[Federal Register Volume 62, Number 183 (Monday, September 22, 1997)]
[Proposed Rules]
[Pages 49460-49462]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25101]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC09


Establishing Oil Value for Royalty Due on Federal Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of reopening the public comment period.

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SUMMARY: The Minerals Management Service (MMS) is reopening the public 
comment period under a proposed rule published in the Federal Register 
on January 24, 1997 (62 FR 3742), amending the regulations governing 
the valuation for royalty purposes of crude oil produced from Federal 
leases. In the July 3, 1997, Federal Register (62 FR 36030), we 
published a supplementary notice of proposed rulemaking. Based on the 
diversity of comments received under the proposed rule and the 
supplementary proposed rule, we are in this notice: publishing a 
summary of those comments, outlining alternatives for proceeding with 
further rulemaking, and requesting public comment on those 
alternatives. MMS intends to hold workshops with State and industry 
representatives to discuss these and other alternatives. We will 
announce the dates and locations of those workshops at a later date. 
MMS intends to issue a further notice of proposed rulemaking following 
the comment period on this notice.

DATES: We must receive comments on or before October 22, 1997.

ADDRESSES: You must send comments 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; 
telephone (303) 231-3432; fax (303) 231-3194; e-Mail 
David__G[email protected].

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Publications Staff, Royalty Management Program, Minerals Management 
Service, telephone (303) 231-3432, fax (303) 231-3194, e-Mail 
David__G[email protected].

SUPPLEMENTARY INFORMATION: The principal author of this notice is 
Deborah Gibbs Tschudy of the Royalty Management Program.

I. Background

    MMS published a notice of proposed rulemaking on January 24, 1997 
(62 FR 3741), to amend its current Federal

[[Page 49461]]

crude oil valuation regulations in 30 CFR part 206. The initial comment 
period expired March 25, 1997, and was twice extended to April 28, 1997 
(62 FR 7189), and to May 28, 1997 (62 FR 19966). As part of the public 
comment process, we held public meetings in Lakewood, Colorado on April 
15, 1997, and Houston, Texas on April 17, 1997, to hear comments on the 
proposal. On July 3, 1997, we published a supplementary proposed 
rulemaking (62 FR 36030). The comment period on the supplementary 
proposed rule closed on August 4, 1997.

II. Summary of Public Comments

    We received written comments on the January 24, 1997, proposed rule 
from 76 entities, including independent oil and gas producers, major 
oil and gas companies, trade associations, States, economic consultants 
and analysts, petroleum marketers, a royalty owner, a Native American 
interest, and individuals. Forty-two speakers provided verbal comments 
on the proposed rule at the public hearings. We received written 
comments on the supplementary proposed rule from 32 entities. Below is 
a summary of the comments on the proposed and supplementary proposed 
rules. If you are interested in reviewing either the written comments 
in full or the transcripts of the public meetings, you may contact 
David S. Guzy, Chief, Rules and Publications Staff, Royalty Management 
Program, Minerals Management Service, telephone (303) 231-3432, fax 
(303) 231-3194, e-Mail David__G[email protected]. A complete set of the 
public comments is also available on the Internet at www.rmp.mms.gov.

States

    State commenters generally support the proposed rule, though each 
has specific suggestions for improvement. Some States supported 
allowing more payors to pay royalties based on gross proceeds received 
under arm's-length contracts. One State suggested that MMS could 
simplify the process without sacrificing value by using published spot 
prices instead of NYMEX. Another State suggested that MMS take and 
market its oil in kind.
    States generally support the proposal to eliminate the provision in 
the existing regulations that allows the use of a FERC-approved tariff 
in lieu of computing actual costs. One State commented that the 
proposed Form MMS-4415 is too burdensome on lessees and recommended 
instead using the lowest published tariff rate in calculating 
differentials. Another State argued that the proposed method for 
determining differentials allows for double-dipping of transportation 
costs.
    Many States supported the changes proposed in the supplementary 
rule regarding valuation of crude oil calls, but suggested that gross 
proceeds be allowed only when the so-called ``most favored nations'' 
clause is enforced. One State objected to the changes proposed in the 
supplementary proposed rule and stated that many States believe that 
gross proceeds should be abandoned altogether. Another State commented 
that they were not convinced that NYMEX is the proper basis for valuing 
crude oil produced in the Rocky Mountain Region and suggested that MMS 
could establish value based on geographic indexing using its own system 
data. That State commented that MMS would have to insure that posted 
prices are not included when using system data to determine market 
prices and that a range of data could be established within a 
geographic area for comparison purposes.

Industry

    The oil and gas industry, both major and independent producers, 
oppose the proposed rule as well as the supplementary proposed rule. 
Many industry commenters argued that MMS does not have the legal 
authority to value production away from the lease and that the NYMEX 
valuation method is flawed. They believe that value is added by 
transporting and marketing the oil away from the lease and that this 
added value exceeds the cost of transportation alone. Many industry 
commenters stated that futures prices don't provide a dependable 
measure of current value and that an active lease market does exist for 
valuing crude oil. Others argue that Rocky Mountain Region prices don't 
track with NYMEX prices due to the isolated nature of that market.
    At least two consultants engaged by industry claim to have evidence 
that disputes our belief that companies maintain overall balances is 
totally implausible. Some industry commenters argued that unequal 
treatment of integrated refiners and independent producers will create 
market inefficiencies that may discourage investments in downstream 
operations (pipelines, gathering systems, storage facilities). Nearly 
all industry commenters suggested that MMS take its royalty in kind to 
assure that it receives fair market value for its production.
    With respect to MMS's proposal for calculating and publishing 
differentials from aggregations points to market centers, industry 
commenters stated that (1) Proposed Form MMS-4415 will impose a huge 
administrative burden, (2) much of the information is not available to 
many of the lessees, (3) seasonal effects on prices and other dynamic 
influences on local crude value will not be captured by the 
differentials, and (4) the differentials don't include all of the costs 
that should be allowed as a deduction. Industry comments also opposed 
the proposal to eliminate the provision in the existing regulations 
that allows the use of a FERC-approved tariff in lieu of computing 
actual costs.
    While some independent producers indicated that they supported the 
changes made in the supplementary proposed rule, they stated that the 
continued proposal regarding a lessee's duty to market at no cost to 
the Federal Government undermines the changes made in the supplementary 
proposed rule. Some independent producers supported the idea of 
requiring lessees to certify that they are not maintaining an overall 
balance with their purchaser. Others recommended that MMS meet with 
State and industry representatives before adopting any kind of radical 
changes to crude oil valuation.

III. Alternatives for Proceeding

    The intent of the January 24, 1997, proposed rule and the July 3, 
1997, supplementary proposed rule was to decrease reliance on oil 
posted prices, add more certainty to valuation of oil produced from 
Federal lands, and develop valuation rules that better reflect market 
value. Because of the frequency of oil exchange agreements, reciprocal 
deals between crude oil buyers and sellers, and other factors where the 
real consideration for the transaction could be hidden, MMS proposed 
using index prices to value production not sold arm's-length. However, 
because the comments on the proposed rule were substantial, we are 
considering alternatives for proceeding with a rulemaking on the 
valuation of oil from Federal leases in addition to the January 24, 
1997, proposed rule and the July 3, 1997, supplementary proposed rule. 
We request comments from all interested parties on each of the 
following alternatives. Those alternatives fall into three categories: 
(1) Benchmarks, (2) differentials, and (3) index pricing.
    While many of the comments, particularly from industry, suggested 
that MMS take its royalty in kind as an alternative to the proposed 
NYMEX method (or ANS in California and Alaska), MMS is not requesting 
comments on that alternative in this notice. MMS has recently completed 
a feasibility study concerning a royalty-in-

[[Page 49462]]

kind program and will continue to pursue input on that program through 
other avenues.

Benchmarks

    Alternative 1--Several industry commenters suggested that a lessee 
be permitted to value its production not sold arm's-length based on 
prices it receives for outright sales of crude oil in a particular 
market area or region. Such a program (called a bid-out or tendering 
program) was described in the comments of two major producers. MMS 
requests comments on this alternative and specifically whether a 
certain minimum amount of production should be required to be tendered 
in a given area before such a price would be acceptable for valuing the 
remainder of a lessee's production not sold arm's-length.
    Alternative 2--In its comments on the supplementary proposed rule, 
one industry trade association representing independent producers 
suggested a series of benchmarks for valuing production not sold under 
arm's-length contracts.

Benchmarks

    (1) Outright sales of like-quality crude in the field or area as 
described in Alternative 1,
    (2) The lessee's or its affiliate's arm's-length purchases from 
producers at the lease in the field or area,
    (3) Outright arm's-length sales by third parties,
    (4) Prices published by MMS based on its RIK sales,
    (5) Netback employing price information from the nearest market 
center or aggregation point.
    MMS requests comments on this alternative. Should the benchmarks be 
considered in any particular order? Should MMS retain the gross 
proceeds minimum requirement of the existing regulations, so that value 
would be the higher of the benchmark value or gross proceeds? With 
regard to the second and third benchmarks, should a certain minimum 
amount of production be required to be purchased by a lessee or its 
affiliate or by third parties before such a price would be acceptable 
for valuing the remainder of a lessee's production not sold arm's-
length? How can MMS verify that those contracts are indeed arm's-length 
sales and that they reflect the total consideration for the value of 
production other than through audit? With regard to the fifth 
benchmark, how should a netback be determined?
    Alternative 3--One of the State commenters suggested that MMS 
establish value based on geographic indexing using its own system data. 
That State commented that MMS would have to insure that posted prices 
are not included when using system data to determine market prices and 
that a range of data could be established within a geographic area for 
comparison purposes. MMS requests comments on this alternative. 
Specifically, how can MMS verify, in a timely manner, that the values 
reported to its data base are correct prior to our publishing this 
information? On what value do non-arm's-length producers pay until MMS 
publishes the values contained in its data base?
    With regard to Alternatives 1 through 3, we request comments on 
whether MMS should apply any one of these alternatives only to the 
Rocky Mountain region while maintaining NYMEX prices as the basis for 
mid-continent and OCS leases and ANS prices for California and Alaska 
leases.

Differentials

    Alternative 4--Several industry and State commenters commented that 
the proposed Form MMS-4415 is too burdensome on lessees. One State 
commented that the proposed method for determining differentials allows 
for double-dipping of transportation costs. Recently, two major oil 
producers reached settlement with State and private royalty litigants 
using fixed rate (cents per barrel) differentials deducted from a 
NYMEX-based value. MMS requests comments on alternatives for 
determining the appropriate location and quality differentials to be 
deducted from the NYMEX method (ANS in California and Alaska) in the 
January 24, 1997, proposed rule. Specifically, MMS requests comments on 
the following methods for MMS to calculate and publish location 
differentials from the lease to the market center:
    (1) Differential in cents per barrel by zone or area,
    (2) Differential in cents per mile by zone or area,
    (3) Differential based on a percentage of the NYMEX (ANS in 
California and Alaska) value.
    MMS also requests comments on alternatives for determining quality 
differentials from the lease to the market center.

Index

    Alternative 5--One State commenter suggested that MMS could 
simplify the process without sacrificing value by using published spot 
prices instead of NYMEX. MMS requests comments on this alternative and 
whether MMS should then allow actual costs of transportation when 
production actually flows to the market center where the spot price is 
published.

IV. Request for Public Comments

    We are not requesting comments on the summary of comments outlined 
in this notice nor on the original proposed rule or supplementary 
proposed rule. We seek comments only on the alternatives described 
above or other alternatives suggested for valuing oil from Federal 
leases. The alternatives listed are not exhaustive. We welcome any new 
alternatives or any modifications to the proposed alternatives for 
consideration.
    The policy of the Department is, whenever practicable, to give the 
public an opportunity to participate in the rulemaking process. 
Accordingly, you should submit written comments, suggestions, or 
objections regarding this notice to the location identified in the 
ADDRESSES section of this notice. You should submit comments on or 
before the date identified in the DATES section of this notice.

    Dated: September 16, 1997.
Lucy Querques Denett,
Associate Director for Royalty Management.
[FR Doc. 97-25101 Filed 9-19-97; 8:45 am]
BILLING CODE 4310-MR-P