[Federal Register Volume 64, Number 48 (Friday, March 12, 1999)]
[Proposed Rules]
[Pages 12267-12269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6147]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 64, No. 48 / Friday, March 12, 1999 / 
Proposed Rules  

[[Page 12267]]


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

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC09


Reopening Public Comment Period and Establishing Workshops on 
Proposed Rule--Establishing Oil Value for Royalty Due on Federal Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of reopening of public comment period and notice of 
workshops.

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

SUMMARY: The Minerals Management Service (MMS) is reopening the public 
comment period on a further supplementary proposed rule amending the 
royalty valuation regulations for crude oil produced from Federal 
leases.
    During the comment period, MMS will hold three workshops. The 
primary purpose of these workshops is to receive new comments not 
previously submitted in this rulemaking record. MMS also seeks written 
comments focusing on new comments.
    We are particularly interested in ideas that would help move the 
rulemaking process forward while still ensuring that the public 
receives fair value for its resources. There is no need to resubmit 
previously submitted comments since comments on previous proposals 
already are included in the rulemaking record.
    Interested parties are invited to attend and participate in these 
workshops. MMS would welcome written comments submitted prior to the 
workshops to help identify the most important issues for discussion.

DATES: Comments must be submitted on or before April 12, 1999. The 
workshops will be held as follows:

Workshop 1--Houston, Texas, on March 24, 1999, beginning at 9 a.m. and 
ending at 5 p.m., Central time
Workshop 2--Albuquerque, New Mexico, on March 25, 1999, beginning at 9 
a.m. and ending at 5 p.m., Mountain time
Workshop 3--Washington, D.C., on April 6, 1999, beginning at 9 a.m. and 
ending at 5 p.m., Eastern time

ADDRESSES: Workshop 1 will be held at the Houston Compliance Division 
Office, Minerals Management Service, 4141 North Sam Houston Parkway 
East, Houston, Texas 77032. Phone: (281) 987-6802.
Workshop 2 will be held at the Bureau of Land Management District 
Office, 435 Montano Road, NE, Albuquerque, New Mexico 87107. Phone: 
(505) 761-8700.
Workshop 3 will be held at the Main Interior Building, 1849 C Street, 
NW, Washington, D.C. 20240 (large buffet room adjacent to the cafeteria 
in the basement). Phone: (202) 208-3512.

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Publications Staff, Minerals Management Service, Royalty Management 
Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225-0165, 
telephone (303) 231-3432, fax number (303) 231-3385, e-Mail 
David__G[email protected].

SUPPLEMENTARY INFORMATION: MMS published an advance notice of its 
intent to amend the current Federal oil valuation regulations in 30 CFR 
parts 202 and 206 on December 20, 1995 (60 FR 65610). The purpose of 
that notice was to solicit comments on new methodologies to establish 
the royalty value of Federal (and Indian) crude oil production in view 
of the changes in the domestic petroleum market, particularly the 
market's move away from posted prices as an indicator of market value.
    Based on comments received on the advance notice, together with 
information gained from a number of presentations by experts in the oil 
marketing business, MMS published its initial notice of proposed 
rulemaking on January 24, 1997 (62 FR 3742), applicable to Federal 
leases only. MMS held public meetings in Lakewood, Colorado, and 
Houston, Texas, to hear comments on the proposal.
    In response to the variety of comments received on the initial 
proposal, MMS published a supplementary proposed rule on July 3, 1997 
(62 FR 36030). This proposal expanded the eligibility requirements for 
valuing oil disposed of under arm's-length transactions.
    Because of the substantial comments received on both proposals, MMS 
reopened the rulemaking to public comment on September 22, 1997 (62 FR 
49460). MMS specifically requested comments on five valuation 
alternatives arising from the public comments. MMS held seven public 
workshops to discuss valuation alternatives.
    As a result of comments received on the proposed alternatives and 
comments made at the public workshops, MMS published a second 
supplementary proposed rule on February 6, 1998 (63 FR 6113). The 
comment period for this second supplementary proposed rule was to close 
on March 23, 1998, but was extended to April 7, 1998 (63 FR 14057). MMS 
held five public workshops (63 FR 6887) on this second supplementary 
proposed rule: in Houston, Texas, on February 18, 1998; Washington, 
D.C., on February 25, 1998; Lakewood, Colorado, on March 2, 1998; 
Bakersfield, California, on March 11, 1998; and Casper, Wyoming, on 
March 12, 1998.
    By Federal Register notice dated July 8, 1998 (63 FR 36868), MMS 
reopened the comment period for the February 6, 1998, second 
supplementary proposed rule from July 9, 1998, until July 24, 1998, to 
receive further comment on the proposed rule. Meetings involving MMS, 
industry representatives, and Members of Congress were held in 
Washington, D.C., on July 9 and July 22, 1998. Another meeting 
involving Members of Congress and various other interested groups was 
held in Washington, D.C., on July 21, 1998. By Federal Register notice 
dated July 27, 1998 (63 FR 40073), MMS extended the comment period 
until July 31, 1998.
    On August 31, 1998, the Assistant Secretary, Land and Minerals 
Management, sent to Members of Congress a letter outlining the 
direction the Department of the Interior might take on the major issues 
in the final rulemaking. This letter can be accessed at http://
www.rmp.mms.gov/library/readroom/pubcomm/FCCont.htm. A copy of the 
letter also is attached as an appendix to the notice, and MMS would 
like comments on the matters addressed in the letter that relate to the 
proposed rule.
    MMS is reopening the comment period on the second supplementary 
proposed rule in response to many requests from Members of Congress and 
other parties interested in moving the

[[Page 12268]]

process forward to publish a final rule. MMS is seeking new, not-
previously-considered ideas that will help move the process forward 
while still ensuring that the public receives fair value for production 
of its resources. MMS would prefer written comments submitted prior to 
the workshops to help identify the most important issues for 
discussion. Commenters will be able to supplement these written 
comments, if necessary, after the workshops.
    It is not necessary to resubmit comments already provided. MMS will 
consider comments submitted during previous comment periods as well as 
comments submitted during this new comment period when it prepares a 
final rule.
    The workshops will be open to the public without advance 
registration. Public attendance may be limited to the space available. 
We encourage a workshop atmosphere; members of the public are 
encouraged to participate in a discussion of the alternatives. For 
building security measures, each person may be required to present a 
picture identification to gain entry to the meetings.

    Dated: March 9, 1999.
Harold Corley,
Acting Associate Director for Royalty Management.

United States Department of the Interior

August 31, 1998.
Honorable John Breaux,
United States Senate,
Washington, DC 20510

    Dear Senator Breaux: In accordance with the commitment contained 
in my August 11, 1998, letter to you, enclosed is an outline of the 
direction the Department of the Interior plans to take on the major 
issues in the final Federal oil valuation rule. The purpose of this 
outline is to advise you of the progress on the final rule. An 
identical letter has been sent to Senators Hutchison, Murkowski, 
Nickles, and Domenici.
    After thoroughly reviewing and considering all of the comments 
received on the several proposed rules, including the July 16, 1998, 
further supplementary proposed rule, we are in the process of 
developing a final rulemaking consistent with the enclosed outline. 
I believe that you will see that we intend to make changes in 
response to comments from the oil and gas industry and other 
commenters while at the same time assure that we achieve fair market 
value for the public's mineral resources. This outline reflects our 
current state of decisions, but there may be changes as the final 
rule proceeds through the review process in the Department and at 
the Office of Management and Budget.
    Recognizing that each company has individual marketing 
circumstances and accounting capabilities, in the final rule, we 
would allow companies a number of options. For example, if the 
lessee sells its oil at arm's length after one or more arm's-length 
exchanges, we would allow the lessee the option of either tracing 
the production to the arm's length sale after the exchanges or 
paying on an index price. For the Rocky Mountain Region, lessees 
would use a series of benchmarks instead of the index price if they 
choose not to trace the production to the arm's-length sale. We 
would offer the same option if the lessee sells or transfers its oil 
to an affiliate that resells the oil under an arm's length contract. 
Further, the final rule would provide that the Assistant Secretary 
for Land and Mineral's Management or his/her delegate may issue 
binding valuation determinations.
    I again call upon you and your colleagues to remove the rider, 
currently in the Interior Appropriations Bill, that would prohibit 
finalizing the rule for another year. As I indicated in my earlier 
letter, we have worked very hard over the past 3 years to 
accommodate the interests of all affected stakeholders in this 
rulemaking. We believe that we have developed the very best 
rulemaking possible, recognizing that the industry that pays the 
royalties and the Federal Government and States that receives the 
royalties, are simply never going to agree on certain issues. 
Delaying the rule for a year will not resolve these differences but 
rather assure continued disputes over the existing regulations and 
the loss of millions of dollars to Federal and State treasuries 
because such regulations are outdated.
    As you may know, the comment period on the rulemaking is closed. 
Therefore, we are not accepting any comments in response to the 
decision reflected in the enclosed outline.
    Thank you again for your continued involvement in this issue.

    Sincerely,
Bob Armstrong,
Assistant Secretary, Land and Minerals Management
    Enclosure:

Outline for Federal Oil Valuation Final Rulemaking

    Note: The following outline reflects the direction in which the 
Minerals Management Service (MMS) and the Department of the Interior 
(Department) are headed in developing a final oil rule after 
reviewing all of the comments received on the several proposed 
rulemakings, including the July 16, 1998, further supplementary 
proposed rulemaking. The decisions reflected in this outline are 
subject to modification when the draft final rule proceeds through 
review in the Department and the Office of Management and Budget. 
Because the comment period on the rulemaking is closed, we are not 
accepting any comments in response to the decisions reflected in 
this outline.

Definitions

Affiliate
    We would define the term ``affiliate'' separately from the term 
``arm's length,'' as suggested by many commenters. The term 
``affiliate'' will use the same criteria for determining control as the 
existing regulations (less than 10 percent ownership representing non-
control, 10-50 percent representing a presumption of control, and 
greater than 50 percent representing control). Following publication of 
the final rule, MMS intends to develop specific guidelines for lessees 
to follow when attempting to rebut the presumption of control when 
ownership is between 10 and 50 percent.
Gross Proceeds
    We would maintain the definition of the term ``gross proceeds'' 
proposed in the February 6, 1998, second supplementary proposed rule. 
That is, the term ``gross proceeds'' would include payments for 
marketing services which the lessee must perform at no cost to the 
Federal Government and for payments made to reduce or buy down the 
purchase price of oil to be produced in later periods.

Valuation of Oil Sold by the Lessee at Arm's Length

    We would provide that value is the gross proceeds received by the 
lessees under an arm's-length sales contract with three exceptions, the 
first two of which are contained in the existing regulations:
    1. The sales contract does not reflect total consideration actually 
transferred either directly or indirectly from the buyer to the seller.
    2. The value is not reasonable due to either:
    a. Misconduct by or between the parties to the arm's-length 
contract; or
    b. Breach of the lessee's duty to market the oil for the mutual 
benefit of the lessee and the lessor. In response to comments received 
from industry and others about the revised language in the July 16, 
1998, proposal being ambiguous, in the final rule MMS is moving in the 
direction of not including the July 16 language in the rule, but 
stating in the preamble that MMS will not second-guess a company's 
marketing decisions.
    3. The oil is disposed of under a non-competitive call that is 
exercise by the purchaser.
    If any one of these exceptions applies, then the lessee must value 
its oil based on the method used to value oil not sold at arm's-length 
(Alaska North Slope (ANS) spot price in California and Alaska, 
benchmarks in the Rocky Mountains, and applicable spot prices for the 
rest of the country).

[[Page 12269]]

Valuation of Oil Sold After Arm's-length Exchange Agreements or Sold by 
an Affiliate at Arm's Length

    If the lessees sells its oil at arm's length after one or more 
arm's-length exchanges, we would allow the lessee the option of valuing 
its production on either the sale after the exchange(s) or index 
prices. For the Rocky Mountain Region, lessees would use a series of 
benchmarks instead of index prices if they choose not to trace the 
production to the arm's-length sale.
    Similarly, if the lessee sells or transfers its oil to an affiliate 
that resells the oil under an arm's-length contract, we would allow the 
lessee the option of valuing the production on either the gross 
proceeds received by the affiliate under the arm's-length resale 
contract, subject to the above stated exceptions for oil sold by the 
lessee at arm's length, or index prices. Again, for the Rocky Mountain 
Region, a series of prescribed benchmarks would be used instead of 
index prices.
    The lessee could make separate elections for oil that it exchanges 
at arm's length and oil that it transfers to an affiliate that resells 
the oil. However, each of these elections must be for a 2-year period, 
and the lessee would value all oil in each of these categories in the 
same manner.

Valuation of Oil Not Sold at Arm's Length

    For California and Alaska: ANS spot price less a location/quality 
differential would apply.
    For the Rocky Mountain Region: (Utah, Colorado, Wyoming, Montana, 
North Dakota, and South Dakota): The first applicable of the following 
benchmarks would apply:
    1. The highest bid under an MMS-approved tendering program in which 
the lessee:
    a. Offers and sells at least 30 percent of its production from both 
Federal and non-Federal leases in the area, and
    b. Receives at least three bids for the tendered volumes from 
bidders who do not have their own tendering programs that cover some or 
all of the same area.
    2. The volume-weighted average of the lessee's and its affiliate's 
arm's-length contract prices for the purchase or sale of oil from the 
field or area. The total volume purchased or sold under those contracts 
must exceed 50 percent of the lessee's and its affiliate's production 
from both Federal and non-Federal leases in the same field or area.
    3. The spot price for West Texas Intermediate crude at Cushing, 
Oklahoma, adjusted for location and quality.
    4. If all of the first three benchmarks result in an unreasonable 
value, the MMS Director could establish an alternative valuation 
method.
    For the OCS and Mid-Continent (other than California, Alaska, and 
the six-State Rocky Mountain Region): A market center spot price less a 
location/quality differential from the market center to the lease would 
apply.

Location/Quality Adjustments to Index Prices

    If the lessee used index pricing to value its production, it would 
adjust the index price for location/quality differentials using:
    1. A location/quality differential contained in the lessee's own 
arm's-length exchange agreement, or
    2. An MMS-calculated location/quality differential. MMS would 
publish annually a series of differentials based on data MMS would 
collect on Form MMS-4415.
    The lessee could also claim a transportation allowance when valuing 
oil based on either index or arm's-length gross proceeds as discussed 
below. Quality bank adjustments based on applicable pipeline quality 
bank specifications could also be taken if they did not duplicate the 
differentials above.

Transportation Allowances

Arm's-length transportation contracts
    If the lessee or its affiliate transports its oil under an arm's-
length transportation contract, the lessee could claim a transportation 
allowance for the actual costs incurred under that contract.
Non-arm's-length transportation contracts
    If the lessee or its affiliate transports its oil under a non-
arm's-length transportation contract, the lessee could claim a 
transportation allowance based on its reasonable, actual costs 
including operating and maintenance expenses, overhead, depreciation, 
and a return on investment using a rate of return equal to the 
industrial bond yield index for Standard and Poor's BBB rating. We 
would not allow Federal Energy Regulatory Commission tariffs as an 
exception to computing actual costs.
Subsea Gathering
    We would include language in the preamble stating that MMS will 
review movement of bulk production from subsea completions to a 
platform on the ocean surface on a case-by-case basis to determine 
whether it is gathering or qualifies as transportation. Recognizing 
that this issue is primarily a gas issue, MMS intends to resolve it by 
issuing separate regulations or policy guidance.

Non-Binding Valuation Guidance

    We would provide that the Assistant Secretary for Land and Minerals 
Management or his/her delegate may issue binding valuation 
determinations.
[FR Doc. 99-6147 Filed 3-11-99; 8:45 am]
BILLING CODE 4310-MR-P