[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.

-----------------------------------------------------------------------

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