[Federal Register Volume 65, Number 189 (Thursday, September 28, 2000)]
[Proposed Rules]
[Pages 58237-58243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24822]



[[Page 58237]]

=======================================================================
-----------------------------------------------------------------------

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 (MMS), Interior.

ACTION: Proposed rule; notice of initial regulatory flexibility 
analysis.

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

SUMMARY: Under the requirements of the Regulatory Flexibility Act, MMS 
is publishing an Initial Regulatory Flexibility Analysis (IRFA) for a 
supplementary proposed rule on establishing oil value for royalty due 
on Indian leases. Our purpose is to aid the public in commenting on the 
small business impact of this proposed rulemaking.

Dates: Your written comments must be submitted on or before October 30, 
2000.

ADDRESSES: If you wish to comment, you may submit your comments by any 
one of several methods. You may mail comments to David S. Guzy, Chief, 
Rules and Publications Staff, Minerals Management Service, Royalty 
Management Program, P.O. Box 25165, MS 3021, Denver, CO 80225-0165. 
Courier or overnight delivery address is Building 85, Room A-613, 
Denver Federal Center, Denver, CO 80225. You may also comment via the 
Internet to [email protected].
    Please submit Internet comments as an ASCII file avoiding the use 
of special characters and any form of encryption. Please also include 
Attn: RIN 1010-AC24 and your name and return address in your Internet 
message. If you do not receive a confirmation from the system that we 
have received your Internet message, contact David S. Guzy directly at 
(303) 231-3432.

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Publications Staff, telephone (303) 231-3432, FAX (303) 231-3385, or e-
mail [email protected].

SUPPLEMENTARY INFORMATION: This notice supplements MMS's February 12, 
1998, notice of proposed rulemaking (63 FR 7089) and the January 5, 
2000, supplementary proposed rule (65 FR 403) that were published in 
the Federal Register. MMS is proposing amendments to its regulations 
for establishing the value for royalty purposes of oil produced from 
Indian leases. The proposed amendments also would establish a new form 
for collecting value and value differential data. These amendments are 
intended to simplify and improve the regulations by decreasing reliance 
on oil posted prices and use more publicly available information. MMS 
received written comments from interested parties on both proposals. 
During the comment period for the proposed rulemaking, MMS held 
workshops in Albuquerque, New Mexico, on March 26, 1998, and Lakewood, 
Colorado, on April 1, 1998, to receive further comment. During the 
comment period for the supplementary proposed rule, MMS held a similar 
workshop in Lakewood, Colorado, on February 8, 2000.
    MMS's notice of February 12, 1998 (63 FR 7097) did not include an 
IRFA under the requirements of the Regulatory Flexibility Act (5 U.S.C. 
603) because MMS certified that the proposed rule would not have a 
significant economic impact on a substantial number of small entities.
    In the January 5, 2000, supplementary proposed rule, MMS stated 
that the proposal would have a significant economic impact on 173 small 
businesses and proposed further modifications that would to some extent 
mitigate the impact on small businesses from the proposed amendments 
under the February 12, 1998, rule (65 FR 410).
    MMS afforded opportunities for public comment in the February 12, 
1998, and January 5, 2000, proposals. MMS received no comments 
concerning the impacts of this rulemaking on small entities during the 
comment periods for the proposed and supplementary proposed rules or at 
the three workshops.
    Upon further analysis, MMS has determined that the proposed rule 
would affect a larger number of small businesses. The proposal, in 
addition to revising the oil value for royalty due on Indian leases for 
companies who pay royalties, also places a reporting requirement on 
non-payor purchasers of oil produced from Indian leases.
    MMS determined that the proposed rule would have a significant 
impact on a substantial number of small businesses. Accordingly, MMS is 
publishing this notice with the analysis to provide further information 
and opportunity for public comment on the small business impact of this 
rulemaking. After the close of the 30-day comment period, MMS will 
prepare a final rule and address all comments received.
    The Executive Summary of the IRFA is included as Attachment 1, 
followed by the analysis, which is included in its entirety as 
Attachment 2 to this notice.

    Dated: September 21, 2000.
Lucy Querques Denett,
Associate Director for Royalty Management.

Attachment 1--Indian Oil Valuation: Supplementary Proposed Rule--
Initial Regulatory Flexibility Analysis; Executive Summary

    Through a series of rulemakings that began on December 20, 1995, 
the Minerals Management Service (MMS) proposes to establish new royalty 
valuation rules for oil produced from Indian lands. MMS issued a 
proposed rule on February 12, 1998, followed by a supplementary 
proposed rule on January 5, 2000. This latest proposal would establish 
royalty value based on the highest of three separate valuation methods:

--The reported gross proceeds from an arm's-length sale.
--A location- and quality-adjusted spot price for the market center 
nearest the producing lease. This spot price is for the oil most 
similar in quality to that of the lease production, and for the month 
of delivery concurrent with the production month.
--The MMS-calculated ``major portion'' price calculated at the 75% 
level. The monthly major portion value would be calculated by arraying 
sales and associated volumes from lowest price to highest, and applying 
the price associated with the sale where accumulated volumes exceed 75 
percent of the total.

    MMS estimates that there would be significant impacts on a 
substantial number of small businesses (less than 500 employees by the 
U.S. Small Business Administration criteria), as a percentage of all 
Indian lease payors, as well as on some large businesses. MMS estimates 
there are approximately 166 small business royalty payors on Indian 
lands. In addition to these payors, MMS estimates that 83 additional 
non-lessee small businesses would be impacted by the proposed rule. 
These 83 small businesses would have an additional cost under the 
proposed rule because they must submit Form MMS-4416 as non-payor 
purchasers of oil produced from Indian leases.
    For each of the 166 small business royalty payors, MMS estimates 
the average impact as:

$16,134 per payor for the first year
$13,634 each year thereafter

    For each of the 83 non-lessee small businesses, the estimated 
average impact is: $3,350 each year.
    Because of MMS's trust responsibility there were very few 
alternatives other than the provisions within the proposed rule. 
Throughout the rulemaking

[[Page 58238]]

process, MMS solicited comments and held public workshops. MMS 
consulted with the affected tribal and allottee representatives on 
several occasions and discussed in depth the merits and provisions of 
several valuation alternatives. MMS, tribal, and allottee 
representatives believe that the proposed rule reflects the best method 
to ensure that Indian lessors receive fair market value for their oil 
resources.

Attachment 2--Indian Oil Valuation: Supplementary Proposed Rule--
Initial Regulatory Flexibility Analysis

Background

    On December 20, 1995, the Minerals Management Service (MMS) 
published an Advance Notice of Proposed Rulemaking regarding valuation 
of oil from Federal and Indian leases. In the notice, MMS asked all 
interested parties to submit or comment on alternate methodologies for 
valuing oil production. Industry generally had no comment on this 
issue, but many States and Indian organizations provided comments. They 
believed that the current valuation system is outdated and that a new 
system based on either the New York Mercantile Exchange or spot prices 
is more appropriate.
    In response to feedback from the Indian community, MMS issued a 
Notice of Proposed Rulemaking revising the current Indian oil valuation 
regulations on February 12, 1998 (63 FR 7089). The intent of our 
February 12, 1998, proposed rulemaking was to add more certainty to the 
valuation of oil produced from Indian lands, eliminate reliance on oil 
posted prices, and address certain terms unique to Indian leases--
specifically, the ``major portion'' provision. Most Indian leases 
include this provision, which provides that value for royalty purposes, 
in the discretion of the Secretary, may be the highest price paid or 
offered at the time of production for the major portion of oil 
production from the same field.
    The February 1998 proposed rule would have required royalty value 
to be based on the higher of three different values:
     A value based on the average of the five highest New York 
Mercantile Exchange (NYMEX) futures prices for the month adjusted for 
location and quality differences.
     The lessee's or its affiliate's gross proceeds adjusted 
for appropriate transportation costs.
     A MMS-calculated major portion value based on prices 
reported by lessees and purchasers in MMS-designated areas typically 
corresponding to reservation boundaries. The monthly major portion 
value would be calculated by arraying sales and associated volumes from 
lowest price to highest, and applying the price associated with the 
sale where accumulated volumes exceed 75 percent of the total. For 
example, assume four sales were reported on a reservation for the 
following volumes and prices:

------------------------------------------------------------------------
                                                      Volume   Price ($/
                                                      (bbls)      bbl)
------------------------------------------------------------------------
Sale #1...........................................      2,000      10.00
Sale #2...........................................      2,000      12.00
Sale #3...........................................      4,000      15.00
Sale #4...........................................      2,000      18.00
                                                   ---------------------
    Total.........................................     10,000  .........
------------------------------------------------------------------------

    The major portion price would be $15.00 (the price at which 
accumulated volumes exceed 75% of the total production). MMS would 
require the two payors who reported less than the $15.00 major portion 
price to pay the difference for their reported volumes ($5.00/bbl and 
$3.00/bbl respectively).
    Because much Indian oil is disposed of under exchange agreements, 
specific criteria were included for these dispositions:

------------------------------------------------------------------------
              If * * *                            Then * * *
------------------------------------------------------------------------
The lessee or its affiliate          Royalty value would have been the
 disposed of production under an      resale price less appropriate
 exchange agreement and then sold     transportation costs unless the
 at arm's length the oil it           NYMEX or major portion values were
 received in return,                  higher.
The lessee or its affiliate          Royalty value would have been the
 disposed of production under an      NYMEX value unless the major
 exchange agreement but refined       portion value were higher.
 rather than sold the oil it
 received in return,
------------------------------------------------------------------------

    The lessee initially would have reported royalties based on the 
higher of the NYMEX value or its gross proceeds. After MMS performed 
its major portion calculation for the production month, the lessee 
would have revised its initial royalty value if the major portion value 
were higher.
    In the February 12, 1998, proposal, adjustments for location and 
quality against the index values were limited to these components:
    1. A location and/or quality differential between the 
representative oil at 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;
    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; or
    3. Where oil flows to the market center, and as determined under 
the existing allowance rules, the actual transportation costs from the 
designated area to the market center.
    Calculation of differentials could vary if the lessee took its 
production directly to its own refinery and the movement in no way 
approximated 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: Indian Crude Oil Valuation Report (Form MMS-4416). This form 
would also help MMS confirm its major portion calculations. Collection 
of this data would allow the Royalty Management Program to fulfill its 
mission of providing for the fair value of oil for royalty calculation 
purposes.

Provisions of the Supplementary Proposed Rule

    MMS received extensive written comments on its February 12, 1998, 
proposal, as well as further comments from the two subsequent workshops 
it held in Albuquerque, New Mexico, on March 26, 1998, and Lakewood, 
Colorado, on April 1, 1998. As a result, MMS issued a supplementary 
proposed rulemaking dated January 5, 2000 (65 FR 403). This proposed 
rule made modifications to the February 12, 1998, proposal in four 
areas:

A. Use of Spot Prices vs. NYMEX Futures Prices

    In response to the February 12, 1998, proposed rule, several 
parties objected to the inclusion of NYMEX prices as one of the three 
values compared to

[[Page 58239]]

determine royalty value on Indian leases. They argued that NYMEX prices 
are not attainable by everyone, that use of NYMEX prices effectively 
moves valuation away from the lease, and that using these prices would 
add administrative complexity. One comment from an Indian tribe, 
however, said that the use of NYMEX prices was long overdue.
    In the January 5, 2000, supplementary proposed rule, MMS proposed 
to use spot rather than NYMEX prices for several reasons. First, spot 
prices are more location-specific, and we believe that when the NYMEX 
futures price, properly adjusted for location and quality differences, 
is compared to spot prices, it nearly duplicates those spot prices. 
Second, application of spot prices would remove one portion of the 
necessary adjustments to the NYMEX price--the leg between Cushing, 
Oklahoma, and the market center location.
    The supplementary proposed rule states that one of the three 
comparative values used to determine royalty value is the spot price 
for:
     The market center nearest your lease where spot prices are 
published in an MMS-approved publication;
     The crude oil most similar in quality to your oil; and
     Deliveries during the production month.
    One exception is that for leases in the Rocky Mountain Region, the 
appropriate market center and spot price would be at Cushing, Oklahoma. 
This is due to the fact that the otherwise-nearest spot price location 
is at Guernsey, Wyoming, where we believe actual trading is too limited 
to result in a reliable spot price.

B. Use of Average of High Daily Spot Prices Rather Than Average of Five 
Highest NYMEX Settle Prices in a Given Month

    MMS received a number of comments that said applying the average of 
the five highest NYMEX settle prices was unfair and unrealistic and 
that this represented a price most sellers could not obtain under any 
circumstances. We agreed with this comment and, in addition to changing 
from NYMEX to spot prices, have modified the subset of spot prices to 
be used. Rather than applying the five highest spot prices in any given 
month, the January 5, 2000, rulemaking proposes to use the average of 
the daily high spot prices for that month in the selected publication. 
This should better reflect values generally obtainable, while at the 
same time maintaining consistency with the major portion provision of 
Indian leases calling for the highest price paid for a major portion of 
production in the field or area.

C. Transportation Costs From Lease vs. Reservation Boundary

    A number of comments said that MMS should not limit transportation 
deductions to only those costs incurred beyond the reservation 
boundary. The commenting parties said that there is no requirement that 
lessees transport oil within a designated area at no cost to the 
lessor, and that transportation costs should be calculated from the 
point where oil is measured for royalty calculation purposes. We agreed 
with these comments and proposed a change to reflect the permissibility 
of transportation deductions from the lease rather than the designated 
area, as well as the reality of exchange agreements whose first 
transfer point is at the lease or an associated aggregation point.

D. Modifications to Proposed Form MMS--4416

    MMS received a number of comments that the data requirements for 
completing proposed Form MMS-4416 were too burdensome and the resultant 
MMS calculations of location differentials would not be reliable. While 
we do not agree with the latter comment, we agreed that Form MMS-4416 
could be streamlined by eliminating or simplifying certain data 
requirements and clarifying the instructions included with the form. 
The Office of Management and Budget (OMB) approved the Form MMS-4416 
when MMS submitted it with the February 12, 1998, proposal. However, we 
revised and clarified the instructions, and proposed to change its 
submission requirements. Only crude oil production from Indian leases 
in designated areas, rather than all production from designated areas, 
must be reported. This change would minimize the administrative burden 
of the information collection while still permitting MMS to acquire the 
information necessary to calculate relevant location differentials and 
to assist MMS in validating its major portion values. OMB approved this 
``streamlined'' version of Form MMS-4416 on February 22, 2000.

Costs and Benefits

    Summarized below are the estimated costs and benefits of this rule 
to payors on Indian leases, including small businesses. The costs are 
segregated into two categories--those costs that would be incurred in 
the first year after this rule is effective and those costs that would 
be incurred each year thereafter.
    In 1997, MMS records indicated there were approximately 220 oil and 
condensate payors on Indian lands. The following chart provides the 
total estimated financial impact on these payors. The subsequent charts 
provide detailed impact estimates for small businesses. Explanations of 
each cost and benefit category follow the charts.

              Total Impact--All 220 Payors on Indian Leases
------------------------------------------------------------------------
                                        First year      Subsequent years
------------------------------------------------------------------------
1. Cost--Additional Royalty               $4,624,944>        $4,624,944>
 Payments.........................
2. Cost--Equipment/Compliance.....         1,650,000>         1,100,000>
3. Cost--Completing Form MMS-4416.            77,000>            77,000>
4. Cost--Filing new 2014 with                 34,125>            34,125>
 Major Portion....................
5. Benefit--Administrative Savings          1,016,200          1,016,200
Net Costs to Industry.............         5,369,869>         4,819,869>
------------------------------------------------------------------------

    Of the 220 oil and condensate payors on Indian lands, 166 would be 
considered small businesses under the U.S. Small Business 
Administration (SBA) criteria. The SBA considers a business in the oil 
and gas industry small if it employs less than 500 people. The total 
impact on this subset of payors is shown below:

[[Page 58240]]



       Total Impact on 166 Small Business Payors on Indian Leases
------------------------------------------------------------------------
                                        First year      Subsequent years
------------------------------------------------------------------------
1. Cost--Additional Royalty               $1,349,438>        $1,349,438>
 Payments.........................
2. Cost--Equipment/Compliance.....         1,245,000>           830,000>
3. Cost--Completing Form MMS-4416.            58,100>            58,100>
4. Cost--Filing new 2014 with                 25,749>            25,749>
 Major Portion....................
5. Benefit--Administrative Savings                  0                  0
Net Costs to Small Business Payors         2,678,287>         2,263,287>
------------------------------------------------------------------------

    For each of the 166 small businesses, MMS estimated individual 
impacts representing averages applied over the entire group. Actual 
individual impacts may vary significantly from those outlined below.

          Small Business Impact Calculated on a Per-Payor Basis
------------------------------------------------------------------------
                                        First year      Subsequent years
------------------------------------------------------------------------
1. Cost--Additional Royalty                   $8,129>            $8,129>
 Payments.........................
2. Cost--Equipment/Compliance.....             7,500>             5,000>
3. Cost--Completing Form MMS-4416.               350>               350>
4. Cost--Filing new 2014 with                    155>               155>
 Major Portion....................
5. Benefit--Administrative Savings                  0                  0
Net Costs per Small Business Payor            16,134>            13,634>
------------------------------------------------------------------------

    In addition to the impact on payors on Indian lands, MMS estimates 
there will be additional impacts on the non-payor purchasers of oil 
produced from Indian leases who are required to submit Form MMS-4416. 
MMS estimates there will be a total of 110 such purchasers, of whom 83 
would be considered small businesses. The estimated total impact on 
this group follows:

        Total Impact on 83 Small Businesses Purchasing Indian Oil
------------------------------------------------------------------------
                                        First year      Subsequent years
------------------------------------------------------------------------
1. Cost--Additional Royalty                       N/A                N/A
 Payments.........................
2. Cost--Equipment/Compliance.....          $249,000>          $249,000>
3. Cost--Completing Form MMS-4416.            29,050>            29,050>
4. Cost--Filing new 2014 with                     N/A                N/A
 Major Portion....................
5. Benefit--Administrative Savings                N/A                N/A
Net Cost to Small Business                   278,050>           278,050>
 Purchasers.......................
------------------------------------------------------------------------

    On a per-purchaser basis, the following chart estimates the impact 
on each small business purchaser who would submit Form MMS-4416.

        Small Business Impact Calculated On a Per-Purchaser Basis
------------------------------------------------------------------------
                                        First year      Subsequent years
------------------------------------------------------------------------
1. Cost--Additional Royalty                       N/A                N/A
 Payments.........................
2. Cost--Equipment/Compliance.....            $3,000>            $3,000>
3. Cost--Completing Form MMS-4416.               350>               350>
4. Cost--Filing new 2014 with                     N/A                N/A
 Major Portion....................
5. Benefit--Administrative Savings                N/A                N/A
Net Costs per Small Business                   3,350>             3,350>
 Purchaser........................
------------------------------------------------------------------------

1. Cost--Additional Royalty Payments
    We estimate that the oil valuation changes proposed in this rule 
would increase the annual royalties industry must pay to Indian tribes 
and allottees by $4,624,944. Based on reported revenues by company in 
1997, we calculate that small businesses would pay approximately $1.35 
million, or roughly 29 percent of the increase. This amounts to an 
average annual increase of approximately $8,100 per small business.
2. Cost--Equipment/Compliance
    Royalty payors would also incur computer, software acquisition, and 
other costs in order to conform with the new reporting requirements. We 
estimate that to comply with the rule, payors would need:

--A subscription to an industry newsletter (Platt's Oilgram or similar 
publication).
--A computer with enough power to effectively run a spreadsheet.
--Spreadsheet software.
--Office space and filing equipment dedicated to maintenance of records 
relating to the rule.

    Although many companies already have these resources available and 
would incur little additional expense, we estimate the following 
additional costs may be necessary. (However, we believe the majority of 
the small businesses would already have the following resources.)

 
 
 
Newslette  $2,000 per year
         r
 subscrip
      tion
 Computer  2,000 one-time
 acquisit
       ion

[[Page 58241]]

 
Spreadshe  500 one-time
        et
  software
   Office  3,000 per year
     space
  and file
 equipmen
   t ($250
       per
     month
   for one
     year)
 
    Total  7,500 per payor
 

    Because some of the costs are not incurred every year, we estimated 
the costs for subsequent years' compliance to be $5,000 per payor. This 
equates to $1,650,000 for all 220 payors to comply with the rule in the 
first year and $1,100,000 in each subsequent year. The impact on the 
166 small businesses amounts to $1,245,000 the first year and $830,000 
each subsequent year.
    Additionally, non-payor purchasers are required to submit Form MMS-
4416. MMS estimates that roughly 110 non-payor purchasers 
(approximately half of the total payors on Indian lands) will need the 
same office space and file equipment as indicated above.

 
 
 
Office space and file equipment ($250 per   $3,000 per year
 month for one year).
 

    This amounts to $3,000  x  110 or $330,000 in additional impact on 
non-payor entities who are required to submit the form. Using the same 
ratio of small businesses to all payors on Indian lands (approximately 
76%) we assume there will be 83 small businesses that will require the 
office space and file equipment. This equates to $249,000 each year for 
all 83 small business non-payor reporters.
    In summary, we estimate a total cost of $1,980,000 ($1,650,000 for 
all payors plus the $330,000 for non-payors) for all of industry to 
comply with the rule the first year and $1,430,000 ($1,100,000 for all 
payors plus the $330,000 for non-payors) in each subsequent year.
    Specifically, the first-year estimated small business impact (for 
both payors and non-payors) amounts to $1,494,000 ($1,245,000 for all 
166 small business payors plus the $249,000 for the 83 small business 
non-payors). This amounts to $6,000 for each of the 249 payor and non-
payor small businesses. For subsequent years, the estimated small 
business impact is $1,079,000 ($830,000 for all 166 small business 
payors plus $249,000 for the 83 small business non payors, or $4,333 
per small business).
3. Cost--Completing Form MMS-4416
    Industry would also incur costs to complete the proposed new 
information collection, Form MMS-4416. Part of the Indian oil valuation 
comparison would rely on price indexes that lessees may adjust for 
locational differences between the index pricing point and the 
aggregation point. Indian land lessees and their affiliates, as well as 
oil purchasers, would be required to give MMS information on the 
location/quality differentials included in their various oil exchange 
agreements and sales contracts. From these data, MMS would calculate 
and publish representative location/quality differentials for payors to 
use in reporting royalties in different areas.
    We estimate the annual costs to industry (both Indian payors and 
the associated non-payor purchasers) to submit the Form MMS-4416 to be 
$115,500 (see figures below). MMS estimates that, on average, a payor 
would have six exchange agreements or sales contracts to dispose of the 
oil production from the Indian lease(s) for which it makes royalty 
payments. We estimate that a payor would need about one-half hour on 
average to gather the necessary contract information and complete Form 
MMS-4416.
    Filing Due to Contract Changes: We estimate a payor would have to 
submit the form twice a year because of contract changes in addition to 
the required annual filing discussed below.

220 payors  x  6 agreements or contracts/payor  x  \1/2\ hour/
submission  x  2 submissions/year = 1,320 burden hours

    MMS estimates that in addition to the 1,320 agreements or contracts 
submitted by all 220 payors, approximately 110 non-payor purchasers of 
crude oil from Indian leases would also submit about half that amount 
(660 agreements or contracts). Again, we estimate that the filing of 
Form MMS-4416 would take 30 minutes per report to gather the necessary 
documents and 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.

660 agreements or contracts - \1/2\ hour/submission  x  2 
submissions/year = 660 burden hours

    Annual Filing: We would also require all 220 payors and all 110 
non-payor purchasers to submit an annual Form MMS-4416 for their 
agreements or contracts. The annual filing requirement would assure 
Indian lessors, tribes and allottees that all payors and non-payor 
purchasers are complying with these proposed Indian valuation 
regulations. We estimate that this annual filing would require 10 
minutes per report to indicate a no-change situation.

(1,320 + 660) agreements or contracts  x  1 annual submission  x  
\1/6\ hour/submission = 330 burden hours

    Total Filing Burden: Based on $50 per hour, we estimate the annual 
cost to industry would be $115,500, computed as follows:

(1,320 + 660 + 330 burden hours)  x  $50/hour = $115,500

    Dividing this total burden by the 330 entities (220 payors and 110 
non-payor purchasers) amounts to a per-business impact of $350. This 
amount applied to the 220 payors equates to an estimated annual burden 
of $77,000. This amount applied to the estimated 166 small business 
payors and the estimated 83 non-payor purchasers equates to estimated 
annual burdens of $58,100 and $29,050 for payors and non-payor 
purchasers respectively, or a total small business impact of $87,150.
4. Cost--Filing Supplemental Report of Royalty and Remittance (Form 
MMS-2014) With Major Portion Uplift
    As mentioned earlier in the provisions of the supplementary 
proposed rule, MMS would calculate a major portion value specific to 
each tribe. Most Indian leases include this provision, which provides 
that value for royalty purposes, in the discretion of the Secretary, 
may be the highest price paid or offered at the time of production for 
the major portion of oil production from the same field. Lessees should 
be aware of this provision and account for its impacts when they agree 
to the lease terms. This is not a new provision created in the proposed 
rule, and it applies equally to all payors, whether small entities or 
not.
    This major portion value would be calculated by MMS based on values 
reported on the Form MMS-2014. If the MMS-calculated value were greater 
than what the lessee initially reported, the lessee would have to file 
a revised Form MMS-2014, and pay additional royalties.
    Industry would incur an administrative burden in filing additional 
Form MMS-2014 lines to comply with the rule's major portion provision. 
MMS analyzed reported royalty data for Indian leases for 1997. There 
were approximately 33,000 individual lines reported for oil and about 
6,000 lines for condensate on Form MMS-2014. We estimated that under 
the provisions of the proposed rule, major portion calculations would 
have been necessary for as many as 7.5% of these lines. As many as 
2,925 lines might have been backed out and reentered, resulting in an 
additional 5,850 line changes/entries. Based on an average of 7 minutes 
per line at $50 per hour, the administrative burden for filing Form 
MMS-2014 lines would total $34,125 annually, or $155 for each of the 
220 payors. $25,749 of the

[[Page 58242]]

$34,125 is allocated to the 166 small businesses.
5. Benefits--Administrative Savings
    Some of the larger industry payors would realize administrative 
savings because of the reduced complexity in royalty determination and 
payment under this proposed rule. However, MMS assumes that many of the 
small payors currently report royalties based on gross proceeds. This 
method of reporting is relatively simple and is not necessarily the 
target of significant audit work. These small businesses will not see 
significant savings under the rule. Specifically, for the larger 
payors, the proposed rule would result in:
    a. Simplification of reporting and pricing, coupled with certainty. 
We anticipate that the proposed rule would significantly reduce a large 
payor's time involved in the royalty calculation process. In the 
proposed framework, the lessee would either report its gross proceeds 
or the adjusted spot price applicable to their production. The need to 
work through and apply the current benchmarks for non-arm's-length 
transactions would be eliminated. Further, once MMS calculates a major 
portion price, the lessee would compare this price to what they 
reported and make adjustments as necessary. The lessee's reporting/
pricing procedures thus should be fairly straightforward. MMS does not 
anticipate that any of the small businesses would realize any 
significant savings because it is likely that the majority of these 
payors simply report their gross proceeds under the current rule.
    It is difficult to quantify the amount of savings by simpler 
reporting. The current level of time spent calculating royalties varies 
greatly by company depending on many variables such as the complexity 
of the disposition or sale of the product, the amount of production to 
account for, and the computation of any necessary adjustments.
    However, we assume that simpler reporting would save each large 
payor at least 30 minutes per month to report. This conservative figure 
amounts to a reduction of 6 hours per year per payor. At $50 per hour, 
the annual savings per payor would be $300. For all 54 large payors 
this amounts to $16,200.
    b. Reductions in audit efforts. When a company is audited, it 
incurs significant costs. It may be required to gather records, provide 
documents, and in some cases provide space and facility resources. 
Although these costs vary significantly by company and by the nature of 
the audit, we believe that cost savings at least as great as those for 
simplified reporting would result. MMS estimates this benefit will be 
realized primarily by the larger payors who are frequently the target 
of such audit work.
    The MMS audit tracking system indicates that approximately 500 
Indian oil and gas leases had some type of audit work initiated in 
1997. This estimate does not include leases that may have been audited 
in 1997, but initiated in another year. Also, this figure does not 
include company audits where auditors examined a sample of leases that 
may have contained Indian leases. These 500 leases involved 
approximately 100 companies. Although it is difficult to quantify the 
future dollar savings for a similar sample of 100 companies, we believe 
that the expected reduced audit burden would be a significant industry 
benefit.
    c. Reductions in valuation determinations and litigation. The 
proposed rule would increase certainty for Indian royalty payors. 
Payors would be assured that if they apply the adjustments required by 
the proposed rule correctly and remit any additional monies due under 
the major portion calculation, the amount they report likely would be 
correct. Additionally, such payors would not be subject to additional 
bills for additional royalties due with late-payment interest attached. 
We expect that valuation disputes and requests for valuation 
determinations would decrease significantly under the proposed rule. 
Valuation determinations and disputes are very costly for both industry 
and the Federal Government. Some statistics follow:

--Over the last 10 years, MMS auditors identified more than 50,000 
instances concerning royalty underpayments. MMS resolved most of the 
issues underlying the underpayments before the actual issuance of an 
order to pay. In fact, MMS issued only 2,100 appealable orders during 
the same period. Of those, 925 appeals resulted. These audit efforts 
resulted in the collection of $1.16 billion in additional royalties 
that otherwise would have gone uncollected.
--Over the past 10 years, Royalty Valuation Division (RVD) Staff 
responded to over 5,000 separate requests by Federal and Indian lessees 
for advice on valuation procedures and transportation/processing 
allowances for royalty calculation purposes. These responses resulted 
in 247 disputes (about 5 percent of all RVD responses) between MMS and 
the payor over this same time period. These included disputes over 
product value (131 separate issues) and allowances for transportation 
or processing (116 separate issues).
--The Department of the Interior Solicitor's Office reported at least 
47 separate cases since 1988 that they believed were significant and 
involved valuation disputes.

    Although it is impossible to quantify the cost to both industry and 
Government for all valuation disputes since 1988, it is undoubtedly in 
the tens of millions of dollars. Similar to the audit savings discussed 
above, we assume this benefit primarily would be realized by the 54 
larger companies affected by the rule. We conservatively estimate that 
the proposed rule's certainty would reduce payors' legal and other 
administrative costs on Indian leases by at least a million dollars 
annually, or about $18,500 for each of the 54 large payors.
    Altogether, with the limited information we can collect and the 
gross estimates we made, we assume a total savings to the larger Indian 
oil lease payors of approximately $1.016 million per year ($16,200 in 
reporting savings, an unquantifiable amount for audit savings, and $1 
million in legal and administrative costs). This total is based on very 
conservative estimates where actual data are difficult, if not 
impossible, to obtain. Actual savings would likely be significantly 
higher.

Alternatives to the Proposed Rule

    Title 5 U.S.C. 603(c) provides:

Each initial regulatory flexibility analysis shall also contain a 
description of any significant alternatives to the proposed rule 
which accomplish the stated objectives of applicable statutes and 
which minimize any significant economic impact of the proposed rule 
on small entities. Consistent with the stated objectives of 
applicable statutes, the analysis shall discuss significant 
alternatives such as * * *
    (1) the establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rule for such small 
entities;
    (3) the use of performance rather than design standards; and
    (4) an exemption from the coverage of the rule, or any part 
thereof, for such small entities.

    Under these provisions, the clear focus of the analysis of 
significant alternatives is on compliance and reporting requirements, 
not the substantive policy choices embodied in a proposed rule. We 
explained above the reasons underlying the agency's policy choices in 
the January 5, 2000, supplementary proposed rule regarding

[[Page 58243]]

valuation of oil produced from Indian leases. For reasons that also 
have been explained above, the agency has simplified to the extent 
possible the reporting requirements associated with the proposed 
provisions, specifically, the proposed Form MMS-4416. The basic initial 
reporting procedures for the Form MMS-2014 (the report of sales and 
royalty) are unchanged from current procedures that have been in place 
for many years.
    The agency has concluded that the reporting requirements in the 
supplementary proposed rule are necessary to carry out the substantive 
royalty valuation policy set forth in that proposal, and that there is 
no significant alternative for compliance or reporting requirements 
that would accomplish the policy objective. The Form MMS-4416, as 
proposed in the supplementary proposal, would collect the minimum 
information necessary for MMS to apply the substantive provisions of 
the rule. We do not perceive significant possibilities for further 
consolidation or simplification of compliance and reporting 
requirements while still accomplishing the substantive requirements of 
the supplementary proposed rule.
    Theoretically, MMS could reduce the potential cost and compliance 
burden on all entities (large or small) by selecting a different (and 
simpler) substantive valuation alternative. Such an alternative also 
likely would result in lower royalty values, and consequently, smaller 
royalty payments by all payors. (There is no basis to establish 
different values of Indian lease oil production based simply on whether 
the payor is a small entity or not.) However, the Regulatory 
Flexibility Act does not mandate or contemplate that an agency must 
select unfavorable substantive policies simply because the policy 
choice affects small entities.
    MMS consulted with the affected tribal and allottee representatives 
on several occasions and discussed the merits and provisions of several 
valuation alternatives in depth. MMS, the tribes, and allottee 
representatives believe that the proposed rule reflects the best method 
to ensure that Indian lessors receive fair market value for their oil 
resources.
    However, we considered a range of related alternatives such as 
changes to the current gross proceeds valuation method, using futures 
prices instead of spot values, and using index-based prices with fixed 
adjustments for production from specific geographic zones. We chose to 
apply the highest of:
    (1) The average of the high daily applicable spot prices for the 
month;
    (2) MMS-calculated major portion prices in the field or area; or
    (3) Gross proceeds received by the lessee or its affiliate.
We chose spot prices as one of the three value measures because:
    (1) They represent actual trading activity in the market,
    (2) They mirror NYMEX futures prices, and
    (3) They permit use of an index price in proximity to the actual 
production whose value is being measured.

Conclusion

    MMS notes that this rule will have a significant impact on a 
substantial number of small business payors on Indian leases as a 
percentage of all Indian lease payors. However, we believe the 
supplementary proposed rule is appropriate because it establishes fair 
and reliable measures of royalty value for Indian resources. As 
explained above, we examined several alternatives but concluded that 
the rule as currently proposed best achieves market value for Indian 
lessors while minimizing the impact on lessees. MMS has made every 
attempt to mitigate such impacts, but cannot select policies 
unfavorable to Indian lessors based on potentially unfavorable impacts 
on small entities.
[FR Doc. 00-24822 Filed 9-27-00; 8:45 am]
BILLING CODE 4310-MR-P