[Federal Register Volume 63, Number 29 (Thursday, February 12, 1998)]
[Proposed Rules]
[Pages 7089-7109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3597]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 206
RIN 1010-AC24
Establishing Oil Value for Royalty Due on Indian Leases
AGENCY: Minerals Management Service, Interior.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This proposed rule would modify the regulations to establish
the value for royalty purposes of oil produced from Indian leases and
establish a new Minerals Management Service (MMS) form for collecting
value and value differential data. These changes would decrease
reliance on oil posted prices and use more publicly available
information.
DATES: Comments must be submitted on or before April 13, 1998.
ADDRESSES: Mail written comments, suggestions, or objections regarding
the proposed rule to: Minerals Management Service, Royalty Management
Program, Rules and Publications Staff, P.O. Box 25165, MS 3021, Denver,
Colorado 80225-0165; courier address is Building 85, Denver Federal
Center, Denver, Colorado 80225; or e:Mail David__G[email protected]. MMS will
publish a separate notice in the Federal Register indicating dates and
locations of public hearings regarding this proposed rulemaking.
FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and
Publications Staff, telephone (303) 231-3432, FAX (303) 231-3385,
e:Mail David__G[email protected], Minerals Management Service, Royalty
Management Program, Rules and Publications Staff, P.O. Box 25165, MS
3021, Denver, Colorado 80225-0165.
SUPPLEMENTARY INFORMATION: The principal authors of this proposed rule
are David A. Hubbard of Royalty Management Program (RMP), Lakewood,
Colorado, and Peter
[[Page 7090]]
Schaumberg of the Office of the Solicitor in Washington, D.C.
I. Introduction
On December 20, 1995, MMS published an Advance Notice of Proposed
Rulemaking about possible changes to the rules for royalty valuation of
oil from Federal and Indian leases (60 FR 65610). The intent of the
changes was to decrease reliance on oil posted prices and to develop
valuation rules that better reflect market value. MMS requested
comments regarding the possible changes.
MMS used various sources of information to develop the proposed
rule. In addition to comments received on the Advance Notice of
Proposed Rulemaking, MMS attended a number of presentations by crude
oil brokers and refiners, commercial oil price reporting services,
companies that market oil directly, and private consultants
knowledgeable in crude oil marketing. MMS's deliberations were aided
greatly by a wide range of expert advice and direct consultations MMS
held with various Indian representatives.
The Department of the Interior's practice is to give the public an
opportunity to participate in the rulemaking process. Anyone interested
may send written comments, suggestions, or objections regarding this
proposed rule to the location cited in the ADDRESSES section of this
preamble. We will post public comments after the comment period closes
on the Internet at http://www.rmp.mms.gov or contact David S. Guzy,
Chief, Rules and Publications Staff, telephone (303) 231-3432, FAX
(303) 231-3385.
II. General Description of the Proposed Rule
MMS's existing regulations for valuing crude oil for royalty
purposes are at 30 CFR part 206. Basically, the same regulations apply
to Federal and Indian leases. These rules rely primarily on posted
prices and prices under arm's-length sales to value oil. Recently,
posted prices have become increasingly suspect as a fair measure of
market value. As a result, for Federal lease production, MMS proposed
new valuation rules that place substantial reliance on crude oil
futures prices on the New York Mercantile Exchange (NYMEX). See 62 FR
3742 (Jan. 24, 1997). Because of the different terms of Indian leases,
MMS is proposing separate rules for Indian oil valuation.
The proposed rulemaking would add more certainty to valuation of
oil produced from Indian leases and eliminate any direct reliance on
posted prices. Most Indian leases include a ``major portion''
provision, which says value is the highest price paid or offered at the
time of production for the major portion of oil production from the
same field. To lessen the current reliance on posted prices and to
better accommodate the major portion provision, the proposed rule
requires that royalty value be based on the highest of three different
values: (1) A value based on NYMEX futures prices adjusted for location
and quality differences; (2) the lessee's or its affiliate's gross
proceeds adjusted for appropriate transportation costs; and (3) an MMS-
calculated major portion value based on prices reported by lessees and
purchasers in MMS-designated areas typically corresponding to
reservation boundaries.
Because much Indian oil is disposed of under exchange agreements,
specific guidance for applying the valuation criteria are included for
these dispositions: (1) if the lessee or its affiliate disposes of
production under an exchange agreement and then sells at arm's length
the oil it receives in return, royalty value would be the resale price
adjusted for appropriate quality differentials and transportation costs
(unless the NYMEX or major portion values are higher); and (2) if the
lessee or its affiliate disposes of production under an exchange
agreement but refines rather than sells the oil it receives in return,
royalty value would be the NYMEX value (unless the major portion value
is higher).
The lessee would initially report royalties based on the higher of
the NYMEX value or its gross proceeds. After MMS does its major portion
calculation for the production month, explained below, the lessee would
revise its initial royalty value if the major portion value were
higher.
Adjustments for location and quality against the index values are
limited to these components:
(1) A location and/or quality differential between the index
pricing point (West Texas Intermediate at Cushing, Oklahoma) and the
appropriate market center (for example, West Texas Intermediate at
Midland, Texas, or Wyoming Sweet at Guernsey, Wyoming), calculated as
the difference between the average monthly spot prices published in an
MMS-approved publication for the respective locations; and either;
(2) A rate either published by MMS or contained in the lessee's
arm's-length exchange agreement representing location and/or quality
differentials between the market center and the boundary of the
designated area (defined term--usually an Indian reservation); or
(3) Where oil flows to the market center, and as determined under
the existing allowance rules, the actual transportation costs to the
market center from the designated area.
Calculation of differentials could vary if the lessee takes its
production directly to its own refinery and the movement in no way
approximates movement to a market center.
MMS would calculate and publish the rate from the market center to
the designated area based on specific information it would collect on a
new form: Form MMS-4416, Indian Crude Oil Valuation Report. This form
would also assist MMS in verifying data used to calculate major portion
values. It is attached to this notice of proposed rulemaking as
Appendix A. MMS requests commenters to provide comments on this form
according to the information under the Paperwork Reduction Act in part
IV, Procedural Matters, of this notice.
MMS will verify during the first 6 months after the effective date
of this rule that the values determined by this rule are replicating
actual market prices and satisfying Indian lease terms. Comments on how
best to perform this analysis are also requested.
In the next section, we describe the major regulatory changes
proposed in this rulemaking. The proposed changes for valuing
production are substantive. But some sections, particularly those
involving transportation allowances, remain mostly the same. Also, to
clarify and simplify the rules, MMS is incorporating many changes that
are not substantive but are an effort to implement concepts of plain
English.
III. Section-by-Section Analysis
30 CFR Part 206
MMS proposes to amend part 206, Subpart B--Indian Oil as described
below. Some of the provisions would be largely the same as in the
existing rules, but would be rewritten for clarity.
Section 206.50 Purpose and Scope.
This section's contents would remain the same except for
clarifications. MMS rewrote it in plain English to improve clarity.
Section 206.51 Definitions.
MMS would retain most of the definitions in Sec. 206.51. Many of
those retained were rewritten to reflect plain English. New definitions
to support the revised valuation procedures are proposed for:
Designated area, Exchange agreement, Index pricing, Index pricing
point, Location
[[Page 7091]]
differential, Major portion, Market center, MMS-approved publication,
NYMEX, Quality differential, Sale, and Settle price. The definition of
Allowance would be amended and captured under Transportation allowance.
The definition of Lessee would be amended to include all of a company's
affiliates, including its production, refining, and marketing arms. The
term ``lessee'' could include multiple parties to a transaction
involving oil sales from Indian leases. For example, it could include
the lessee of record, the lessee of record's marketing affiliate, the
operator, and the purchaser, if the purchaser were paying MMS
royalties. Thus, when the term ``lessee'' is used in the proposed
regulations and this preamble, it is used expansively and refers to all
persons that are lessees under the proposed definition. For example, if
the proposed regulations require the lessee to retain all data relevant
to the determination of royalty value, this requirement would apply to
the producer, the marketing arm and the purchaser, if the purchaser
paid MMS royalties. We will discuss the new and amended definitions
below where they appear in the regulatory text.
The proposed rule would remove the definitions of Marketing
affiliate, Net-back method, Oil shale, Posted price, Processing,
Selling arrangement and Tar sands because they no longer relate to how
most crude oil is marketed or to the structure of the proposed rules.
The definition of Like-quality lease products also would be revised
under a new definition of Like-quality oil to support the new valuation
publications. We will discuss this definition below where it appears in
the regulatory text.
Section 206.52 How Does a Lessee Calculate Royalty Value for Oil?
This section would explain how you, as a lessee, a defined term,
must calculate the value of oil production for royalty purposes. It is
the principal valuation section of the proposed rules.
The current Indian oil valuation procedures rely heavily on posted
prices and contract prices. Since many contracts use posted prices as a
basis, the influence of posted prices is magnified. MMS is proposing a
different valuation approach because market conditions have changed and
because MMS believes the major portion provision of Indian leases needs
to be better implemented. Moreover, the widespread use of exchange
agreements and reciprocal sales, as well as the difficulties with
relying on posted prices, suggests that many of these past pricing
mechanisms are no longer accurate indicators of value in the
marketplace. Given the mounting evidence that posted prices frequently
do not reflect value in today's marketplace, the proposed valuation
standards do not rely at all on postings. Furthermore, the prices
referred to in exchange agreements and reciprocal sales may not
represent market values. If two companies maintain a balance between
purchases and sales, it is irrelevant to them whether the referenced
price represents market value. So, after consulting various crude oil
pricing experts and after considerable deliberation, MMS proposes to
revise this section to value production from Indian leases at the
highest of three values: NYMEX futures prices, gross proceeds, or a
major portion value. These three methods would be outlined in a table
for easy access. MMS proposes this multiple comparison largely because
of concerns that current oil marketing practices may at least partially
mask the actual value accruing to the lessee. Multiple sales and
purchases between the same participants, while apparently at arm's
length, may be suspect concerning the contractual price terms. A
producer may have less incentive to capture full market value in its
sales contracts if it knows it will have reciprocal dealings with the
same participant where it, in turn, may be able to buy oil at less than
market value. Several MMS consultants reinforced the notion that as
long as the two parties maintain relative parity in value of oil
production traded, the absolute contract price in any particular
transaction has little meaning. This is particularly obvious in the
case of exchange agreements.
Based on the information available to the lessee at the time it
needs to value and pay royalties on production, the lessee would first
determine whether its gross proceeds or a NYMEX-based index price would
yield the higher value. As explained below, MMS would later determine
and publish a major portion value. The lessee would then determine if
the major portion value was higher than the value it initially reported
and paid royalties on. If so, the lessee would owe additional monies.
Paragraphs (a), (b), (c), and (d) explain this process. They replace
most of existing paragraphs (a), (b), and (c).
Paragraphs (a)(1)-(5). The first of the comparative values would be
the average of the five highest daily NYMEX futures settle prices at
Cushing, Oklahoma, for the Domestic Sweet crude oil contract for the
prompt month. Settle price would mean the price established by the New
York Mercantile Exchange (NYMEX) Settlement Committee at the close of
each trading session as the official price to be used in determining
net gains or losses, margin requirements, and the next day's price
limits. The prompt month would be the earliest month for which futures
are traded on the first day of the month of production. For example, if
the production month is April 1997, the prompt month would be May 1997,
since that is the earliest, or nearest, month for which futures are
traded on April 1.
Paragraphs (a)(2) and (3) would explain that the NYMEX price would
have to be adjusted for applicable location and quality differentials,
and could be adjusted for transportation costs as discussed below.
Paragraph (a)(4) would maintain that where the lessee disposes of
production under an exchange agreement and the lessee refines rather
than sells the oil received in return, the lessee would apply this
paragraph (unless paragraph (c) results in a higher value). An Exchange
agreement would be defined as an agreement by one person to deliver oil
to another person at a specified location in exchange for reciprocal
oil deliveries at another location. Such agreements may be made because
each party has crude oil production closer to the other's refinery or
transportation facilities than to its own, so each may gain locational
advantages. Exchange agreements may or may not specify prices for the
oil involved and frequently specify dollar amounts reflecting location,
quality, or other differentials. Buy/sell agreements, which specify
prices to be paid at each exchange point and may appear to be two
separate sales within the same agreement, are considered exchange
agreements. Transportation agreements are purely to accomplish
transportation. They specify a location differential for moving oil
from one point to the other, with redelivery to the first party at the
second exchange point. They are not considered exchange agreements.
Paragraph (a)(5) would provide that MMS would monitor the NYMEX
prices. If MMS determines that NYMEX prices are unavailable or no
longer represent reasonable royalty value, MMS would, by rule, amend
this paragraph to establish a substitute valuation method.
Attached Appendix B is an example of the NYMEX-based index pricing
method. Assume that the production month is January 1997. The prompt
month would then be February 1997, the prompt month in effect on
January 1. In this instance, February 1997 oil futures are traded on
the NYMEX from December 20, 1996, through January 21, 1997. The average
of the five highest
[[Page 7092]]
daily NYMEX futures settle prices for the February 1997 prompt month is
$26.25 per bbl. This price would be adjusted for location/quality
differentials and transportation (discussed later) to determine the
proper oil value for January production.
MMS searched for indicators to best reflect current market prices
and settled on NYMEX for several reasons. It represents the price for a
widely-traded domestic crude oil (West Texas Intermediate at Cushing,
Oklahoma), and there is little likelihood that any particular
participant in NYMEX trading could impact the price. Also, NYMEX prices
were regarded by many of the experts MMS consulted to be the best
available measure of oil market value. As will be discussed in more
detail below, the most difficult problem would be to make appropriate
location and quality adjustments when comparing the NYMEX crude with
the crude produced. Other indicators MMS considered included spot
prices as tabulated by various publications and the P-plus market. The
P-plus indicator shows premiums over posted prices to reflect oil
market value on any given day. Spot prices offer the advantage that
they are published for several different locations and might involve
somewhat less difficult location and quality adjustments. MMS is
proposing NYMEX prices primarily because they are perceived to best
reflect current domestic crude oil market value on any given day and
the minimal likelihood that any one party could influence them.
Selection of the average of the five highest daily NYMEX settle prices
for a given month is in keeping with a 75th percentile major portion
calculation as discussed below for paragraph (c). MMS's proposal to use
the five highest prices rather than a strict 75th percentile cutoff is
purely for administrative simplicity. Because the number of business
days in any given month may vary from 19 to 23, a strict application of
the 75th percentile cutoff would lead to questions about whether four,
five, or six daily prices should be included. Since 75 percent of the
range from 19 to 23 is between 4.75 and 5.75, MMS suggests simply using
the average of the five highest daily prices in the month.
MMS also considered timing of NYMEX application. Since the prompt
month changes around the 21st of any given production month, two
different prompt months exist during the production month. MMS decided
to use the prompt month in effect on the first day of the production
month. This would result in valuing the current month's production at
the nearest month's futures price, but would reflect the market's
assessment of value during the production month. The daily closing
NYMEX prices are widely available in most major newspapers and various
other publications.
MMS received comments on its proposed Federal oil rule (62 FR 3742,
January 24, 1996) that we should use a one-month-earlier futures price,
where the price would apply to deliveries in the production month but
would be determined in an earlier time period. MMS specifically
requests comments on the timing of the NYMEX application. MMS also
requests comments on each of the following, and any other related
issues you may want to address:
Use of NYMEX as a market value indicator (index),
Possible alternative market value indicators, and
Use of the average of the five highest daily NYMEX settle
prices as one of the comparison values.
MMS also received comments on its proposed rule for Federal oil
valuation suggesting that the NYMEX may not be reflective value for the
Rocky Mountain Region due to the isolated nature of that market. MMS
requests comments on whether we should use a different valuation method
for the Rocky Mountain Region.
Paragraphs (b)(1)-(4). The second of the comparative values would
be the lessee's gross proceeds from the sale of its oil under an arm's-
length contract. This value could be adjusted for appropriate
transportation costs as discussed below. If the lessee disposes of
production under an exchange agreement and the lessee then sells the
oil received in return at arm's length, the value would be the lessee's
resale price adjusted for appropriate quality differentials and
transportation costs.
Paragraph (b)(3) would state that the lessee's reported royalty
value is subject to monitoring, review, and audit by MMS. MMS may
examine whether the lessee's oil sales contract reflects the total
consideration actually transferred either directly or indirectly from
the buyer to the lessee. If it does not, then MMS may require the
lessee to value the oil sold under that contract at the total
consideration it received. MMS may require the lessee to certify that
its arm's-length contract provisions include all of the consideration
the buyer must pay, either directly or indirectly, for the oil.
Paragraph (b)(4) would embody the provisions of current paragraph
(j) and would require that value be based on the highest price the
lessee can receive through legally enforceable claims under its
contract. If the lessee fails to take proper or timely action to
receive prices or benefits it is entitled to, the lessee must base
value on that obtainable price or benefit. 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 documented
measures to force purchaser compliance, it would owe no additional
royalties unless or until it receives monies or consideration resulting
from the price increase or additional benefits. This paragraph would
not permit the lessee to avoid its royalty payment obligation where a
purchaser fails to pay, pays only in part, or pays late. Any contract
revisions or amendments that reduce prices or benefits to which the
lessee is entitled must be in writing and signed by all parties to the
arm's-length contract.
Paragraph (c)(1)-(5). The third comparative value would be a major
portion value MMS would calculate within 120 days of the end of each
production month based on data reported by lessees and purchasers in
the designated area for the production month. Designated area would
mean an area specified by MMS for valuation and transportation cost/
differential purposes, usually corresponding to an Indian reservation.
Paragraph (c)(2) would explain that each designated area would
apply to all Indian leases in that area. MMS would publish in the
Federal Register a list of the leases associated with each designated
area. This paragraph would list the fifteen initial designated areas
based generally on Indian reservations boundaries, plus any other areas
MMS designates. This paragraph would also provide that MMS would
publish any new area designations in the Federal Register. MMS also
would publish in the Federal Register a list of all Indian leases that
are in a designated area for purposes of these regulations.
Paragraph (c)(3) would describe how MMS would calculate the major
portion value. MMS would use price and volume information submitted by
lessees on Form MMS-2014, Report of Sales and Royalty Remittance. As
explained previously, each price reported by lessees on Form MMS-2014
would be the highest of the gross proceeds on a NYMEX-based index
price. MMS also would use information provided by buyers and sellers of
production from the designated area on new Form MMS-4416, Indian Crude
Oil Valuation Report, to verify values reported on Form MMS-2014. Form
MMS-4416 reporting is discussed in more detail below. For each
designated area, MMS would first adjust individual
[[Page 7093]]
values for quality differences and appropriate transportation costs.
Then MMS would array the reported values from highest to lowest. The
major portion value would be that value at which 75 percent of the oil
(by volume, starting from the lowest value) is bought or sold. Sales
volumes would include those volumes taken in kind and resold by the
Indian lessor.
The proposed major portion calculation would be a departure from
the current regulation, where the major portion value is the value at
which 50 percent plus 1 barrel of oil is sold, starting from the lowest
price. MMS and Indian representatives had considerable deliberation on
this issue. Indian lessors have criticized MMS since the publication of
the definition of the major portion value in 1988. They have argued
that the definition of the major portion in the 1988 regulation does
not adequately represent the lease terms concerning the highest price
paid or offered for a major portion of production. They argue that
median is not synonymous with major. Thus, MMS is proposing to use the
value at which 75 percent or more of the oil is sold, starting with the
lowest value, as the definition of the term major.
Paragraph (d). This paragraph would explain how the lessee would
report and pay royalties on the values determined under paragraphs (a),
(b), and (c) above. It would explain that by the date the royalty
payments are due, the lessee would be required to report, on Form MMS-
2014, and pay the value of production at the higher of the values
determined under paragraph (a) or (b). Once MMS completes its major
portion calculations, MMS would inform the lessee of the major portion
value for its applicable designated area. If this value exceeds the
value the lessee initially reported for the production month, it would
have to adjust the value to the higher major portion value by
submitting an amended Form MMS-2014 within 30 days after it receives
notice from MMS of the major portion value. MMS intends to monitor
compliance with this requirement. MMS would specify, in the MMS Oil and
Gas Payor Handbook, additional reporting requirements related to
paragraphs (a), (b), and (c). This paragraph would also provide that
the lessee would not accrue late-payment interest under 30 CFR 218.54
on any underpayment associated with a higher major portion value until
the due date of its amended Form MMS-2014. MMS did not consider it
equitable to assess interest for periods before MMS notifies the lessee
of the major portion value.
MMS believes the major portion value at the 75th percentile from
the bottom is a reasonable safeguard to assure that major portion
provisions of Indian leases are satisfied. Thus, to build certainty
into the lessee's royalty valuation, MMS also proposes in paragraph (d)
that it could not change its major portion value once it issues notice
of the value to lessees, except as may be required by an administrative
or judicial decision. Such a decision may include an Interior Board of
Land Appeals, District Court, or Circuit Court decision overturning
MMS's calculation of the major portion price. A lessee or an Indian
lessor could appeal the major portion value if it could demonstrate
that MMS had not performed the calculation correctly.
MMS requests comments on the comparison of NYMEX prices, gross
proceeds, and a major portion value as the proper method of valuing
Indian crude oil for royalty purposes. Please also incorporate specific
comments on the proposed major portion calculation procedure,
particularly whether there is a more efficient and contemporaneous
process for calculating and publishing the major portion price.
In addition to comments on the comparison between the three
different price bases discussed above, MMS requests specific comments
on alternative valuation techniques based on local market indicators.
MMS believes that today's oil marketing is driven largely by the NYMEX
market. But the location/quality adjustments needed to derive lease
value using NYMEX would involve considerable administrative effort for
all involved. MMS requests suggestions on ways to value Indian oil
production based on market indicators in the vicinity of the lease,
with the following in mind:
(1) The methods should not rely on posted prices unless they
account for the difference between postings and market value.
(2) The methods must account for value differences related to
quality and location.
(3) The methods must be widely applicable and flexible enough to
apply to all Indian crude oil production.
(4) Most importantly, the methods must address the major portion
provisions of Indian leases--the method must reflect ``the highest
price paid or offered at the time of production for the major portion
of oil production from the same field.''
MMS has considered that maximizing royalty revenues from Indian
leases might affect the economics of mineral resource development. But
MMS believes that specific royalty values should be independent of this
concept and not effectively lowered as a result. Rather, this issue
should be examined in the context of lease term adjustments by the
Bureau of Indian Affairs and the Indian lessor. MMS requests specific
comments on whether these proposed regulations would decrease leasing
on Indian lands or otherwise affect the competitiveness of Indian
leases.
Section 206.53 What Other General Responsibilities Do I have to Value
the Oil?
This newly designated section would include several of the
provisions of the existing rules, but rewritten and reordered for
clarity. These provisions would replace part or all of current
paragraphs (d), (e), (f), and (i), under existing Sec. 206.52 and would
state that:
(a) The lessee must make its oil sales and volume data available to
authorized MMS, Indian, and other representatives on request. This
would include any relevant data it has from fee and State leases. When
the lessee entered into the lease, it expressly agreed that the
Secretary will determine royalty value and that value may be calculated
based on the price paid for the major portion of oil sold from the
field where the leased lands are located. The lessee also agreed to
provide all records necessary to determine royalty value. Finally, the
lessee agreed to abide by and conform to the Secretary's regulations.
The Secretary needs the lessee's records concerning its production from
State and fee lands to determine value under the lease terms and
regulations. Thus, MMS may require the lessee to submit records
concerning the volume and value of non-Federal and non-Indian oil
production;
(b) The lessee must retain all data relevant to royalty value
determination according to recordkeeping requirements at 30 CFR 207.5.
MMS or the lessor may review and audit the lessee's data, and may
direct the lessee to use a different value if MMS determines the
lessee's reported value is inconsistent with the requirements of this
section;
(c) If MMS determines that the lessee has undervalued its
production, the lessee must pay the difference plus interest under 30
CFR 218.54. If the lessee has a credit due, MMS will provide
instructions for taking it; and
(d) The lessee must place the oil in marketable condition and
market the oil for the mutual benefit of the lessee and lessor at no
cost to the Indian lessor unless the lease agreement or this section
provide otherwise. We would modify this paragraph to clarify that it
includes a duty to market the oil. This
[[Page 7094]]
is consistent with several Interior Board of Land Appeals decisions
construing this duty. See Walter Oil and Gas Corporation, 111 IBLA 260
(1989).
Section 206.54 May I ask MMS for Valuation Guidance?
This new section would replace existing Sec. 206.52(g) to explain
that MMS will provide guidance to lessees in determining value. MMS
points out that all value determinations are subject to later review
and audit, and the lessee later could be required to pay based on a
different value. If so, the lessee also could be liable for additional
royalties and late payment interest for the period it used an improper
value for the production.
Section 206.55 Does MMS Protect Information I Provide?
Newly designated Sec. 206.55 would include the content of existing
Sec. 206.52(l), but would be rewritten for clarity. It would also state
that MMS would protect information from disclosure to the extent
allowed under applicable laws and regulations.
Deletion of existing Sec. 206.52(e)(2) and (h)
MMS proposes to delete existing Sec. 206.52(e)(2), which requires
lessees to notify MMS if they determine value under existing
Sec. 206.52(c)(4) or (c)(5). Since MMS proposes to delete those
paragraphs, paragraph (e)(2) no longer would apply.
MMS also proposes to delete Sec. 206.52(h), which says royalty
value will not be less than the lessee's gross proceeds, less
applicable allowances. This clause would be redundant given that the
lessee's gross proceeds already form one of the value bases proposed
for comparison in Sec. 206.52.
Section 206.57 Point of Royalty Settlement
This section would not be changed from existing Sec. 206.53, but
would be redesignated as Sec. 206.57.
Section 206.60 What Transportation Allowances and Other Adjustments
Apply to the Value of Oil?
Paragraph (a) Transportation Allowances
This paragraph would be similar in scope to Sec. 206.54(a) of the
present rule, but would apply only when the lessee values production
based on gross proceeds (Section 206.52(b)) and under limited
conditions when the lessee values production using NYMEX (Section
206.52(a)) as discussed below. Paragraph (a)(1) would use a table to
outline when a lessee may claim a transportation allowance.
Transportation allowance would mean a deduction in determining
royalty value for the reasonable, actual costs of moving oil from the
designated area boundary to a point of sale or delivery off the
designated area. The transportation allowance would not include
gathering costs or costs of moving production from the lease to the
designated area boundary. MMS's proposal not to allow transportation
costs within Indian reservations would be based on consistent feedback
from Indian lessors that such costs should not be permitted. They say
that since their leases typically are silent on transportation costs,
there is no specific provision permitting such deductions. But they
acknowledge that costs to move production away from the reservation/
designated area may be legitimate deductions.
Paragraph (a)(2) would explain that transportation allowances would
not be permitted:
(i) if the oil is taken in kind and delivered in the designated
area;
(ii) when the sale or title transfer point is within the designated
area; or
(iii) when the lessee values production under the major portion
provision at Section 206.52(c)--permissible transportation costs
already would have been deducted before MMS performs this calculation.
MMS requests specific comments on permitting transportation
allowances from the designated area rather than the lease.
Paragraph (b) Are There Limits on My Transportation Allowance?
Proposed paragraphs (b)(1) and (b)(2) would include the substance
of existing Sec. 206.54(b)(1) and (b)(2) respectively, but would be
rewritten for clarity and to reflect plain English. Paragraph (b)(1)
would also contain a table outlining the allowance limits. Paragraph
(b)(1) would clarify that except as provided in paragraph (b)(2), the
allowance deduction cannot be more than 50 percent of the oil value at
the point of sale when valuing oil under gross proceeds. Under NYMEX
valuation, the allowance would not be permitted to exceed 50 percent of
the average of the five highest daily NYMEX futures settle prices
(Cushing, Oklahoma) for the domestic Sweet crude oil contract for the
prompt month.
Paragraph (c) Must I Allocate Transportation Costs?
Proposed paragraph (c) would be essentially the same as existing
Sec. 206.54(c). However, it would also point out that the lessee may
not allocate costs to production for which those costs were not
incurred.
Paragraph (d) What Other Adjustments Apply When I Value Production
Based on Index Pricing?
Proposed new paragraph (d) would state that if the lessee values
oil based on index pricing (NYMEX) under Sec. 206.52(a), MMS would
require certain location differentials associated with oil value
differences between the designated area and the index pricing point
outside the designated area. We discuss those differentials below under
Sec. 206.61(c). If the lessee produces oil in the designated area that
includes Cushing, Oklahoma, it would only be entitled to a quality
adjustment.
Paragraph (e) What Additional Payments May I Be Liable For?
Proposed paragraph (e) would contain similar requirements as
existing Sec. 206.54(d), but would be rewritten for clarity. Further,
because adjustments would be made for location and quality differences,
this paragraph would provide that the lessee would be liable for
additional payments if those adjustments were incorrect.
Section 206.61 How do lessees determine transportation allowances and
other adjustments?
Paragraph (a), dealing with arm's-length transportation contracts,
would not be changed. However, MMS notes that lessees no longer are
required to file Form MMS-4110, Oil Transportation Allowance Report,
before claiming an arm's-length allowance on Federal leases. MMS
requests specific comments on the benefits and drawbacks of continuing
to require submission of Form MMS-4110 before lessees may claim an
arm's-length transportation allowance on Indian leases.
Paragraph (b), dealing with non-arm's-length and no contract
situations, would be changed by deleting paragraph (b)(5). The existing
paragraph (b)(5) allows a lessee to apply for an exception from the
requirement that it compute actual costs of transportation; a Federal
Energy Regulatory Commission (FERC) approved tariff could be used
instead.
MMS believes that the use of actual costs is fair to lessees and
that use of a FERC-approved tariff overstates allowable costs in non-
arm's-length situations. Also, just as for arm's-length contracts, MMS
notes that lessees of Federal lands no longer are required to file Form
MMS-4110 before claiming a non-arm's-length transportation allowance.
MMS requests specific comments on whether lessees should
[[Page 7095]]
still be required to submit Form MMS-4110 before claiming a non-arm's-
length transportation allowance on Indian leases.
Paragraph (c) What adjustments apply when using index pricing?
Proposed paragraph (c)(1) would describe adjustments the lessee must
make to index prices where it values its oil based on index pricing
under Sec. 206.52(a). These adjustments and deductions would reflect
the location/quality differentials and transportation costs associated
with value differences between oil at the designated area boundary and
the index pricing point outside the designated area. Index pricing
point would be the physical location where a given price index--in this
case NYMEX--is established. For NYMEX, that location is Cushing,
Oklahoma. Although location differentials would reflect differences in
value of oil at different locations, they are not transportation cost
allowances. In fact, location differentials may increase a value rather
than decrease it. Quality differentials would reflect differences in
the value of oil due to different API gravities, sulfur content, etc.
Location differentials generally also encompass quality differentials.
Proposed paragraph (c)(1) would identify the specific adjustments and
allowances that may apply to your production. The possible adjustments
and allowances would be:
(i) A location differential to reflect the difference in value
between crude oils at the index pricing point (West Texas Intermediate
at Cushing, Oklahoma) and the appropriate market center (for example,
West Texas Intermediate at Midland, Texas). Market center would be
defined as a major destination point for crude oil sales, refining, or
transshipment. As used here, market centers would be locations where
trade publications provide crude oil spot price estimates. The market
center that the lessee would use is the point where oil produced from
its lease or unit ordinarily would flow towards if not disposed of at
an earlier point.
For any given production month, the market center-index pricing
point location/quality differential would be the difference between the
average spot prices for the respective locations as published in an
MMS-approved publication. MMS-approved publication would mean a
publication MMS approves for determining NYMEX prices or location
differentials (MMS-approved publications are discussed further below.)
The purpose of this differential is to derive a NYMEX price at the
market center by adjusting the NYMEX price at the index pricing point
to the general quality of crude typically traded at the market center,
and otherwise to reflect location/quality value differences at the
appropriate market center.
Attached as Appendices C and D are examples of how the averages of
the daily spot prices would be calculated for the index pricing point
(Cushing, OK) and a selected market center (Midland, TX), respectively.
The value difference between the two spot price averages would be the
location differential between the index pricing point and the market
center.
As an example, assume that Platt's Oilgram is an MMS-approved
publication. For the February 1997 delivery month, spot sales prices
are assessed from December 26, 1996, through January 24, 1997. The
average of the daily (mean) spot price assessments for the month is
utilized to calculate the location differential. In this instance, the
average spot price for Cushing is $25.38 per bbl. and the average spot
price for Midland is $25.20 per bbl. Since the Midland price is $.18
per bbl. lower than the Cushing price, the $.18 per bbl. would be
deducted from the NYMEX-based price (or an addition would be made if
the Midland price were higher than the Cushing price).
(ii) An express location/quality differential under the lessee's
arm's-length exchange agreement that would include a clearly
identifiable location/quality differential for the crude oil value
difference between the market center and the designated area boundary.
In the cases that involve such agreements, the differential stated
in the agreement should reflect actual value differences resulting from
differences in location and quality between crude oils at the
designated area boundary and the associated market center.
(iii) A location/quality differential that MMS would publish in the
Federal Register annually that the lessee would use if it did not
dispose of production under an arm's-length exchange agreement that
contains an express differential as described above. MMS would stratify
its calculated differentials so that specific quality differentials
attributable to different grades of crude oil would be identified
separately from location differentials. MMS would publish differentials
for each designated area and an associated market center outside of the
designated area. A designated area may be associated with more than one
market center. As discussed in more detail below, MMS would
periodically publish in the Federal Register a list of market centers
associated with designated areas. The differential would represent
crude oil value differences due to location and quality factors. MMS
would acquire the information needed to calculate these specific
differentials from exchange agreement data provided by lessees on a new
reporting form (Form MMS-4416) discussed below. MMS would calculate the
differentials using a volume-weighted average of the differentials
derived from data reported on Form MMS-4416 for the previous reporting
year. The differentials may reflect both a location differential based
on the market center/designated area pairs and a quality differential
based on the different types of crude oil exchanged. The lessee would
apply the differential on a calendar production year basis. This means
the lessee would apply it for the reporting months of February through
the following January.
(iv) The lessee's actual transportation costs from the designated
area boundary to the market center outside of the designated area as
determined under Sec. 206.61. MMS is not proposing to change the
existing methods to calculate transportation allowances. The allowance
would terminate at the market center as part of the total adjustment to
derive an index-price-based value at the lease.
The purpose of these adjustments and allowances would be to reflect
value differences for crude oil production of different qualities and
at different locations to derive value at the designated area. The
location differentials between the index pricing point and the market
center, and between the market center and the designated area, would
not necessarily reflect transportation alone. They would represent the
overall market assessment of the different relative values of similar
crude oil delivered at different locations. Only the actual
transportation costs from the designated area to the market center
would represent pure transportation costs.
MMS considered alternative index price adjustment methods ranging
from using index values with no location adjustments to picking a
specific percentage deduction from the index value to generically
reflect location differentials. A variation of the latter would be to
develop percentage or absolute dollar deductions for different
geographical zones. In addition to specific comments on the proposed
method of adjusting index values, MMS requests suggestions on
alternative methods.
Proposed paragraph (c)(2) would specify which of the adjustments
and allowances described above would
[[Page 7096]]
apply to the lessee in various situations. This paragraph would include
a table that would outline which adjustments under paragraph (c)(1)
would apply. If the lessee disposed of its production under an arm's-
length exchange agreement and the agreement had an express location/
quality differential to reflect the difference in value between the
designated area boundary for its lease and an associated market center
outside of the designated area, then it would use two of the four
possible adjustments and allowances. Specifically, it would use the
market center-index pricing point location/quality differential under
paragraph (c)(1)(i) and the designated area-market center differential
specified in its exchange agreement under paragraph (c)(1)(ii).
Attached as Appendix E is an example of a NYMEX-based royalty
computation for production from the Navajo reservation. The
publications for calculating the NYMEX price and index pricing point-
market center location differential have been discussed above and are
illustrated at Appendices B, C, and D.
The deduction from the NYMEX-based price for the location/quality
differential between the market center and designated area would be the
actual exchange agreement differential or an MMS-published
differential. (For purposes of this example, we used $.25 per bbl.)
If the lessee moved lease production directly to an MMS-identified
market center outside of a designated area that is also the index
pricing point (Cushing, Oklahoma), then it would use only two of the
adjustments and allowances. The lessee would use the designated area-
market center (index pricing point) quality differential under
paragraph (c)(1)(iii) to determine the difference in value attributable
to quality differences, and the actual transportation costs from the
designated area boundary to the market center under paragraph
(c)(1)(iv). For applying paragraph (c)(1)(iii), the lessee would use
the quality differential published by MMS corresponding to oil similar
to its production as compared to the quality of oil used for index
pricing.
If the lessee did not move lease production from a designated area
to an MMS-identified market center, but instead moved it directly to an
alternate disposal point (for example, its own refinery), then it would
use only two of the adjustments and allowances. The lessee would use
the market center-index pricing point location/quality differential
under paragraph (c)(1)(i) and the actual transportation costs from the
designated area boundary to the alternate disposal point outside of the
designated area under paragraph (c)(1)(iv). The market center for
purposes of paragraph (c)(1)(i) is the MMS-identified market center
nearest the lease where there is a published spot price for crude oil
of like quality to the lessee's. Like-quality oil would mean oil with
similar chemical, physical, and legal characteristics. For example,
West Texas Sour and Wyoming Sour would be like-quality, as would West
Texas Intermediate and Light Louisiana Sweet. The market center for
purposes of paragraph (c)(1)(iv) would be the alternate disposal point.
For example, a lessee producing sour crude from Indian leases in
Wyoming might transport its oil directly to a refinery in Salt Lake
City, Utah, without accessing any defined market center. In this case
West Texas Sour crude at Midland, Texas, might represent the crude oil/
market center combination most like and nearest to the oil produced.
The market center-index pricing point location/quality differential
under paragraph (c)(1)(i) would then be the difference in the spot
price between West Texas Intermediate at Cushing, Oklahoma, and West
Texas Sour at Midland, Texas as published in an MMS-approved
publication. In addition to that adjustment, the lessee would be
entitled to an allowance for the actual transportation costs from the
designated area boundary in Wyoming to Salt Lake City (paragraph
(c)(1)(iv), with Salt Lake City considered the market center for
applying this deduction). MMS is proposing that this method is the best
way to calculate the differences in value between the designated area
and the index pricing point due to location, quality, and
transportation when the production is not actually moved to a market
center.
In all other situations, the lessee would use the market center-
index pricing point location/quality differential (paragraph (c)(1)(i))
and the MMS-published designated area-market center location/quality
differential under paragraph (c)(1)(iii). These adjustments would cover
all location, quality, and transportation differences in value between
the designated area and the index pricing point.
Proposed paragraph (c)(3) would state that if an MMS-calculated
differential does not apply to a lessee's oil, due to either location
or quality differences, the lessee must request in writing that MMS
calculate a location/quality differential that would apply to its oil.
Conditions for an exception would include:
(1) After MMS publishes its annual listing of location/quality
differentials, the lessee must deliver to MMS its written request for
an MMS-calculated differential;
(2) The lessee must provide evidence demonstrating why the
published differential(s) does not adequately reflect its
circumstances; and
(3) MMS will calculate a revised differential for the lessee when
it receives the lessee's request or when it determines that the
published differential does not apply to the lessee's oil. If
additional royalties and interest are due, MMS then would bill for
them. If the lessee filed a request for exception within 30 days after
MMS publishes its annual listing of location/quality differentials, the
MMS-calculated differential would apply as of the effective date of the
published differentials. But if the request was received more than 30
days after MMS publishes its differential listing, the MMS-calculated
differential would apply beginning the first day of the month following
the date of the lessee's application for exception. In this case the
published differentials would apply in the interim and MMS would not
refund any overpayments made due to failure to timely request MMS to
calculate a differential.
MMS would insert paragraph (c)(4) to note that it would
periodically publish a list of MMS-approved publications in the Federal
Register. This paragraph would also specify the criteria for
acceptability. It would specify that the publications must:
(i) Be frequently used by buyers and sellers;
(ii) Be frequently mentioned in purchase or sales contracts;
(iii) Use adequate survey techniques, including development of spot
price estimates based on daily surveys of buyers and sellers of crude
oil; and
(iv) Be independent from MMS, other lessors, and lessees.
Proposed paragraph (c)(5) would allow any publication to petition
MMS to add them to the list of acceptable publications.
Proposed paragraph (c)(6) would state that MMS would reference the
specific tables in individual publications that lessees must use to
determine location differentials.
Proposed paragraph (c)(7) would explain that MMS would periodically
publish in the Federal Register a list of market centers. MMS would
monitor market activity and, if necessary, add or modify market
centers. MMS would consider the following factors and conditions in
specifying market centers:
(i) Points where MMS-approved publications publish prices useful
for index purposes;
[[Page 7097]]
(ii) Markets served;
(iii) Pipeline and other transportation linkage;
(iv) Input from industry and others knowledgeable in crude oil
marketing and transportation;
(v) Simplification; and
(vi) Other relevant matters.
MMS would initially consider the following as Market Centers:
Cushing, OK;
Empire, LA;
Guernsey, WY;
Midland, TX; and
St. James, LA.
Where Cushing, Oklahoma, is used as a market center, the index
pricing point and market center would coincide. MMS requests specific
comments on the initial list of market centers, including suggested
additions, deletions and other modifications.
(d) Reporting requirements. MMS would redesignate existing
paragraph (c) as (d) and revise redesignated paragraphs (d)(1)(i) and
(d)(2)(i). Paragraph (d)(3) would otherwise remain the same, except
that MMS would delete existing paragraph (c)(2)(viii) consistent with
the previous change to delete the use of FERC- or State-approved
tariffs. Redesignated paragraph (d)(4) would be modified to say that
not only transportation allowances, but also location and quality
differentials, must be reported as separate lines on Form MMS-2014
unless MMS approves a different procedure. MMS would provide additional
royalty reporting details and requirements in the MMS Oil and Gas Payor
Handbook.
(5) What Information Must a Lessee Provide To Support Index Pricing
Deductions, and How Is It Used?
Proposed paragraph (d)(5) would be added to require lessees and all
other purchasers of crude oil from Indian leases to submit a new form
to MMS. We realize this may result in some duplicate information being
filed by buyers and sellers, but MMS believes the buyer information
will be very useful in confirming reported royalty values. Proposed
Form MMS-4416, Indian Crude Oil Valuation Report, would capture value
and location differential information from all exchange agreements or
other contracts for disposal of oil from Indian lands. MMS would use
these data to calculate location differentials between market centers
and designated areas and to verify values reported on Form MMS-2014.
MMS would publish annually in the Federal Register the location
differentials for lessees to use in royalty reporting. MMS has included
a copy of proposed Form MMS-4416 as Appendix A to these proposed
regulations.
Information submitted on the new form would cover all of the
lessee's crude oil production from Indian leases. All Indian lessees
and all purchasers of oil from Indian lands would initially submit Form
MMS-4416 no later than 2 months after the effective date of this
reporting requirement, and then by October 31 of the year this
regulation takes effect and by October 31 of each succeeding year.
However, if October 31 of the year this regulation takes effect is less
than 6 months after the effective date of this reporting requirement,
the second submission of the Form MMS-4416 would not be required until
October 31 of the succeeding year. In addition to the annual
requirement to file this form, a new form would be required to be filed
each time a new exchange or sales contract involving the production of
oil from an Indian lease is executed. However, if the contract merely
extends the time period a contract is in effect without changing any
other terms of the contract, this requirement would not apply.
The reporting requirement would take effect before the effective
date of the remainder of the rule. Early submittal of this information
would allow MMS to publish the representative market center-designated
area location differentials in the Federal Register by the effective
date of the final regulation. Then MMS would publish location
differentials by January 31 of all subsequent years. MMS would publish
differentials for different qualities/grades of crude oil if the data
are sufficient and if multiple differentials are appropriate for the
area. Each year following the year this regulation became effective,
lessees would use the new published differentials beginning with
January production royalties reported in February.
MMS received many comments under its proposed Federal oil valuation
rule on the administrative burden created by proposed Form MMS-4415.
Therefore, MMS requests comments on how proposed Form MMS-4416 for
Indian oil could be simplified, yet remain useful, in determining
adjustments to the NYMEX-based price. Specifically, MMS requests
comments on Form MMS-4416 (See Appendix A), including:
Its layout and information requested;
Frequency and timing of submittal;
Frequency and timing of MMS's calculations and publication
of differentials; and
All other relevant comments.
Remainder of Section 206.55
MMS proposes no changes to existing paragraphs (d) and (e) except
to redesignate them as paragraphs (e) and (f).
In addition to redesignating paragraph (f) as (g), MMS proposes to
remove the reference to FERC- or State-approved tariffs to be
consistent with the proposed deletion of paragraph 206.55(b)(5). MMS
proposes no change to existing paragraph (g) except to redesignate it
as paragraph (h).
IV. Procedural Matters
The Regulatory Flexibility Act
The Department certifies that this rule will not have significant
economic effect on a substantial number of small entities under the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This proposed rule
would amend regulations governing the valuation for royalty purposes of
crude oil produced from Indian lands. These changes would modify the
valuation methods in the existing regulations. Small entities are
encouraged to comment on this proposed rule.
Approximately 125 payors pay royalties to MMS on oil production
from Indian lands. The majority of these payors are considered small
businesses under the criteria of the Small Business Administration (500
employees or less). MMS estimates this proposal will have an annual
dollar impact of $368 per payor (Total Dollar Impact of
$45,955125 Indian Royalty Payors). The estimated yearly
industry compliance cost under this rule is $45,955. This amount is
based on an annual burden of 1,313 hours for 125 payors X $35 (industry
cost per hour).
Further, based on data obtained from the Small Business
Administration (SBA), a small business on average has estimated
receipts of $2,000,000. An annual cost impact of $368 for a small
business to comply with this rule is not considered significant.
Approximately 125 payors report and pay royalties on oil production
from Indian mineral leases. Of these 125 companies, most would be
considered small entities under the SBA criteria. Since there are
15,838 small firms in the oil and gas industry in the United States,
only about 1 percent (12515,838) are involved with MMS's
business of reporting and paying royalty on oil produced from Indian
lands. Accordingly, this rule will not affect a substantial number of
small entities.
Unfunded Mandates Reform Act of 1995
The Department of the Interior has determined and certifies
according to the Unfunded Mandates Reform Act, 2
[[Page 7098]]
U.S.C. 1502 et seq., that this rule will not impose a cost of $100
million or more in any given year on local, tribal, or State
governments, or the private sector.
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, Governmental Actions and
Interference with Constitutionally Protected Property Rights.
Executive Order 12988
The Department has certified to the Office of Management and Budget
that this proposed rule meets the applicable civil justice reform
standards provided in Sections 3(a) and 3(b)(2) of this Executive
Order.
Executive Order 12866
The Office of Management and Budget has determined this rule is a
significant rule under Executive Order 12866 Section 3(f)(4)c, which
states: ``Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
this Executive Order.'' The Office of Management and Budget has
reviewed this rule under Executive Order 12866.
The Department's analysis of these proposed revisions to the oil
valuation regulations indicates these changes will not have a
significant economic effect as defined by Section 3(f)(1) of Executive
Order 12866.
This rule will not have an annual effect on the economy of $100
million or more or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal
governments or communities. The MMS concludes that this proposed rule
would result in an annual increase in Indian oil royalties of
approximately $3.6 million. MMS and industry will realize
administrative savings because of reduced complexity in royalty
determination and payments and would introduce certainty into Indian
royalty reporting.
Paperwork Reduction Act
This proposed rule contains a collection of information which has
been submitted to the Office of Management and Budget (OMB) for review
and approval under section 3507(d) of the Paperwork Reduction Act of
1995. As part of our continuing effort to reduce paperwork and
respondent burden, MMS invites the public and other Federal agencies to
comment on any aspect of the reporting burden. Submit your comments to
the Office of Information and Regulatory Affairs, OMB, Attention Desk
Officer for the Department of the Interior, Washington, D.C. 20503.
Send copies of your comments to: Minerals Management Service, Royalty
Management Program, Rules and Publications Staff, P.O. Box 25165, MS
3021, Denver, Colorado 80225-0165; courier address is: Building 85,
Denver Federal Center, Denver, Colorado 80225; e:Mail address is:
David__G[email protected].
OMB may make a decision to approve or disapprove this collection of
information after 30 days from receipt of our request. Therefore, your
comments are best assured of being considered by OMB if OMB receives
them within that time period. However, MMS will consider all comments
received during the comment period for this notice of proposed
rulemaking.
The information collection is titled Indian Crude Oil Valuation
Report. Part of the valuation of oil under this proposed rule relies on
price indices that lessees may adjust for location differences between
the index pricing point and the designated area. Lessees (and their
affiliates as appropriate) on Indian lands, as well as purchasers of
oil from these lands, would be required to give MMS information on the
prices and location differentials included in their various oil
exchange agreements and sales contracts. MMS would use these data to
calculate and publish representative location differentials for
lessees' use in reporting royalties in different areas. MMS would also
use these data to verify royalty values reported on Form MMS-2014. This
process would introduce certainty into royalty reporting.
Rules establishing the use of Form MMS-4416 to report oil values
and location differentials are at proposed 30 CFR 206.55(d)(5).
Information provided on the forms may be used by MMS auditors and the
Royalty Valuation Division (RVD).
MMS estimates the annual reporting burden at 1,313 hours. There are
approximately 125 oil royalty payors on Indian leases. These payors
will have varying business relationships with one or more Indian tribes
and/or allottees. MMS estimates that, on average, a payor will have six
exchange agreements or sales contracts which enable the Indian oil
royalty payor to either sell or refine the oil production from the
Indian lease(s) for which they are making royalty payments. We estimate
that a payor will fill out Form MMS-4416 in about one-half hour; we
estimate the payor would have to submit the form twice a year because
of contract changes in addition to the required annual filing discussed
below (750 agreements/contracts x \1/2\ hour x 2=750 burden hours).
In addition, MMS estimates that half of the exchange agreements or
sales contracts would also be reported by non-payor purchasers of crude
oil from Indian leases as required by 30 CFR 206.55(d)(5). Again, we
estimate that the filing of Form MMS-4416 could take one-half hour per
report to extract the data from individual exchange agreements and
sales contracts; we also estimate that a non-payor purchaser would file
a report twice a year for each agreement/contract (375 agreements/
contracts x \1/2\ hour x 2=375 burden hours).
To assure Indian lessors, tribes and allottees that all payors and
non-payor purchasers are complying with these proposed Indian valuation
regulations, we will require that Form MMS-4416 be submitted annually
for all agreements/contracts to which payors and non-payor purchasers
are parties, regardless of whether the agreements/contracts change or
not. We estimate that this would require 10 minutes per report to
indicate a no-change situation (750+375) agreements/contracts x \1/6\
hour = 187.5 burden hours). Only a minimal recordkeeping burden would
be imposed by this collection of information. Based on $35 per hour
cost estimate, the annual industry cost is estimated to be $45,955
[(750+375+188) total burden hours x $35=$45,955].
In compliance with the Paperwork Reduction Act of 1995, Section
3506 (c)(2)(A), we are notifying you, members of the public and
affected agencies, of this collection of information, and are inviting
your comments. For instance your comments may address the following
areas. Is this information collection necessary for us to properly do
our job? Have we accurately estimated the industry burden for
responding to this collection? Can we enhance the quality, utility, and
clarity of the information we collect? Can we lessen the burden of this
information collection on the respondents by using automated collection
techniques or other forms of information technology?
The Paperwork Reduction Act of 1995 provides that an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number.
[[Page 7099]]
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 Part 206
Coal, Continental shelf, Geothermal energy, Government contracts,
Indians-lands, Mineral royalties, Natural gas, Petroleum, Public
lands--mineral resources, Reporting and recordkeeping requirements.
Dated: November 26, 1997.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
For the reasons set out in the preamble, MMS proposes to amend 30
CFR part 206 as follows:
PART 206--PRODUCT VALUATION
1. The authority citation for part 206 continues to read as
follows:
Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 96a 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.
Subpart B--Indian Oil
2. Section 206.53 is redesignated as Sec. 206.57, Sec. 206.54 is
redesignated as Sec. 206.60, and Sec. 206.55 is redesignated as
Sec. 206.61.
3. Sections 206.50 through 206.52 are revised and new Secs. 206.53
through 206.56 are added to read as follows:
Sec. 206.50 What is the purpose of this subpart?
(a) This subpart applies to all oil produced from Indian (tribal
and allotted) oil and gas leases (except leases on the Osage Indian
Reservation, Osage County, Oklahoma). It explains how lessees (a
defined term) must calculate the value of production for royalty
purposes consistent with applicable laws and lease terms.
(b) A provision in this subpart does not apply if it is
inconsistent with:
(1) A Federal statute;
(2) A treaty;
(3) A settlement agreement resulting from administrative or
judicial litigation; or
(4) An express provision of an oil and gas lease subject to this
subpart.
(c) MMS or Indian tribes may audit and adjust all royalty payments.
(d) This subpart is intended to ensure that the United States
discharges its trust responsibilities for administering Indian oil and
gas leases under the governing mineral leasing laws, treaties, and
lease terms.
Sec. 206.51 Definitions.
The following definitions apply to this subpart:
Area means a geographic region at least as large as the 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 between
independent, nonaffiliated persons with opposing economic interests
regarding that contract. Two persons are affiliated if one person
controls, is controlled by, or is under common control with another
person. Based on the instruments of ownership of the voting securities
of an entity, or based on other forms of ownership: ownership over 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. MMS may rebut this presumption if it
demonstrates actual or legal control, as through interlocking
directorates. MMS may require the lessee to certify the percentage of
ownership or control. Aside from the percentage ownership criteria,
contracts between relatives, either by blood or by marriage, are not
arm's-length contracts. To be considered arm's-length for any
production month, a contract must satisfy this definition for that
month, as well as when the contract was executed.
Audit means a review, conducted under generally accepted accounting
and auditing standards, of royalty payment compliance activities of
lessees 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 processing. Condensate
is the mixture of liquid hydrocarbons resulting 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, between two or more persons, that is enforceable by law
and that with due consideration creates an obligation.
Designated area means an area specified by MMS for valuation and
transportation allowance/differential purposes, usually corresponding
to an Indian reservation.
Exchange agreement means an agreement where one person agrees to
deliver oil to another person at a specified location in exchange for
oil deliveries at another location. Exchange agreements may or may not
specify prices for the oil involved. They frequently specify dollar
amounts reflecting location, quality, or other differentials. Exchange
agreements include ``buy/sell'' agreements, which specify prices to be
paid at each exchange point and may appear to be two separate sales
within the same agreement. Exchange agreements do not include
``transportation'' agreements, whose principal purpose is
transportation.
Field means a geographic region situated over one or more
subsurface oil and gas reservoirs and encompassing at least the
outermost boundaries of all oil and gas accumulations known within
those reservoirs, vertically projected to the land surface. State oil
and gas regulatory agencies usually name onshore fields and designate
their official boundaries.
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 that BLM approves for onshore leases.
Gross proceeds means the total monies and other consideration
accruing to the lessee for the disposition of oil produced. Gross
proceeds includes, but is not limited to, the examples discussed in
this definition. Gross proceeds includes payments for services such as
dehydration, measurement, and/or gathering which the lessee must
perform at no cost to the Indian lessor. It also includes the value of
services, such as salt water disposal, that the lessee normally
performs but that the buyer performs on the lessee's behalf. Gross
proceeds also includes reimbursements for terminaling fees. Tax
reimbursements are part of the gross proceeds even though the Indian
royalty interest may be exempt from taxation. Monies and all other
consideration a seller is contractually or legally entitled to, but
does not seek to collect through reasonable efforts, are also part of
gross proceeds.
Indian allottee means any Indian for whom the United States holds
land or a land interest in trust or who holds title subject to Federal
restriction against alienation.
[[Page 7100]]
Indian tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other Indian group for which the
United States holds any land or land interest in trust or which is
subject to Federal restriction against alienation.
Index pricing means using NYMEX futures prices for royalty
valuation.
Index pricing point means the physical location where an index
price is established in an MMS-approved publication.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under a
mineral leasing law applicable to Indian lands that authorizes
exploration for, development or extraction of, or removal of oil or gas
products--or the land area covered by that authorization, whichever the
context requires.
Lessee means any person to whom an Indian Tribe or allottee issues
a lease, and any person assigned an obligation to make royalty or other
payments required by the lease. This includes any person holding a
lease interest (including operating rights owners) as well as an
operator, purchaser, or other person with no lease interest but who
makes royalty payments to MMS or the lessor on the lessee's behalf.
Lessee includes all affiliates, including but not limited to a
company's production, marketing, and refining arms.
Like-quality oil means oil with similar chemical, physical, and
legal characteristics.
Load oil means any oil used in 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.
Location differential means the value difference for oil at two
different points.
Major portion means the highest price paid or offered at the time
of production for the major portion of oil production from the same
designated area. It is calculated monthly using like-quality oil from
the same designated area (or, if the corresponding field or area is
larger than the designated area and if necessary to obtain a reasonable
sample, from the same field or area).
Market center means a location MMS recognizes for oil sales,
refining, or transshipment. Market centers generally are locations
where MMS-approved publications publish oil spot prices.
Marketable condition means oil sufficiently free from impurities
and otherwise in a condition a purchaser will accept under a sales
contract typical for the field or area.
MMS means the Minerals Management Service of the Department of the
Interior.
MMS-approved publication means a publication MMS approves for
determining NYMEX prices or location differentials.
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.
Netting means reducing the reported sales value to account for
transportation instead of reporting a transportation allowance as a
separate line on Form MMS-2014.
NYMEX means the New York Mercantile Exchange.
Oil means a mixture of hydrocarbons that existed in the liquid
phase in natural underground reservoirs, remains liquid at atmospheric
pressure after passing through surface separating facilities, and is
marketed or used as a liquid. Condensate recovered in lease separators
or field facilities is considered oil.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Quality differential means the value difference between two oils
due to differences in their API gravity, sulfur content, viscosity,
metals content, and other quality factors.
Sale means a contract where:
(1) The seller unconditionally transfers title to the oil to the
buyer. The seller may not retain any related rights such as the right
to buy back similar quantities of oil from the buyer elsewhere;
(2) The buyer pays money or other consideration for the oil; and
(3) The parties' intent is for a sale of the oil to occur.
Settle price means the price established by NYMEX's Exchange
Settlement Committee at the close of each trading session as the
official price to be used in determining net gains or losses, margin
requirements, and the next day's price limits.
Spot price means the price under a spot sales contract where:
(1) A seller agrees to sell to a buyer a specified amount of oil at
a specified price over a specified period of short duration;
(2) No cancellation notice is required to terminate the sales
agreement; and
(3) There is no obligation or implied intent to continue to sell in
subsequent periods.
Transportation allowance means a deduction in determining royalty
value for the reasonable, actual costs of moving oil from the
designated area boundary to a point of sale or delivery off the
designated area. The transportation allowance does not include
gathering costs or costs of moving production from the lease to the
designated area boundary.
Sec. 206.52 How does a lessee determine the royalty value of the oil?
This section explains how you must determine the value of oil
produced from Indian leases. For royalty purposes, the value of oil
produced from leases subject to this subpart is the value calculated
under this section with applicable adjustments determined under this
subpart. The following table lists three oil valuation methods. You
must determine the value of oil using the method that yields the
highest value. As explained under paragraph (d) of this section, you
must select from the first two methods and make an initial value
calculation and payment based on the method that yields the highest
value. MMS will calculate and publish the value under the third method.
If the third method yields a higher value than the first two methods,
you must adjust the value from your initial calculation as explained
under paragraph (d) of this section.
----------------------------------------------------------------------------------------------------------------
Valuation method Subject to
----------------------------------------------------------------------------------------------------------------
The average of the five highest daily NYMEX Paragraphs (a) (1)-(5) of this section.
futures settle prices (Cushing, Oklahoma) for
the Domestic Sweet crude oil contract for the
prompt month.
The gross proceeds from the sale of your oil Paragraphs (b) (1)-(4) of this section.
under an arm's-length contract.
A major portion value that MMS calculates for Paragraphs (c) (1)-(4) of this section.
each designated area within 120 days of the end
of each production month.
----------------------------------------------------------------------------------------------------------------
(a) You may calculate value using the average of the five highest
daily NYMEX futures settle prices (Cushing, Oklahoma) for the Domestic
Sweet crude oil contract for the prompt month.
[[Page 7101]]
If you use this method, the provisions of this paragraph (a) apply.
(1) The prompt month is the earliest month for which futures are
traded on the first day of the month of production. For example, if the
production month is April 1997, the prompt month would be May 1997,
since that is the earliest month for which futures are traded on April
1.
(2) You must adjust the index price for applicable location and
quality differentials under Sec. 206.61(c) of this subpart.
(3) If applicable, you may adjust the index price for
transportation costs under Sec. 206.61(c) of this subpart.
(4) If you dispose of oil under an exchange agreement and you
refine rather than sell the oil that you receive in return, you must
use this paragraph (a) to determine initial value.
(5) MMS will monitor the NYMEX prices. If MMS determines that NYMEX
prices are unavailable or no longer represent reasonable royalty value,
MMS will amend this section to establish a substitute valuation method.
(b) You may calculate value using the gross proceeds from the sale
of your oil under an arm's-length contract. If you use this method, the
provisions of this paragraph (b) apply.
(1) You may adjust the gross proceeds-based value calculated under
this section for appropriate transportation costs under Sec. 206.61(c)
of this subpart.
(2) If you dispose of your oil under an exchange agreement and then
sell the oil that you receive in return under an arm's-length contract,
value is the sales price adjusted for appropriate quality differentials
and transportation costs.
(3) MMS may monitor, review, or audit the royalty value that you
report under this paragraph (b).
(i) MMS may examine whether your oil sales contract reflects the
total consideration actually transferred either directly or indirectly
from the buyer to you. If it does not, then MMS may require you to
value the oil sold under that contract at the total consideration you
received.
(ii) MMS may require you to certify that the arm's-length contract
provisions include all of the consideration the buyer must pay, either
directly or indirectly, for the oil.
(4) You must base value on the highest price that you can receive
through legally enforceable claims under your oil sales contract. If
you fail to take proper or timely action to receive prices or benefits
you are entitled to, you must base value on that obtainable price or
benefit.
(i) In some cases you may apply timely for a price increase or
benefit allowed under your oil sales contract, but the purchaser
refuses your request. If this occurs, and you take reasonable
documented measures to force purchaser compliance, you will owe no
additional royalties unless or until you receive monies or
consideration resulting from the price increase or additional benefits.
This paragraph (b)(4) does not permit you to avoid your royalty payment
obligation if a purchaser fails to pay, pays only in part, or pays
late.
(ii) Any contract revisions or amendments that reduce prices or
benefits to which you are entitled must be in writing and signed by all
parties to your arm's-length contract.
(c) You may use a major portion value that MMS will calculate. If
you use this method, the provisions of this paragraph apply.
(1) MMS will calculate and publish the major portion value for each
designated area within 120 days of the end of each production month.
(2) Each designated area includes all Indian leases in that area.
MMS will publish in the Federal Register a list of the leases in each
designated area. The designated areas are:
(i) Alabama-Coushatta;
(ii) Blackfeet Reservation;
(iii) Crow Reservation;
(iv) Fort Belknap Reservation;
(v) Fort Peck Reservation;
(vi) Jicarilla Apache Reservation;
(vii) MMS-designated groups of counties in the State of Oklahoma;
(viii) Michigan Agency;
(ix) Navajo Reservation;
(x) Northern Cheyenne Reservation;
(xi) Southern Ute Reservation;
(xii) Turtle Mountain Reservation; (xiii) Ute Mountain Ute Reservation;
(xiv) Uintah and Ouray Reservation;
(xv) Wind River Reservation; and
(xvi) Any other area that MMS designates. MMS will publish any new area
designations in the Federal Register.
(3) MMS will calculate the major portion value from information
submitted for production from leases in the designated area on Form
MMS-2014, Report of Sales and Royalty Remittance.
(i) MMS will use information from Form MMS-4416, Indian Crude Oil
Valuation Report, to verify values reported on Form MMS-2014. See
Sec. 206.61(d)(5) of this subpart for further requirements related to
Form MMS-4416.
(ii) MMS will arrange the reported values (adjusted for location
and quality) from highest to lowest. The major portion value is the
value of the 75th percentile (by volume, including volumes taken in
kind) starting from the lowest value.
(4) MMS will not change the major portion value after it notifies
you of that value for your leases, unless an administrative or judicial
decision requires MMS to make a change.
(d) On Form MMS-2014, you must initially report and pay the value
of production at the higher of the index-based or gross proceeds-based
values determined under paragraphs (a) or (b) of this section,
respectively. You must file this report and pay MMS by the date royalty
payments are due for the lease. MMS will inform you of its calculated
major portion value for the designated area. If this value exceeds the
value you initially reported for the production month, you must submit
an amended Form MMS-2014 with the higher value within 30 days after you
receive notice from MMS of the major portion value. MMS will specify,
in the MMS Oil and Gas Payor Handbook, additional requirements for
reporting under paragraphs (a), (b), or (c) of this section. You will
not begin to accrue late-payment interest under 30 CFR 218.54 on any
underpayment until the due date of your amended Form MMS-2014.
Sec. 206.53 What other general responsibilities do I have for valuing
oil?
(a) On request, you must make available sales and volume data for
production you sold, purchased, or obtained from the designated area or
from nearby fields or areas. This includes sales and volume data from
fee and State leases within the designated area or from nearby fields
or areas. You must make this data available to the authorized MMS or
Indian representatives, the Office of the Inspector General of the
Department of the Interior, or other persons authorized to receive such
information.
(b) You must retain all data relevant to the determination of
royalty value. Recordkeeping requirements are found at 30 CFR 207.5.
MMS or the lessor may review and audit such data you possess, and MMS
will direct you to use a different value if it determines that the
reported value is inconsistent with the requirements of this section.
(c) If MMS determines that you have not properly determined value,
you must:
(1) Pay the difference, if any, between the royalty payments you
made and those that are due based upon the value MMS establishes;
(2) Pay interest on the difference computed under 30 CFR 218.54;
and
[[Page 7102]]
(3) If you are entitled to a credit, MMS will tell you how to take
that credit.
(d) You must place oil in marketable condition and market the oil
for the mutual benefit of yourself and the lessor at no cost to the
Indian lessor, unless the lease agreement or this part provides
otherwise. In the process of marketing the oil or placing it in
marketable condition, your gross proceeds may be reduced because
services are performed on your behalf that normally would be your
responsibility. If this happens, and if you valued the oil using gross
proceeds under Sec. 206.52(b), you must increase value to the extent
that your gross proceeds are reduced.
Sec. 206.54 May I ask MMS for valuation guidance?
You may ask MMS for guidance in determining value. You may propose
a value method to MMS. Submit all available data related to your
proposal and any additional information MMS deems necessary. MMS will
promptly review your proposal and provide you with the guidance you
request.
Sec. 206.55 Does MMS protect information I provide?
MMS will keep confidential, to the extent allowed under applicable
laws and regulations, any data you submit that is privileged,
confidential, or otherwise exempt.
(a) Certain information you submit to MMS to support valuation
proposals, including transportation allowances, is exempt from
disclosure under Federal law.
(b) All requests for information about determinations made under
this part must be submitted under the Freedom of Information Act
regulation of the Department of the Interior, 43 CFR part 2.
(c) The Indian lessor has the right to obtain directly from you or
MMS any information to which it may be lawfully entitled under the
terms of the lease, 30 U.S.C. 1733, or other applicable law.
4. Newly redesignated section 206.60 is revised to read as follows:
Sec. 206.60 What transportation allowances and other adjustments apply
to the value of oil?
(a) Transportation allowances. (1) You may deduct a transportation
allowance from the value of oil determined under Sec. 206.52 of this
part as explained in the following table.
----------------------------------------------------------------------------------------------------------------
If you value oil And Then
----------------------------------------------------------------------------------------------------------------
Based on index pricing under Sec. You may claim a transportation allowance only
206.52(a). under the limited circumstances listed at Sec.
206.61(c)(2).
Based on gross proceeds under Sec. The movement of the oil MMS will allow a deduction for the reasonable,
206.52(b). is not gathering. actual costs to transport oil from the
designated area boundary to the sales point.
----------------------------------------------------------------------------------------------------------------
(i) See Sec. 206.61(a) and (b) for information on how to determine
the transportation allowance.
(ii) [Reserved]
(2) You may not deduct a transportation allowance for transporting
oil:
(i) Taken as Royalty-In-Kind and delivered to the lessor in the
designated area;
(ii) When the sale or transfer point occurs within the designated
area; or
(iii) When you value oil based on a major portion value under
Sec. 206.52(c).
(b) Are there limits on my transportation allowance? (1) Except as
provided in paragraph (b)(2) of this section:
------------------------------------------------------------------------
If you determine the value of Then your transportation allowance
the oil based on deduction may not exceed
------------------------------------------------------------------------
Index pricing under Sec. 50 percent of the average of the five
206.52(a). highest daily NYMEX futures settle
prices (Cushing, Oklahoma) for the
Domestic Sweet crude oil contract for
the prompt month.
Gross proceeds under Sec. 50 percent of the value of the oil at the
206.52(b). point of sale.
------------------------------------------------------------------------
(2) If you ask, MMS may approve a transportation allowance
deduction in excess of the limitation in paragraph (b)(1) of this
section. You must demonstrate that the transportation costs incurred
were reasonable, actual, and necessary. Your application for exception
(using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) must contain all relevant and supporting documentation
necessary for MMS to make a determination. You may never reduce the
royalty value of any production to zero.
(c) Must I allocate transportation costs? You must allocate
transportation costs among all products produced and transported as
provided in Sec. 206.61 of this subpart. You may not allocate
transportation costs from production for which those costs were
incurred to production for which those costs were not incurred. You
must express transportation allowances for oil as dollars per barrel.
(d) What other adjustments apply when I value production based on
index pricing? If you value oil based on index pricing under
Sec. 206.52(a) of this subpart, you must adjust the value for the
differences in location and quality between oil at the designated area
boundary and the index pricing point outside the designated area as
specified under Sec. 206.61(c). If the oil is produced in the
designated area that includes Cushing, Oklahoma, you are only entitled
to a quality adjustment. See Sec. 206.61 for more information on
adjusting for location and quality differences.
(e) What additional payments may I be liable for? If MMS determines
that you underpaid royalties because an excessive transportation
allowance or other adjustment was claimed, then you must pay any
additional royalties, plus interest under 30 CFR 218.54. You also could
be entitled to a credit with interest if you understated the
transportation allowance or other adjustment. If you take a deduction
for transportation on 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, MMS may assess you an amount under
Sec. 206.61(e) of this subpart.
5. Newly redesignated Sec. 206.61 is amended by revising the
section heading; removing paragraphs (b)(5) and (c)(2)(viii);
redesignating paragraphs (c) through (g) as paragraphs (d) through (h);
adding new paragraphs (c) and (d)(5); and revising newly redesignated
[[Page 7103]]
paragraphs (d)(1)(i), (d)(2)(i), (d)(4) and (g) to read as follows:
Sec. 206.61 How do lessees determine transportation allowances and
other adjustments?
* * * * *
(c) What adjustments apply when lessees use index pricing? (1) When
you use index pricing to calculate the value of production under
Sec. 206.52(a), you must adjust the index price for location/quality
differentials. Your adjustments must reflect the reasonable oil value
differences in location and quality between the designated area
boundary and the market center and between the market center and the
index pricing point outside the designated area. The adjustments that
might apply to your production are listed in paragraphs (c)(1)(i)
through (iv) of this section. See paragraphs (c)(2) and(c)(3) of this
section to determine which adjustments you must use based on how you
dispose of your production. These adjustments are:
(i) A location differential to reflect the difference in value of
crude oils at the index pricing point and the appropriate market
center. For any production month, the location differential is the
difference between the average spot prices for that month for the
respective crude oils at the index pricing point and at the market
center. Use MMS-approved publications to determine average spot prices
and calculate the location differential;
(ii) An express location/quality differential under your arm's-
length exchange agreement that reflects the difference in value of
crude oil at the designated area boundary and the market center;
(iii) A location/quality differential reflecting the crude oil
value difference between the designated area boundary and the market
center that MMS will publish annually based on data it collects on Form
MMS-4416. MMS will calculate that differential using a volume-weighted
average of the differentials reported on Form MMS-4416 for the previous
reporting year. MMS may publish separate rates for various crude oil
qualities that are identified separately on Form MMS-4416 (for example,
sweet vs. sour oil, or oil in different gravity ranges). MMS will
publish differentials that reflect both a location differential based
on the market center/designated area pairs and a quality differential
based on the type of crude oil. MMS will publish these differentials in
the Federal Register by the effective date of the final regulation and
by January 31 of all subsequent years. You must use MMS-published rates
on a calendar year basis--apply them to January through December
production reported February through the following January; and
(iv) Actual transportation costs from the designated area boundary
to the market center determined under this section.
(2) To determine which adjustments and transportation allowances
apply to your production, use the following table.
----------------------------------------------------------------------------------------------------------------
If you And Then
----------------------------------------------------------------------------------------------------------------
Dispose of your production under an That exchange agreement has Adjust your value using paragraphs (c)(1)(i)
arm's-length exchange agreement. an express location and (ii) of this section.
differential to reflect
the difference in value
between the designated
area boundary for the
lease and the associated
market center.
Move your production from a The market center is also Use paragraph (c)(1)(iii) to determine the
designated area directly to an MMS- the index pricing point. quality differential and paragraph (c)(1)(iv)
identified market center. to deduct the actual transportation costs to
that market center, subject to this paragraph
(c)(2)(i).
Do not move your production from a You instead move it Adjust your value using paragraphs (c)(1)(i)
designated area to an MMS- directly to an alternate and (iv) of this section, subject to this
identified market center. disposal point (for paragraph (c)(2)(ii).
example, your own
refinery).
Transport or dispose of your Adjust your value using paragraphs (c)(1)(i)
production under any other and (iii).
arrangement.
----------------------------------------------------------------------------------------------------------------
(i) If you move your production from a designated area directly to
an MMS-identified market center that is also the index pricing point,
use the separate MMS-published quality differential between oil similar
to yours and the oil used for index pricing for purposes of applying
paragraph (c)(1)(iii). For purposes of paragraph (c)(1)(i) of this
section, the market center is the MMS-identified market center nearest
the lease where there is a published spot price for crude oil of like
quality to the oil being valued. The spot price you use must be for
like-quality oil.
(ii) The market center for purposes of paragraph (c)(1)(iv) of this
section is the alternate disposal point.
(3) If an MMS-calculated differential under paragraph (c)(1)(iii)
of this section does not apply to your oil, either due to location or
quality differences, you must request MMS to calculate a differential
for you.
(i) After MMS publishes its annual listing of location/quality
differentials, you must file your request in writing with MMS for an
MMS-calculated differential.
(ii) You must demonstrate why the published differential does not
adequately reflect your circumstances.
(iii) MMS will calculate such a differential when it receives your
request or when it discovers that the differential published under
paragraph (c)(1)(iii) of this section does not apply to your oil. MMS
will bill you for any additional royalties and interest due. If you
file a request for an MMS-calculated differential within 30 days after
MMS publishes its annual listing of location/quality differentials, the
calculated differential will apply beginning with the effective date of
the published differentials. Otherwise, the MMS-calculated differential
will apply beginning the first day of the month following the date of
your application. In this case the published differentials will apply
in the interim and MMS will not refund any overpayments you made due to
your failure to timely request MMS to calculate a differential for you.
(iv) Send your request to: Minerals Management Service, Royalty
Management Program Royalty Valuation Division P.O. Box 25165, Mail Stop
3150 Denver, CO., 80225-0165.
(4) For the differentials referenced in paragraph (c)(1)(i) of this
section, periodically MMS will publish in the Federal Register a list
of MMS-approved publications. MMS's decision to approve a publication
will be based on criteria which include but are not limited to:
[[Page 7104]]
(i) Publications buyers and sellers frequently use;
(ii) Publications frequently mentioned in purchase or sales
contracts;
(iii) Publications which use adequate survey techniques, including
development of spot price estimates based on daily surveys of buyers
and sellers of crude oil; and
(iv) Publications independent from MMS, other lessors, and lessees.
(5) Any publication may petition MMS to be added to the list of
acceptable publications.
(6) MMS will specify the tables you must use in the publications to
determine the associated location differentials.
(7) Periodically, MMS will publish in the Federal Register a list
of market centers. MMS will monitor market activity and, if necessary,
modify the list of market centers and will publish such modifications
in the Federal Register. MMS will consider the following factors and
conditions in specifying market centers:
(i) Points where MMS-approved publications publish prices useful
for index purposes;
(ii) Markets served;
(iii) Pipeline and other transportation linkage;
(iv) Input from industry and others knowledgeable in crude oil
marketing and transportation;
(v) Simplification; and
(vi) Other relevant matters.
(d) Reporting requirements--(1) Arm's-length contracts. (i) With
the exception of those transportation allowances specified in
paragraphs (d)(1)(v) and (d)(1)(vi) of this section, you must submit
page one of the initial Form MMS-4110 (and Schedule 1), Oil
Transportation Allowance Report, before, or at the same time as, you
report the transportation allowance determined under an arm's-length
contract 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 is considered to be timely received.
* * * * *
(2) Non-arm's-length or no contract. (i) With the exception of
those transportation allowances specified in paragraphs (d) (2) (v) and
(d) (2) (vii) of this section, you must submit an initial Form MMS-4110
before, or at the same time as, you report the transportation allowance
determined under a non-arm's-length contract or no-contract situation
on Form MMS-2014. A Form MMS-4110 received by the end of the month that
the Form MMS-2014 is due is considered to be timely received. The
initial report may be based upon estimated costs.
* * * * *
(4) What additional requirements apply to Form MMS-2014 reporting?
You must report transportation allowances, location differentials, and
quality differentials as separate lines on Form MMS-2014, unless MMS
approves a different reporting procedure. MMS will provide additional
reporting details and requirements in the MMS Oil and Gas Payor
Handbook.
(5) What information must lessees provide to support index pricing
adjustments, and how is it used? You must submit information on Form
MMS-4416 related to all of your crude oil production from designated
areas. You initially must submit Form MMS-4416 no later than [insert
the date 2 months after the effective date of this rule] and then by
October 31 [insert the year this regulation takes effect], and by
October 31 of each succeeding year. In addition to the annual
requirement to file this form, you must file a new form each time you
execute a new exchange or sales contract involving the production of
oil from an Indian lease. However, if the contract merely extends the
time period a contract is in effect without changing any other terms of
the contract, this requirement to file does not apply. All other
purchasers of crude oil from designated areas are likewise subject to
the requirements of this paragraph (d)(5).
* * * * *
(g) Actual or theoretical losses. Notwithstanding any other
provision of this subpart, for other than arm's-length contracts, no
cost is allowed for oil transportation which results from payments
(either volumetric or for value) for actual or theoretical losses.
* * * * *
Note: The following Appendices will not appear in the Code of
Federal Regulations.
Appendix A
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[[Page 7105]]
[GRAPHIC] [TIFF OMITTED] TP12FE98.000
[[Page 7106]]
[GRAPHIC] [TIFF OMITTED] TP12FE98.001
[[Page 7107]]
[GRAPHIC] [TIFF OMITTED] TP12FE98.002
BILLING CODE 4310-MR-C
[[Page 7108]]
Appendix B--NYMEX Index Price Basis
[January 1997 Production and Sale]
----------------------------------------------------------------------------------------------------------------
NYMEX trade date NYMEX Delivery (prompt) month NYMEX daily Close
----------------------------------------------------------------------------------------------------------------
Jan-08-97..................................... Feb. 1997............................. $26.62
Jan-06-97..................................... Feb. 1997............................. 26.37
Jan-07-97..................................... Feb. 1997............................. 26.23
Jan-10-97..................................... Feb. 1997............................. 26.09
Jan-15-97..................................... Feb. 1997............................. 25.95
Dec-31-97..................................... Feb. 1997............................. 25.92
Jan-02-97..................................... Feb. 1997............................. 25.69
Jan-09-97..................................... Feb. 1997............................. 25.69
Jan-03-97..................................... Feb. 1997............................. 25.59
Jan-16-97..................................... Feb. 1997............................. 25.52
Jan-17-97..................................... Feb. 1997............................. 25.41
Dec-30-97..................................... Feb. 1997............................. 25.37
Jan-20-97..................................... Feb. 1997............................. 25.23
Dec-27-97..................................... Feb. 1997............................. 25.22
Jan-13-97..................................... Feb. 1997............................. 25.19
Jan-14-97..................................... Feb. 1997............................. 25.11
Dec-24-97..................................... Feb. 1997............................. 25.10
Dec-20-97..................................... Feb. 1997............................. 25.08
Dec-26-97..................................... Feb. 1997............................. 24.92
Jan-21-97..................................... Feb. 1997............................. 24.80
Dec-23-97..................................... Feb. 1997............................. 24.79
NYMEX Average Price for five high daily settle .................................... 26.25
prices for January 1997 production.
----------------------------------------------------------------------------------------------------------------
Appendix C--WTI Spot Price, Market Center: Cushing, OK
[January 1997 Production and Sale]
----------------------------------------------------------------------------------------------------------------
Final
Cushing WTI spot trade date Cushing WTI spot delivery assess. cushing WTI (Mean)
month spot
----------------------------------------------------------------------------------------------------------------
Dec-26-96..................................... Feb. 1997............................. $24.88
Dec-27-96..................................... Feb. 1997............................. 25.09
Dec-30-96..................................... Feb. 1997............................. 25.23
Dec-31-96..................................... Feb. 1997............................. 25.78
Jan-02-97..................................... Feb. 1997............................. 25.80
Jan-03-97..................................... Feb. 1997............................. 25.59
Jan-06-97..................................... Feb. 1997............................. 26.34
Jan-07-97..................................... Feb. 1997............................. 26.28
Jan-08-97..................................... Feb. 1997............................. 26.53
Jan-09-97..................................... Feb. 1997............................. 26.30
Jan-10-97..................................... Feb. 1997............................. 26.18
Jan-13-97..................................... Feb. 1997............................. 25.16
Jan-14-97..................................... Feb. 1997............................. 25.11
Jan-15-97..................................... Feb. 1997............................. 25.88
Jan-16-97..................................... Feb. 1997............................. 25.41
Jan-17-97..................................... Feb. 1997............................. 25.28
Jan-20-97..................................... Feb. 1997............................. 25.14
Jan-21-97..................................... Feb. 1997............................. 24.57
Jan-22-97..................................... Feb. 1997............................. 24.32
Jan-23-97..................................... Feb. 1997............................. 23.97
Jan-24-97..................................... Feb. 1997............................. 24.05
Cushing WTI Avg Spot Price for January 1997... .................................... 25.38
----------------------------------------------------------------------------------------------------------------
Appendix D--WTI Spot Price, Market Center: Midland, TX
[January 1997 Production and Sale]
----------------------------------------------------------------------------------------------------------------
Final
Midland WTI spot trade date Midland WTI spot delivery assess. Midland WTI (Mean)
month spot
----------------------------------------------------------------------------------------------------------------
Dec-26-96..................................... Feb. 1997............................. $24.88
Dec-27-96..................................... Feb. 1997............................. 25.08
Dec-30-96..................................... Feb. 1997............................. 25.08
Dec-31-96..................................... Feb. 1997............................. 25.77
Jan-02-97..................................... Feb. 1997............................. 25.80
Jan-03-97..................................... Feb. 1997............................. 25.58
Jan-06-97..................................... Feb. 1997............................. 26.33
[[Page 7109]]
Jan-07-97..................................... Feb. 1997............................. 26.24
Jan-08-97..................................... Feb. 1997............................. 26.48
Jan-09-97..................................... Feb. 1997............................. 26.18
Jan-10-97..................................... Feb. 1997............................. 26.02
Jan-13-97..................................... Feb. 1997............................. 24.99
Jan-14-97..................................... Feb. 1997............................. 24.88
Jan-15-97..................................... Feb. 1997............................. 25.65
Jan-16-97..................................... Feb. 1997............................. 25.10
Jan-17-97..................................... Feb. 1997............................. 24.94
Jan-20-97..................................... Feb. 1997............................. 24.80
Jan-21-97..................................... Feb. 1997............................. 24.19
Jan-22-97..................................... Feb. 1997............................. 23.88
Jan-23-97..................................... Feb. 1997............................. 23.58
Jan-24-97..................................... Feb. 1997............................. 23.66
WTI Midland Avg Spot Price for January 1997... .................................... 25.20
----------------------------------------------------------------------------------------------------------------
Appendix E--NYMEX-based Oil Royalty Computation, Navajo Nation, Market
Center: Midland, TX
[January 1997 Production and Sale]
------------------------------------------------------------------------
------------------------------------------------------------------------
Average of Five High Daily NYMEX
Settle Prices................... $26.25
Cushing/Market Center Location
Differential:
WTI Cushing Average Spot
Price....................... $25.38
WTI Midland Average Spot
Price....................... 25.20
-------------
WTI Midland over (under) WTI
Cushing..................... (.18)
Market Center/Designated Area
Location and Quality
Differential (Exchange
Agreement):
Transportation and Quality
Differential from Midland to
Navajo reservation.......... (.25)
Royalty Value per barrel......... 25.82
------------------------------------------------------------------------
[FR Doc. 98-3597 Filed 2-11-98; 8:45 am]
BILLING CODE 4310-MR-P