[Federal Register Volume 68, Number 61 (Monday, March 31, 2003)]
[Proposed Rules]
[Pages 15390-15404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6703]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 204

RIN 1010-AC30


Accounting and Auditing Relief for Marginal Properties

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Supplementary proposed rule.

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SUMMARY: MMS is proposing new regulations to implement certain 
provisions in the Federal Oil and Gas Royalty Simplification and 
Fairness Act of 1996. These regulations would explain how lessees and 
their designees could obtain accounting and auditing relief for Federal 
oil and gas leases and unit and communitization agreements that qualify 
as marginal properties.

EFFECTIVE DATE: Comments must be submitted on or before May 30, 2003.

ADDRESSES: Address your comments, suggestions, or objections regarding 
this proposed rule to:
    By regular U.S. mail. Minerals Management Service, Minerals Revenue 
Management, Regulations and FOIA Team, P.O. Box 25165, MS 320B2, 
Denver, Colorado 80225-0165; or
    By overnight mail or courier. Minerals Management Service, Minerals 
Revenue Management, Building 85, Room A-614, Denver Federal Center, 
Denver, Colorado 80225; or
    By e-ail. [email protected]. Please submit Internet comments as 
an ASCII file and avoid the use of special characters and any form of 
encryption. Also, please include ``Attn: RIN 1010-AC30'' and your name 
and return address in your Internet message. If you do not receive a 
confirmation that we have received your Internet message, call the 
contact person listed below.

FOR FURTHER INFORMATION CONTACT: Paul A. Knueven, Chief, Regulation and 
FOIA Team, Minerals Revenue Management, MMS, telephone (303) 231-3316, 
fax (303) 231-3385, or e-mail [email protected].

SUPPLEMENTARY INFORMATION: The principal authors of this rule are Sarah 
L. Inderbitzin of the Office of the Solicitor and David A. Hubbard of 
Minerals Revenue Management, MMS, Department of the Interior.

I. Background

    On August 13, 1996, the President signed into law the Federal Oil 
and Gas Royalty Simplification and Fairness Act (RSFA).\1\ RSFA amends 
the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA).\2\ 
Section 7 of RSFA allows MMS and the State concerned (defined under 
RSFA as ``a State which receives a portion of royalties or other 
payments under the mineral leasing laws from [a Federal onshore or OCS 
oil and gas lease]'')\3\ to provide royalty prepayment and regulatory 
relief for marginal properties for Federal onshore and Outer 
Continental Shelf (OCS) oil and gas leases.\4\ The stated purpose of 
granting relief to marginal properties under RSFA is to promote 
production, reduce administrative costs, and increase net receipts to 
the United States and the States.\5\ Specifically, paragraph (c) of the 
new 30 U.S.C. 1726 enacted by RSFA section 7 directed the Secretary 
(and States that had received a delegation of audit authority) to 
``provide accounting, reporting, and auditing relief that will 
encourage lessees to continue to produce and develop'' marginal 
properties, ``provided that such relief will only be available to 
lessees in a State that allows.'' (There is an exception to the 
requirement for State allowance if royalty payments from a lease are 
not shared with a State under applicable law.)
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    \1\ Pub. L. 104-185, as corrected by Pub. L. 104-200.
    \2\ 30 U.S.C. 1711 et seq.
    \3\ 30 U.S.C. 1701(31).
    \4\ 30 U.S.C. 1726.
    \5\ 30 U.S.C. 1726(a).
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    In response to the RSFA section 7 amendments, MMS conducted three 
workshops to receive input from a wide variety of constituent groups to 
develop a proposed rule. The workshops were held at MMS offices in 
Denver, Colorado, on October 31, 1996, January 23, 1997, and November 
5, 1997. Representatives from several Federal and State government 
organizations participated along with industry organizations 
representing both small and large Federal oil and gas lessees. The 
input received during these workshops was instrumental in developing 
the proposed rule that was published in the Federal Register on January 
21, 1999 (64 FR 3360).
    Public comments received in response to the proposed rule were 
sharply contradictory. The comments fell into two general categories:
    1. The States believed that MMS was offering too much relief to 
industry; and
    2. Industry believed that the rule was too complicated and did not 
offer enough relief.
    Because of the contradictory opinions, the Associate Director for 
Minerals Revenue Management asked the Royalty Policy Committee (RPC) of 
the Department of the Interior's Minerals Management Advisory Board to 
form a subcommittee to review the marginal property issue and make 
recommendations to the Department on how MMS should proceed. The RPC 
appointed a subcommittee with members from several industry 
associations and the major States affected by the relief provisions. 
MMS employees and a representative of the Office of the Solicitor 
served as technical advisors to the subcommittee.
    The RPC subcommittee prepared a report that was submitted to the 
RPC on March 27, 2001. The RPC accepted the subcommittee's 
recommendations. On August 2, 2001, the Acting MMS Director--on behalf 
of the Secretary of the Interior--approved the report and advised MMS 
to proceed with a second proposed rule incorporating the subcommittee's 
recommendations. This second proposed rule includes the RPC 
subcommittee's recommendations with one exception described below.

II. Comments on the 1999 Proposed Rule

    MMS received comments on the initial proposed rule published on 
January 21, 1999 (64 FR 3360) from the following nine entities:
    [sbull] 3 States;
    [sbull] 1 State and Indian audit organization;
    [sbull] 2 oil and gas producers;
    [sbull] 2 industry associations; and
    [sbull] 1 law firm representing 1 industry association and 11 oil 
and gas companies.
    These comments are analyzed and discussed below:

Definition of Base Period

    1999 Proposed Rule. In Sec.  204.2, MMS proposed to define the base 
period as the 12-month period from October 1 through September 30 
immediately preceding the calendar year in which the lessee takes or 
requests marginal property relief.
    Public Comments. One State commented that the base period should 
track as closely as possible to the beginning of the applicable 
calendar year in which the lessee takes marginal property relief. One 
producer requested that the base period be moved from October 1 through 
September 30 to

[[Page 15391]]

September 1 through August 31 because the proposed period did not allow 
sufficient time for producers to report. One industry association also 
requested that the base period be moved back to give industry more time 
for calculations.
    RPC Subcommittee Recommendation. The subcommittee members discussed 
the need to change the proposed base period. Producer groups indicated 
that the base period needed to be moved back at least 1 or 2 months. 
However, one State representative said that the base period needed to 
be as close to the calendar year as possible, but the State could 
accept moving it back to September 1 through August 31. The 
subcommittee ultimately recommended changing the base period to July 1 
through June 30. The subcommittee felt that it was necessary to move 
the base period back in order for MMS to publish a Federal Register 
notice before the first of the calendar year listing which States were 
participating in the marginal property relief options. The subcommittee 
believes that the following schedule should meet the needs of all 
parties (industry, States, and MMS):
    August 15: Operators submit production reports for June production.
    October 1: MMS furnishes States a report of marginal properties for 
July-June base period.
    November 1: States notify MMS if they wish to opt in or out of 
marginal property accounting and auditing relief (if a State fails to 
notify MMS, they are deemed to have opted out).
    December 1: MMS publishes a Federal Register notice listing which 
States are opting in or out.
    MMS Response. We agree with the RPC subcommittee recommendation to 
change the period to July 1 through June 30.

Definition of ``Marginal Property''

    1999 Proposed Rule. In Sec.  204.4, MMS proposed to define a 
``marginal property'' as a property having average daily well 
production of less than 15 barrels of oil equivalent (BOE) per well per 
day during the base period.
    Public Comments. The law firm and the two industry associations 
suggested that MMS establish separate production levels for different 
situations, particularly offshore and onshore properties. One State was 
concerned that using all producing wells in the calculation could 
result in classifying properties with very prolific wells as marginal. 
The same State also objected to MMS delegating to itself the 
determination of what marginal production is because RSFA stated that 
MMS and the States should determine the definition jointly.
    RPC Subcommittee Recommendation. The subcommittee members discussed 
the comment that separate qualification rates should be established for 
offshore and onshore. MMS representatives advised the subcommittee that 
industry had previously formed an operational group to establish a rate 
for offshore, but the group could not agree and the idea was dropped. 
Subcommittee members also discussed whether the States could set their 
own individual qualification rates. The subcommittee members decided 
this was not acceptable because of the administrative burden associated 
with tracking and auditing different rates for different States. One 
State representative was concerned that some States might want to offer 
some relief but not at 15 BOE. The RPC subcommittee did not recommend 
any changes in the definition of ``marginal property.''
    MMS Response. We propose to retain the definition of ``marginal 
property'' contained in the 1999 proposed rule. MMS agrees with the 
subcommittee's conclusion that using different State production levels 
to define ``marginal property'' would be too administratively onerous 
for use. Such an approach also would result in a Federal law having 
different meanings in different States, which would raise serious legal 
concerns.
    Although using all producing wells in the calculation to determine 
whether a property is marginal may result in some leases or units with 
high-producing wells being classified as marginal properties, we 
believe it would be too administratively burdensome to allow relief for 
individual wells, rather than by lease or unit or communitization 
agreement (hereinafter referred to as ``agreement'' in this context) as 
the rule provides. MMS believes that the proposed rule does allow the 
Secretary (acting through MMS) and the State to ``jointly determine, on 
a case-by-case basis, the amount of what marginal production from a 
lease or leases or well or wells, or parts thereof'' may obtain royalty 
accounting and auditing relief, as the statute provides (30 U.S.C. 
1726(a)). Several State representatives on the subcommittee ultimately 
recommended using the production level in the proposed rule. Moreover, 
any State that does not agree with the production levels MMS ultimately 
adopts under this rule may decline to allow accounting, reporting, and 
auditing relief under Sec.  204.208.

Statutory Requirements for Relief

    1999 Proposed Rule. In Sec.  204.5, MMS reiterated the RSFA 
statutory requirements that any relief granted for marginal properties 
must promote production, reduce administrative costs, and increase net 
receipts to the Federal Government and the States.
    Public Comments. One State stated that the proposed rule was 
contrary to law because it was unlikely to promote production or 
increase net receipts. Further, the State argued that there is no way 
to determine if the relief will increase net receipts. The State also 
noted that we must take into account the loss of the time value of 
royalty receipts if we allow delayed reporting.
    RPC Subcommittee Recommendation. The subcommittee discussed 
numerous times the difficulty in finding possible relief options that 
would meet all three RSFA objectives. The subcommittee recommended that 
two relief options be retained--cumulative reporting and ``other'' 
relief.
    MMS Response. We understand the State's concerns, but do not agree 
that the relief offered will not promote production or increase net 
receipts. Because use of the annual reporting option is limited to 
properties producing 1,000 BOE or less annually, we believe there will 
be little loss of time value of the royalties. Moreover, we believe the 
administrative savings to the lessee will promote production, and the 
administrative savings to MMS and the States will more than offset any 
possible loss of interest. A member of MMS's reengineering team 
informed the subcommittee that each different relief option would 
require modifications to MMS's compliance programs and thus add cost. 
We propose to limit our relief options to those recommended by the 
subcommittee to avoid being cost-prohibitive.

State Liability for Denials of Requests for Relief

    1999 Proposed Rule. In Sec.  204.6, MMS proposed that if MMS denied 
a request for relief based on a State's denial, then the decision was 
final for the Department of the Interior and could not be appealed 
administratively.
    Public Comments. One State believed that MMS's interpretation of 
RSFA was incorrect and left the States open to litigation in Federal 
court. Another State indicated that the proposed rule did not clearly 
acknowledge that nothing in RSFA serves to waive a State's immunity 
from suit.
    RPC Subcommittee Recommendation. All of the State representatives 
on the subcommittee expressed grave concern

[[Page 15392]]

over the language in the proposed rule that said if a decision not to 
grant relief is based on a State's denial, the decision would not be 
subject to administrative appeal. This would put any challenge to a 
decision not to grant relief directly into Federal District Court. The 
States were not willing to accept that risk. Based on this discussion, 
the subcommittee sent a request to seven State agencies asking their 
opinion on the comments raised by State representatives on the 
subcommittee. Only one agency responded, stating that it agreed with 
the other States' concerns. Consequently, the subcommittee recommended 
that each State be given the ability to determine, before each calendar 
year, whether it will allow either the notification-based relief option 
or the request-based relief option, or both. If a State decides to 
allow the request-based relief option, the State would thereby agree to 
let MMS make the final decision on the relief request. That decision 
could be appealed administratively within the Department of the 
Interior.
    MMS Response. We agree with the subcommittee's recommendation. We 
also believe that modifying the proposed rule at Sec.  204.207(b) to 
read as follows would eliminate the States' concerns:

    If, for your marginal property, there is a State concerned that 
has determined in advance that it will allow either or both of the 
relief options under this subpart, MMS will decide whether to 
approve, deny, or modify your relief request after consulting with 
the State concerned.

Thus, the approval process under this proposed rule is like the current 
process for issuance of orders where the State has performed the audit. 
Although the State is consulted regarding whether to grant, deny or 
modify relief, MMS would ultimately issue the decision and the State 
would not be subject to suit in Federal District Court. Moreover, any 
State that does not wish to allow accounting and reporting relief may 
opt out.

Who May Request Relief

    1999 Proposed Rule. In Sec.  204.201, MMS proposed that a lessee or 
the lessee's designee of a Federal property could obtain relief if the 
property qualified as marginal. Further, the lessee or lessee's 
designee could request relief only for the lessee's fractional interest 
in the property.
    Public Comments. One industry association liked the fact that not 
all lessees in a property have to seek relief in order for an 
individual lessee to take relief on the lessee's portion. One State 
commented that RSFA did not allow designees to apply for relief in 
place of the lessee.
    RPC Subcommittee Recommendation. The subcommittee suggested 
retaining the original proposed language concerning designees.
    MMS Response. We agree with the State that RSFA does not 
specifically state that designees may seek relief on behalf of lessees. 
However, it also does not specifically preclude such action. Indeed, 30 
U.S.C. 1726(c) merely authorizes the Secretary and delegated States to 
provide relief ``to encourage lessees to continue to produce and 
develop properties'' and that relief will only be ``available to 
lessees in a State that allows'' such relief. The statute is silent 
about who may request relief. Therefore, because the statute is silent, 
and designees are acting as the lessee's agent, we believe that it is 
reasonable and consistent with RSFA to authorize designees to request 
relief under this rulemaking.

Cumulative Reporting and Payment Relief

    1999 Proposed Rule. In Sec.  204.203, MMS proposed to allow lessees 
to report quarterly, semi-annually, or annually depending upon the 
volume of royalty BOE produced on the property.
    Public Comments. One State objected to allowing payments less often 
than monthly because that is what is required by lease terms. The law 
firm commented that cumulative reporting should not be less often than 
annual. One industry association suggested that the thresholds for the 
lessee to be allowed to submit cumulative reports should be higher. The 
other industry association was concerned that lessees could not perform 
the complicated calculations to determine the level of relief and 
suggested MMS establish a consistent production level for eligibility 
for relief. The industry association also stated that the calculations 
to determine cumulative royalty reporting relief were too narrow and 
too burdensome and all marginal properties should get the same relief. 
The association also suggested that MMS eliminate the requirement to 
report allowances separately on marginal properties and explain how 
estimates would work with reporting less often than monthly. One State 
was concerned that MMS would have to develop a separate database to 
track reporting dates and royalty rates by lessee.
    RPC Subcommittee Recommendation. A representative of the MMS 
financial reengineering team was invited to a subcommittee meeting on 
cumulative reporting. The reengineering team representative stated that 
MMS would have to make some modifications to its financial system in 
order to process reporting on a periodic, cumulative basis. She 
explained that each reporting frequency would require funding for 
system modifications; thus, we would probably have to limit the 
available relief options to avoid being cost-prohibitive. Consequently, 
the subcommittee recommended that only annual cumulative reporting be 
retained as a notification-based relief option and that this option be 
limited to marginal properties producing 1,000 BOE or less annually.
    MMS Response: We agree with the subcommittee's recommendations. 
Moreover, with respect to one State's concern regarding the lease 
instrument's requirement that lessees pay monthly, the Government may 
by rule waive an obligation under the lease terms if doing so does not 
change the lessee's position to its detriment.

Complex Calculations

    1999 Proposed Rule. In Sec. Sec.  204.203, 204.204, and 204.205, 
the level of relief in each reporting option was based on various 
levels of marginal production. The calculations required lessees to 
multiply the BOE attributable to a marginal property by the applicable 
lease royalty rate.
    Public Comments. One State pointed out that MMS did not provide any 
rationale for the volume cut-offs for relief. Another State commented 
that it was unclear how MMS derived production levels for the levels of 
relief.
    RPC Subcommittee Recommendation. Discussion in the subcommittee 
centered on the complexity of the calculations required to determine 
whether a marginal property qualified for a particular form of 
accounting relief. The proposed rule included five different production 
levels for the five different forms or levels of accounting relief. The 
subcommittee ultimately decided to recommend volume limits based on 
total BOE rather than royalty BOE. The subcommittee also reduced the 
number of volume levels from five to one. This simplified the 
calculations significantly.
    MMS Response. We agree with the subcommittee's recommendations.

Net Adjustment Reporting

    1999 Proposed Rule. In Sec.  204.204, MMS proposed to allow net 
adjustment reporting as one of the notification-based relief options. 
In this reporting scenario, lessees could adjust a previously-reported 
royalty line in a one-line net entry on the Report of Sales and Royalty 
Remittance, Form MMS-

[[Page 15393]]

2014, rather than using MMS's traditional two-line adjustment process.
    Public Comments. One State objected to allowing net adjustments. 
One industry association thought net adjustment reporting should be 
allowed for all leases under MMS's reengineered system. The law firm, 
however, commented that net adjustments would not be ``relief'' for 
marginal properties if it is allowed for all reporters in the 
reengineered system.
    RPC Subcommittee Recommendation. The subcommittee members discussed 
the problems MMS's financial reengineering team had encountered in 
trying to implement net adjustment reporting. Because of very specific 
requirements in FOGRMA for certain data elements to be displayed on the 
Explanation of Payments (EOP) sent to States and tribes, the 
reengineering team and MMS's industry partners found net adjustment 
reporting unworkable. However, MMS continues to look for acceptable net 
adjustment reporting options for reengineering purposes. Based on MMS's 
continuing efforts to offer net adjustment reporting for all reporters, 
the subcommittee recommended that the net adjustment reporting relief 
option be dropped from the proposed rule.
    MMS Response. We agree with the subcommittee's recommendation.

``Rolled-Up'' Reporting Relief Option

    1999 Proposed Rule. In Sec.  204.205, MMS proposed to allow 
``rolled-up'' reporting as one of the notification-based relief 
options. In this reporting scenario, lessees could report all selling 
arrangements for a revenue source under a single selling arrangement on 
the Form MMS-2014.
    Public Comments. The law firm stated that ``rolled-up'' reporting 
was not significant relief. One of the industry associations agreed 
that if all product codes could not be rolled up, this was not 
significant relief.
    RPC Subcommittee Recommendation. The subcommittee recommended that 
the rolled-up reporting relief option be dropped from the proposed 
rule. This recommendation was, again, associated with the problem of 
accommodating required EOP information and the fact that selling 
arrangements were dropped from the revised Form MMS-2014 effective 
October 1, 2001.
    MMS Response. We agree with the subcommittee's recommendation.

Alternate Valuation Relief Option

    1999 Proposed Rule. In Sec.  204.206, MMS proposed to allow lessees 
to request approval to report and pay royalties using a valuation 
method other than that required under 30 CFR part 206.
    Public Comments. One State and one industry association did not 
think alternative valuation relief was necessary because lessees 
already have that option under current valuation regulations. The law 
firm was troubled by the provision that the proposed valuation method 
should ``approximate 30 CFR part 206.'' The law firm stated that with 
all the litigation currently in progress, it would be difficult for 
someone to determine what that value should be. Another State commented 
that the proposed rule invited litigation because there was no way for 
a State or MMS to determine whether an alternate valuation method would 
``approximate'' royalties in the future. The State further added that 
alternate valuation relief was not accounting, reporting or auditing 
relief but really royalty relief.
    RPC Subcommittee Recommendation. The subcommittee recommended 
dropping this option from the proposed rule.
    MMS Response. We agree with removal of this option for the reasons 
stated by the commenters. Moreover, alternative valuation is still an 
option a lessee may request under the other relief option in Sec.  
204.203 of this second proposed rule.
    1999 Proposed Rule. In Sec.  204.211, MMS proposed how it would 
review requests for alternative relief. MMS did not propose time frames 
within which it would review requests.
    RPC Subcommittee Recommendation. The subcommittee recommended that 
MMS have 120 days to review alternative relief requests. The 
subcommittee recommended that if MMS did not complete the review within 
the prescribed 120 days, requests would be deemed ``approved.''
    MMS Response. MMS has not determined whether to adopt the RPC 
subcommittee's recommendations. We are concerned about deeming a 
request ``approved'' based solely on the length of time elapsed after 
receipt of the request without any Department review. One alternative 
is to deem the request denied if MMS does not approve or disapprove a 
lessee's request within 120 days after MMS received the request. 
Because denial of a request may be appealed, that would give the 
Department the opportunity to review the request and make an informed 
decision. The other alternative is to have no timing requirements by 
not including any provision at all.
    Because of these concerns we are specifically requesting comments 
on:
    [sbull] Whether there should be a time limit on MMS approval after 
it receives a request for reporting, accounting, and auditing relief;
    [sbull] Whether the request should be deemed approved or denied 
after some time period, and what that period should be; and
    [sbull] Any other alternative approaches.

Audit Relief Option

    1999 Proposed Rule. In Sec.  204.207, MMS proposed to allow audit 
relief such as audits of limited scope, audits coordinated with other 
State or Federal agencies, or audits by independent public accountants.
    Public Comments. One State objected to any limit on the scope of 
audits. The State further added that independent auditors do not review 
whether royalties are paid correctly. Another State stated that it did 
not believe that audit relief was warranted and would not participate 
in it. The third State wanted to remove the audit relief option related 
to ``coordinated royalty and severance tax audits'' because it 
compromised the State's right to audit. The law firm stated that audit 
relief was not much relief because under the current strategy marginal 
properties are seldom audited. One industry association agreed that 
audit relief was not much relief because the States and MMS already 
practice coordinated audits. The other industry association, however, 
strongly supported audit relief.
    RPC Subcommittee Recommendation. The subcommittee recommended 
dropping this option from the proposed rule.
    MMS Response. We agree with removal of this option for the reasons 
stated by the State commenters. Moreover, audit relief is still an 
option a lessee may request under the ``other'' relief option in Sec.  
204.203 of this second proposed rule.

Other Relief Option

    1999 Proposed Rule. In Sec.  204.208, MMS proposed to allow a 
lessee to request any type of accounting and auditing relief that was 
appropriate for a specific marginal property provided that it was not 
specifically prohibited.
    Public Comments. One State opposed the other relief option because 
the burden to evaluate the request was too great for a meaningless 
level of cost savings.
    RPC Subcommittee Recommendation. The subcommittee members discussed 
all three approval-based relief options contained in the 1999 proposed 
rule. Because of the sensitivities surrounding what was in the original 
proposal, the subcommittee decided to recommend an approval-based 
relief option called ``other'' relief. Other relief would apply

[[Page 15394]]

to all marginal properties and could be anything within MMS authority 
that the lessee or his/her designee believes would be marginal property 
relief. The lessee would need to submit a proposal to MMS for approval. 
After consultation with the State or States concerned, MMS would decide 
whether to grant the requested relief. Examples of what might be 
considered are payments made more than annually but less than monthly 
or an alternative valuation method.
    MMS Response. We agree with the subcommittee's recommendation. 
Further, we disagree with one State's comment that such an option is 
too great a burden relative to any savings. As this second proposed 
rule states, any relief requested must meet the statutory requirements 
in RSFA to promote production, increase net receipts, and reduce 
administrative costs.

Disallowed Relief Options

    1999 Proposed Rule. In Sec.  204.209, MMS listed relief items that 
MMS would not approve if requested by lessees.
    Public Comments. One State wanted to add three items to the types 
of relief that MMS would not approve. The items were any relief request 
that (1) decreases royalty income below true market value, (2) 
increases allowances, or (3) reduces royalty-bearing volumes.
    RPC Subcommittee Recommendation. The subcommittee recommended 
retaining the list of disallowed items with no changes.
    MMS Response. We believe that Sec.  204.203(a)(1) in this second 
proposed rule, which provides that any alternative valuation 
methodology must approximate royalties payable under 30 CFR part 206, 
addresses the State's concern.

Notification-Based Relief

    1999 Proposed Rule. In Sec.  204.210(a), MMS described the 
information a lessee must submit to MMS before taking any notification-
based relief.
    Public Comment. One industry association supported notification-
based relief rather than request-based relief. The other industry 
association did not want any required notification for taking relief in 
Sec. Sec.  204.203, 204.204, and 204.205.
    Two States opposed the automatic relief options. One of those 
States indicated that all relief should be gained through an approval 
process. One industry association liked the provision that would allow 
lessees to file a single notification for multiple marginal properties.
    RPC Subcommittee Recommendation. The subcommittee recommended only 
one type of notification-based relief--cumulative annual reporting.
    MMS Response. We agree with the subcommittee recommendation to 
allow only notification-based relief for annual reporting.

Approval Process

    1999 Proposed Rule. In Sec. Sec.  204.212 and 204.213, MMS 
described the approval process for request-based relief.
    Public Comments. All three States thought that the approval process 
placed too much administrative burden on the States. One State objected 
to MMS telling the States what the scope, timing or process should be 
for its review of a request. The same State noted that MMS cannot tell 
a State who in the State will make determinations on relief or how long 
they have to make the determinations. One industry association 
suggested that authority to approve alternative valuation should be 
delegated to someone below the Assistant Secretary for Land and 
Minerals Management (ASLM). The other industry association wanted 
approval authority for all properties to be with the ASLM. The law 
firm, one State, and one industry association commented that they did 
not agree with the fact that the regulation required States to do 
things within specified time periods but not MMS. One State did not 
agree with the provision that if the State did not notify MMS of its 
decision within 30 days then the State is deemed to agree with MMS's 
determination. One industry association was concerned that States might 
be given more than 30 days to review and decide relief options. The 
same industry association supported publication of States' decisions to 
allow or disallow certain types of relief and wanted MMS and the States 
to develop criteria for analyzing relief requests.
    RPC Subcommittee Recommendation. The subcommittee recommended that 
MMS consult with the State concerned about a request for relief rather 
than requiring a decision from the State in a specific period of time.
    MMS Response. The State's concerns regarding timing are no longer 
an issue because this proposed rule now requires consultation with the 
State concerned, rather than specific timing requirements. See 
discussion on proposed Sec.  204.207(b) under the topic ``State 
Liability'' above.

Length of Relief

    1999 Proposed Rule. In Sec.  204.217, MMS proposed that any 
approved relief would remain in effect for as long as the property 
qualified as marginal.
    Public Comments. One State opposed continuous relief throughout the 
life of a lease and thought the marginal properties should be monitored 
periodically. One industry association supported relief for the life of 
the lease.
    RPC Subcommittee Recommendation. The subcommittee did not recommend 
any changes in Sec.  204.217 (redesignated as Sec.  205.209).
    MMS Response. We agree that properties should have relief for the 
life of the lease only if they continue to qualify as marginal. 
Moreover, nothing in this proposed rulemaking precludes MMS from 
monitoring and auditing leases for compliance with other MMS 
regulations and lease terms.

Relationship to Other Incentive Programs

    1999 Proposed Rule. In Sec.  204.218, MMS proposed that a lessee 
could obtain accounting and auditing relief for a marginal property 
even if the property benefited from other Federal or State production 
incentive programs.
    Public Comments. One State commented that lessees should be 
required to disclose other types of relief they are receiving. One 
industry association supported the provision allowing lessees to get 
marginal property relief even if they benefit from other incentive 
programs.
    RPC Subcommittee Recommendation. The subcommittee did not recommend 
any changes in this provision.
    MMS Response. We agree that lessees should get marginal property 
accounting and auditing relief even if they benefit from other relief 
programs. Nothing in RSFA precludes obtaining marginal property relief 
if a lessee obtains other relief.

Fees

    1999 Proposed Rule. In Sec.  210.210(b), MMS listed the information 
that lessees must submit in their requests for accounting and auditing 
relief and the requirement to submit a $50 fee with each request.
    Public Comments. One State stated that the items to be included in 
the written request for relief were inadequate. Two States said the $50 
fee is too low compared to the cost incurred by States and MMS to 
process requests. Two States thought the fees should be shared with the 
States. Both industry associations opposed the fee. One industry 
association said that small independent producers could not afford it 
and did not like the fact that MMS would not refund the fee for any 
reason.

[[Page 15395]]

    RPC Subcommittee Recommendation. The subcommittee recommended 
elimination of the fee for request-based relief.
    MMS Response. After further legal review, we have decided that it 
is reasonable not to recover a processing fee for requests or notices 
under this proposed rule. MMS recovers its costs under the Independent 
Offices Appropriations Act of 1952 (IOAA),\6\ for Federal offshore 
leases, and the Federal Land Policy and Management Act of 
1976(FLPMA),\7\ for Federal onshore leases. Thus, as part of the 
previously-proposed rulemaking, we analyzed the proposed marginal 
property relief's cost recovery fees for reasonableness according to 
the factors in FLPMA section 304(b).\8\ In that proposed rulemaking, we 
examined the ``reasonableness factors'' which FLPMA requires to be 
considered: (a) Actual costs (exclusive of management overhead); (b) 
the monetary value of the rights or privileges sought by the applicant; 
(c) the efficiency to the Government processing involved; (d) that 
portion of the cost incurred for the benefit of the general public 
interest rather than for the exclusive benefit of the applicant; (e) 
the public service provided; and (f) other factors relevant to 
determining the reasonableness of the costs.
---------------------------------------------------------------------------

    \6\ 31 U.S.C. 9701 et seq.
    \7\ 43 U.S.C. 1701.
    \8\ 64 FR 3366-69.
---------------------------------------------------------------------------

    For marginal property relief taken or requested under Sec.  
204.210, the method used to evaluate the factors under the previously-
proposed rulemaking was twofold. First, we estimated actual costs and 
evaluated each of the remaining FLPMA reasonableness factors (b) 
through (f) individually to decide whether the factor might reasonably 
lead to an adjustment in actual costs. If so, that factor was then 
weighed against the remaining factors to determine whether another 
factor might reasonably increase, decrease, or eliminate any 
contemplated reduction. On the basis of that twofold analysis, although 
MMS's total estimated actual costs were $2,370 to process an average 
request, MMS determined that a fee of $50 to process relief requests 
was reasonable.
    MMS determined a reduced fee was reasonable primarily based on its 
evaluation of FLPMA factor (f) Other Factors. MMS's primary 
consideration under this factor was RSFA's purpose with respect to 
marginal properties. Congress enacted RSFA to ``promote 
production,''\9\ by ``encourag[ing] lessees to continue to produce and 
develop marginal properties.''\10\ Congress stated that ``certain 
regulatory * * * obligations should be waived if it can be demonstrated 
such a waiver could aid in maintaining production that might otherwise 
be abandoned.''\11\ However, RSFA also mandated that any relief should 
``reduce administrative costs, and increase net receipts to the United 
States and the States.''\12\ Congress stated that granting relief for 
marginal properties should ``result in additional receipts from oil and 
gas production that would otherwise be abandoned, and would * * * 
increase oil and gas production on Federal lands by creating economic 
efficiencies to make Federal leases more competitive with private 
leases.''\13\ Thus, as part of its FLPMA reasonableness analysis, MMS 
considered (1) whether the benefit from the increase in royalties to be 
gained from continued production from marginal properties and the 
decreased administrative burden to MMS from granting such relief 
merited a reduction in fee charges; and (2) whether recovering the fee 
would defeat the Congressional intent to provide relief by discouraging 
companies from requesting relief.
---------------------------------------------------------------------------

    \9\ RSFA section 7(a).
    \10\ S. Rep. 260, 104th Cong., 2d Sess. 20 (1996); H.R. 667, 
104th Cong., 2d Sess. 20 (1996).
    \11\ H.R. 667, 104th Cong., 2d Sess. 20 (1996).
    \12\ RSFA section 7(a).
    \13\ Id. at 20-21.
---------------------------------------------------------------------------

    MMS has reexamined the analysis under factor (f) in the previously-
proposed rule to determine whether those factors warranted elimination 
of the proposed fee. We believe they do. We do not believe that the 
administrative savings to industry that may be afforded if they are 
granted relief will be significant enough for them to pay to request 
relief. Moreover, we believe that the companies that most need the 
relief are small independents who would be discouraged from applying 
for relief by even the nominal $50 fee previously proposed. Because the 
purpose of RSFA is to grant relief to producers so that they will 
continue to produce, we believe it is counterproductive to include a 
fee that will discourage many of the smaller marginal producers from 
requesting relief. Thus, we are not proposing to require payment of a 
processing fee for relief requests.

III. Procedural Matters

1. Public Comment Policy

    Our practice is to make comments, including names and home 
addresses of respondents, available for public review during regular 
business hours and on our Internet site at www.mrm.mms.gov. Individual 
respondents may request that we withhold their home address from the 
rulemaking record, which we will honor to the extent allowable by law. 
There also may be circumstances in which we would withhold from the 
rulemaking record a respondent's identity, as allowable by law. If you 
wish us to withhold your name and/or address, you must state this 
prominently at the beginning of your comments. However, we will not 
consider anonymous comments. We will make all submissions from 
organizations or businesses, and from individuals identifying 
themselves as representatives or officials of organizations or 
businesses, available for public inspection in their entirety.

2. Summary Cost and Benefit Data

    We have summarized below the estimated costs and benefits of this 
proposed rule to all potentially-affected groups: industry, State and 
local governments, and the Federal Government. Indian tribes and 
allottees are not affected by this rule. The cost and benefit 
information in this Item 2 of Procedural Matters is used as the basis 
for the Departmental certifications in Items 3 through 11 below.
A. Industry
    (1) Cost--Notification-based relief--Submitting notifications. 
Approximately 3,000 Federal oil and gas properties produce 1,000 or 
less BOE annually. In the first year after this rule becomes effective, 
we estimate that lessees of 1,000 of these properties will submit 
notifications that they will take cumulative reporting and payment 
relief. We do not anticipate that all lessees of qualifying properties 
will submit notifications because not all States will allow reporting 
and payment relief, and large corporations may find that modifying 
their computer systems to report and pay on a few leases annually 
rather than monthly will not be cost effective.
    We further estimate that a lessee will require 2 hours to determine 
if a property qualifies for cumulative reporting and payment relief and 
then prepare and submit the notification to MMS. Consequently, the 
total estimated burden for all notifications in the first year is 2,000 
hours (1,000 properties x 2 hours). Using an estimated $50 per hour 
cost, the total cost for all lessees to submit these notifications is 
$100,000 (2,000 burden hours x $50).
    Because the reporting and payment relief for a qualified property 
is for the life of the property as long as the property produces less 
than 1,000 BOE per year, a notification need only be

[[Page 15396]]

filed one time. However, we estimate that MMS will receive 
notifications for approximately 100 newly-qualifying properties in each 
subsequent year. The total estimated burden for each subsequent year is 
200 hours (100 properties x 2 hours) for a total cost of $10,000 (200 
hours x $50).
    (2) Benefit--Notification-based relief--Reporting fewer lines. We 
estimate that an average of 1,000 properties (500 leases and 500 
Agreements) will involve cumulative reporting and payment relief 
annually. This means that royalties on these properties will be 
reported and paid annually rather than monthly. We further estimate 
that lessees will submit 5,500 fewer lines for leases (1 line per month 
x 11 months x 500 leases) and 16,500 fewer lines for Agreements (3 
lines per month x 11 months x 500 Agreements) on Form MMS-2014, each 
year for a total of 22,000 fewer lines per year. Because each line 
averages 3 minutes to submit, we estimate that lessees will save 1,100 
burden hours (22,000 lines x 3 minutes / 60 minutes/hour) or a total of 
$55,000 (1,100 hours x $50/hour) in the first year this rule is 
effective and for each year thereafter.
    (3) Cost--Request-based relief--Requesting approval. MMS expects 
approximately 10 requests per year for other accounting and auditing 
relief. We estimate each request will require 4 hours for a lessee to 
prepare and submit. This estimate also includes providing information 
originally omitted from the request and lessee approval of MMS 
modifications, if any. The estimated cost to lessees to request other 
relief is approximately $2,000 per year (10 requests x 4 hours per 
request x $50 per hour).
    (4) Benefit--Request-based relief--Taking request-based relief. We 
are unable to quantify the benefits of the request-based relief 
category at this time because we do not know what types of relief 
industry will request or how many MMS will approve.
    (5) Cost--Both types of relief--Notifying MMS that relief has 
ceased. When a property ceases to qualify for previously granted 
relief, the lessee or designee is required to notify MMS. MMS expects 
that 24 properties will cease to qualify for relief each year and that 
each notification will require \1/4\ hour to prepare and submit. The 
estimated cost to lessees for these notifications is approximately $300 
(24 properties x .25 hours x $50).
    Small Business Issues. Approximately 2,500 companies report and pay 
royalties to MMS. We estimate that over 97 percent of these companies 
are small businesses as defined by the U.S. Small Business 
Administration because they have 500 or fewer employees. We anticipate 
that most of the relief granted under this proposed rule will benefit 
small companies. Typically, as properties near the end of their 
productive life, larger companies with higher overhead, sell their 
marginal properties to small companies who can operate them more 
profitably. We expect most small companies will avail themselves of the 
cumulative reporting and payment relief option. Generally, larger 
companies may not use this option because of the expense of modifying 
their large, complex computer systems to report a few leases on an 
annual rather than a monthly basis. However, we expect that most 
request-based relief will be sought by larger companies having more 
sophisticated and complex accounting considerations. If any company, 
large or small, chooses not to take the accounting and auditing relief 
offered in this proposed rule, it will incur no additional expense or 
burden.
B. State and Local Governments
    This rule will not impose any additional burden on local 
governments. MMS estimates that States impacted by this rule would 
incur costs and benefits as calculated below:
    (1) Cost--Notification-based relief--Determining State 
participation. Burden hours for review and development of a blanket 
State policy on accounting and auditing relief is estimated to be 40 
hours at the beginning of each year. Only 4 States have sufficient 
numbers of marginal properties to require an in-depth analysis of the 
economic impact of offering accounting and auditing relief. 
Consequently, we estimate the total annual burden to establish blanket 
policies for all States to be approximately 160 hours (4 primary States 
x 40 hours) or a total cost of $8,000 (160 hours x $50).
    (2) Cost--Request-based relief--Consulting with MMS. Consultation 
with MMS on individual requests for other accounting and auditing 
relief is estimated to be 4 hours per property. As noted previously, 
MMS expects approximately 10 requests for individual accounting and 
auditing relief each year for a total burden of 40 hours for all States 
(10 requests x 4 hours per request) or a total cost of $2,000 (40 hours 
x $50).
    (3) Benefit--Notification-based relief--Prolonging life of marginal 
wells. As discussed in item 2.A., we estimate that after the first 
year, cumulative reporting will save industry approximately $45,000 
annually ($55,000-$10,000). We believe this reduced cost of operations 
will prolong the life of marginal wells. If the reporting relief 
encourages industry to continue to produce oil and gas from marginal 
properties, States will benefit in the additional receipts. The States 
generally would receive 50 percent of the royalties collected on 
additional production plus additional severance and ad valorem taxes. 
The States also would benefit from continued employment and economic 
activity resulting from production that would otherwise be abandoned. 
We cannot determine the length and dollar benefit of this additional 
well life at this time. However, we believe that if States choose to 
participate in this reporting relief, the net benefits to the States 
will be positive.
    (4) Cost--Notification-based relief--Lost time value of money. 
Because payments would be made annually rather than monthly, States 
will lose the time value of money on sales made in the 11 months before 
the royalty payment is due. Generally, States receive 50 percent of the 
royalties collected for onshore leases.
    For example, New Mexico has the largest number of properties 
qualifying for cumulative reporting and payment relief--approximately 
1,280. Using a value of $21 per barrel of oil and $2.20 per Mcf of gas 
and a 7 percent interest rate, we estimate that if all 1,280 qualifying 
properties take cumulative reporting and payment relief, New Mexico 
would lose a maximum of $14,000 annually in the time value of money. 
The calculation for New Mexico marginal properties producing 1,000 BOE 
per year or less is as follows:

----------------------------------------------------------------------------------------------------------------
                         Action                              Gas (Mcf)          Oil (bbl)            Total
----------------------------------------------------------------------------------------------------------------
Total qualifying volume................................          1,741,829            154,101  .................
Multiplied by estimated unit value.....................            x $2.20           x $21.00  .................
Total estimated value..................................         $3,832,023         $3,236,121         $7,068,144
Multiplied by royalty rate \1\.........................  .................  .................             x .125
Total royalty due for year.............................  .................  .................          $ 883,518

[[Page 15397]]

 
Divided by 12 months \2\...............................  .................  .................                /12
Average royalty due per month..........................  .................  .................           $ 73,626
Multiplied by est. interest rate.......................  .................  .................              x .07
Interest on 1 mo. royalty for 1 yr.....................  .................  .................              5,153
Multiplied by 66/12 \3\................................  .................  .................            x 66/12
Interest (time value) lost for yr. \4\.................  .................  .................            28,341
----------------------------------------------------------------------------------------------------------------
\1\ The royalty rate for Federal onshore leases is most often 12\1/2\ percent. However, many of these marginal
  properties may also qualify for lower royalty rates under the stripper oil royalty rate reduction program (30
  CFR 216.57). Consequently, the royalty value in this calculation could be less.
\2\ To simplify this calculation, we divided the total royalty due for the year by 12 months on the assumption
  that the royalties would be evenly produced throughout the year.
\3\ This factor reflects the fact that different amounts of interest would accrue for each production month,
  beginning with \11/12\ of 7 percent for the first month; \10/12\ of 7 percent for the second month; \9/12\ of
  7 percent for the third month, etc. for a total of \66/12\.
\4\ The New Mexico State share is 50 percent; the Federal share is 50 percent. We rounded each share to $14,000.

    As noted above, we calculated the time value of money lost for 
qualifying properties in New Mexico to be approximately $28,000 
annually (the New Mexico share is $14,000 and the Federal government's 
share is $14,000). Because New Mexico has 43 percent of all marginal 
properties producing 1,000 BOE or less per year, we extrapolated the 
total loss for qualifying properties in all States to be $65,000 
annually ($28,000 /. 43 = $65,000). The share of the lost time value of 
money for all States would be $32,500 and the Federal government's 
share would be $32,500.
C. Federal Government
    (1) Benefit--Notification-based relief--Processing fewer lines. As 
noted in item 2.A.(2) above, lessees will report--and MMS will 
process--approximately 22,000 fewer lines under the cumulative 
reporting and payment relief option. We estimate that MMS will save 
approximately $8,360 per year (22,000 lines X $.38 processing cost per 
line). We determined the cost per line using cost data from OMB Control 
Number 1010-0140 ($958,229 cost to MMS to process lines received from 
industry on the Form MMS-2014 divided by 2,496,000 expected lines per 
year).
    (2) Cost--Notification-based relief--Processing notifications. In 
the first year, MMS expects to receive 1,000 notifications from lessees 
who wish to report annually on their marginal properties. We estimate 
that recording each notification in MMS's automated records will 
require 5 minutes per notice. Total time to record the notifications is 
83 hours (1,000 notices X 5 minutes/notice 60 minutes/hour). Using an 
average cost of $50 per hour, the total cost to the Government is 
estimated to be $4,150.
    In the second year and each year thereafter, MMS expects to receive 
only 100 notifications. Total time to record the notifications is 8 
hours (100 notices X 5 minutes/notice 60 minutes/hour) or a total cost 
of $400 (8 hours X $50/hour).
    (3) Cost--Request-based relief--Evaluating requests for other 
relief. As noted in item 2.A.(3) above, MMS expects to receive 10 
individual accounting and auditing relief requests from lessees 
annually. We estimate that each request will require 40 hours to 
analyze for a total cost of $20,000 (10 requests X 40 hours per request 
X $50 per hour).
    (4) Benefit--Notification-based relief--Prolonging life of marginal 
wells. As discussed in item 2.A. above, we estimate that after the 
first year cumulative reporting will save industry approximately 
$45,000 annually ($55,000--$10,000). We believe this reduced cost of 
operations will prolong the life of marginal wells. We cannot determine 
the length and dollar benefit of this additional well life at this 
time. The Federal government would generally receive 50 percent of the 
royalties collected on additional production. We believe the net 
benefit to the Federal government will be positive.
    (5) Cost--Notification-based relief--Lost time value of money. The 
Federal government will lose the time value of money on sales made in 
the 11 months before the royalty payment is due. Generally, the Federal 
government receives 50 percent of the royalties collected for onshore 
leases. We believe the amount lost to the Federal government for the 
time value of money would be the same as for all States or $32,500 
annually (see item B.4. above for the calculation).
D. Summary of Costs and Benefits

------------------------------------------------------------------------
                                            Benefit / 
                                         -------------------------------
               Description                                  Subsequent
                                            First Year         Years
------------------------------------------------------------------------
                               A. Industry
------------------------------------------------------------------------
(1)--Notification-based   $<100,000               >
-----------------------------------------
                     B. State and Local Governments
------------------------------------------------------------------------
(1) Cost--Notification-based relief--     <8,000
(3) Cost--Request-based relief--          <20,000http://www.mrm.mms.gov/Laws_R_D/FRNotices/FRInfColl.htm.
    We will post all comments in response to this proposed information 
collection on our Web site at http://www.mrm.mms.gov/Laws_R_D/InfoColl/InfoColCom.htm. We will also make copies of the comments 
available for public review, including names and addresses of 
respondents, during regular business hours at our offices in Lakewood, 
Colorado. Individual respondents may request that we withhold their 
home address from the public record, which we will honor to the extent 
allowable by law. There also may be circumstances in which we would 
withhold from the rulemaking record a respondent's identity, as 
allowable by law. If you request that we withhold your name and/or 
address, state this prominently at the beginning of your comment. 
However, we will not consider anonymous comments. We will make all 
submissions from organizations or businesses, and from individuals 
identifying themselves as representatives or officials of organizations 
or businesses, available for public inspection in their entirety.

11. National Environmental Policy Act

    This proposed rule does not constitute a major Federal action 
significantly affecting the quality of the human environment. A 
detailed statement under the National Environmental Policy Act of 1969 
is not required.

12. Clarity of this Regulation

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand. We invite your comments on how to make 
this rule easier to understand, including answers to questions such as 
the following: (1) Are the requirements in the rule clearly stated? (2) 
Does the rule contain technical language or jargon that interferes with 
its clarity? (3) Does the format of the rule (grouping and order of 
sections, use of headings, paragraphing, etc.) aid or reduce its 
clarity? (4) Would the rule be easier to understand if it were divided 
into more (but shorter) sections? (A ``section'' appears in bold type 
and is preceded by the symbol ``Sec.  '' and a numbered heading; for 
example, Sec.  204.200 What is the purpose of this part?) (5) Is the 
description of the rule in the ``Supplementary Information'' section of 
the preamble helpful in understanding the proposed rule? What else 
could we do to make the rule easier to understand?
    Send a copy of any comments that concern how we could make this 
rule easier to understand to: Office of Regulatory Affairs, Department 
of the Interior, Room 7229, 1849 C Street NW, Washington, DC 20240. You 
may also e-mail the comments to this address: [email protected].

13. Energy Supply, Distribution, or Use (Executive Order 13211)

    This rule is not a significant rule and is not subject to review by 
the Office of Management and Budget under Executive Order 12866. The 
primary purpose of this rule is to provide accounting and auditing 
relief to certain lessees of Federal oil and gas properties, largely in 
the form of reduced records submittal requirements. This rule does not 
have a significant effect on energy supply, distribution, or use 
because while it should promote some additional production on a subset 
of Federal oil and gas leases, the additional production would not be 
significant in comparison to total production from Federal oil and gas 
leases.

List of Subjects in 30 CFR Part 204

    Continental shelf, Government contracts, Mineral royalties, Natural 
gas, Petroleum, Public lands--mineral resources, Reporting and 
recordkeeping requirements.

    Dated: February 19, 2003.
Rebecca W. Watson,
Assistant Secretary for Land and Minerals Management.
    For reasons set out in the preamble, 30 CFR part 204 is proposed to 
be added as follows:

PART 204--ALTERNATIVES FOR MARGINAL PROPERTIES

Subpart A--General Provisions
Sec.
204.1 What is the purpose of this part?
204.2 What definitions apply to this part?
204.3 What alternatives are available for marginal properties?
204.4 What is a marginal property under this part?
204.5 What statutory requirements must I meet to obtain royalty 
prepayment or accounting and auditing relief?
204.6 May I appeal if MMS denies my request for prepayment or 
accounting and auditing relief?
Subpart B--Prepayment of Royalty [Reserved]
Subpart C--Accounting and Auditing Relief
204.200 What is the purpose of this subpart?
204.201 Who may obtain accounting and auditing relief?
204.202 What is the cumulative royalty reports and payments relief 
option?
204.203 What is the other relief option?
204.204 What accounting and auditing relief will MMS not allow?
204.205 How do I obtain accounting and auditing relief?
204.206 What will MMS do when it receives my request for accounting 
and auditing relief?
206.207 Who will approve, deny, or modify my request for accounting 
and auditing relief?
204.208 May a State decide that it will or will not allow one or 
both of the relief options under this subpart?
204.209 What if my property ceases to qualify for relief obtained 
under this subpart?
204.210 What if BLM approves my property as part of a nonqualifying 
agreement?
204.211 When may MMS retroactively rescind relief for a property?

[[Page 15401]]

204.212 What if I took relief for which I was ineligible?
204.213 May I obtain relief for a property that benefits from other 
Federal or State incentive programs?
204.214 Are the information collection requirements in this subpart 
approved by the Office of Management and Budget?

    Authority: 30 U.S.C. 1701 et seq.

Subpart A--General Provisions


Sec.  204.1  What is the purpose of this part?

    This part explains how you as a lessee or lessee's designee of a 
Federal onshore or Outer Continental Shelf (OCS) oil and gas lease may 
obtain prepayment or accounting and auditing relief for certain 
marginal properties.


Sec.  204.2  What definitions apply to this part?

    Agreement means a federally approved communitization Agreement or 
unit participating area.
    Barrels of oil equivalent (BOE) means the combined equivalent 
production of oil and gas stated in barrels of oil. Each barrel of oil 
production is equal to one BOE. Also, each 6,000 cubic feet of gas 
production is equal to one BOE.
    Base period means the 12-month period from July 1 through June 30 
immediately preceding the calendar year in which you take or request 
marginal property relief. For example, if you request relief in January 
2006, your base period will be July 1, 2004 through June 30, 2005.
    Combined equivalent production means the total of all oil and gas 
production for the marginal property, stated in BOE.
    Designee means the person designated by a lessee under Sec.  218.52 
of this chapter to make all or part of the royalty or other payments 
due on a lease on the lessee's behalf.
    Producing wells means only those producing oil or gas wells that 
contribute to the sum of BOE used in the calculation under Sec.  
204.4(c). Producing wells do not include injection or water wells.
    State concerned (State) means the State that receives a 
statutorily-prescribed portion of the royalties from a Federal onshore 
or OCS lease.


Sec.  204.3  What alternatives are available for marginal properties?

    If you have production from a marginal property, MMS and the State 
may allow you the following options:
    (a) Prepay royalty. MMS and the State may allow you to make a lump-
sum advance payment of royalties instead of monthly royalty payments 
for the remainder of the lease term.
    (b) Take accounting and auditing relief. MMS and the State may 
allow various accounting and auditing relief options to encourage you 
to continue to produce and develop your marginal property. See subpart 
C for accounting and auditing relief requirements.


Sec.  204.4  What is a marginal property under this part?

    To qualify as a marginal property eligible for royalty prepayment 
or accounting and auditing relief under this part, your property must 
meet the following requirements:
    (a) Production must be from, or attributable to, a Federal onshore 
or OCS lease or Agreement. Indian leases are not eligible for the 
marginal property alternatives under this part, even though production 
from a qualifying marginal property may be attributable to an Indian 
lease. You must also meet the criteria shown in the following table:

------------------------------------------------------------------------
   If your lease is * * *          Then * * *             And * * *
------------------------------------------------------------------------
(1) Not in an Agreement.....  The entire lease
                               must qualify as a
                               marginal property
                               under paragraph (b)
                               of this section..
(2) Entirely or partly        The entire Agreement  Agreement production
 committed to one Agreement.   must qualify as a     allocable to your
                               marginal property     lease may be
                               under paragraph (b)   eligible for relief
                               of this section.      under this part.
                                                     Any production from
                                                     your lease that is
                                                     not committed to
                                                     the Agreement also
                                                     may be eligible for
                                                     separate relief
                                                     under (a)(4) of
                                                     this table.
(3) Entirely or partly        The Agreement must    Only the qualifying
 committed to more than one    qualify separately    Agreement's
 Agreement.                    as a marginal         production
                               property under        allocable to your
                               paragraph (b) of      lease may be
                               this section.         eligible for
                                                     separate relief
                                                     under this part.
(4) Partly committed to an    The part of the
 Agreement and you have        lease that is not
 production from the part of   committed to the
 the lease that is not         Agreement must
 committed to the Agreement.   qualify separately
                               as a marginal
                               property under
                               paragraph (b) of
                               this section..
------------------------------------------------------------------------

    (b) To qualify as a marginal property for a calendar year, the 
combined equivalent production of the property during the base period 
must equal an average daily well production of less than 15 barrels of 
oil equivalent (BOE) per well per day calculated under paragraph (c) of 
this section.
    (c) To determine the average daily well production on or 
attributable to your property, divide the sum of the BOE for all 
producing wells on the property by the sum of the number of days that 
each of those wells actually produced during the base period. If your 
property is in an Agreement, your calculation under this section must 
include all wells included in the Agreement, even if they are not on a 
Federal onshore or OCS lease.


Sec.  204.5  What statutory requirements must I meet to obtain royalty 
prepayment or accounting and auditing relief?

    (a) MMS and the State may allow royalty prepayment or accounting 
and auditing relief for your marginal property if MMS and the State 
jointly determine that the prepayment or relief is in the best 
interests of the Federal Government and the State to:
    (1) Promote production;
    (2) Reduce the administrative costs of MMS and the State; and
    (3) Increase net receipts to the Federal Government and the State.
    (b) MMS and the State may discontinue any prepayment or accounting 
and auditing relief options granted for your marginal property if MMS 
and the State jointly determine that the prepayment or relief no longer 
meets the criteria in paragraph (a) of this section.


Sec.  204.6  May I appeal if MMS denies my request for prepayment or 
accounting and auditing relief?

    If MMS denies your request for prepayment or accounting and 
auditing relief under this part, you may appeal under part 290 of this 
chapter.

[[Page 15402]]

Subpart B--Prepayment of Royalty [Reserved]

Subpart C--Accounting and Auditing Relief


Sec.  204.200  What is the purpose of this subpart?

    This subpart explains how you as a lessee or lessee's designee may 
obtain accounting and auditing relief for production from a marginal 
property. The two types of relief that you can receive under this 
subpart are cumulative reports and payment relief (explained in Sec.  
204.202) and other accounting and auditing relief appropriate for your 
property (explained in Sec.  204.203).


Sec.  204.201  Who may obtain accounting and auditing relief?

    (a) You may obtain accounting and auditing relief under this 
subpart:
    (1) If you are a lessee or its designee for a Federal lease with 
production from a property that qualifies as a marginal property under 
Sec.  204.4;
    (2) If you meet any additional requirements for specific types of 
relief under this subpart; and
    (3) Only for your fractional interest in the marginal property.
    (b) You may not obtain one or both of the relief options specified 
in this subpart on any portion of a property if:
    (1) The property covers multiple States; and
    (2) One of the States determines under Sec.  204.208 that it will 
not allow one or both of the relief options.


Sec.  204.202  What is the cumulative royalty reports and payments 
relief option?

    (a) The cumulative royalty reports and payments relief option 
allows you to submit royalty reports and payments annually for the 
calendar year. You are eligible for this option only if the total 
volume produced from the marginal property is 1,000 BOE or less during 
the base period.
    (b) You must notify MMS under Sec.  204.205(a) before taking relief 
under this option.
    (c) To use the cumulative royalty reports and payments relief 
option, you must do all of the following.
    (1) Submit your royalty report and payment in accordance with Sec.  
218.51(g) of this chapter if you do not have an estimated payment on 
file for gas under 30 CFR 218.150(b). You must make this submission by 
the end of February of the year following the calendar year for which 
you are reporting annually.
    (2) Submit your royalty report and payment by the end of March of 
the year following the year for which you are reporting annually if you 
have an estimate on file.
    (3) Use as the sales month the month before the month that you will 
report and pay under this paragraph (c) to report royalty information 
for the entire calendar year. (For example, if you report and pay by 
the end of February, use January as the sales month.)
    (4) Report one line of cumulative royalty information on the Report 
of Sales and Royalty Remittance, Form MMS-2014, for the calendar year, 
the same as if it were a monthly report.
    (d) If you do not pay your royalty by the date due in paragraph (c) 
of this section, you will owe late payment interest determined under 
part 218 of this chapter from the date your payment was due under this 
section until the date MMS receives it.
    (e) If you take relief you are not qualified for, you must:
    (1) Pay MMS late payment interest determined under part 218 of this 
chapter from the date your payment was due until the date MMS receives 
it; and
    (2) Amend your Form MMS-2014 to reflect the required monthly 
reporting.
    (f) You must report allowances on Form MMS-2014 on the same annual 
basis as the royalties for your marginal property.
    (g) If you dispose of a marginal property for which you have taken 
relief under this section, you must:
    (1) Report and pay royalties for the portion of the calendar year 
for which you had an ownership interest; and
    (2) Make the report and payment by the end of the month after you 
dispose of the marginal property.


Sec.  204.203  What is the other relief option?

    (a) Under this relief option, you may request any type of 
accounting and auditing relief that is appropriate for your marginal 
property, provided it is not prohibited under Sec.  204.204 and meets 
the statutory requirements of Sec.  204.5. Examples of relief options 
you could request are:
    (1) To report and pay royalties using a valuation method other than 
that required under part 206 of this chapter that approximates 
royalties payable under part 206 of this chapter; and
    (2) To reduce your royalty audit burden. However, MMS will not 
consider any request that eliminates MMS's or the State's right to 
audit.
    (b) You must request approval from MMS under Sec.  204.205(b) 
before taking relief under this option.


Sec.  204.204  What accounting and auditing relief will MMS not allow?

    MMS will not approve your request for accounting and auditing 
relief under this subpart if your request:
    (a) Prohibits MMS or the State from conducting any form of audit;
    (b) Permanently relieves you from making future royalty reports or 
payments;
    (c) Provides for less frequent royalty reports and payments than 
annually;
    (d) Provides for you to submit royalty reports and payments at 
separate times;
    (e) Impairs MMS's ability to properly or efficiently account for or 
distribute royalties;
    (f) Requests relief for a lease under which the Federal Government 
takes its royalties in-kind;
    (g) Alters production reporting requirements;
    (h) Alters lease operation or safety requirements;
    (i) Conflicts with rent, minimum royalty, or lease requirements; or
    (j) Requests relief for a marginal property located in a State that 
has determined in advance that it will not allow such relief under 
Sec.  204.208.


Sec.  204.205  How do I obtain accounting and auditing relief?

    (a) To take accounting relief under Sec.  204.202, you must notify 
MMS in writing by January 31 of the calendar year for which you begin 
taking your relief.
    (1) Your notification must contain:
    (i) Your company name, MMS-assigned payor code, address, phone 
number, and contact name; and
    (ii) The specific MMS lease number and Agreement number, if 
applicable.
    (2) You may file a single notification for multiple marginal 
properties.
    (b) To obtain accounting or auditing relief under Sec.  204.203, 
you must file a written request for relief with MMS.
    (1) Your request must contain:
    (i) Your company name, MMS-assigned payor code, address, phone 
number, and contact name;
    (ii) The MMS lease number and Agreement number, if applicable; and
    (iii) A complete and detailed description of the specific 
accounting or auditing relief you seek.
    (2) You may file a single request for multiple marginal properties 
if you are requesting the same relief for all properties.


Sec.  204.206  What will MMS do when it receives my request for 
accounting and auditing relief?

    When MMS receives your request for accounting and auditing relief 
under Sec.  204.205(b), it will notify you in writing as follows:
    (a) If your request for relief is complete, MMS may either approve, 
deny, or modify your request in writing.
    (1) If MMS approves your request for relief, MMS will notify you of 
the

[[Page 15403]]

effective date of your accounting or auditing relief and other 
specifics of the relief approved.
    (2) If MMS denies your relief request, MMS will notify you of the 
reasons for denial and your appeal rights under Sec.  204.6.
    (3) If MMS modifies your relief request, MMS will notify you of the 
modifications.
    (i) You have 60 days from your receipt of MMS's notice to either 
accept or reject any modification(s) in writing.
    (ii) If you reject the modification(s) or fail to respond to MMS's 
notice, MMS will deny your relief request. MMS will notify you in 
writing of the reasons for denial and your appeal rights under Sec.  
204.6.
    (b) If your request for relief is not complete, MMS will notify you 
in writing that your request is incomplete and identify any missing 
information.
    (1) You must submit the missing information within 60 days of your 
receipt of MMS's notice that your request is incomplete.
    (2) If you submit all required information, MMS and the State may 
approve, deny, or modify your request for relief. You may submit a new 
request for relief under this subpart at any time after MMS returns 
your incomplete request.
    (3) If you do not submit all required information within 60 days of 
your receipt of MMS's notice that your request is incomplete, MMS will 
deny your relief request. MMS will notify you in writing of the reasons 
for denial and your appeal rights under Sec.  204.6.
    (c) [The regulatory text in this paragraph concerning the time 
period, if any, within which MMS must either deny or approve your 
request will be determined after due consideration of public comments. 
See section II of the preamble titled ``Comments on the 1999 Proposed 
Rule, Alternate Valuation Relief Option.'']


Sec.  204.207  Who will approve, deny, or modify my request for 
accounting and auditing relief?

    (a) If there is not a State concerned for your marginal property, 
only MMS will decide whether to approve, deny, or modify your relief 
request.
    (b) If there is a State concerned for your marginal property that 
has determined in advance that it may allow either or both of the 
relief options under this subpart, MMS will decide whether to approve, 
deny, or modify your relief request after consulting with the State 
concerned.


Sec.  204.208  May a State decide that it will or will not allow one or 
both of the relief options under this subpart?

    (a) A State may decide in advance that it will or will not allow 
one or both of the relief options specified in this subpart for a 
particular calendar year.
    (b) To help States decide whether to allow one or both of the 
relief options specified in this subpart, MMS will send States a Report 
of Marginal Properties by September 30 of the preceding calendar year.
    (c) If a State decides under paragraph (a) of this section that it 
will or will not allow one or both of the relief options in this 
subpart, within 30 days of the State's receipt of the Report of 
Marginal Properties under paragraph (b) of this section, the State 
must:
    (1) Notify the Associate Director for Minerals Revenue Management, 
MMS, in writing, of its intent to allow or not allow one or both of the 
relief options under this subpart; and
    (2) Specify in its notice of intent to MMS which relief option(s) 
it will allow or not allow.
    (d) If a State decides in advance under paragraph (a) of this 
section that it will not allow one or both of the relief options 
specified in this subpart, it may decide for subsequent calendar years 
that it will allow one or both of the relief options in this subpart. 
If it so decides, within 30 days of the State's receipt of the Report 
of Marginal Properties under paragraph (b) of this section, the State 
must:
    (1) Notify the Associate Director for Minerals Revenue Management, 
MMS, in writing, of its intent to allow one or both of the relief 
options allowed under this subpart; and
    (2) Specify in its notice of intent to MMS which relief option(s) 
it will allow.
    (e) If a State does not notify MMS under paragraphs (c) or (d) of 
this section, the State will be deemed to have decided not to allow 
either of the relief options under this subpart.
    (f) MMS will publish a notice of the State's intent to allow or not 
allow certain relief options under this section in the Federal Register 
no later than 30 days before the beginning of the applicable calendar 
year.


Sec.  204.209  What if my property ceases to qualify for relief 
obtained under this subpart?

    (a) Your property must qualify for relief under this subpart for 
each calendar year based on production during the base period for that 
calendar year. The notice or request you provided to MMS under Sec.  
204.205 for the first calendar year that your property qualified for 
relief remains effective for successive calendar years if you continue 
to qualify.
    (b) If your property is no longer eligible for relief for any 
reason during a calendar year other than the reason under Sec.  204.210 
or paragraph (c) of this section, the relief for your property 
terminates as of December 31 of that calendar year. You must notify MMS 
in writing by December 31 that the relief for your property has 
terminated.
    (c) If you dispose of your property during the calendar year, your 
relief terminates as of the end of the sales month in which you 
disposed of the property.


Sec.  204.210  What if BLM approves my property as part of a 
nonqualifying Agreement?

    If the Bureau of Land Management (BLM) or MMS's Offshore Minerals 
Management (OMM) retroactively approves your marginal property as part 
of a nonqualifying Agreement, the property no longer qualifies for 
relief under this subpart. In that case:
    (a) MMS will not retroactively rescind the marginal property relief 
for your property under Sec.  204.211;
    (b) Your marginal property relief terminates as of December 31 of 
the calendar year that you receive the BLM or OMM approval of your 
marginal property as part of a nonqualifying Agreement; and
    (c) You must adjust your royalty payments if they are affected by 
any required BLM or OMM reallocation under the nonqualifying Agreement.


Sec.  204.211  When may MMS retroactively rescind relief for a 
property?

    MMS may retroactively rescind the relief for your property if MMS 
determines that your property was not eligible for the relief obtained 
under this subpart because:
    (a) You did not submit a notice or request for relief under Sec.  
204.205;
    (b) You submitted erroneous information in the notice or request 
for relief you provided to MMS under Sec.  204.205 or in your royalty 
or production reports; or
    (c) Your property is no longer eligible for relief because 
production increased, but you failed to provide the notice required 
under Sec.  204.209(b).


Sec.  204.212  What if I took relief for which I was ineligible?

    If you took relief under this subpart for a period for which you 
were not eligible, you may owe additional royalties and late payment 
interest determined under part 218 of this chapter from the date your 
additional

[[Page 15404]]

payments were due until the date MMS receives them.


Sec.  204.213  May I obtain relief for a property that benefits from 
other Federal or State incentive programs?

    You may obtain accounting and auditing relief for your marginal 
property under this subpart even if the property benefits from other 
Federal or State production incentive programs.


Sec.  204.214  Are the information collection requirements in this 
subpart approved by the Office of Management and Budget?

    The information collection requirements contained in this subpart 
have been approved by OMB under 44 U.S.C. 3501 et seq. and assigned OMB 
control number 1010-----. See part 210 of this chapter for details 
concerning your estimated reporting burden and how you may comment on 
the accuracy of the burden estimate.

[FR Doc. 03-6703 Filed 3-28-03; 8:45 am]
BILLING CODE 4310-MR-P