitation prescribed by paragraph (c)(2) of
this section. The lessee must demonstrate that the processing costs
incurred in excess of the limitation prescribed in paragraph (c)(2) of
this section were reasonable, actual, and necessary. An application for
exception (using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation for
MMS to make a determination. Under no circumstances shall the value for
royalty purposes of any gas plant product be reduced to zero.
* * * * *
(e) If MMS determines that a lessee has improperly determined a
processing allowance authorized by this subpart, then the lessee shall
pay any additional royalties, plus interest determined in accordance
with 30 CFR 218.54, or shall be entitled to a credit, without interest.
If the lessee takes a deduction for transportation on the Form MMS-2014
by improperly netting the allowance against the sales value of the oil
instead of reporting the allowance as a separate line item, he may be
assessed an additional amount under 206.159(d).
19. In Sec. 206.159, paragraphs (c)(1)(ii), (c)(1)(iii), (c)(1)(v),
(c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v), (c)(2)(vii), (c)(3),
and (c)(4) are removed; paragraphs (c)(1)(iv), (c)(2)(iv), (c)(2)(vi),
and (c)(2)(viii) are redesignated as paragraphs (c)(1)(ii), (c)(2)(ii),
(c)(2)(iii) and (c)(2)(iv) respectively; and revising paragraphs
(a)(1)(i), (a)(3), (b)(1), (b)(2)(v), (c)(1)(i), (c)(2)(i) newly
designated (c)(2)(ii), newly designated (c)(2)(iii), (d), (e)(1) and
(e)(2) to read as follows:
Sec. 206.159 Determination of processing allowances.
(a) Arm's-length processing contracts.
(1)(i) For processing costs incurred by a lessee under 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 (a)(1)(iii)
of this section, subject to monitoring, review,
[[Page 5467]]
audit, and adjustment. The lessee shall have the burden of
demonstrating that its contract is arm's-length. MMS' prior approval is
not required before a lessee may deduct costs incurred under an arm's-
length contract. The lessee must claim a transportation allowance by
reporting it as a separate line entry on the Form MMS-2014.
* * * * *
(3) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use its proposed allocation
procedure until MMS issues its determination. The lessee shall submit
all relevant data to support its proposal. MMS shall then determine the
processing allowance based upon the lessee's proposal and any
additional information MMS deems necessary. No processing allowance
will be granted for the costs of processing lease production which is
not royalty bearing. The lessee must submit the allocation proposal
within 3 months of claiming the allocated deduction on Form MMS-2014.
* * * * *
(b) Non-arm's-length or no contract. (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. The lessee must claim a
processing allowance by reflecting it as a separate line entry on the
Form MMS-2014. When necessary or appropriate, MMS may direct a lessee
to modify its estimated or actual processing allowance.
(2)* * *
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
* * * * *
(c) Reporting requirements (1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
* * * * *
(2) Non-arm's-length or no contract.
(i) The lessee must notify MMS of an allowance based on the
incurred costs by using a separate line entry on the Form MMS-2014.
(ii) For new processing plants, the lessee's initial deduction
shall include estimates of the allowable gas processing costs for the
applicable period. Cost estimates shall be based upon the most recently
available operations data for the plant or, if such data are not
available, the lessee shall use estimates based upon industry data for
similar gas processing plants.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(d) Interest and assessments.
(1) If a lessee nets a processing allowance against the royalty
value on the Form MMS-2014, the lessee shall be assessed an amount of
up to 10 percent of the allowance netted not to exceed $250 per lease
selling arrangement per sales period.
(2) If a lessee deducts a processing allowance on its Form MMS-2014
that exceeds 66\2/3\ percent of the value of the gas processed without
obtaining prior approval of MMS under Section 206.158, the lessee shall
pay interest on the excess allowance amount taken from the date such
amount is taken to the date the lessee files an exception request with
MMS.
(3) 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.
(4) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments.
(1) If the actual processing allowance is less than the amount the
lessee has taken on Form MMS-2014 for each month during the allowance
reporting period, the lessee shall pay additional royalties due plus
interest computed under 30 CFR 218.54 from the allowance reporting
period when the lessee took the deduction to the date the lessee repays
the difference to MMS. If the actual processing allowance is greater
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall be entitled to
a credit without interest.
(2) For lessees transporting production from onshore Federal
leases, the lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with
instructions provided by MMS.
* * * * *
20. The subpart heading Subpart E--Solid Minerals, General
[Reserved] is removed and a new Subpart E--Indian Gas is added to read
as follows:
Subpart E--Indian Gas
Sec.
206.170 Purpose and scope.
206.171 Definitions.
206.172 Valuation standards--unprocessed gas.
206.173 Valuation standards--processed gas.
206.174 Determination of quantities and qualities for computing
royalties.
206.175 Accounting for comparison.
206.176 Transportation allowances--general.
206.177 Determination of transportation allowances.
206.178 Processing allowances--general.
206.179 Determination of processing allowances.
Subpart E--Indian Gas
Sec. 206.170 Purpose and scope.
(a) This subpart is applicable to all gas production from Indian
(Tribal and allotted) oil and gas leases (except leases on the Osage
Indian Reservation, Osage County, Oklahoma). The purpose of this
subpart is to establish the value of production for royalty purposes
consistent with the mineral leasing laws, other applicable laws, and
lease terms.
(b) If the specific provisions of any statute, treaty, or
settlement agreement between the Indian lessor and a lessee resulting
from administrative or judicial litigation, or oil and gas lease
subject to the requirements of this subpart are inconsistent with any
regulation in this subpart, then the lease, statute, treaty provision
or settlement agreement shall govern to the extent of that
inconsistency.
(c) All royalty payments made to any Tribe or allottee are subject
to audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian oil and gas leases are discharged in
accordance with the requirements of the governing mineral leasing laws,
treaties, and lease terms.
Sec. 206.171 Definitions.
For purposes of this subpart:
Allowance means an approved or an (MMS)-initially accepted
deduction in determining value for royalty purposes. Processing
allowance means an allowance for the reasonable, actual costs incurred
by the lessee for
[[Page 5468]]
processing gas, or an approved or MMS-initially accepted deduction for
costs of such processing, determined pursuant to this subpart.
Transportation allowance means an allowance for the reasonable, actual
costs incurred by the lessee for moving unprocessed gas, residue gas,
or gas plant products to a point of sale or point of delivery off the
lease, unit area, communitized area, or away from a processing plant,
excluding gathering, or an approved or MMS-initially accepted deduction
for costs of such transportation, determined pursuant to this subpart.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field, in which oil and/or gas lease
products have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated
persons with opposing economic interests regarding that contract. For
purposes of this subpart, two persons are affiliated if one person
controls, is controlled by, or is pursuant to common control with
another person. For purposes of this subpart, based on the instruments
of ownership of the voting securities of an entity, or based on other
forms of ownership: ownership in excess of 50 percent constitutes
control; ownership of 10 through 50 percent creates a presumption of
control; and ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. MMS may require the lessee to certify ownership control. To
be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month, as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Compression means the process of raising the pressure of gas.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by
law that with due consideration creates an obligation.
Field means a geographic region situated over one or more
subsurface oil and gas reservoirs encompassing at least the outermost
boundaries of all oil and gas accumulations known to be within those
reservoirs vertically projected to the land surface. Onshore fields are
usually given names and their official boundaries are often designated
by oil and gas regulatory agencies in the respective States in which
the fields are located.
Gas means any fluid, either combustible or noncombustible,
hydrocarbon or nonhydrocarbon, which is extracted from a reservoir and
which has neither independent shape nor volume, but tends to expand
indefinitely. It is a substance that exists in a gaseous or rarefied
state pursuant to standard temperature and pressure conditions.
Gas plant products means separate marketable elements, compounds,
or mixtures, whether in liquid, gaseous, or solid form, resulting from
processing gas, excluding residue gas.
Gathering means the movement of lease production to a central
accumulation and/or treatment point on the lease, unit or communitized
area, or to a central accumulation or treatment point off the lease,
unit or communitized area as approved by BLM operations personnel for
onshore leases.
Gross proceeds (for royalty payment purposes) means the total
monies and other consideration accruing to an oil and gas lessee for
the disposition of unprocessed gas, residue gas, or gas plant products
produced. Gross proceeds includes, but is not limited to, payments to
the lessee for certain services such as compression, dehydration,
measurement, and/or field gathering to the extent that the lessee is
obligated to perform them at no cost to the Indian lessor, and payments
for gas processing rights. Gross proceeds, as applied to gas, also
includes but is not limited to reimbursements for severance taxes and
other reimbursements. Tax reimbursements are part of the gross proceeds
accruing to a lessee even though the Indian royalty interest may be
exempt from taxation. Monies and other consideration, including the
forms of consideration identified in this paragraph, to which a lessee
is contractually or legally entitled but which it does not seek to
collect through reasonable efforts are also part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject
to Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States pursuant to
a mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered
by that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Indian leases.
Lessee means any person to whom an Indian Tribe, or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease.
This includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser pursuant to a sales contract typical for the
field or area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that
the lessee must pay as specified in the lease or in applicable leasing
regulations.
MMS means the Minerals Management Service of the Department of the
Interior.
Net-back method (or work-back method) means a method for
calculating market value of gas at the lease.
[[Page 5469]]
Pursuant to this method, costs of transportation, processing, or
manufacturing are deducted from the proceeds received for the gas,
residue gas or gas plant products, and any extracted, processed, or
manufactured products, or from the value of the gas, residue gas or gas
plant products, and any extracted, processed, or manufactured products,
at the first point at which reasonable values for any such products may
be determined by a sale pursuant to an arm's-length contract or
comparison to other sales of such products, to ascertain value at the
lease.
Net output means the quantity of residue gas and each gas plant
product that a processing plant produces.
Net profit share (for applicable Indian leases) means the specified
share of the net profit from production of oil and gas as provided in
the agreement.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Posted price means the price, net of all adjustments for quality
and location, specified in publicly available price bulletins or other
price notices available as part of normal business operations for
quantities of unprocessed gas, residue gas, or gas plant products in
marketable condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which
normally take place on or near the lease, such as natural pressure
reduction, mechanical separation, heating, cooling, dehydration, and
compression, are not considered processing. The changing of pressures
and/or temperatures in a reservoir is not considered processing.
Residue gas means that hydrocarbon gas consisting principally of
methane resulting from processing gas.
Selling arrangement means the individual contractual arrangements
pursuant to which sales or dispositions of gas, residue gas and gas
plant products are made. Selling arrangements are described by
illustration in the MMS Royalty Management Program Oil and Gas Payor
Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of unprocessed gas, residue gas, or
gas plant products at a specified price over a fixed period, usually of
short duration, which does not normally require a cancellation notice
to terminate, and which does not contain an obligation, nor imply an
intent, to continue in subsequent periods.
Warranty contract means a long-term contract entered into prior to
1970, including any amendments thereto, for the sale of gas wherein the
producer agrees to sell a specific amount of gas and the gas delivered
in satisfaction of this obligation may come from fields or sources
outside of the designated fields.
Sec. 206.172 Valuation standards--unprocessed gas.
(a) (1) This section applies to the valuation of all gas that is
not processed and all gas that is processed but is sold or otherwise
disposed of by the lessee pursuant to an arm's-length contract prior to
processing (including all gas where the lessee's arm's-length contract
for the sale of that gas prior to processing provides for the value to
be determined on the basis of a percentage of the purchaser's proceeds
resulting from processing the gas). This section also applies to
processed gas that must be valued prior to processing in accordance
with Sec. 206.175 of this subpart. Where the lessee's contract includes
a reservation of the right to process the gas and the lessee exercises
that right, Sec. 206.173 of this subpart shall apply instead of this
section.
(2) The value of production, for royalty purposes, of gas subject
to this subpart shall be the value of gas determined pursuant to this
section less applicable allowances determined pursuant to this subpart.
(3) (i) 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 of production 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.
(ii) For purposes of this paragraph, major portion means the
highest price paid or offered at the time of production for the major
portion of gas production from the same field. The major portion will
be calculated using like-quality gas sold pursuant to arm's-length
contracts from the same field (or, if necessary to obtain a reasonable
sample, from the same area) for each month. All such sales will be
arrayed from highest price to lowest price (at the bottom). The major
portion is that price at which 50 percent (by volume) plus 1 mcf of the
gas (starting from the bottom) is sold.
(b)(1) (i) The value of gas which is sold pursuant to an arm's-
length contract shall be the gross proceeds accruing to the lessee,
except as provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of this
section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value which the lessee reports, for
royalty purposes, is subject to monitoring, review, and audit. For
purposes of this section, gas which is sold or otherwise transferred to
the lessee's marketing affiliate and then sold by the marketing
affiliate pursuant to an arm's-length contract shall be valued in
accordance with this paragraph based upon the sale by the marketing
affiliate. Also, where the lessee's arm's-length contract for the sale
of gas prior to processing provides for the value to be determined
based upon a percentage of the purchaser's proceeds resulting from
processing the gas, the value of production, for royalty purposes,
shall never be less than a value equivalent to 100 percent of the value
of the residue gas attributable to the processing of the lessee's gas.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the gas. If the
contract does not reflect the total consideration, then MMS may require
that the gas sold pursuant to that contract be valued in accordance
with paragraph (c) of this section. Value may not be less than the
gross proceeds accruing to the lessee, including the additional
consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then MMS shall require that the gas
production be valued pursuant to paragraphs (c)(2) or (c)(3) of this
section, and in accordance with the notification requirements of
paragraph (e) of this section. When MMS determines that the value may
be unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
value.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of gas sold pursuant to a warranty contract shall be
determined by MMS, and due consideration will be given to all valuation
criteria specified in this section. The lessee must request a value
determination in accordance with paragraph (g) of this section for gas
sold pursuant to a warranty contract;
[[Page 5470]]
provided, however, that any value determination for a warranty contract
in effect on the effective date of these regulations shall remain in
effect until modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the gas.
(c) The value of gas subject to this section which is not sold
pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
pursuant to its non-arm's-length contract (or other disposition other
than by an arm's-length contract), provided that those gross proceeds
are equivalent to the gross proceeds derived from, or paid pursuant to,
comparable arm's-length contracts for purchases, sales, or other
dispositions of like-quality gas in the same field (or, if necessary to
obtain a reasonable sample, from the same area). In evaluating the
comparability of arm's-length contracts for the purposes of these
regulations, the following factors shall be considered: price, time of
execution, duration, market or markets served, terms, quality of gas,
volume, and such other factors as may be appropriate to reflect the
value of the gas;
(2) A value determined by consideration of other information
relevant in valuing like-quality gas, including gross proceeds pursuant
to arm's-length contracts for like-quality gas in the same field or
nearby fields or areas, posted prices for gas, prices received in
arm's-length spot sales of gas, other reliable public sources of price
or market information, and other information as to the particular lease
operation or the salability of the gas; or
(3) A net-back method or any other reasonable method to determine
value.
(d) (1) Notwithstanding any other provisions of this section,
except paragraph (h) of this section, if the maximum price permitted by
Federal law at which gas may be sold is less than the value determined
pursuant to this section, then MMS shall accept such maximum price as
the value. For purposes of this section, price limitations set by any
State or local government shall not be considered as a maximum price
permitted by Federal law.
(2) The limitation prescribed in paragraph (d)(1) of this section
shall not apply to gas sold pursuant to a warranty contract and valued
pursuant to paragraph (b)(2) of this section.
(e) (1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review
and audit, and MMS will direct a lessee to use a different value if it
determines that the reported value is inconsistent with the
requirements of these regulations.
(2) Any Indian lessee will make available upon request to the
authorized MMS or Indian representatives, to the Office of the
Inspector General of the Department of the Interior, or other person
authorized to receive such information, arm's-length sales and volume
data for like-quality production sold, purchased or otherwise obtained
by the lessee from the field or area or from nearby fields or areas.
(3) A lessee shall notify MMS if it has determined value pursuant
to paragraph (c)(2) or (c)(3) of this section. The notification shall
be by letter to MMS Associate Director for Royalty Management or his/
her designee. The letter shall identify the valuation method to be used
and contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method
authorized by paragraph (c)(2) or (c)(3) of this section, and each time
there is a change in a method pursuant to paragraph (c)(2) or (c)(3) of
this section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR
218.54. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method,
and may use that method in determining value for royalty purposes until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. MMS shall expeditiously determine the value
based upon the lessee's proposal and any additional information MMS
deems necessary. In making a value determination MMS may use any of the
valuation criteria authorized by this subpart. That determination shall
remain effective for the period stated therein. After MMS issues its
determination, the lessee shall make the adjustments in accordance with
paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, pursuant
to 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.
(i) The lessee is required to place gas in marketable condition at
no cost to the Indian lessor unless otherwise provided in the lease
agreement. Where the value established pursuant to this section is
determined by a lessee's gross proceeds, that value shall be increased
to the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the
gas in marketable condition.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims pursuant to its contract. If
there is no contract revision or amendment, and the lessee fails to
take proper or timely action to receive prices or benefits to which it
is entitled, it must pay royalty at a value based upon that obtainable
price or benefit. Contract revisions or amendments shall be in writing
and signed by all parties to an arm's-length contract. If the lessee
makes timely application for a price increase or benefit allowed
pursuant to its contract but the purchaser refuses, and the lessee
takes reasonable measures, which are documented, to force purchaser
compliance, the lessee will owe no additional royalties unless or until
monies or consideration resulting from the price increase or additional
benefits are received. This paragraph shall not be construed to permit
a lessee to avoid its royalty payment obligation in situations where a
purchaser fails to pay, in whole or in part or timely, for a quantity
of gas.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value pursuant to this
section shall be considered final or binding as against the Indian
Tribes or allottees until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation, processing, or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal Law. Any data specified by law to
be privileged, confidential, or otherwise exempt will be maintained in
a confidential manner
[[Page 5471]]
in accordance with applicable law and regulations. All requests for
information about determinations made pursuant to this subpart are to
be submitted in accordance with the Freedom of Information Act
regulation of the Department of the Interior, 43 CFR Part 2. Nothing in
this section is intended to limit or diminish in any manner whatsoever
the right of an Indian lessor to obtain any and all information as such
lessor may be lawfully entitled from MMS or such lessor's lessee
directly pursuant to the terms of the lease, 30 U.S.C. 1733, or other
applicable law.
Sec. 206.173 Valuation standards--processed gas.
(a) (1) This section applies to the valuation of all gas that is
processed by the lessee and any other gas production to which this
subpart applies and that is not subject to the valuation provisions of
Sec. 206.172 of this part. This section applies where the lessee's
contract includes a reservation of the right to process the gas and the
lessee exercises that right.
(2) The value of production, for royalty purposes, of gas subject
to this section shall be the combined value of the residue gas and all
gas plant products determined pursuant to this section, plus the value
of any condensate recovered downstream of the point of royalty
settlement without resorting to processing determined pursuant to
section of this part, less applicable transportation allowances and
processing allowances determined pursuant to this subpart.
(3) (i) 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 values determined in accordance with this
section for any lease product with the major portion determined for
that lease product. The value to be used in determining the value of
production for royalty purposes shall be the higher of those two
values.
(ii) For purposes of this paragraph, major portion means the
highest price paid or offered at the time of production for the major
portion of gas production from the same field, or for residue gas or
gas plant products from the same processing plant, as applicable. The
major portion will be calculated using like-quality lease products sold
pursuant to arm's-length contracts from the same field or processing
plant (or, if necessary to obtain a reasonable sample, from the same
area or nearby processing plants) for each month. All such sales will
be arrayed from highest price to lowest price (at the bottom). The
major portion is that price at which 50 percent (by volume) plus 1 mcf
of the gas (starting from the bottom) is sold, or for gas plant
products, 50 percent (by volume) plus 1 unit.
(b)(1) (i) The value of the residue gas or any gas plant product
which is sold pursuant to an arm's-length contract shall be the gross
proceeds accruing to the lessee, except as provided in paragraphs
(b)(1)(ii) and (b)(1)(iii) of this section. The lessee shall have the
burden of demonstrating that its contract is arm's-length. The value
that the lessee reports for royalty purposes is subject to monitoring,
review, and audit. For purposes of this section, residue gas or any gas
plant product which is sold or otherwise transferred to the lessee's
marketing affiliate and then sold by the marketing affiliate pursuant
to an arm's-length contract shall be valued in accordance with this
paragraph based upon the sale by the marketing affiliate.
(ii) In conducting these reviews and audits, MMS will examine
whether or not the contract reflects the total consideration actually
transferred either directly or indirectly from the buyer to the seller
for the residue gas or gas plant product. If the contract does not
reflect the total consideration, then MMS may require that the residue
gas or gas plant product sold pursuant to that contract be valued in
accordance with paragraph (c) of this section. Value may not be less
than the gross proceeds accruing to the lessee, including the
additional consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the residue gas or gas plant product because of
misconduct by or between the contracting parties, or because the lessee
otherwise has breached its duty to the lessor to market the production
for the mutual benefit of the lessee and the lessor, then MMS shall
require that the residue gas or gas plant product be valued pursuant to
paragraphs (c)(2) or (c)(3) of this section, and in accordance with the
notification requirements of paragraph (e) of this section. When MMS
determines that the value may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written
information justifying the lessee's value.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of residue gas sold pursuant to a warranty contract
shall be determined by MMS, and due consideration will be given to all
valuation criteria specified in this section. The lessee must request a
value determination in accordance with paragraph (g) of this section
for gas sold pursuant to a warranty contract; provided, however, that
any value determination for a warranty contract in effect on the
effective date of these regulations shall remain in effect until
modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the residue gas or gas plant
product.
(c) The value of residue gas or any gas plant product which is not
sold pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
pursuant to its non-arm's-length contract (or other disposition other
than by an arm's-length contract), provided that those gross proceeds
are equivalent to the gross proceeds derived from, or paid pursuant to,
comparable arm's-length contracts for purchases, sales, or other
dispositions of like quality residue gas or gas plant products from the
same processing plant (or, if necessary to obtain a reasonable sample,
from nearby plants). In evaluating the comparability of arm's-length
contracts for the purposes of these regulations, the following factors
shall be considered: price, time of execution, duration, market or
markets served, terms, quality of residue gas or gas plant products,
volume, and such other factors as may be appropriate to reflect the
value of the residue gas or gas plant products;
(2) A value determined by consideration of other information
relevant in valuing like-quality residue gas or gas plant products,
including gross proceeds pursuant to arm's-length contracts for like-
quality residue gas or gas plant products from the same gas plant or
other nearby processing plants, posted prices for residue gas or gas
plant products, prices received in spot sales of residue gas or gas
plant products, other reliable public sources of price or market
information, and other information as to the particular lease operation
or the salability of such residue gas or gas plant products; or
(3) A net-back method or any other reasonable method to determine
value.
(d) (1) Notwithstanding any other provisions of this section,
except paragraph (h) of this section, if the maximum price permitted by
Federal law at which any residue gas or gas plant products may be sold
is less than
[[Page 5472]]
the value determined pursuant to this section, then MMS shall accept
such maximum price as the value. For the purposes of this section,
price limitations set by any State or local government shall not be
considered as a maximum price permitted by Federal law.
(2) The limitation prescribed by paragraph (d)(1) of this section
shall not apply to residue gas sold pursuant to a warranty contract and
valued pursuant to paragraph (b)(2) of this section.
(e) (1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review
and audit, and MMS will direct a lessee to use a different value if it
determines upon review or audit that the reported value is inconsistent
with the requirements of these regulations.
(2) The Indian lessee will make available upon request to the
authorized MMS, or Indian representatives, to the Office of the
Inspector General of the Department of the Interior, or other persons
authorized to receive such information, arm's-length sales and volume
data for like-quality residue gas and gas plant products sold,
purchased or otherwise obtained by the lessee from the same processing
plant or from nearby processing plants.
(3) A lessee shall notify MMS if it has determined any value
pursuant to paragraph (c)(2) or (c)(3) of this section. The
notification shall be by letter to MMS Associate Director for Royalty
Management or his/her designee. The letter shall identify the valuation
method to be used and contain a brief description of the procedure to
be followed. The notification required by this paragraph is a one-time
notification due no later than the end of the month following the month
the lessee first reports royalties on a Form MMS-2014 using a valuation
method authorized by paragraph (c)(2) or (c)(3) of this section, and
each time there is a change in a method pursuant to paragraph (c)(2) or
(c)(3) of this section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest computed on that difference pursuant to 30 CFR
218.54. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method,
and may use that method in determining value for royalty purposes until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. MMS shall expeditiously determine the value
based upon the lessee's proposal and any additional information MMS
deems necessary. In making a value determination, MMS may use any of
the valuation criteria authorized by this subpart. That determination
shall remain effective for the period stated therein. After MMS issues
its determination, the lessee shall make the adjustments in accordance
with paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, pursuant
to no circumstances shall the value of production for royalty purposes
be less than the gross proceeds accruing to the lessee for residue gas
and/or any gas plant products, less applicable transportation
allowances and processing allowances determined pursuant to this
subpart.
(i) The lessee is required to place residue gas and gas plant
products in marketable condition at no cost to the Indian lessor unless
otherwise provided in the lease agreement. Where the value established
pursuant to this section is determined by a lessee's gross proceeds,
that value shall be increased to the extent that the gross proceeds
have been reduced because the purchaser, or any other person, is
providing certain services the cost of which ordinarily is the
responsibility of the lessee to place the residue gas or gas plant
products in marketable condition.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims pursuant to its contract.
Absent contract revision or amendment, if the lessee fails to take
proper or timely action to receive prices or benefits to which it is
entitled it must pay royalty at a value based upon that obtainable
price or benefit. Contract revisions or amendments shall be in writing
and signed by all parties to an arm's-length contract. If the lessee
makes timely application for a price increase or benefit allowed
pursuant to its contract but the purchaser refuses, and the lessee
takes reasonable measures, which are documented, to force purchaser
compliance, the lessee will owe no additional royalties unless or until
monies or consideration resulting from the price increase or additional
benefits are received. This paragraph shall not be construed to permit
a lessee to avoid its royalty payment obligation in situations where a
purchaser fails to pay, in whole or in part, or timely, for a quantity
of residue gas or gas plant product.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value pursuant to this
section shall be considered final or binding against the Indian Tribes
or allottees until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances, processing allowances
or extraordinary cost allowances, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 552, or other Federal law. Any
data specified by law to be privileged, confidential, or otherwise
exempt, will be maintained in a confidential manner in accordance with
applicable law and regulations. All requests for information about
determinations made pursuant to this Part are to be submitted in
accordance with the Freedom of Information Act regulation of the
Department of the Interior, 43 CFR Part 2. Nothing in this section is
intended to limit or diminish in any manner whatsoever the right of an
Indian lessor to obtain any and all information as such lessor may be
lawfully entitled from MMS or such lessor's lessee directly pursuant to
the terms of the lease, 30 U.S.C. 1733, or other applicable law.
Sec. 206.174 Determination of quantities and qualities for computing
royalties.
(a) (1) Royalties shall be computed on the basis of the quantity
and quality of unprocessed gas at the point of royalty settlement
approved by BLM for onshore leases.
(2) If the value of gas determined pursuant to Sec. 206.172 of this
subpart is based upon a quantity and/or quality that is different from
the quantity and/or quality at the point of royalty settlement, as
approved by BLM or MMS, that value shall be adjusted for the
differences in quantity and/or quality.
(b) (1) For residue gas and gas plant products, the quantity basis
for computing royalties due is the monthly net output of the plant even
though residue gas and/or gas plant products may be in temporary
storage.
(2) If the value of residue gas and/or gas plant products
determined pursuant to Sec. 206.173 of this subpart is based upon a
quantity and/or quality of residue gas and/or gas plant products that
is different from that which is attributable to a lease, determined in
accordance with paragraph (c) of this section, that value shall be
adjusted for
[[Page 5473]]
the differences in quantity and/or quality.
(c) The quantity of the residue gas and gas plant products
attributable to a lease shall be determined according to the following
procedure:
(1) When the net output of the processing plant is derived from gas
obtained from only one lease, the quantity of the residue gas and gas
plant products on which computations of royalty are based is the net
output of the plant.
(2) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of uniform content, the
quantity of the residue gas and gas plant products allocable to each
lease shall be in the same proportions as the ratios obtained by
dividing the amount of gas delivered to the plant from each lease by
the total amount of gas delivered from all leases.
(3) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of nonuniform content,
the quantity of the residue gas allocable to each lease will be
determined by multiplying the amount of gas delivered to the plant from
the lease by the residue gas content of the gas, and dividing the
arithmetical product thus obtained by the sum of the similar
arithmetical products separately obtained for all leases from which gas
is delivered to the plant, and then multiplying the net output of the
residue gas by the arithmetic quotient obtained. The net output of gas
plant products allocable to each lease will be determined by
multiplying the amount of gas delivered to the plant from the lease by
the gas plant product content of the gas, and dividing the arithmetical
product thus obtained by the sum of the similar arithmetical products
separately obtained for all leases from which gas is delivered to the
plant, and then multiplying the net output of each gas plant product by
the arithmetic quotient obtained.
(4) A lessee may request MMS approval of other methods for
determining the quantity of residue gas and gas plant products
allocable to each lease. If approved, such method will be applicable to
all gas production from Indian leases that is processed in the same
plant.
(d) (1) No deductions may be made from the royalty volume or
royalty value for actual or theoretical losses. Any actual loss of
unprocessed gas that may be sustained prior to the royalty settlement
metering or measurement point will not be subject to royalty provided
that such loss is determined to have been unavoidable by BLM .
(2) Except as provided in paragraph (d)(1) of this section and 30
CFR 202.171(c), royalties are due on 100 percent of the volume
determined in accordance with paragraphs (a) through (c) of this
section. There can be no reduction in that determined volume for actual
losses after the quantity basis has been determined or for theoretical
losses that are claimed to have taken place. Royalties are due on 100
percent of the value of the unprocessed gas, residue gas, and/or gas
plant products as provided in this subpart, less applicable allowances.
There can be no deduction from the value of the unprocessed gas,
residue gas, and/or gas plant products to compensate for actual losses
after the quantity basis has been determined, or for theoretical losses
that are claimed to have taken place.
Sec. 206.175 Accounting for comparison.
(a) Except as provided in paragraph (b) of this section, where the
lessee (or a person to whom the lessee has transferred gas pursuant to
a non-arm's-length contract or without a contract) processes the
lessee's gas and after processing the gas the residue gas is not sold
pursuant to an arm's-length contract, the value, for royalty purposes,
shall be the greater of (1) the combined value, for royalty purposes,
of the residue gas and gas plant products resulting from processing the
gas determined pursuant to Sec. 206.173 of this subpart, plus the
value, for royalty purposes, of any condensate recovered downstream of
the point of royalty settlement without resorting to processing
determined pursuant to Sec. 206.52 of this subpart; or (2) the value,
for royalty purposes, of the gas prior to processing determined in
accordance with Sec. 206.172 of this subpart.
(b) The requirement for accounting for comparison contained in the
terms of leases, particularly Indian leases, will govern as provided in
Sec. 206.170(b) of this subpart. When accounting for comparison is
required by the lease terms, such accounting for comparison shall be
determined in accordance with paragraph (a) of this section.
Sec. 206.176 Transportation allowances--general.
(a) Where the value of gas has been determined pursuant to
Sec. 206.172 or Sec. 206.173 of this subpart at a point (e.g., sales
point or point of value determination) off the lease, MMS shall allow a
deduction for the reasonable actual costs incurred by the lessee to
transport unprocessed gas, residue gas, and gas plant products from a
lease to a point off the lease including, if appropriate,
transportation from the lease to a gas processing plant off the lease
and from the plant to a point away from the plant.
(b) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.177.
(c) (1) Except as provided in paragraph (c)(3) of this section, for
unprocessed gas valued in accordance with Sec. 206.172 of this subpart,
the transportation allowance deduction on the basis of a selling
arrangement shall not exceed 50 percent of the value of the unprocessed
gas determined in accordance with Sec. 206.172 of this subpart.
(2) Except as provided in paragraph (c)(3) of this section, for gas
production valued in accordance with Sec. 206.173 of this subpart the
transportation allowance deduction on the basis of a selling
arrangement shall not exceed 50 percent of the value of the residue gas
or gas plant product determined in accordance with Sec. 206.173 of this
subpart. For purposes of this section, natural gas liquids shall be
considered one product.
(3) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitations prescribed by
paragraphs (c)(1) and (c)(2) of this section. The lessee must
demonstrate that the transportation costs incurred in excess of the
limitations prescribed in paragraphs (c)(1) and (c)(2) of this section
were reasonable, actual, and necessary. An application for exception
(using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation
necessary for MMS to make a determination. Pursuant to no circumstances
shall the value for royalty purposes pursuant to any selling
arrangement be reduced to zero.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest.
Sec. 206.177 Determination of transportation allowances.
(a) Arm's-length transportation contracts.
(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,
[[Page 5474]]
residue gas and/or gas plant products pursuant to that contract, except
as provided in paragraphs (a)(1)(ii) and (a)(1)(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 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.
(ii) In conducting reviews and audits, MMS will examine whether or
not the contract reflects more than the consideration actually
transferred either directly or indirectly from the lessee to the
transporter for the transportation. If the contract reflects more than
the total consideration, then MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(iii) If MMS determines that the consideration paid pursuant to an
arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(2) (i) If an arm's-length transportation contract includes more
than one product in a gaseous phase and the transportation costs
attributable to each product cannot be determined from the contract,
the total transportation costs shall be allocated in a consistent and
equitable manner to each of the products transported in the same
proportion as the ratio of the volume of each product (excluding waste
products which have no value) to the volume of all products in the
gaseous phase (excluding waste products which have no value). Except as
provided in this paragraph, no allowance may be taken for the costs of
transporting lease production which is not royalty bearing without MMS
approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this subpart.
(3) If an arm's-length transportation contract includes both
gaseous and liquid products and the transportation costs attributable
to each cannot be determined from the contract, the lessee shall
propose an allocation procedure to MMS. The lessee may use the
transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall submit all
relevant data to support its proposal. The initial proposal must be
submitted by June 30, 1988, or within 3 months after the last day of
the month for which the lessee requests a transportation allowance,
whichever is later (unless MMS approves a longer period). MMS shall
then determine the gas transportation allowance based upon the lessee's
proposal and any additional information MMS deems necessary.
(4) Where the lessee's payments for transportation pursuant to an
arm's-length contract are not based on a dollar per unit, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(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.
(b) Non-arm's-length or no contract. (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 pursuant to a non-arm's-length or no
contract situation are subject to monitoring, review, audit, and
adjustment. 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 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.
(2) The transportation allowance for non-arm's-length or no-
contract situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and 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
depreciable investment in the transportation system multiplied by a
rate of return in accordance with paragraph (b)(2)(iv)(B) of this
section. Allowable capital costs are generally those costs for
depreciable fixed assets (including costs of delivery and installation
of capital equipment) which are an integral part of the transportation
system.
(i) Allowable operating expenses include: Operations supervision
and engineering; operations labor; fuel; utilities; materials; ad
valorem property taxes; rent; supplies; and any other directly
allocable and attributable operating expense which the lessee can
document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which
the lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
(iv) A lessee may use either depreciation or a return on
depreciable capital investment. After a lessee has elected to use
either method for a transportation system, the lessee may not later
elect to change to the other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the
[[Page 5475]]
reserves which the transportation system services, or a unit of
production method. After an election is made, the lessee may not change
methods without MMS approval. A change in ownership of a transportation
system shall not alter the depreciation schedule established by the
original transporter/lessee for purposes of the allowance calculation.
With or without a change in ownership, a transportation system shall be
depreciated only once. Equipment shall not be depreciated below a
reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the transportation system multiplied by
the rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to transportation facilities first placed
in service after March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent
transportation allowance reporting period (which is determined pursuant
to paragraph (c) of this section).
(3) (i) The deduction for transportation costs shall be determined
on the basis of the lessee's cost of transporting each product through
each individual transportation system. Where more than one product in a
gaseous phase is transported, the allocation of costs to each of the
products transported shall be made in a consistent and equitable manner
in the same proportion as the ratio of the volume of each product
(excluding waste products which have no value) to the volume of all
products in the gaseous phase (excluding waste products which have no
value). Except as provided in this paragraph, the lessee may not take
an allowance for transporting a product which is not royalty bearing
without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of
the cost allocation. The lessee shall submit all relevant data to
support its proposal. The initial proposal must be submitted by June
30, 1988 or within 3 months after the last day of the month for which
the lessee begins the transportation, whichever is later, unless MMS
approves a longer period. MMS shall then determine the transportation
allowance based upon the lessee's proposal and any additional
information MMS deems necessary.
(5) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(4) of this section. MMS will grant the exception only if
the lessee has a tariff for the transportation system approved by the
Federal Energy Regulatory Commission (FERC) for Indian leases. MMS
shall deny the exception request if it determines that the tariff is
excessive as compared to arm's-length transportation charges by
pipelines, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if: (i) No
FERC cost analysis exists and the FERC has declined to investigate
pursuant to MMS timely objections upon filing; and (ii) the tariff
significantly exceeds the lessee's actual costs for transportation as
determined pursuant to this section.
(c) Reporting requirements.
(1) Arm's-length contracts. (i) With the exception of those
transportation allowances specified in paragraphs (c)(1)(v) and
(c)(1)(vi) of this section, the lessee shall submit page one of the
initial Form MMS-4295 (and Schedule 1) prior to, or at the same time
as, the transportation allowance determined pursuant to an arm's-length
contract is reported on Form MMS-2014, Report of Sales and Royalty
Remittance. A Form MMS-4295 received by the end of the month that the
Form MMS-2014 is due shall be considered to be timely received.
(ii) The initial Form MMS-4295 shall be effective for a reporting
period beginning the month that the lessee is first authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until the applicable contract or rate terminates
or is modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4295 (and
Schedule 1) within 3 months after the end of the calendar year, or
after the applicable contract or rate terminates or is modified or
amended, whichever is earlier, unless MMS approves a longer period
(during which period the lessee shall continue to use the allowance
from the previous reporting period).
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(v) Transportation allowances which are based on arm's-length
contracts and 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.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract.
(i) With the exception of those transportation allowances specified
in paragraphs (c)(2)(v), (c)(2)(vii), and (c)(2)(viii) of this section,
the lessee shall submit an initial Form MMS-4295 prior to, or at the
same time as, the transportation allowance determined pursuant to a
non-arm's-length contract or no contract situation is reported on Form
MMS-2014, Report of Sales and Royalty Remittance. A Form MMS-4295
received by the end of the month that the Form MMS-2014 is due shall be
considered to be timely received. The initial report may be based upon
estimated costs.
(ii) The initial Form MMS-4295 shall be effective for a reporting
period beginning the month that the lessee first is authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until the transportation pursuant to the non-
arm's-length contract or the no contract situation terminates,
whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4295
containing the actual costs for the previous reporting period. If the
transportation is continuing, the lessee shall include on Form MMS-4295
its estimated costs for the next calendar year. The estimated
transportation allowance shall be based
[[Page 5476]]
on the actual costs for the previous reporting period plus or minus any
adjustments which are based on the lessee's knowledge of decreases or
increases which will affect the allowance. Form MMS-4295 must be
received by MMS within 3 months after the end of the previous reporting
period, unless MMS approves a longer period (during which period the
lessee shall continue to use the allowance from the previous reporting
period).
(iv) For new transportation facilities or arrangements, the
lessee's initial Form MMS-4295 shall include estimates of the allowable
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system, or if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(v) 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.
(vi) 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.
(vii) MMS may establish in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) If the lessee is authorized to use its FERC-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.
(3) MMS may establish reporting dates for individual lessees
different than those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and failure
to report.
(1) If a lessee deducts a processing allowance on its Form MMS-2014
without complying with the requirements of this section, the lessee
shall pay interest only on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a transportation allowance
which results in an underpayment of royalties, interest shall be paid
on the amount of that underpayment.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be
required to pay additional royalties due plus interest computed
pursuant to 30 CFR 218.54, retroactive to the first day of the first
month the lessee is authorized to deduct a transportation allowance. If
the actual transportation allowance is greater than the amount the
lessee has taken on Form MMS-2014 for each month during the allowance
form reporting period, the lessee shall be entitled to a credit,
without interest.
(2) For lessees transporting production from onshore Indian leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Actual or theoretical losses. Notwithstanding any other
provisions of this subpart, for other than arm's-length contracts no
cost shall be allowed for transportation which results from payments
(either volumetric or for value) for actual or theoretical losses. This
section does not apply when the transportation allowance is based upon
a FERC or state regulatory agency approved tariff.
(g) Other transportation cost determinations. The provisions of
this section shall apply to determine transportation costs when
establishing value using a net-back valuation procedure or any other
procedure that requires deduction of transportation costs.
Sec. 206.178 Processing allowances--general.
(a) Where the value of gas is determined pursuant to Sec. 206.173
of this subpart, a deduction shall be allowed for the reasonable actual
costs of processing.
(b) Processing costs must be allocated among the gas plant
products. A separate processing allowance must be determined for each
gas plant product and processing plant relationship. Natural gas
liquids (NGL's) shall be considered as one product.
(c) (1) Except as provided in paragraph (d)(2) of this section, the
processing allowance shall not be applied against the value of the
residue gas. Where there is no residue gas MMS may designate an
appropriate gas plant product against which no allowance may be
applied.
(2) Except as provided in paragraph (c)(3) of this section, the
processing allowance deduction on the basis of an individual product
shall not exceed 66\2/3\ percent of the value of each gas plant product
determined in accordance with Sec. 206.173 of this subpart (such value
to be reduced first for any transportation allowances related to
postprocessing transportation authorized by Sec. 206.176 of this
subpart).
(3) Upon request of a lessee, MMS may approve a processing
allowance in excess of the limitation prescribed by paragraph (c)(2) of
this section. The lessee must demonstrate that the processing costs
incurred in excess of the limitation prescribed in paragraph (c)(2) of
this section were reasonable, actual, and necessary. An application for
exception (using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation for
MMS to make a determination. Under no circumstances shall the value for
royalty purposes of any gas plant product be reduced to zero.
(d)(1) Except as provided in paragraph (d)(2) of this section, no
processing cost deduction shall be allowed for the costs of placing
lease products in marketable condition, including dehydration,
separation, compression, or storage, even if those functions are
performed off the lease or at a processing plant. Where gas is
processed for the removal of acid gases, commonly referred to as
``sweetening,'' no processing cost deduction shall be allowed for such
costs unless the acid gases removed are further processed into a gas
plant product. In such event, the lessee shall be eligible for a
processing allowance as determined in accordance with this subpart.
However, MMS will not grant any processing allowance for processing
lease production which is not royalty bearing.
(2) (i) If the lessee incurs extraordinary costs for processing gas
production from a gas production operation, it may apply to MMS for an
allowance for those costs which shall be in addition to any other
processing allowance to which the lessee is entitled pursuant to this
section. Such an allowance may be granted only if the lessee can
demonstrate that the costs are, by reference to standard industry
[[Page 5477]]
conditions and practice, extraordinary, unusual, or unconventional.
(ii) Prior MMS approval to continue an extraordinary processing
cost allowance is not required. However, to retain the authority to
deduct the allowance the lessee must report the deduction to MMS in a
form and manner prescribed by MMS.
(e) If MMS determines that a lessee has improperly determined a
processing allowance authorized by this subpart, then the lessee shall
pay any additional royalties, plus interest determined in accordance
with 30 CFR 218.54, or shall be entitled to a credit, without interest.
Sec. 206.179 Determination of processing allowances.
(a) Arm's-length processing contracts.
(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 pursuant to
that contract, except as provided in paragraphs (a)(1)(ii) and
(a)(1)(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 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 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.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the processor for the
processing. If the contract reflects more than the total consideration,
then MMS may require that the processing allowance be determined in
accordance with paragraph (b) of this section.
(iii) If MMS determines that the consideration paid pursuant to an
arm's-length processing contract does not reflect the reasonable value
of the processing because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee
and lessor, then MMS shall require that the processing allowance be
determined in accordance with paragraph (b) of this section. When MMS
determines that the value of the processing may be unreasonable, MMS
will notify the lessee and give the lessee an opportunity to provide
written information justifying the lessee's processing costs.
(2) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
can be determined from the contract, then the processing costs for each
gas plant product shall be determined in accordance with the contract.
No allowance may be taken for the costs of processing lease production
which is not royalty-bearing.
(3) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use its proposed allocation
procedure until MMS issues its determination. The lessee shall submit
all relevant data to support its proposal. The initial proposal must be
submitted by June 30, 1988 or within 3 months after the last day of the
month for which the lessee requests a processing allowance, whichever
is later (unless MMS approves a longer period). MMS shall then
determine the processing allowance based upon the lessee's proposal and
any additional information MMS deems necessary. No processing allowance
will be granted for the costs of processing lease production which is
not royalty bearing.
(4) Where the lessee's payments for processing pursuant to an
arm's-length contract are not based on a dollar per unit basis, the
lessee shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract.
(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 pursuant to a non-arm's-length or no
contract situation are subject to monitoring, review, audit, and
adjustment. 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 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) The processing allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for processing
during the reporting period, including operating and maintenance
expenses, overhead, and 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
depreciable investment in the processing plant multiplied by a rate of
return in accordance with paragraph (b)(2)(iv)(B) of this section.
Allowable capital costs are generally those costs for depreciable fixed
assets (including costs of delivery and installation of capital
equipment) which are an integral part of the processing plant.
(i) Allowable operating expenses include: Operations supervision
and engineering; operations labor; fuel; utilities; materials; ad
valorem property taxes; rent; supplies; and any other directly
allocable and attributable operating expense which the lessee can
document.
(ii) Allowable maintenance expenses include: maintenance of the
processing plant; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which
the lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the processing plant is an allowable expense. State
and Federal income taxes and severance taxes, including royalties, are
not allowable expenses.
(iv) A lessee may use either depreciation or a return on
depreciable capital investment. 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.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the processing plant services, or a
unit-of-production method. After an election is made, the lessee may
not change methods without MMS approval. A change in ownership of a
processing plant shall not alter the depreciation schedule established
by the original processor/lessee for purposes of the allowance
calculation. With or without a change in ownership, a processing plant
shall be depreciated
[[Page 5478]]
only once. Equipment shall not be depreciated below a reasonable
salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the processing plant multiplied by the
rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to plants first placed in service after
March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent processing
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) The processing allowance for each gas plant product shall be
determined based on the lessee's reasonable and actual cost of
processing the gas. Allocation of costs to each gas plant product shall
be based upon generally accepted accounting principles. The lessee may
not take an allowance for the costs of processing lease production
which is not royalty bearing.
(4) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(3) of this section. MMS may grant the exception only if:
(i) The lessee has arm's-length contracts for processing other gas
production at the same processing plant; and (ii) at least 50 percent
of the gas processed annually at the plant is processed pursuant to
arm's-length processing contracts; if MMS grants the exception, the
lessee shall use as its processing allowance the volume weighted
average prices charged other persons pursuant to arm's-length contracts
for processing at the same plant.
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) With the exception of those processing allowances specified in
paragraphs (c)(1)(v) and (c)(1)(vi) of this section, the lessee shall
submit page one of the initial Form MMS-4109 (and Schedule 1) prior to
the time, or at the same time as, the processing allowance determined
pursuant to an arm's-length contract is reported on Form MMS-2014,
Report of Sales and Royalty Remittance. A Form MMS-4109 received by the
end of the month that the Form MMS-2014 is due shall be considered to
be timely received.
(ii) The initial Form MMS-4109 shall be effective for a reporting
period beginning the month that the lessee is first authorized to
deduct a processing allowance and shall continue until the end of the
calendar year, or until the applicable contract or rate terminates or
is modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page 1 of Form MMS-4109 (and
Schedule 1) within 3 months after the end of the calendar year, or
after the applicable contract or rate terminates or is modified or
amended, whichever is earlier, unless MMS approves a longer period
(during which period the lessee shall continue to use the allowance
from the previous reporting period).
(iv) MMS may require that a lessee submit arm's-length processing
contracts and related documents. Documents shall be submitted within a
reasonable time, as determined by MMS.
(v) Processing allowances which are based on arm's-length contracts
and which are in effect at the time these regulations become effective
will be allowed to continue until such allowances terminate. For the
purpose 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 became effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract.
(i) With the exception of those processing allowances specified in
paragraphs (c)(2)(v), (c)(2)(vii) and (c)(2)(viii) of this section, the
lessee shall submit an initial Form MMS-4109 prior to, or at the same
time as, the processing allowance determined pursuant to a non-arm's-
length contract or no contract situation is reported on Form MMS-2014,
Report of Sales and Royalty Remittance. A Form MMS-4109 received by the
end of the month that the Form MMS-2014 is due shall be considered to
be timely received. The initial report may be based upon estimated
costs.
(ii) The initial Form MMS-4109 shall be effective for a reporting
period beginning the month that the lessee first is authorized to
deduct a processing allowance and shall continue until the end of the
calendar year, or until the processing pursuant to the non-arm's-length
contract or the no contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4109
containing the actual costs for the previous reporting period. If gas
processing is continuing, the lessee shall include on Form MMS-4109 its
estimated costs for the next calendar year. The estimated gas
processing allowance shall be based on the actual costs for the
previous period plus or minus any adjustments which are based on the
lessee's knowledge of decreases or increases which will affect the
allowance. Form MMS-4109 must be received by MMS within 3 months after
the end of the previous reporting period, unless MMS approves a longer
period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new processing plants, the lessee's initial Form MMS-4109
shall include estimates of the allowable gas processing costs for the
applicable period. Cost estimates shall be based upon the most recently
available operations data for the plant, or if such data are not
available, the lessee shall use estimates based upon industry data for
similar gas processing plants.
(v) Processing allowances based on non-arm's-length or no contract
situations which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate
for gas production from Indian leases. 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.
(vi) Upon request by MMS, the lessee shall submit all data used by
the lessee to prepare its Form MMS-4109. The data shall be provided
within a reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) 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.
(3) MMS may establish reporting dates for individual leases
different from those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
[[Page 5479]]
(4) Processing allowances must be reported as a separate line on
the Form MMS-2014, unless MMS approves a different reporting procedure.
(d) Interest assessments for incorrect or late reports and failure
to report.
(1) If a lessee deducts a processing allowance on its Form MMS-2014
without complying with the requirements of this section, the lessee
shall pay interest only on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) 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.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.54.
(e) Adjustments.
(1) If the actual gas processing allowance is less than the amount
the lessee has taken on Form MMS-2014 for each month during the
allowance form reporting period, the lessee shall be required to pay
additional royalties due plus interest computed pursuant to 30 CFR
218.54, retroactive to the first day of the first month the lessee is
authorized to deduct a processing allowance. If the actual processing
allowance is greater than the amount the lessee has taken on Form MMS-
2014 for each month during the allowance period, the lessee shall be
entitled to a credit, without interest.
(2) For lessees processing production from onshore Indian leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Other processing cost determinations. The provisions of this
section shall apply to determine processing costs when establishing
value using a net back valuation procedure or any other procedure that
requires deduction of processing costs.
21. Subpart F--Coal is amended by revising the heading to read as
follows:
Subpart F--Federal Coal
22. Section 206.250 is amended by removing paragraph (d) and
revising paragraphs (a) and (b) to read as follows:
Sec. 206.250 Purpose and scope.
(a) This subpart is applicable to all coal produced from Federal
coal leases. The purpose of this subpart is to establish the value of
coal produced for royalty purposes, of all coal from Federal leases
consistent with the mineral leasing laws, other applicable laws and
lease terms.
(b) If the specific provisions of any statute or settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or any coal lease subject to the
requirements of this subpart, are inconsistent with any regulation in
this subpart then the statute, lease provision, or settlement shall
govern to the extent of that inconsistency.
* * * * *
23. Section 206.251 is amended by adding in alphabetical order a
definition for Netting, revising the definitions Allowance, Audit,
Gross proceeds; Lease, Lessee, and removing the definitions BIA, Indian
allottee, and Indian Tribe to read as follows:
Sec. 206.251 Definitions.
* * * * *
Allowance means a deduction used in determining value for royalty
purposes. Coal washing allowance means an allowance for the reasonable,
actual costs incurred by the lessee for coal washing. Transportation
allowance means an allowance for the reasonable, actual costs incurred
by the lessee for moving coal to a point of sale or point of delivery
remote from both the lease and mine or wash plant.
* * * * *
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
* * * * *
Gross proceeds (for royalty payment purposes) means the total
monies and other consideration accruing to a coal lessee for the
production and disposition of the coal produced. Gross proceeds
includes, but is not limited to, payments to the lessee for certain
services such as crushing, sizing, screening, storing, mixing, loading,
treatment with substances including chemicals or oils, and other
preparation of the coal to the extent that the lessee is obligated to
perform them at no cost to the Federal Government. Gross proceeds, as
applied to coal, also includes but is not limited to reimbursements for
royalties, taxes or fees, and other reimbursements. Tax reimbursements
are part of the gross proceeds accruing to a lessee even though the
Federal royalty interest may be exempt from taxation. Monies and other
consideration, including the forms of consideration identified in this
paragraph, to which a lessee is contractually or legally entitled but
which it does not seek to collect through reasonable efforts are also
part of gross proceeds.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States for a
Federal coal resource under a mineral leasing law that authorizes
exploration for, development or extraction of, or removal of coal--or
the land covered by that authorization, whichever is required by the
context.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
* * * * *
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting
the deduction as a separate line item on the Form MMS-2014.
* * * * *
24. Section 206.253 is amended by revising paragraphs (a) and (c)
to read as follows:
Sec. 206.253 Coal subject to royalties--general provisions.
(a) All coal (except coal unavoidably lost as determined by BLM
under 43 CFR part 3400) from a Federal lease subject to this part is
subject to royalty. This includes coal used, sold, or otherwise
disposed of by the lessee on or off the lease.
* * * * *
(c) If waste piles or slurry ponds are reworked to recover coal,
the lessee shall pay royalty at the rate specified in the lease at the
time the recovered coal is used, sold, or otherwise finally disposed
of. The royalty rate shall be that rate applicable to the production
method used to initially mine coal in the waste pile or slurry pond;
i.e., underground mining method or surface mining method. Coal in waste
pits or slurry ponds initially mined from Federal leases shall be
allocated to such leases regardless of whether it is stored on Federal
lands. The lessee shall maintain accurate records to determine to which
individual Federal lease coal in the waste pit or slurry pond should be
allocated. However, nothing in this section requires payment of a
royalty on
[[Page 5480]]
coal for which a royalty has already been paid.
* * * * *
25. Section 206.255 is amended by revising paragraphs (a) and (b)
to read as follows:
Sec. 206.255 Point of royalty determination.
(a) For all leases subject to this subpart, royalty shall be
computed on the basis of the quantity and quality of Federal coal in
marketable condition measured at the point of royalty measurement as
determined jointly by BLM and MMS.
(b) Coal produced and added to stockpiles or inventory does not
require payment of royalty until such coal is later used, sold, or
otherwise finally disposed of. MMS may ask BLM to increase the lease
bond to protect the lessor's interest when BLM determines that
stockpiles or inventory become excessive so as to increase the risk of
degradation of the resource.
* * * * *
26. Section 206.256 is amended by revising paragraph (a) to read as
follows:
Sec. 206.256 Valuation standards for cents-per-ton leases.
(a) This section is applicable to coal leases on Federal lands
which provide for the determination of royalty on a cents-per-ton (or
other quantity) basis.
* * * * *
27. Section 206.257 is amended by revising paragraphs (a), (d)(2),
(h), (j), and (k) to read as follows:
Sec. 206.257 Valuation standards for ad valorem leases.
(a) This section is applicable to coal leases on Federal lands
which provide for the determination of royalty as a percentage of the
amount of value of coal (ad valorem). The value for royalty purposes of
coal from such leases shall be the value of coal determined under this
section, less applicable coal washing allowances and transportation
allowances determined under Secs. 206.258 through 206.262 of this
subpart, or any allowance authorized by Sec. 206.265 of this subpart.
The royalty due shall be equal to the value for royalty purposes
multiplied by the royalty rate in the lease.
* * * * *
(d) * * *
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Inspector General of
the Department of the Interior or other persons authorized to receive
such information, arm's-length sales value and sales quantity data for
like-quality coal sold, purchased, or otherwise obtained by the lessee
from the area.
* * * * *
(h) The lessee is required to place coal in marketable condition at
no cost to the Federal Government. Where the value established under
this section is determined by a lessee's gross proceeds, that value
shall be increased to the extent that the gross proceeds has been
reduced because the purchaser, or any other person, is providing
certain services, the cost of which ordinarily is the responsibility of
the lessee to place the coal in marketable condition.
* * * * *
(j) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
(k) Certain information submitted to MMS to support valuation
proposals, including transportation, coal washing, or other allowances
under Sec. 206.265 of this subpart, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 522. Any data specified by the Act
to be privileged, confidential, or otherwise exempt shall be maintained
in a confidential manner in accordance with applicable law and
regulations. All requests for information about determinations made
under this Part are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
Part 2.
28. Section 206.258 is amended by revising paragraph (c) to read as
follows:
Sec. 206.258 Washing allowances--general.
* * * * *
(c) Lessees shall not disproportionately allocate washing costs to
Federal leases.
* * * * *
29. Section 206.259 is amended by removing paragraphs (c)(1)(ii),
(c)(1)(iii), (c)(1)(v), (c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v),
(c)(2)(vii), (c)(3), and (c)(4); redesignating paragraphs (c)(1)(iv),
(c)(2)(iv), and (c)(2)(vi) as (c)(1)(ii), (c)(2)(ii), and (c)(2)(iii)
respectively; and by revising paragraphs (a)(1), (b)(1), (b)(2)(v),
(c)(1)(i), (c)(2)(i), newly designated (c)(2)(ii), newly designated
(c)(2)(iii), (d), and (e)(1) to read as follows:
Sec. 206.259 Determination of washing allowances.
(a) Arm's-length contracts.
(1) For washing costs incurred by a lessee under an arm's-length
contract, the washing allowance shall be the reasonable actual costs
incurred by the lessee for washing the coal under that contract,
subject to monitoring, review, audit, and possible future adjustment.
The lessee shall have the burden of demonstrating that its contract is
arm's-length. MMS' prior approval is not required before a lessee may
deduct costs incurred under an arm's-length contract. The lessee must
claim a washing allowance by reporting it as a separate line entry on
the Form MMS-2014.
* * * * *
(b) Non-arm's-length or no contract.
(1) If a lessee has a non-arm's-length contract or has no contract,
including those situations where the lessee performs washing for
itself, the washing allowance will be based upon the lessee's
reasonable actual costs. All washing allowances deducted under a non-
arm's-length or no contract situation are subject to monitoring,
review, audit, and possible future adjustment. The lessee must claim a
washing allowance by reporting it as a separate line entry on the Form
MMS-2014. When necessary or appropriate, MMS may direct a lessee to
modify its estimated or actual washing allowance.
(2) * * *
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
* * * * *
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) The lessee must notify MMS of an allowance based on incurred
costs by using a separate line entry on the Form MMS-2014.
(ii) * * *
(2) Non-arm's-length or no contract.
(i) The lessee must notify MMS of an allowance based on the
incurred costs by using a separate line entry on the Form MMS-2014.
(ii) For new washing facilities or arrangements, the lessee's
initial washing deduction shall include estimates of the allowable coal
washing costs for the applicable period. Cost estimates shall be based
upon the most recently available operations data for the processing
system or, if such data are not available, the lessee shall use
estimates based upon industry data for similar washing systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the
[[Page 5481]]
allowance deduction. The data shall be provided within a reasonable
period of time, as determined by MMS.
(d) Interest and assessments.
(1) If a lessee nets a washing allowance on the Form MMS-2014, then
the lessee shall be assessed an amount up to 10 percent of the
allowance netted not to exceed $250 per lease selling arrangement per
sales period.
(2) If a lessee erroneously reports a washing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.202.
(e) Adjustments. (1) If the actual coal washing allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall pay additional
royalties due plus interest computed under 30 CFR 218.202 from the date
when the lessee took the deduction to the date the lessee repays the
difference to MMS. If the actual washing allowance is greater than the
amount the lessee has taken on Form MMS-2014 for each month during the
allowance reporting period, the lessee shall be entitled to a credit
without interest.
* * * * *
30. Section 206.261 is amended by revising paragraphs (a)(1),
(a)(2), and (e) to read as follows:
Sec. 206.261 Transportation allowances--general.
(a) * * *
(1) Transport the coal from a Federal lease to a sales point which
is remote from both the lease and mine; or
(2) Transport the coal from a Federal lease to a wash plant when
that plant is remote from both the lease and mine and, if applicable,
from the wash plant to a remote sales point. In-mine transportation
costs shall not be included in the transportation allowance.
* * * * *
(e) Lessees shall not disproportionately allocate transportation
costs to Federal leases.
31. Section 206.262 is amended by removing paragraphs (c)(1)(ii),
(c)(1)(iii), (c)(1)(v), (c)(1)(vi), (c)(2)(ii), (c)(2)(iii), (c)(2)(v),
(c)(2)(vii), (c)(3) and (c)(4); redesignating paragraphs (c)(1)(iv),
(c)(2)(iv), (c)(2)(vi), and (c)(2)(viii) as paragraphs (c)(1)(ii),
(c)(2)(ii), (c)(2)(iii), and (c)(2)(v) respectively; and revising
paragraphs (a)(1), (b)(1), (b)(2)(v), (b)(3), (c)(1)(i), (c)(2)(i),
newly designated (c)(2)(ii), newly designated (c)(2)(iii), (d) and (e)
to read as follows:
Sec. 206.262 Determination of transportation allowances.
(a) Arm's-length contracts.
(1) 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
coal under that contract, subject to monitoring, review, audit, and
possible future adjustment. The lessee shall have the burden of
demonstrating that its contract is arm's-length. The lessee must claim
a transportation allowance by reporting it as a separate line entry on
the Form MMS-2014.
* * * * *
(b) Non-arm's-length or no contract.
(1) If a lessee has a non-arm's-length 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. All transportation allowances
deducted under a non-arm's-length or no contract situation are subject
to monitoring, review, audit, and possible future adjustment. The
lessee must claim a transportation allowance by reporting it as a
separate line entry on the Form MMS-2014. When necessary or
appropriate, MMS may direct a lessee to modify its estimated or actual
transportation allowance deduction.
(2) * * *
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
(3) A lessee may apply to MMS for exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1) and
(b)(2) of this section. MMS will grant the exception only if the lessee
has a rate for the transportation approved by a Federal agency or by a
State regulatory agency (for Federal leases). MMS shall deny the
exception request if it determines that the rate is excessive as
compared to arm's-length transportation charges by systems, owned by
the lessee or others, providing similar transportation services in that
area. If there are no arm's-length transportation charges, MMS shall
deny the exception request if:
(i) No Federal or State regulatory agency costs analysis exists and
the Federal or State regulatory agency, as applicable, has declined to
investigate under MMS timely objections upon filing; and
(ii) The rate significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) The lessee must notify MMS of an allowance based on incurred
costs by using a separate line entry on the Form MMS-2014.
(ii) * * *
(2) Non-arm's-length or no contract.
(i) The lessee must notify MMS of an allowance based on the
incurred costs by using a separate line entry on Form MMS-2014.
(ii) For new transportation facilities or arrangements, the
lessee's initial deduction shall include estimates of the allowable
coal transportation costs for the applicable period. Cost estimates
shall be based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) * * *
(d) Interest and assessments.
(1) If a lessee nets a transportation allowance on Form MMS-2014,
the lessee shall be assessed an amount of up to 10 percent of the
allowance netted not to exceed $250 per lease selling arrangement per
sales period.
(2) * * *
(3) * * *
(e) Adjustments.
(1) If the actual coal transportation allowance is less than the
amount the lessee has taken on Form MMS-2014 for each month during the
allowance reporting period, the lessee shall pay additional royalties
due plus interest computed under 30 CFR 218.202 from the date when the
lessee took the deduction to the date the lessee repays the difference
to MMS. If the actual transportation allowance is greater than amount
the lessee has taken on Form MMS-2014 for each month during the
allowance reporting period, the lessee shall be entitled to a credit
without interest.
* * * * *
32. A new Subpart J is added to read as follows:
Subpart J--Indian Coal
Sec.
206.450 Purpose and scope.
206.451 Definitions.
[[Page 5482]]
206.452 Coal subject to royalties--general provisions.
206.453 Quality and quantity measurement standards for reporting
and paying royalties.
206.454 Point of royalty determination.
206.455 Valuation standards for cents-per-ton leases.
206.456 Valuation standards for ad valorem leases.
206.457 Washing allowances--general.
206.458 Determination of washing allowances.
206.459 Allocation of washed coal.
206.460 Transportation allowances--general.
206.461 Determination of transportation allowances.
206.462 Contract submission.
206.463 In-situ and surface gasification and liquefaction
operations.
206.464 Value enhancement of marketable coal.
Subpart J--Indian Coal
Sec. 206.450 Purpose and scope.
(a) This subpart prescribes the procedures to establish the value,
for royalty purposes, of all coal from Indian Tribal and allotted
leases (except leases on the Osage Indian Reservation, Osage County,
Oklahoma).
(b) If the specific provisions of any statute, treaty, or
settlement agreement between the Indian lessor and a lessee resulting
from administrative or judicial litigation, or any coal lease subject
to the requirements of this subpart, are inconsistent with any
regulation in this subpart, then the statute, treaty, lease provision,
or settlement shall govern to the extent of that inconsistency.
(c) All royalty payments are subject to later audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian coal leases are discharged in accordance with
the requirements of the governing mineral leasing laws, treaties, and
lease terms.
Sec. 206.451 Definitions.
Ad valorem lease means a lease where the royalty due to the lessor
is based upon a percentage of the amount or value of the coal.
Allowance means an approved, or an MMS-initially accepted deduction
in determining value for royalty purposes. Coal washing allowance means
an allowance for the reasonable, actual costs incurred by the lessee
for coal washing, or an approved or MMS-initially accepted deduction
for the costs of washing coal, determined pursuant to this subpart.
Transportation allowance means an allowance for the reasonable, actual
costs incurred by the lessee for moving coal to a point of sale or
point of delivery remote from both the lease and mine or wash plant, or
an approved MMS-initially accepted deduction for costs of such
transportation, determined pursuant to this subpart.
Area means a geographic region in which coal has similar quality
and economic characteristics. Area boundaries are not officially
designated and the areas are not necessarily named.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated
persons with opposing economic interests regarding that contract. For
purposes of this subpart, two persons are affiliated if one person
controls, is controlled by, or is under common control with another
person. For purposes of this subpart, based on the instruments of
ownership of the voting securities of an entity, or based on other
forms of ownership: ownership in excess of 50 percent constitutes
control; ownership of 10 through 50 percent creates a presumption of
control; and ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. MMS may require the lessee to certify ownership control. To
be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month, as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Coal means coal of all ranks from lignite through anthracite.
Coal washing means any treatment to remove impurities from coal.
Coal washing may include, but is not limited to, operations such as
flotation, air, water, or heavy media separation; drying; and related
handling (or combination thereof).
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by
law that with due consideration creates an obligation.
Gross proceeds (for royalty payment purposes) means the total
monies and other consideration accruing to a coal lessee for the
production and disposition of the coal produced. Gross proceeds
includes, but is not limited to, payments to the lessee for certain
services such as crushing, sizing, screening, storing, mixing, loading,
treatment with substances including chemicals or oils, and other
preparation of the coal to the extent that the lessee is obligated to
perform them at no cost to the Indian lessor. Gross proceeds, as
applied to coal, also includes but is not limited to reimbursements for
royalties, taxes or fees, and other reimbursements. Tax reimbursements
are part of the gross proceeds accruing to a lessee even though the
Indian royalty interest may be exempt from taxation. Monies and other
consideration, including the forms of consideration identified in this
paragraph, to which a lessee is contractually or legally entitled but
which it does not seek to collect through reasonable efforts are also
part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject
to Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States for an
Indian coal resource under a mineral leasing law that authorizes
exploration for, development or extraction of, or removal of coal--or
the land covered by that authorization, whichever is required by the
context.
Lessee means any person to whom the Indian Tribe or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease.
This includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality coal means coal has similar chemical and physical
characteristics.
Marketable condition means coal that is sufficiently free from
impurities and otherwise in a condition that it will be
[[Page 5483]]
accepted by a purchaser under a sales contract typical for that area.
Mine means an underground or surface excavation or series of
excavations and the surface or underground support facilities that
contribute directly or indirectly to mining, production, preparation,
and handling of lease products.
MMS means the Minerals Management Service of the Department of the
Interior.
Net-back method means a method for calculating market value of coal
at the lease or mine. Under this method, costs of transportation,
washing, handling, etc., are deducted from the ultimate proceeds
received for the coal at the first point at which reasonable values for
the coal may be determined by a sale pursuant to an arm's-length
contract or by comparison to other sales of coal, to ascertain value at
the mine.
Net output means the quantity of washed coal that a washing plant
produces.
Person means by individual, firm, corporation, association,
partnership, consortium, or joint venture.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of coal are made to a purchaser.
Spot market price means the price received under any sales
transaction when planned or actual deliveries span a short period of
time, usually not exceeding one year.
Sec. 206.452 Coal subject to royalties--general provisions.
(a) All coal (except coal unavoidably lost as determined by BLM
pursuant to 43 CFR Group 3400) from an Indian lease subject to this
part is subject to royalty. This includes coal used, sold, or otherwise
disposed of by the lessee on or off the lease.
(b) If a lessee receives compensation for unavoidably lost coal
through insurance coverage or other arrangements, royalties at the rate
specified in the lease are to be paid on the amount of compensation
received for the coal. No royalty is due on insurance compensation
received by the lessee for other losses.
(c) If waste piles or slurry ponds are reworked to recover coal,
the lessee shall pay royalty at the rate specified in the lease at the
time the recovered coal is used, sold, or otherwise finally disposed
of. The royalty rate shall be that rate applicable to the production
method used to initially mine coal in the waste pile or slurry pond;
i.e., underground mining method or surface mining method. Coal in waste
pits or slurry ponds initially mined from Indian leases shall be
allocated to such leases regardless of whether it is stored on Indian
lands. The lessee shall maintain accurate records to determine to which
individual Indian lease coal in the waste pit or slurry pond should be
allocated. However, nothing in this section requires payment of a
royalty on coal for which a royalty has already been paid.
Sec. 206.453 Quality and quantity measurement standards for reporting
and paying royalties.
(a) For leases subject to Sec. 206.456 of this subpart, the quality
of coal on which royalty is due shall be reported on the basis of
percent sulfur, percent ash, and number of British thermal units (Btu)
per pound of coal. Coal quality determinations shall be made at
intervals prescribed in the lessee's sales contract. If there is no
contract, or if the contract does not specify the intervals of coal
quality determination, the lessee shall propose a quality test schedule
to MMS. In no case, however, shall quality tests be performed less than
quarterly using standard industry-recognized testing methods. Coal
quality information shall be reported on the appropriate forms required
under 30 CFR Part 216.
(b) For all leases subject to this subpart, the quantity of coal on
which royalty is due shall be measured in short tons (of 2,000 pounds
each) by methods prescribed by the BLM. Coal quantity information shall
be reported on appropriate forms required under 30 CFR Part 216 and on
the Report of Sales and Royalty Remittance, Form MMS-2014, as required
under 30 CFR Part 210.
Sec. 206.454 Point of royalty determination.
(a) For all leases subject to this subpart, royalty shall be
computed on the basis of the quantity and quality of Indian coal in
marketable condition measured at the point of royalty measurement as
determined jointly by BLM and MMS.
(b) Coal produced and added to stockpiles or inventory does not
require payment of royalty until such coal is later used, sold, or
otherwise finally disposed of. MMS may ask BLM or BIA to increase the
lease bond to protect the lessor's interest when BLM determines that
stockpiles or inventory become excessive so as to increase the risk of
degradation of the resource.
(c) The lessee shall pay royalty at a rate specified in the lease
at the time the coal is used, sold, or otherwise finally disposed of,
unless otherwise provided for at Sec. 206.455(d) of this subpart.
Sec. 206.455 Valuation standards for cents-per-ton leases.
(a) This section is applicable to coal leases on Indian Tribal and
allotted Indian lands (except leases on the Osage Indian Reservation,
Osage County, Oklahoma) which provide for the determination of royalty
on a cents-per-ton (or other quantity) basis.
(b) The royalty for coal from leases subject to this section shall
be based on the dollar rate per ton prescribed in the lease. That
dollar rate shall be applicable to the actual quantity of coal used,
sold, or otherwise finally disposed of, including coal which is
avoidably lost as determined by BLM pursuant to 43 CFR Part 3400.
(c) For leases subject to this section, there shall be no
allowances for transportation, removal of impurities, coal washing, or
any other processing or preparation of the coal.
(d) When a coal lease is readjusted pursuant to 43 CFR Part 3400
and the royalty valuation method changes from a cents-per-ton basis to
an ad valorem basis, coal which is produced prior to the effective date
of readjustment and sold or used within 30 days of the effective date
of readjustment shall be valued pursuant to this section. All coal that
is not used, sold, or otherwise finally disposed of within 30 days
after the effective date of readjustment shall be valued pursuant to
the provisions of Sec. 206.456 of this subpart, and royalties shall be
paid at the royalty rate specified in the readjusted lease.
Sec. 206.456 Valuation standards for ad valorem leases.
(a) This section is applicable to coal leases on Indian Tribal and
allotted Indian lands (except leases on the Osage Indian Reservation,
Osage County, Oklahoma) which provide for the determination of royalty
as a percentage of the amount of value of coal (ad valorem). The value
for royalty purposes of coal from such leases shall be the value of
coal determined pursuant to this section, less applicable coal washing
allowances and transportation allowances determined pursuant to
Sec. 206.457 through Sec. 206.461 of this subpart, or any allowance
authorized by Sec. 206.464 of this subpart. The royalty due shall be
equal to the value for royalty purposes multiplied by the royalty rate
in the lease.
(b) (1) The value of coal that is sold pursuant to an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(2), (b)(3), and (b)(5) of this section. The
lessee shall have the burden of demonstrating that its contract is
arm's-length. The value
[[Page 5484]]
which the lessee reports, for royalty purposes, is subject to
monitoring, review, and audit.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the coal
produced. If the contract does not reflect the total consideration,
then MMS may require that the coal sold pursuant to that contract be
valued in accordance with paragraph (c) of this section. Value may not
be based on less than the gross proceeds accruing to the lessee for the
coal production, including the additional consideration.
(3) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then MMS shall require that the coal
production be valued pursuant to paragraphs (c)(2)(ii), (c)(2)(iii),
(c)(2)(iv), or (c)(2)(v) of this section, and in accordance with the
notification requirements of paragraph (d)(3) of this section. When MMS
determines that the value may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written
information justifying the lessee's reported coal value.
(4) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the coal production.
(5) The value of production for royalty purposes shall not include
payments received by the lessee pursuant to a contract which the lessee
demonstrates, to MMS' satisfaction, were not part of the total
consideration paid for the purchase of coal production.
(c) (1) The value of coal from leases subject to this section and
which is not sold pursuant to an arm's-length contract shall be
determined in accordance with this section.
(2) If the value of the coal cannot be determined pursuant to
paragraph (b) of this section, then the value shall be determined
through application of other valuation criteria. The criteria shall be
considered in the following order, and the value shall be based upon
the first applicable criterion:
(i) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract (or other disposition of produced
coal by other than an arm's-length contract), provided that those gross
proceeds are within the range of the gross proceeds derived from, or
paid under, comparable arm's-length contracts between buyers and
sellers neither of whom is affiliated with the lessee for sales,
purchases, or other dispositions of like-quality coal produced in the
area. In evaluating the comparability of arm's-length contracts for the
purposes of these regulations, the following factors shall be
considered: price, time of execution, duration, market or markets
served, terms, quality of coal, quantity, and such other factors as may
be appropriate to reflect the value of the coal;
(ii) Prices reported for that coal to a public utility commission;
(iii) Prices reported for that coal to the Energy Information
Administration of the Department of Energy;
(iv) Other relevant matters including, but not limited to,
published or publicly available spot market prices, or information
submitted by the lessee concerning circumstances unique to a particular
lease operation or the salability of certain types of coal;
(v) If a reasonable value cannot be determined using paragraphs
(c)(2)(i), (c)(2)(ii), (c)(2)(iii), or (c)(2)(iv) of this section, then
a net-back method or any other reasonable method shall be used to
determine value.
(3) When the value of coal is determined pursuant to paragraph
(c)(2) of this section, that value determination shall be consistent
with the provisions contained in paragraph (b)(5) of this section.
(d) (1) Where the value is determined pursuant to paragraph (c) of
this section, that value does not require MMS' prior approval. However,
the lessee shall retain all data relevant to the determination of
royalty value. Such data shall be subject to review and audit, and MMS
will direct a lessee to use a different value if it determines that the
reported value is inconsistent with the requirements of these
regulations.
(2) An Indian lessee will make available upon request to the
authorized MMS or Indian representatives, or to the Inspector General
of the Department of the Interior or other persons authorized to
receive such information, arm's-length sales and sales quantity data
for like-quality coal sold, purchased, or otherwise obtained by the
lessee from the area.
(3) A lessee shall notify MMS if it has determined value pursuant
to paragraphs (c)(2)(ii), (c)(2)(iii), (c)(2)(iv), or (c)(2)(v) of this
section. The notification shall be by letter to the Associate Director
for Royalty Management or his/her designee. The letter shall identify
the valuation method to be used and contain a brief description of the
procedure to be followed. The notification required by this section is
a one-time notification due no later than the month the lessee first
reports royalties on the Form MMS-2014 using a valuation method
authorized by paragraphs (c)(2)(ii), (c)(2)(iii), (c)(2)(iv), or
(c)(2)(v) of this section, and each time there is a change in a method
under paragraphs (c)(2)(iv) or (c)(2)(v) of this section.
(e) If MMS determines that a lessee has not properly determined
value, the lessee shall be liable for the difference, if any, between
royalty payments made based upon the value it has used and the royalty
payments that are due based upon the value established by MMS. The
lessee shall also be liable for interest computed pursuant to 30 CFR
218.202. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(f) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method,
and may use that method in determining value for royalty purposes until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. MMS shall expeditiously determine the value
based upon the lessee's proposal and any additional information MMS
deems necessary. That determination shall remain effective for the
period stated therein. After MMS issues its determination, the lessee
shall make the adjustments in accordance with paragraph (e) of this
section.
(g) Notwithstanding any other provisions of this section, under no
circumstances shall the value for royalty purposes be less than the
gross proceeds accruing to the lessee for the disposition of produced
coal less applicable provisions of paragraph (b)(5) of this section and
less applicable allowances determined pursuant to Sec. 206.457 through
Sec. 206.461 and Sec. 206.464 of this subpart.
(h) The lessee is required to place coal in marketable condition at
no cost to the Indian lessor. Where the value established pursuant to
this section is determined by a lessee's gross proceeds, that value
shall be increased to the extent that the gross proceeds has been
reduced because the purchaser, or any other person, is providing
certain services, the cost of which ordinarily is the responsibility of
the lessee to place the coal in marketable condition.
(i) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee
[[Page 5485]]
fails to take proper or timely action to receive prices or benefits to
which it is entitled, it must pay royalty at a value based upon that
obtainable price or benefit. Contract revisions or amendments shall be
in writing and signed by all parties to an arm's-length contract, and
may be retroactively applied to value for royalty purposes for a period
not to exceed two years, unless MMS approves a longer period. If the
lessee makes timely application for a price increase allowed under its
contract but the purchaser refuses, and the lessee takes reasonable
measures, which are documented, to force purchaser compliance, the
lessee will owe no additional royalties unless or until monies or
consideration resulting from the price increase are received. This
paragraph shall not be construed to permit a lessee to avoid its
royalty payment obligation in situations where a purchaser fails to
pay, in whole or in part or timely, for a quantity of coal.
(j) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Indian Tribes or
allottees until the audit period is formally closed.
(k) Certain information submitted to MMS to support valuation
proposals, including transportation, coal washing, or other allowances
pursuant to Sec. 206.457 through 206.461 and Sec. 206.464 of this
subpart, is exempted from disclosure by the Freedom of Information Act,
5 U.S.C. 522. Any data specified by the Act to be privileged,
confidential, or otherwise exempt shall be maintained in a confidential
manner in accordance with applicable law and regulations. All requests
for information about determinations made under this Part are to be
submitted in accordance with the Freedom of Information Act regulation
of the Department of the Interior, 43 CFR Part 2. Nothing in this
section is intended to limit or diminish in any manner whatsoever the
right of an Indian lessor to obtain any and all information as such
lessor may be lawfully entitled from MMS or such lessor's lessee
directly under the terms of the lease or applicable law.
Sec. 206.457 Washing allowances--general.
(a) For ad valorem leases subject to Sec. 206.456 of this subpart,
MMS shall, as authorized by this section, allow a deduction in
determining value for royalty purposes for the reasonable, actual costs
incurred to wash coal, unless the value determined pursuant to
Sec. 206.456 of this subpart was based upon like-quality unwashed coal.
Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.461 of this subpart
reduce the value for royalty purposes to zero.
(b) If MMS determines that a lessee has improperly determined a
washing allowance authorized by this section, then the lessee shall be
liable for any additional royalties, plus interest determined in
accordance with 30 CFR 218.202, or shall be entitled to a credit,
without interest.
(c) Lessees shall not disproportionately allocate washing costs to
Indian leases.
(d) No cost normally associated with mining operations and which
are necessary for placing coal in marketable condition shall be allowed
as a cost of washing.
(e) Coal washing costs shall only be recognized as allowances when
the washed coal is sold and royalties are reported and paid.
Sec. 206.458 Determination of washing allowances.
(a) Arm's-length contracts.
(1) For washing costs incurred by a lessee pursuant to an arm's-
length contract, the washing allowance shall be the reasonable actual
costs incurred by the lessee for washing the coal under that contract,
subject to monitoring, review, audit, and possible future adjustment.
MMS' prior approval is not required before a lessee may deduct costs
incurred under an arm's-length contract. However, before any deduction
may be taken, the lessee must submit a completed page one of Form MMS-
4292, Coal Washing Allowance Report, in accordance with paragraph
(c)(1) of this section. A washing 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-4292 is filed with MMS, unless MMS
approves a longer period upon a showing of good cause by the lessee.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the washer for the
washing. If the contract reflects more than the total consideration
paid, then MMS may require that the washing allowance be determined in
accordance with paragraph (b) of this section.
(3) If MMS determines that the consideration paid pursuant to an
arm's-length washing contract does not reflect the reasonable value of
the washing because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee
and the lessor, then MMS shall require that the washing allowance be
determined in accordance with paragraph (b) of this section. When MMS
determines that the value of the washing may be unreasonable, MMS will
notify the lessee and give the lessee an opportunity to provide written
information justifying the lessee's washing costs.
(4) Where the lessee's payments for washing under an arm's-length
contract are not based on a dollar-per-unit basis, the lessee shall
convert whatever consideration is paid to a dollar value equivalent.
Washing allowances shall be expressed as a cost per ton of coal washed.
(b) Non-arm's-length or no contract.
(1) If a lessee has a non-arm's-length contract or has no contract,
including those situations where the lessee performs washing for
itself, the washing allowance will be based upon the lessee's
reasonable actual costs. All washing allowances deducted under a non-
arm's-length or no contract situation are subject to monitoring,
review, audit, and possible future adjustment. Prior MMS approval of
washing allowances is not required for non-arm's-length or no contract
situations. However, before any estimated or actual deduction may be
taken, the lessee must submit a completed Form MMS-4292 in accordance
with paragraph (c)(2) of this section. A washing 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-4292 is filed with MMS, unless
MMS approves a longer period upon a showing of good cause by the
lessee. 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 washing allowance.
(2) The washing allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for washing
during the reported period, including operating and maintenance
expenses, overhead, and 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 depreciable
investment in the wash plant multiplied by the rate of return in
accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and
[[Page 5486]]
installation of capital equipment) which are an integral part of the
wash plant.
(i) Allowable operating expenses include: Operations supervision
and engineering; operations labor; fuel; utilities; materials; ad
valorem property taxes; rent; supplies; and any other directly
allocable and attributable operating expense which the lessee can
document.
(ii) Allowable maintenance expenses include: Maintenance of the
wash plant; maintenance of equipment; maintenance labor; and other
directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the wash plant is an allowable expense. State and
Federal income taxes and severance taxes, including royalties, are not
allowable expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or (b)(2)(iv)
(B) of this section. After a lessee has elected to use either method
for a wash plant, the lessee may not later elect to change to the other
alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the wash plant services, whichever is
appropriate, or a unit of production method. After an election is made,
the lessee may not change methods without MMS approval. A change in
ownership of a wash plant shall not alter the depreciation schedule
established by the original operator/lessee for purposes of the
allowance calculation. With or without a change in ownership, a wash
plant shall be depreciated only once. Equipment shall not be
depreciated below a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
capital investment in the wash plant multiplied by the rate of return
determined pursuant to paragraph (b)(2)(v) of this section. No
allowance shall be provided for depreciation. This alternative shall
apply only to plants first placed in service or acquired after March 1,
1989.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent washing
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) The washing allowance for coal shall be determined based on the
lessee's reasonable and actual cost of washing the coal. The lessee may
not take an allowance for the costs of washing lease production that is
not royalty bearing.
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) With the exception of those washing allowances specified in
paragraphs (c)(1)(v) and (c)(1)(vi) of this section, the lessee shall
submit page one of the initial Form MMS-4292 prior to, or at the same
time, as the washing allowance determined pursuant to an arm's-length
contract is reported on Form MMS-2014, Report of Sales and Royalty
Remittance. A Form MMS-4292 received by the end of the month that the
Form MMS-2014 is due shall be considered to be received timely.
(ii) The initial Form MMS-4292 shall be effective for a reporting
period beginning the month that the lessee is first authorized to
deduct a washing allowance and shall continue until the end of the
calendar year, or until the applicable contract or rate terminates or
is modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4292 within
3 months after the end of the calendar year, or after the applicable
contract or rate terminates or is modified or amended, whichever is
earlier, unless MMS approves a longer period (during which period the
lessee shall continue to use the allowance from the previous reporting
period).
(iv) MMS may require that a lessee submit arm's-length washing
contracts and related documents. Documents shall be submitted within a
reasonable time, as determined by MMS.
(v) Washing allowances which are based on arm's-length contracts
and 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.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(2) Non-arm's-length or no contract.
(i) With the exception of those washing allowances specified in
paragraphs (c)(2)(v) and (c)(2)(vii) of this section, the lessee shall
submit an initial Form MMS-4292 prior to, or at the same time as, the
washing allowance determined pursuant to a non-arm's-length contract or
no contract situation is reported on Form MMS-2014, Report of Sales and
Royalty Remittance. A Form MMS-4292 received by the end of the month
that the Form MMS-2014 is due shall be considered to be timely
received. The initial reporting may be based on estimated costs.
(ii) The initial Form MMS-4292 shall be effective for a reporting
period beginning the month that the lessee first is authorized to
deduct a washing allowance and shall continue until the end of the
calendar year, or until the washing under the non-arm's-length contract
or the no contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4292
containing the actual costs for the previous reporting period. If coal
washing is continuing, the lessee shall include on Form MMS-4292 its
estimated costs for the next calendar year. The estimated coal washing
allowance shall be based on the actual costs for the previous period
plus or minus any adjustments which are based on the lessee's knowledge
of decreases or increases which will affect the allowance. Form MMS-
4292 must be received by MMS within 3 months after the end of the
previous reporting period, unless MMS approves a longer period (during
which period the lessee shall continue to use the allowance from the
previous reporting period).
(iv) For new wash plants, the lessee's initial Form MMS-4292 shall
include estimates of the allowable coal washing costs for the
applicable period. Cost estimates shall be based upon the most recently
available operations data for the plant, or if such data are not
available, the lessee shall use estimates based upon industry data for
similar coal wash plants.
(v) Washing allowances based on non-arm's-length or no contract
situations 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.
(vi) Upon request by MMS, the lessee shall submit all data used by
the lessee to prepare its Forms MMS-4292. The data shall be provided
within a
[[Page 5487]]
reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(3) MMS may establish coal washing allowance reporting dates for
individual leases different from those specified in this subpart in
order to provide more effective administration. Lessees will be
notified of any change in their reporting period.
(4) Washing allowances must be reported as a separate line on the
Form MMS-2014, unless MMS approves a different reporting procedure.
(d) Interest assessments for incorrect or late reports and failure
to report.
(1) If a lessee deducts a washing allowance on its Form MMS-2014
without complying with the requirements of this section, the lessee
shall be liable for interest on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a washing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.202.
(e) Adjustments.
(1) If the actual coal washing allowance is less than the amount
the lessee has taken on Form MMS-2014 for each month during the
allowance form reporting period, the lessee shall be required to pay
additional royalties due plus interest computed pursuant to 30 CFR
218.202, retroactive to the first month the lessee is authorized to
deduct a washing allowance. If the actual washing allowance is greater
than the amount the lessee has estimated and taken during the reporting
period, the lessee shall be entitled to a credit, without interest.
(2) The lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with
instructions provided by MMS.
(f) Other washing cost determinations. The provisions of this
section shall apply to determine washing costs when establishing value
using a net-back valuation procedure or any other procedure that
requires deduction of washing costs.
Sec. 206.459 Allocation of washed coal.
(a) When coal is subjected to washing, the washed coal must be
allocated to the leases from which it was extracted.
(b) When the net output of coal from a washing plant is derived
from coal obtained from only one lease, the quantity of washed coal
allocable to the lease will be based on the net output of the washing
plant.
(c) When the net output of coal from a washing plant is derived
from coal obtained from more than one lease, unless determined
otherwise by BLM, the quantity of net output of washed coal allocable
to each lease will be based on the ratio of measured quantities of coal
delivered to the washing plant and washed from each lease compared to
the total measured quantities of coal delivered to the washing plant
and washed.
Sec. 206.460 Transportation allowances--general.
(a) For ad valorem leases subject to Sec. 206.456 of this subpart,
where the value for royalty purposes has been determined at a point
remote from the lease or mine, MMS shall, as authorized by this
section, allow a deduction in determining value for royalty purposes
for the reasonable, actual costs incurred to:
(1) Transport the coal from an Indian lease to a sales point which
is remote from both the lease and mine; or
(2) Transport the coal from an Indian lease to a wash plant when
that plant is remote from both the lease and mine and, if applicable,
from the wash plant to a remote sales point. In-mine transportation
costs shall not be included in the transportation allowance.
(b) Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.456 of this subpart
reduce the value of coal under any selling arrangement to zero.
(c) (1) When coal transported from a mine to a wash plant is
eligible for a transportation allowance in accordance with this
section, the lessee is not required to allocate transportation costs
between the quantity of clean coal output and the rejected waste
material. The transportation allowance shall be authorized for the
total production which is transported. Transportation allowances shall
be expressed as a cost per ton of cleaned coal transported.
(2) For coal that is not washed at a wash plant, the transportation
allowance shall be authorized for the total production which is
transported. Transportation allowances shall be expressed as a cost per
ton of coal transported.
(3) Transportation costs shall only be recognized as allowances
when the transported coal is sold and royalties are reported and paid.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
section, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.202, or shall be
entitled to a credit, without interest.
(e) Lessees shall not disproportionately allocate transportation
costs to Indian leases.
Sec. 206.461 Determination of transportation allowances.
(a) Arm's-length contracts.
(1) 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
coal under that contract, subject to monitoring, review, audit, and
possible future adjustment. MMS' prior approval is not required before
a lessee may deduct costs incurred under an arm's-length contract.
However, before any deduction may be taken, the lessee must submit a
completed page one of Form MMS-4293, Coal 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-4293 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for
the transportation. If the contract reflects more than the total
consideration paid, then MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(3) If MMS determines that the consideration paid pursuant to an
arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When
[[Page 5488]]
MMS determines that the value of the transportation may be
unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
transportation costs.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar-per-unit basis, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract.
(1) If a lessee has a non-arm's-length 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. All transportation allowances
deducted under a non-arm's-length or no contract situation are subject
to monitoring, review, audit, and possible future adjustment. Prior MMS
approval of transportation allowances is not required for non-arm's-
length or no contract situations. However, before any estimated or
actual deduction may be taken, the lessee must submit a completed Form
MMS-4293 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-4293 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee. 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
estimated or actual transportation allowance deduction.
(2) The transportation allowance for non-arm's-length or no
contract situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and 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 depreciable
investment in the transportation system multiplied by the rate of
return in accordance with paragraph (b)(2)(iv)(B) of this section.
Allowable capital costs are generally those for depreciable fixed
assets (including costs of delivery and installation of capital
equipment) which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision
and engineering; operations labor; fuel; utilities; materials; ad
valorem property taxes; rent; supplies; and any other directly
allocable and attributable operating expense which the lessee can
document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which
the lessee can document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the transportation system is an allowable expense. State
and Federal income taxes and severance taxes and other fees, including
royalties, are not allowable expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or paragraph
(b)(2)(iv)(B) of this section. After a lessee has elected to use either
method for a transportation system, the lessee may not later elect to
change to the other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services,
whichever is appropriate, or a unit of production method. After an
election is made, the lessee may not change methods without MMS
approval. A change in ownership of a transportation system shall not
alter the depreciation schedule established by the original
transporter/lessee for purposes of the allowance calculation. With or
without a change in ownership, a transportation system shall be
depreciated only once. Equipment shall not be depreciated below a
reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
capital investment in the transportation system multiplied by the rate
of return determined pursuant to paragraph (b)(2)(B)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to transportation facilities first placed
in service or acquired after March 1, 1989.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average as published in Standard and Poor's Bond Guide for the first
month of the reporting period of which the allowance is applicable and
shall be effective during the reporting period. The rate shall be
redetermined at the beginning of each subsequent transportation
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) A lessee may apply to MMS for exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1) and
(b)(2) of this section. MMS will grant the exception only if the lessee
has a rate for the transportation approved by a Federal agency for
Indian leases. MMS shall deny the exception request if it determines
that the rate is excessive as compared to arm's-length transportation
charges by systems, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if:
(i) No Federal regulatory agency cost analysis exists and the
Federal regulatory agency has declined to investigate pursuant to MMS
timely objections upon filing; and
(ii) The rate significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements.
(1) Arm's-length contracts.
(i) With the exception of those transportation allowances specified
in paragraphs (c)(1)(v) and (c)(1)(vi) of this section, the lessee
shall submit page one of the initial Form MMS-4293 prior to, or at the
same time as, the transportation allowance determined pursuant to an
arm's-length contract is reported on Form MMS-2014, Reports of Sales
and Royalty Remittance.
(ii) The initial Form MMS-4293 shall be effective for a reporting
period beginning the month that the lessee is first authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until the applicable contract or rate terminates
or is modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4293 within
3 months after the end of the calendar year, or after the applicable
contract or rate terminates or is modified or amended, whichever is
earlier, unless MMS approves a longer period (during which period the
lessee shall continue to use the allowance from the previous reporting
period). Lessees may request special reporting procedures in unique
allowance reporting situations, such as those related to spot sales.
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
[[Page 5489]]
(v) Transportation allowances that are based on arm's-length
contracts and 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.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(2) Non-arm's-length or no contract.
(i) With the exception of those transportation allowances specified
in paragraphs (c)(2)(v) and (c)(2)(vii) of this section, the lessee
shall submit an initial Form MMS-4293 prior to, or at the same time as,
the transportation allowance determined pursuant to a non-arm's-length
contract or no contract situation is reported on Form MMS-2014, Report
of Sales and Royalty Remittance. The initial report may be based on
estimated costs.
(ii) The initial Form MMS-4293 shall be effective for a reporting
period beginning the month that the lessee first is authorized to
deduct a transportation allowance and shall continue until the end of
the calendar year, or until the transportation under the non-arm's-
length contract or the no contract situation terminates, whichever is
earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4293
containing the actual costs for the previous reporting period. If the
transportation is continuing, the lessee shall include on Form MMS-4293
its estimated costs for the next calendar year. The estimated
transportation allowance shall be based on the actual costs for the
previous reporting period plus or minus any adjustments that are based
on the lessee's knowledge of decreases or increases that will affect
the allowance. Form MMS-4293 must be received by MMS within 3 months
after the end of the previous reporting period, unless MMS approves a
longer period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new transportation facilities or arrangements, the
lessee's initial Form MMS-4293 shall include estimates of the allowable
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system, or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(v) Non-arm's-length contract or no contract-based transportation
allowances that are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For 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.
(vi) Upon request by MMS, the lessee shall submit all data used to
prepare its Form MMS-4293. The data shall be provided within a
reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(viii) If the lessee is authorized to use its Federal-agency-
approved rate as its transportation cost in accordance with paragraph
(b)(3) of this section, it shall follow the reporting requirements of
paragraph (c)(1) of this section.
(3) MMS may establish reporting dates for individual lessees
different than those specified in this paragraph in order to provide
more effective administration. Lessees will be notified as to any
change in their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and failure
to report.
(1) If a lessee deducts a transportation allowance on its Form MMS-
2014 without complying with the requirements of this section, the
lessee shall be liable for interest on the amount of such deduction
until the requirements of this section are complied with. The lessee
also shall repay the amount of any allowance which is disallowed by
this section.
(2) If a lessee erroneously reports a transportation allowance
which results in an underpayment of royalties, interest shall be paid
on the amount of that underpayment.
(3) Interest required to be paid by this section shall be
determined in accordance with 30 CFR 218.202.
(e) Adjustments.
(1) If the actual transportation allowance is less than the amount
the lessee has taken on Form MMS-2014 for each month during the
allowance form reporting period, the lessee shall be required to pay
additional royalties due plus interest, computed pursuant to 30 CFR
218.202, retroactive to the first month the lessee is authorized to
deduct a transportation allowance. If the actual transportation
allowance is greater than the amount the lessee has estimated and taken
during the reporting period, the lessee shall be to a credit, without
interest.
(2) The lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with
instructions provided by MMS.
(f) Other transportation cost determinations. The provisions of
this section shall apply to determine transportation costs when
establishing value using a net-back valuation procedure or any other
procedure that requires deduction of transportation costs.
Sec. 206.462 Contract submission.
(a) The lessee and other payors shall submit to MMS, upon request,
contracts for the sale of coal from ad valorem leases subject to this
subpart. MMS must receive the contracts within a reasonable period of
time, as specified by MMS. Lessees shall include as part of the
submittal requirements any contracts, agreements, contract amendments,
or other documents that affect the gross proceeds received for the sale
of coal, as well as any other information regarding any consideration
received for the sale or disposition of coal that is not included in
such contracts. At the time of its contract submittals, MMS may require
the lessee to certify in writing that it has provided all documents and
information that reflect the total consideration provided by purchasers
of coal from ad valorem leases subject to this subpart. Information
requested under this section may include contracts for both ad valorem
and cents-per-ton leases and shall be available in the lessee's offices
during normal business hours or provided to MMS at such time and in
such manner as may be requested by authorized Department of the
Interior personnel. Any oral sales arrangement negotiated by the lessee
must be placed in a written form and be retained by the lessee. Nothing
in this section shall be construed to limit the authority of MMS to
obtain or have access to information pursuant to 30 CFR Part 212.
(b) Lessees and other payors shall designate, for each contract
submitted pursuant to this section, whether the contract in arm's-
length or non-arm's-length.
(c) A lessee's or other payor's determination that its contract is
arm's-length is subject to future audit to verify that the contract
meets the criteria of the arm's-length contract definition in
Sec. 206.251 of this subpart.
[[Page 5490]]
(d) Information required to be submitted under this section that
constitutes trade secrets and commercial and financial information that
is identified as privileged or confidential shall not be available for
public inspection or made public or disclosed without the consent of
the lessee or other payor, except as otherwise provided by law or
regulation.
Sec. 206.463 In-situ and surface gasification and liquefaction
operations.
In an ad valorem Federal coal lease is developed by in-situ or
surface gasification or liquefaction technology, the lessee shall
propose the value of coal for royalty purposes to MMS. MMS will review
the lessee's proposal and issue a value determination. The lessee may
use its proposed value until MMS issues a value determination.
Sec. 206.464 Value enhancement of marketable coal.
If, prior to use, sale, or other disposition, the lessee enhances
the value of coal after the coal has been placed in marketable
condition in accordance with Sec. 206.456(h) of this subpart, the
lessee shall notify MMS that such processing is occurring or will
occur. The value of that production shall be determined as follows:
(a) A value established for the feedstock coal in marketable
condition by application of the provisions of Sec. 206.465(c)(2)(i)
through (iv) of this subpart; or,
(b) In the event that a value cannot be established in accordance
with paragraph (a) of this section, then the value of production will
be determined in accordance with Sec. 206.456(c)(2)(v) of this subpart
and the value shall be the lessee's gross proceeds accruing from the
disposition of the enhanced product, reduced by MMS-approved processing
costs and procedures including a rate of return on investment equal to
two times the Standard and Poor's BBB bond rate applicable under
Sec. 206.458(b)(2)(v) of this subpart.
PART 202--ROYALTIES
1. The authority citation for part 202 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., 1801 et seq.
Subpart D--Federal and Indian Gas
2. Section 202.151 is amended by revising paragraph (a) to read as
follows:
Sec. 202.151 Royalty on processed gas.
(a)(1) A royalty, as provided in the lease, shall be paid on the
value of:
(i) any condensate recovered downstream of the point of royalty
settlement without resorting to processing; and
(ii) residue gas and all gas plant products resulting from
processing the gas produced from a lease subject to this subpart.
(2) MMS shall authorize a processing allowance for the reasonable,
actual costs of processing the gas produced from Federal and Indian
leases. Processing allowances shall be determined in accordance with 30
CFR part 206 subpart D for gas production from Federal leases and 30
CFR part 206 subpart E for gas production from Indian leases.
* * * * *
[FR Doc. 96-2641 Filed 2-9-96; 8:45 am]
BILLING CODE 4310-MR-P