[Federal Register Volume 62, Number 77 (Tuesday, April 22, 1997)]
[Proposed Rules]
[Pages 19536-19538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10386]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 202, 206, and 211

RIN 1010-AC02


Amendments to Gas Valuation Regulations for Federal Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice withdrawing proposed rulemaking and requesting comments 
on supplemental information.

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SUMMARY: The Minerals Management Service (MMS) is withdrawing its 
proposed rulemaking to amend the regulations for valuing natural gas 
produced from Federal leases for royalty purposes. MMS also is 
requesting comments on supplemental options for valuation.

DATES: Written comments must be received on or before June 23, 1997.

ADDRESSES: Comments should be sent to: David S. Guzy, Chief, Rules and 
Publications Staff, Royalty Management Program, Minerals Management 
Service, P.O. Box 25165, MS 3101, Denver, Colorado 80225-0165; courier 
delivery to Building 85, Denver Federal Center, Denver, Colorado 80225; 
or e-Mail David__G[email protected].

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Publications Staff, Telephone (303) 231-3432, FAX (303) 231-3194, e-
Mail David__G[email protected].

SUPPLEMENTARY INFORMATION: On November 6, 1995, MMS published a 
proposed rule that would amend the regulations governing the valuation 
of natural gas produced from Federal leases (60 FR 56007). The proposed 
amendments reflected the consensus recommendations of the Federal Gas 
Valuation Negotiated Rulemaking Committee (Committee), which the 
Secretary chartered on June 27, 1994, to resolve many issues facing the 
valuation of Federal gas. Through the consensus negotiated rulemaking 
process, the Committee attempted to develop alternative royalty 
valuation methodologies that would simplify the gas royalty valuation 
process but would not have a significant impact on gas royalty 
collections.
    The recommendations and subsequent proposed amendments the 
Committee developed would have allowed lessees to choose from several 
options for valuing gas for royalty purposes, including, for example, 
index prices published in natural gas newsletters, affiliated 
companies' arm's-

[[Page 19537]]

length resale prices, and residue gas prices applied to the wellhead. 
The amendments also would have eliminated certain administrative 
functions such as accounting for comparison (also known as ``dual 
accounting''), and redefined specific terms such as gathering and 
compression to clarify their deductibility from royalty.
    While the proposed rule reflected the consensus decisions of the 
Committee, MMS received many unfavorable comments in response to the 
proposed rule. Many of the comments focused on the complexity of the 
various valuation alternatives, while others expressed concern about 
the impact on royalty revenues. On the other hand, many comments 
supported the proposals to clarify terms and eliminate administrative 
burdens.
    Because of the comments received, in mid-1996 MMS reconvened the 
Committee and reopened the public comment period asking the public and 
the Committee to provide comments on five options for proceeding with 
rulemaking. When the Committee reconvened, representatives from major 
and independent companies who served on the Committee presented a 
``Unified Option.'' However, State and MMS Committee members could not 
support the industry proposal because it would have been based on data 
reported to MMS but not verified for accuracy or compliance by audit. 
The reopened comment period closed in August 1996.
    As required by the Regulatory Flexibility Act, MMS next performed a 
cost/benefit analysis of the impacts of the proposed rule. The MMS 
selected data from 1994 and 1995, because it reflected the Federal 
Energy Regulatory Commission (FERC) Order No. 636 marketing 
environment. The analysis compared the royalties that MMS would have 
received based on the proposed index price methodology to the actual 
royalties MMS received based on the lessee's gross proceeds (not 
verified by audit) under the current regulations. The analysis 
accounted for the so-called ``safety net'' (see November 6, 1995, 
proposed rule) comprising a median value of gross proceeds prices 
reported by payors who MMS assumed would chose not to pay royalties 
based on index prices. The results of the analysis indicated that the 
proposed rule would result in a loss in revenues of approximately $20 
million annually. That amount is likely understated as it is based on a 
comparison to gross proceeds data not verified by audit. Details of the 
analysis may be found at the Royalty Management Program Internet home 
page at www.mms.gov or by calling Mr. Larry Cobb at (303) 275-7245.
    MMS has decided at this time not to issue a final rule based on the 
consensus recommendations of the Committee for a number of reasons:
    1. The natural gas market is still undergoing dramatic change. FERC 
recently published a Federal Register Notice (62 FR 10266, March 6, 
1997) seeking public and industry input about ``how the industry 
currently works, how the industry is changing, and how the Commission's 
regulatory policies should respond to such changes in the 
marketplace.'' The FERC stated that significant changes in the 
structure of the natural gas industry have occurred since the issuance 
of Order No. 636. These include ``the consolidation in the ownership of 
interstate pipelines, the spin-off and spin-down of gathering 
facilities with the potential for State regulation, the emergence of 
mega-markets, and the emerging electric and gas convergence.'' The FERC 
also cited issues such as increasing unbundled retail access, hourly 
trading of natural gas, and increased transportation efficiencies in 
calling for a need to take a step back and examine where the market is 
headed.
    2. MMS believes that its existing regulations are very flexible and 
therefore are the most appropriate means to face the continued changes 
in the natural gas market.
    3. MMS does not believe that published indices for natural gas, 
representing spot prices at major pipeline interconnects, less 
transportation to the lease, have developed sufficiently to be 
representative of the gross proceeds actually received for lease 
production.
    4. In the absence of published indices that accurately represent 
fair market value, any rule using these indices would inevitably become 
complicated because of the requirement to compare them to gross 
proceeds. The comparison would have to take the form of some sort of 
safety net calculation, as in the proposed rule, or an adjustment to 
index based on the difference between index and gross proceeds. 
Analyzing and verifying gross proceeds data to accomplish these 
comparisons would place a significant administrative burden on MMS.
    5. The results of the MMS cost/benefit analysis indicate that the 
proposed rule does not achieve revenue neutrality, one of the primary 
goals MMS and the Committee established in developing new regulations.
    MMS still seeks alternative valuation methods that would simplify 
the gas valuation process without significantly impacting royalty 
revenues. In light of MMS's decision not to proceed with finalizing the 
November 6, 1995, proposed rule, MMS solicits comments on two 
additional options for valuing Federal gas. MMS also asks for ideas and 
comments on other valuation options not yet presented in this 
rulemaking that are not inconsistant with our reasons for not issuing a 
final rule.
    The first option is index-based. Payors wishing to pay on index 
would be required to pay on index plus (or minus) an annual percentage 
factor (known as the index +/-``X-factor'' method). The percentage X-
factor would account for any difference between the average index value 
in the zone (as described in the November 6, 1995, proposed rule) and 
the average arm's-length gross proceeds received by payors paying on 
index in the zone. The X-factor to be applied to the current year's 
index prices would be computed from the previous year's differences 
between average indices and average gross proceeds. The X-factor may be 
positive or negative depending on how the average gross proceeds net of 
transportation costs compare to the average index value. Because 
transportation costs are already accounted for in the X-factor, no 
additional transportation allowance would be permitted to be deducted 
from index. In evaluating arm's-length gross proceeds, MMS would 
include affiliates' arm's-length resale prices.
    The second option is based on the royalty collection practice in 
Norway. Royalty values for crude oil produced in Norway are established 
by the Petroleum Price Board (Board). The Board establishes ``norm'' 
prices that may be reduced by transportation tariffs, if the norm price 
point is away from the producing area. (In Norway, no norm prices can 
be set for gas because the royalty rate of gas was set to zero in 
1992.)
    The Board does not use a specific formula in deciding the norm 
price. Instead, the Board considers specific information sources 
including:
    (1) Spot market indicators;
    (2) Realized prices for external sales, gathered by the Board from 
companies on all liftings of Norwegian crude and summarized into a 
``Brent-Blend Equivalent,'' which is the volume-weighted average of all 
Norwegian crude oils. These prices are adjusted by assessed price-
differentials to Brent Blend; and
    (3) Company evaluations and recommendations.
    The procedure for setting the norm price has several important 
features.

[[Page 19538]]

From a timing standpoint, the prices are set quarterly and on a 
retroactive basis. After the end of each quarter, companies are given 4 
weeks to send information about the previous quarter. Within 2 weeks 
the Board gives its preliminary evaluation in the form of a price band. 
After the band is issued, companies have 3 weeks to meet with the Board 
to give their views, and the Board issues its final norm price within 2 
weeks thereafter.
    For Federal gas (and if appropriate for other commodities), the 
Department of the Interior would establish a Pricing Board to determine 
prices similar to the process used by Norway. However, we would 
simplify the process wherever possible, such as eliminating the aspect 
of retroactive price adjustments.
    Send comments on these two alternative methods to the address 
contained in the ADDRESSES section.

    Dated: April 17, 1997.
Cynthia L. Quarterman,
Director, Minerals Management Service.
[FR Doc. 97-10386 Filed 4-21-97; 8:45 am]
BILLING CODE 4310-MR-P