[Federal Register Volume 70, Number 228 (Tuesday, November 29, 2005)]
[Proposed Rules]
[Pages 71421-71425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23380]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 205
RIN 1010-AC29
Reporting and Paying Royalties on Federal Leases on Takes or
Entitlements Basis
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Advance notice of proposed rulemaking and announcement of
public meeting.
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SUMMARY: The MMS requests comments and suggestions to assist us in
proposing regulations regarding so-called ``takes versus entitlements''
reporting and payment of royalties when oil and gas production is
commingled upstream of the point of royalty measurement. See IV,
Description of Information Requested, for details.
DATES: You must submit your comments by January 30, 2006. A public
meeting will be held on December 14, 2005.
ADDRESSES: Please use the regulation identifier number (RIN), RIN 1010-
AC29, in all your correspondence. Submit your comments, suggestions, or
objections regarding the advanced notice of the proposed rulemaking by
any of the following methods:
By regular U.S. mail. Minerals Management Service, Minerals Revenue
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225-0165;
By overnight mail, courier, or hand-delivery. Minerals Management
Service, Minerals Revenue Management, Building 85, Room A-614, Denver
Federal Center, West 6th Avenue and Kipling Blvd., Denver, Colorado
80225; or
By e-mail. [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-AC29'' and your name
and return
[[Page 71422]]
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: Sharron L. Gebhardt, Lead Regulatory
Specialist, Minerals Management Service, Minerals Revenue Management,
P.O. Box 25165, MS 302B2, Denver, Colorado 80225-0165, telephone (303)
231-3211, FAX (303) 231-3781, or e-mail [email protected].
SUPPLEMENTARY INFORMATION:
I. Dates Information
The MMS may not necessarily consider or include in the
Administrative Record, for any proposed rule, comments that MMS
receives after the close of the comment period or comments delivered to
an address other than those listed in the ADDRESSES section of this
document.
II. Public Meeting Information
The MMS will hold a public meeting to allow the public an
opportunity to comment on how MMS should implement the royalty
reporting and payment provision at section 6(d) of the Federal Oil and
Gas Royalty Simplification and Fairness Act (RSFA). The meeting will be
held in Houston, Texas, on the following date at the following
specified time and location: Wednesday, December 14, 2005, from 9 a.m.-
1 p.m. central time, in the San Antonio Room located on the second
floor of the Sheraton North Houston Hotel, located at 15700 John F.
Kennedy Blvd, Houston, Texas 77032. For further information, please
contact Roman A. Geissel at (303) 231-3226.
III. Public Comment and Meeting Procedures
A. Written Comment Procedures
We are particularly interested in receiving comments and
suggestions about the topics identified in IV, Description of
Information Requested. Your written comments should: (1) Be specific;
(2) explain the reason for your comments and suggestions; (3) address
the issues outlined in this notice; and (4) where possible, if you
refer to the specific provision, section, or paragraph of statutory
law, case law, or existing regulations, please cite that provision.
The comments and recommendations that are most useful and have
greater likelihood of influencing decisions on the content of a
possible future proposed rule are: (1) Comments and recommendations
supported by quantitative information or studies; and/or (2) comments
that include citations to, and analyses of, the applicable laws and
regulations.
B. Public Meeting Procedures
At the public meeting, those attending will be able to comment on
the scope, proposed action, and possible alternatives the MMS should
consider. The purpose of the meeting is to gather comments and input
from a variety of stakeholders and the public.
If you do not wish to speak at the meeting but you have views,
questions, or concerns with regard to the MMS's implementation of
section 6(d) of RSFA, Public Law 104-185, Aug. 13, 1996, 110 Stat 1700,
1713-1714, as corrected by Public Law 104-200, Sept. 22, 1996, codified
at 30 U.S.C. 1721(k), entitled ``Volume Allocations of Oil and Gas
Production,'' you may submit written statements at the meeting for
inclusion in the public record. You may also submit written comments
and suggestions regardless of whether you attend or speak at the public
meeting. See the ADDRESSES section of this document for instructions on
submitting written comments.
The site for the public meeting is accessible to individuals with
physical impairments. If you need a special accommodation to
participate in the meeting (e.g., interpretive service, assistive
listening device, or materials in alternative format), please notify
Lonnie Kimball at (281) 987-6800, no later than 2 weeks prior to the
scheduled meeting. Although we will make every effort to accommodate
requests received, it may not be possible to satisfy every request.
C. Public Comment Policy
Our practice is to make comments, including names and home
addresses of respondents, available for public review at our Denver
office during regular business hours and on our Web site at http://www.mrm.mms.gov/Law_R_D/FRNotices/FRHome.htm, or on request to
Sharron Gephardt at (303) 231-3211. Individual respondents may request
that we withhold their individual 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.
IV. Description of Information Requested
On August 13, 1996, the President signed RSFA into law. Section
6(d) of RSFA, entitled, ``Volume Allocations of Oil and Gas
Production,'' amended section 111 of the Federal Oil and Gas Royalty
Management Act of 1982 (FOGRMA), Public Law 97-451--Jan. 12, 1983 (30
U.S.C. 1721), by adding new paragraphs (k)(1)-(5). The proposed
rulemaking would implement RSFA amendments to FOGRMA section 111(k)(1)-
(4).
Congress enacted these amendments to clarify and resolve the long-
standing issues regarding so-called ``takes versus entitlements.''
Those issues arose primarily where the amount of natural gas taken
(``takes'') and sold by a lessee from Federal leases subject to a unit
or communitization agreement was not equal to the lessee's entitled
share (``entitlements''), based on its ownership interest in leases in
the unit or communitization agreement. These imbalances led to numerous
questions about who should report and pay on what volumes and for what
leases.
To obtain input from parties affected by RSFA amendments to FOGRMA
section 111(k)(1)-(4), MMS formed a consultation team comprised of
representatives from interested states, oil and gas trade associations,
and MMS. The consultation team held meetings on October 30, November
19, and December 6, 1996. The meetings resulted in general agreement on
definitions, the reporting requirements for 100-percent Federal units
and communitization agreements, the definition of a ``marginal
property,'' and how a marginal property reporting exception would be
determined.
Subsequent to those meetings, in the process of trying to develop a
proposed rule implementing RSFA amendments to FOGRMA section 111(k)(1)-
(4), an issue arose regarding the commingling of oil and gas production
from multiple properties upstream of the point of royalty measurement.
For purposes of this discussion:
A ``property'' is defined as a lease, unit, or
communitization agreement.
A ``100-percent Federal unit or communitization
agreement'' means any unit or communitization agreement that contains
only Federal leases having the same fixed royalty rate and funds
distribution.
A ``unit'' means a unit participating area, enhanced
recovery unit, or field-wide unit.
[[Page 71423]]
A ``mixed unit or communitization agreement'' means any
unit or communitization agreement other than 100-percent Federal unit
or communitization agreement. These are unit or communitization
agreements that contain any mixture of Federal, Indian, state or
private mineral estates, or that contain all Federal leases with
different royalty rates (fixed or variable) or different funds
distribution.
A ``stand-alone lease'' means a lease or a portion of a
lease that is not in a unit or communitization agreement.
The RSFA cldarly identifies when it is appropriate to initially
report and pay on a ``takes'' or ``entitlements'' basis for production
from leases, units or communization agreements that is not commingled
with production from other properties before the royalty measurement
point. For instance:
When taking production from a 100-percent Federal unit or
communitization agreement, the lessee(s) must pay on actual takes (30
U.S.C. 1721(K)(1)(A)), or
When taking production from a mixed Federal unit or
communitization agreement, the Federal lessee(s) must pay on
entitlements (30 U.S.C. 1721(k)(1)(B)), or
When taking production from a stand-alone Federal lease,
the lessee(s) must pay on takes (30 U.S.C. 1721(k)(1)(C)).
It is important to note that, while RSFA section 6(d) amended
FOGRMA by adding section 111(k)(1), which addressed the reporting and
payment requirements, the addition of section 111(k)(2) went on to
clarify that the requirements outlined in section 111(k)(1) ``apply
only to requirements for reporting and paying royalties. Nothing in
this subsection is intended to alter a lessee's liability for royalties
on oil or gas production allocated to lease, in accordance with the
terms of the lease, a unit or communitization agreement, or any other
agreement.'' Thus, the lessee's ultimate liability to pay royalties on
its entitled share of production is not changed.
Commingling adds additional complications to the issue of how to
report and pay royalties. Not only do imbalances between operating
rights owners within a property occur, but imbalances between
properties also are commonplace.
Commingling is the combining of production from multiple properties
before measurement for royalty purposes and requires approval of the
MMS Offshore Minerals Management program for offshore leases or the
Bureau of Land Management for onshore leases. The commingling approval
identifies where the volume is measured by royalty purposes and how
that volume must be allocated to each property that is subject to the
commingling approval. It does not affect how volume is allocated to
leases within a unit or communitization agreement. Commingling can be,
and often is, approved between properties with the same royalty rate
and funds distribution and between properties with different royalty
rates or different funds distributions.
The RSFA provision added to FOGRMA at 30 U.S.C. 1721(k)(1)-(5) does
not address the effect of commingling or commingling imbalances.
Commingling complicates reporting requirements because there is an
impact on royalty payments when there are properties with mixed royalty
rates or funds distribution upstream of the approved commingling point.
For example, assume that production from two stand-alone Federal leases
that are not unitized or communitized, each with a different royalty
rate, is commingled before the royalty measurement point. Assume that
each lease receives a 50 percent allocation of the total measure
production (1,000 Mcf) under the commingling approval. The lessee of
the lease with a 16\2/3\ percent royalty rate actually sells (takes)
750 Mcf of gas and the lessee of the lease with the 12\1/2\ percent
royalty rate actually sells (takes) 250 Mcf of gas. Based on the
commingling approval, the leases are out of balance. The commingling
approval determines the volume deemed to have been removed or sold from
each lease upon which the lessees ultimately must pay royalty. Should
each lessee pay royalties on its actual sales (takes), the Federal
Government initially would be paid more than the royalty ultimately
owed. If the sales were reversed, the Federal Government initially
would be paid on less than the royalty ultimately owed.
RSFA prescribes how lessees should initially report and pay royalty
on production removed or sold from a lease or unit or communitization
agreement. The commingling approval determines the volume removed or
sold from the leases or unit or communitization agreements subject to
the commingling approval. RSFA was silent on the effect of commingling
approvals. We are asking for your input on several questions regarding
RSFA's application to production subject to a commingling approval
before the royalty measurement point. Those questions include the
following:
(1) Should lessees of a lease or a 100-percent Federal unit or
communitization agreement report and pay initially on their takes in a
situation where production from that lease or unit or communitization
agreement is commingled with other production upstream of the royalty
measurement point:
(2) RSFA requires that Federal lessees in mixed unit or
communitization agreements report royalties on an entitlement basis,
regardless of whether the unit or communitization agreement is subject
to a commingling approval. Should MMS treat a commingling approval as
the equivalent of a unit or communitization agreement and apply the
RSFA reporting and payment provisions on that basis? For example, if
all properties measured at the commingling point are 100 percent
Federal leases or units or communitization agreements with the same
fixed royalty rate and funds distribution, then payments could be made
on takes. If one or more of the properties measured at or after the
commingling point have different royalty rates (fixed or variable,
different funds distribution, or are not 100 percent Federal, all
lessees would pay on entitlements.
The three examples presented below illustrate some alternative
methodologies to apply the provisions of RSFA to situations where
production is commingled before royalty measurement. For each example,
assume there is a stand-alone Federal lease with two lessees (lessee A
and lessee B, each of whom owns 50 percent of the working interest), a
100-percent Federal unit or communitization agreement with two lessees
(with lessee C owning 75 percent of the combined working interest in
the two leases, and lessee D owning the remaining 25 percent), and a
state lease, all of which are subject to a commingling approval. (For
simplicity, assume that all of the Federal leases have the same royalty
rate.) Additionally, assume that for each example, the total commingled
production allocated to the properties is 100,000 Mcf of gas. Further
assume that, for the month shown in the examples, the stand-alone
Federal lease and the state lease are each allocated 25 percent of the
commingled production under the commingling approval, and that the
Federal unit or communitization agreement is allocated 50 percent.
Further, assume that lessee A takes and sells 20,000 Mcf of gas. Assume
that lessee B has no takes. Assume that lessee C takes and sells 30,000
Mcf of gas while lessee D takes and sells 23,000 Mcf of gas. Assume
that the lessee of the state lease takes and sells 27,000 Mcf of gas.
In each example, lessee ownership percentages and liability remain the
[[Page 71424]]
same, but the volume on which royalty initially must be paid varies
depending on the methology used. (The numbers used in the following
examples are rounded to the nearest whole number.)
Example 1--``Pure Takes'' Reporting and Paying
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Allocated
volume per Entitled share Volume on
Property commingling Lessee Ownership of allocated Sales by which royalty
approval percentage volume (Mcf) lessees (Mcf) paid to MMS
(Mcf) (Takes) (Mcf)
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Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 20,000
.............. B.......................... 50 12,500 0 0
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 30,000
Agreement (2 lessees). D.......................... 25 12,500 23,000 23,000
State Lease................................ 25,000 ........................... .............. 25,000 27,000 0
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Totals................................. 100,000 ........................... .............. 100,000 100,000 73,000
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By using a pure takes methodology, the volume deemed sold and
removed from each lease and the unit or communitization agreement as
determined under the commingling approval is not properly accounted
for. Under this methodology, MMS could be paid on a volume either
greater than or less than that on which the lessees ultimately owe
royalty because the takes on which the Federal lessees reported and
paid royalty would not always equal the volume on which royalty is due
under the commingling approval. In this example, the MMS would be paid
royalty on 2,000 Mcf less than the volume on which the Federal lessees
ultimately owe royalty because under the commingling approval the
Federal lessees owe royalty on 75,000 Mcf and on a pure takes basis,
the Federal lessees only paid on 73,000 Mcf. Therefore, adopting this
methodology presumably would require each royalty reporter to adjust
royalty payments (at least on an annual basis) to its entitled volume
(equal to its ownership percentage times the volume allocated to its
lease or unit or communitization agreement under the commingling
approval).
Example 2.--``Pure Entitlements'' Reporting and Paying
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Allocated Volume on
volume per Entitled share which royalty
Property commingling Lessee Ownership of allocated Sales by paid to MMS
approval percentage volume (Mcf) lessee (Mcf) (entitlements)
(Mcf) (Mcf)
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Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 12,500
.............. B.......................... 50 12,500 0 12,500
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 37,500
Agreement (2 lessees). D.......................... 25 12,500 23,000 12,500
State Lease................................ 25,000 ........................... .............. 25,000 27,00 0
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Totals................................. 100,000 ........................... .............. 100,000 100,000 75,000
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Reporting on a ``pure entitlements'' basis that the Federal
government is made whole with respect to royalties, but would not allow
for initial reporting and payment based on takes if production is
commingled before the royalty measurement point. Under this
methodology, MMS would be made whole each month because lessees would
report and pay on their entitled volume each month, even if a
particular lessee (lessee B in this example) took no production.
Therefore, an adjustment to the entitled volume, as discussed above for
Example 1, would not be necessary.
Example 3.--``Proportionate Takes'' Reporting and Paying
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Allocated Volume on
volume per Entitled share which royalty
Property commingling Lessee Ownership of allocated Sales by paid to MMS
approval percentage volume (Mcf) lessee (Mcf) (proportionate
(Mcf) takes) (Mcf)
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Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 25,000
.............. B.......................... 50 12,500 0 0
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 28,302
Agreement (2 lessees). D.......................... 25 12,500 23,000 21,698
State Lease................................ 25,000 ........................... .............. 25,000 27,000 0
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Totals................................. 100,000 ........................... .............. 100,000 100,000 75,000
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[[Page 71425]]
This methodology would combine takes and entitlements by requiring
lessees to report and pay on volumes equal to the sales by the lessee
divided by the total sales for the property times the allocated volume
under the commingling approval for the property. Consider lessees C and
D: In this example, lessee C would report and pay on 28,302 Mcf, even
though it actually took 30,000 Mcf, and its entitled volume is 37,500
Mcf. The 28,302 Mcf is computed as follows:
(30,000 Mcf/53,000 Mcf) x 50,000 Mcf = 28,302 Mcf for lessee C,
where 53,000 Mcf (total sales for the property) is the sum of 30,000
Mcf (lessee C's total sales) and 23,000 Mcf (lessee D's total sales),
and 50,000 Mcf is the allocated volume under the commingling approval
for the property. Lessee D's initial reporting and payment would be
computed similarly.
Considering lessees A and B: If a lessee took no production (lessee
B in this example), it would not have to pay any royalty. However, a
lessee (lessee A in this example) could pay royalty on a volume greater
than either its actual takes or its entitled share. Under this
methodology, MMS would be made whole each month because it would
receive royalty based on the total Federal production subject to the
commingling approval each month. Therefore, an adjustment to the
entitled volume, as discussed above for Example 1, would not be
necessary. In Example 3, lessees would have to adjust their payments
among themselves.
As explained above, in instances where a lessee pays on ``Pure
Entitlements'' such as Example 2, or ``Proportionate Takes'' such as
Example 3, the lessee may take production that is more or less than its
entitled share. In that case, a lessee would need to value its entitled
share. The MMS believes that the best means of valuing the entitled
share is to apply a volume weighted average of the royalty values of
the volumes actually taken to the entitled shared volumes. The MMS
requests comments on any other alternatives for valuing such volumes.
In addition, MMS is interested in receiving comments on these three
Examples which describe alternative methodologies. The MMS is also
interested in receiving comments on any other alternative
methodologies. If you propose a methodology different from those
discussed above, please use our example criteria and explain why you
believe your methodology is the best alternative. In addition, MMS
would like your input on how the various methodologies would affect
your business practices, bookkeeping, etc.
Dated: November 14, 2005.
R.M. ``Johnnie'' Burton,
Assistant Secretary for Land and Minerals Management.
[FR Doc. 05-23380 Filed 11-28-05; 8:45 am]
BILLING CODE 4310-MR-M