[Federal Register Volume 71, Number 29 (Monday, February 13, 2006)]
[Proposed Rules]
[Pages 7453-7475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1285]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AD00


Indian Oil Valuation

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rule.

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SUMMARY: The Minerals Management Service (MMS) is proposing to amend 
its regulations regarding valuation, for royalty purposes, of oil 
produced from Indian leases. This proposal intends to add certainty to 
Indian oil valuation, eliminate reliance on posted oil prices, and 
address unique terms of Indian leases.

DATES: Comments must be submitted on or before April 14, 2006.

ADDRESSES: Proposed Rule Comments: Submit your comments, suggestions, 
or objections regarding the proposed rule 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;
    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-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-AD00'' 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.
    Information Collection Request (ICR) Comments: Submit written 
comments by either fax (202) 395-6566 or e-mail ([email protected]) directly to the Office of Information and 
Regulatory Affairs, OMB, Attention: Desk Officer for the Department of 
the Interior [OMB Control Numbers ICR 1010-0140 (expires October 31, 
2006) and ICR 1010-0103 (expires April 30, 2006), as they relate to the 
proposed Indian oil valuation rule].
    Also submit copies of written comments to Sharron L. Gebhardt, Lead 
Regulatory Specialist, Minerals Management Service, Minerals Revenue 
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225. If you 
use an overnight courier service, our courier address is Building 85, 
Room A-614, Denver Federal Center, Denver, Colorado 80225. You may also 
e-mail your comments to us at [email protected]. Include the title 
of the information collection and the OMB control number in the 
``Attention'' line of your comment. Also include your name and return 
address. Submit electronic comments as an ASCII file avoiding the use 
of special characters and any form of encryption. If you do not receive 
a confirmation that we have received your e-mail, contact Ms. Gebhardt 
at (303) 231-3211.
    The OMB has up to 60 days to approve or disapprove this collection 
of information but may respond after 30 days. Therefore, public 
comments should be submitted to OMB within 30 days in order to assure 
their maximum consideration. However, we will consider all comments 
received during the comment period for this notice of proposed 
rulemaking.

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, telephone (303) 231-
3211, fax (303) 231-3781, or e-mail [email protected]. The 
principal authors of this proposed rule are John Barder, Theresa Walsh 
Bayani, and Kenneth R. Vogel of the Minerals Revenue Management, MMS, 
Department of the Interior, and Geoffrey Heath of the Office of the 
Solicitor, Department of the Interior, in Washington, D.C.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 12, 1998, the MMS published a notice in the Federal 
Register (63 FR 7089) (February 1998 proposal) of proposed rulemaking 
applicable exclusively to the valuation of oil produced from Indian 
leases. The February 1998 proposal proposed to value oil based on the 
highest of (1) New York Mercantile Exchange (NYMEX) prices, adjusted 
for location and quality; (2) the lessee's or its affiliate's gross 
proceeds; or (3) an MMS-calculated ``major portion'' value. The MMS 
proposed further changes to the February 1998 proposal in a 
supplementary proposed rule published on January 5, 2000 (65 FR 403) 
(January 2000 proposal). Among other things, the January 2000 proposal 
proposed to replace using NYMEX futures prices with spot prices, 
including using the average of the high daily spot prices, rather than 
the average of the five highest NYMEX settle prices in a given month. 
The MMS received extensive

[[Page 7454]]

comments on both the February 1998 and January 2000 proposals.
    The MMS published a notice in the Federal Register on February 22, 
2005 (70 FR 8556) withdrawing the February 1998 and January 2000 
proposals. The MMS explained that it was beginning a new process of 
developing a proposed rule to value oil produced from Indian leases for 
royalty purposes. In the same notice, MMS scheduled public meetings in 
three different locations to consult with Indian tribes and individual 
Indian mineral owners and to obtain information from interested 
parties. The public meetings were held on March 8, 2005, in Oklahoma 
City, Oklahoma; on March 9, 2005, in Albuquerque, New Mexico; and on 
March 16, 2005, in Billings, Montana. The MMS has posted summaries of 
the discussions at the meetings on its Web site at www.mrm.mms.gov/Laws_R_D/FRNotices/AD00.htm. In June 2005, MMS conducted five 
additional consultation meetings with tribes and with individual Indian 
mineral owners regarding this proposed rulemaking.
    The intent of this proposed rulemaking is to add more certainty to 
the valuation of oil produced from Indian lands, eliminate reliance on 
oil posted prices, and address the unique terms of Indian (tribal and 
allotted) leases--specifically, the major portion provision. Most 
Indian leases include a major portion provision, stating that value for 
royalty purposes may, in the discretion of the Secretary, be calculated 
on the basis of the highest price paid or offered at the time of 
production for the major portion of oil produced from the same field.

II. General Valuation Approach of the Proposed Rule (Proposed 30 CFR 
Sec. Sec.  206.52 and 206.53)

    Establishing proper values, for royalty purposes, of oil produced 
from Indian leases begins with an understanding of where the oil is 
produced and how it is marketed. The areas of oil production on tribal 
reservations and allotted lands are the following:
    1. The San Juan Basin in southeastern Utah, northwestern New 
Mexico, and southwestern Colorado (including Navajo tribal, Navajo 
allotted, Ute Mountain Ute tribal, Southern Ute tribal, Southern Ute 
allotted, and Jicarilla Apache tribal leases). This area accounted for 
36 percent of the oil sold from all Indian leases in 2004 (down from 
42.75 percent in 2003).
    2. Northeastern Utah (Ute tribal and allotted leases). This area 
accounted for 25 percent of the oil sold from all Indian leases in 2004 
(up from 15.32 percent in 2003).
    3. Wyoming (Shoshone and Arapaho tribal and allotted leases). This 
area accounted for 21.54 percent of the oil sold from all Indian leases 
in 2004 (down from 22.53 percent in 2003).
    4. Oklahoma (mostly allotted leases with a few leases distributed 
among several tribes). This area accounted for 9.98 percent of the oil 
sold from all Indian leases in 2004 (down from 10.89 percent in 2003).
    5. Western and central Montana (Blackfeet tribal and allotted and 
Crow tribal and allotted leases) and the Williston Basin area in 
eastern Montana and western North Dakota (Ft. Peck Assiniboine and 
Sioux tribal and allotted and Ft. Berthold Arikara, Mandan, and Hidatsa 
tribal and allotted leases). Together, these areas accounted for 6.14 
percent of the oil sold from all Indian leases in 2004 (down from 6.80 
percent in 2003).
    6. Texas (Alabama-Coushatta tribal leases). This area accounted for 
1.31 percent of the oil sold from all Indian leases in 2004 (down from 
1.68 percent in 2003).
    7. Two other leases (one in northern North Dakota and one in 
Michigan) accounted for the remaining 0.03 percent of the oil sold from 
Indian leases in 2003 and 2004.
    This overview reveals a stark contrast with the composition of 
Federal leases that produce oil. First, the vast majority of oil 
produced from Federal leases comes from the Gulf of Mexico Outer 
Continental Shelf. Second, there are numerous onshore Federal leases in 
California and Alaska (where there are no Indian leases covered by this 
proposed rule). Federal leases in the Western United States also far 
outnumber Indian leases there. These factors result in major 
differences in the marketing of oil produced from Federal and Indian 
leases.
    According to our analysis and experience, almost all oil sold from 
Indian leases (more than 98 percent in 2003 and more than 97 percent in 
2004) is sold or exchanged at arm's length before it is refined. 
Included in that percentage are volumes taken by one tribal lessor as 
royalty in kind (RIK). It appears that only one payor (who is a lessee 
in one of the producing areas) currently transports oil produced from 
Indian leases to its own refinery. The oil sold by that payor 
constituted 1.69 percent of oil sold from all Indian leases in 2003 and 
2.02 percent in 2004. There is only one producing area in which 
significant volumes (reported by one producer) are initially 
transferred to an affiliate before being resold at arm's length. There 
are other occasional non-arm's-length transfers, but they involve only 
a few payors and insignificant volumes.
    Further, the vast majority of the oil sold at arm's length appears 
to be sold at the lease. As discussed below, MMS records indicate that 
only two payors claimed transportation allowances for oil produced from 
Indian leases in 2004. Only one payor has claimed transportation 
allowances thus far in 2005.
    Further, except for the possibility of some oil sold in Oklahoma 
(which, as explained above, accounts for only about 10 percent of the 
oil sold from Indian leases), oil sold from Indian leases apparently 
does not flow to (and is not exchanged to) Cushing, Oklahoma, where 
NYMEX prices are published. Thus, with the exception of Oklahoma (and 
possibly one type of oil produced in Wyoming), it is extremely 
difficult to obtain reliable location and quality differentials between 
Cushing and areas where the large majority of the oil is produced from 
Indian leases, including the San Juan Basin, northeastern Utah, Wyoming 
(for other oil types), and Montana. Even in Oklahoma, more than 97 
percent of the oil sold from Indian leases in 2004 was reported to MMS 
as sold at arm's length.
    This contrasts sharply with the marketing and disposition of oil 
produced from Federal leases. Much of the oil produced from Federal 
leases that is ultimately sold at arm's length, whether without or 
after a transfer to an affiliate, is transported before the arm's-
length sale. Additionally, a substantial share of the oil produced from 
Federal leases, particularly oil produced offshore in the Gulf of 
Mexico, is exchanged to Cushing or flows to market centers that have 
well-established differentials between the market center and Cushing.
    Consequently, MMS is not proposing to use either NYMEX or spot 
market index pricing as primary measures of value for oil produced from 
Indian leases. Because of the environment in which Indian oil is 
produced and marketed, MMS proposes to value oil at the gross proceeds 
the lessee or its affiliate receives in an arm's-length sale. In the 
rare circumstance that the sale occurs away from the lease, the 
proposed rule would provide for appropriate transportation allowances 
discussed further below (see paragraphs (a) through (d) of proposed 
Sec.  206.52). This valuation principle would apply to almost all the 
oil produced from Indian leases on which royalty is paid in value.
    The MMS also proposes to specify in Sec.  206.52(b) that, if a 
lessee sells oil produced from a lease under multiple arm's-length 
contracts instead of just

[[Page 7455]]

one contract, the value of the oil is the volume-weighted average of 
the total consideration established under Sec.  206.52 for all 
contracts for the sale of oil produced from that lease. In the Federal 
Oil Valuation Rule, published on March 15, 2000 (65 FR 14022) (2000 
Federal Oil Rule), the regulations at 30 CFR 206.102(b) provide that, 
if a lessee has multiple arm's-length contracts for the sale of oil 
produced from a lease, the value of the oil is ``the volume-weighted 
average of the values established under this section for each contract 
for the sale of oil produced from that lease.'' The volume-weighted 
average is the sum of the unit values of each contract multiplied by 
the volume sold under each contract divided by the total volume. The 
phraseology in Sec.  206.52(b) of this proposed rule clarifies that the 
volume-weighted average is calculated on the total consideration 
received under all of the contracts.
    It is possible that the lessee or its affiliate may enter into one 
or more exchanges. The MMS anticipates that, if there are any exchanges 
of oil produced from Indian lands at all, they would be quite rare. The 
MMS does not presently know of any specific examples of exchanges, but 
the proposed rule covers this contingency (see proposed Sec.  
206.52(e)). If the lessee or its affiliate ultimately sells the oil 
received in exchange, the value would be the gross proceeds for the oil 
received in exchange, adjusted for location and quality differentials 
derived from the exchange agreement(s). If the lessee exchanges oil 
produced from Indian leases to Cushing, Oklahoma, value would be the 
NYMEX price, adjusted for location and quality differentials derived 
from the exchange agreements. If the lessee does not ultimately sell 
the oil received in exchange, and does not exchange oil to Cushing, the 
lessee must ask MMS to establish a value based on relevant matters.
    The only situation that is not covered under the proposed Sec.  
206.52 is where the lessee transports the oil produced from the lease 
to its own refinery. As mentioned above, there appears to be only one 
such case at the present time. In this circumstance, proposed Sec.  
206.53 would require the lessee to value the oil at the volume-weighted 
average of the gross proceeds paid or received by the lessee or its 
affiliate, including the refining affiliate, for purchases and sales 
under arm's-length contracts of other like-quality oil produced from 
the same field (or the same area if the lessee does not have sufficient 
arm's-length purchases and sales from the field) during the production 
month, adjusted for transportation costs. If the lessee purchases oil 
away from the field(s) and if it cannot calculate a price in the 
field(s) because it cannot determine the seller's cost of 
transportation, it would not include those purchases in the weighted-
average price calculation.

III. Calculation of the Major Portion Value

    Most Indian leases include a major portion provision, under which 
value may, in the discretion of the Secretary, be calculated on the 
basis of the ``highest price paid or offered at the time of production 
for the major portion of oil production from the same field.'' The 
current rule at 30 CFR 206.52(a)(2), promulgated in 1988 and recodified 
to its current section in 1996, provides that, if data are available to 
compute a major portion value, MMS will, where practicable, compare the 
major portion value to the value computed under the other provisions of 
that section. It further provides that the major portion value will be 
calculated using like-quality oil sold under arm's-length contracts 
from the same field (or, if necessary to obtain a reasonable sample, 
from the same area). That production is then arrayed from the highest 
price to the lowest price (at the bottom). The major portion value is 
the price at which 50 percent (by volume) plus one barrel (starting 
from the bottom) is sold.
    Historically, MMS has encountered considerable difficulty in 
calculating oil major portion values. Among other factors, complete 
sales price data for a producing field that includes particular Indian 
leases often is not available because the field also includes private 
or state leases (or both), whose working interest owners do not report 
to MMS. Quality information also has not been readily available in a 
practically usable form because currently there is no requirement to 
collect the crude oil type and API gravity (quality) information on the 
Form MMS-2014. By collecting the quality information needed to 
calculate major portion prices directly on Form MMS-2014, MMS would 
have all the necessary information to more accurately calculate major 
portion prices. For these and other reasons, calculating an accurate 
major portion value has most often not been practicable.
    For oil produced from Indian leases, this proposed rule would use 
values reported for Indian oil produced from the designated area 
(discussed below) on Form MMS-2014, Report of Sales and Royalty 
Remittance, because it is the best data available to MMS in view of the 
fact that sales price information for production from state or private 
leases (that may be within the field) is not available. The proposed 
rule would allow MMS to identify designated areas, and MMS would 
publish in the Federal Register and make available on its Web site at 
www.mrm.mms.gov a list of the Indian lease number prefixes in each 
designated area. The proposed rule would allow MMS to designate and 
publish additional areas as circumstances warrant. For example, MMS may 
designate groups of counties in Oklahoma, for purposes of calculating 
major portion values for the Indian leases in Oklahoma, after 
conducting research regarding the location of the leases and the fields 
in which they are located. Those designated areas would be identified 
in a later notice. The MMS seeks comments on:
     Whether we should include arm's-length sales of oil 
produced from Federal leases within a designated area, as reported to 
MMS, in the calculation of the major portion value; and
     Whether we should expand the boundaries of the designated 
area beyond the reservation boundaries and include arm's-length sales 
of oil produced from Federal leases in the vicinity of a reservation, 
as reported to MMS, in the calculation of the major portion value.
    The proposed rule would not use values reported for oil that is not 
ultimately sold at arm's length before being refined. Under the 
proposed rule, MMS would use the values reported to MMS under Sec.  
206.52. That will include all lessees' arm's-length sales and their 
affiliates' arm's-length re-sales. The MMS would adjust reported values 
for any applicable transportation allowances.
    One of the tribal lessors takes a substantial portion of its 
royalty in kind rather than in value. The producers nevertheless do 
report a value for that oil on Form MMS-2014. The MMS understands that 
the value reported for the royalty-in-kind volumes is the price at 
which the lessee sold its working interest share. Under the proposed 
rule, MMS would include these values in the major portion calculation. 
Not doing so would result in loss of substantial volumes from the major 
portion calculation.
    The only reported values that would not be included in the major 
portion calculation are values reported for oil that is refined without 
being sold at arm's length (i.e., values reported under Sec.  206.53 or 
Sec.  206.52(e)(4)). As noted above, MMS knows of only one such 
situation.
    The MMS would not change the percentile at which the major portion 
value is determined. The MMS

[[Page 7456]]

historically has used the 50th-percentile-plus-one-unit measure for the 
major portion calculation. Because we believe almost all oil produced 
from Indian leases is sold at arm's length, there appears to be no 
reason in the oil context to depart from the major portion measure in 
the current rule.
    There are a few older Indian leases that are still in production 
that do not contain a major portion provision and do not reserve to the 
Secretary the authority to determine the reasonable value of 
production. The major portion provisions of the proposed Sec.  206.54 
would not apply to those leases. However, the burden would be on the 
lessee to demonstrate that its lease has neither of these provisions. 
The MMS would presume that the lease has at least one of these 
provisions, unless the lessee demonstrates otherwise.
    To calculate the major portion value, MMS must normalize the 
reported values for each oil type produced from the designated area to 
a common quality basis, adjusting for API gravity using applicable 
posted price gravity adjustment scale tables. The MMS would use posted 
price adjustment tables to adjust for gravity because the posted price 
adjustment tables are the only reliable source of this information that 
is available. The MMS's experience has been that the adjustment tables 
are accurate and are consistent between different parties who post 
prices. The MMS believes that the adjustment tables are likely to 
remain reliable because the posting purchasers are in competition. The 
MMS would use the posted price adjustment tables only for purposes of 
normalizing for gravity within a particular type of oil.
    The MMS would calculate separate major portion values for different 
oil types because the lease provision expressly refers to ``like-
quality'' oil (oil of the same type is of like quality). The proposed 
rule would define ``oil type'' as a general classification of oil that 
has generally similar chemical and physical characteristics. For 
example, oil types may include classifications such as New Mexico sour, 
Wyoming sweet, Wyoming asphalt sour, black wax, yellow wax, etc. Like-
quality oil does not have to be of the same API gravity. Further 
normalizing for gravity within the oil type will yield reported prices 
in the major portion calculation that are based on a common quality. 
The MMS will designate the oil types that are produced from each 
designated area. A designated area may produce more than one oil type.
    For MMS to be able to calculate major portion values based on oil 
type, and to be able to adjust reported arm's-length gross proceeds 
values for API gravity, MMS must require the royalty payors to report 
this information on Form MMS-2014. The API gravity is currently 
reported to MMS on production reports, but not in a manner that will 
allow the data to be used in conjunction with the royalty data 
reported. If a final rule adopts the major portion methodology proposed 
here, MMS would revise the reporting requirements for Indian leases for 
Form MMS-2014 to require lessees to report oil type and API gravity for 
Indian leases.
    The MMS would then array the normalized and adjusted (for 
transportation costs) values in order from the highest to the lowest, 
together with the corresponding volumes reported at those values. The 
major portion value would be the normalized and adjusted price in the 
array that corresponds to 50 percent (by volume) plus one barrel of the 
oil (starting from the bottom). Proposed Sec.  206.54(e) contains an 
example.
    Under the proposed Sec.  206.54, lessees would initially report on 
Form MMS-2014 the value of production at the value determined under 
Sec.  206.52 or Sec.  206.53, and would pay royalty on that value. The 
MMS would calculate the major portion values as described above and 
notify lessees of the major portion values by publishing the major 
portion values for each designated area in the Federal Register and 
making them available on MMS's Web site at www.mrm.mms.gov. The values 
that MMS publishes would be at the normalized gravity, and MMS would 
include the normalized gravity and the adjustment tables in the Federal 
Register and on the Web site.
    The lessee would then compare the major portion value to the value 
initially reported on Form MMS-2014, normalized and adjusted for 
gravity and transportation. If the major portion value is higher than 
the value initially reported, normalized and adjusted for gravity and 
transportation, the lessee would have to submit an amended Form MMS-
2014, reporting the value as the major portion value, and pay any 
additional royalty owed. The Web site also would include a due date by 
which the lessee would have to submit an amended Form MMS-2014, 
together with any additional royalty due. Proposed Sec.  206.54(f) 
includes an example.
    Under proposed Sec.  206.54(g), late payment interest would not 
begin to accrue under 30 CFR 218.54 on any additional amount owed as a 
result of the higher major portion value, until after the due date of 
the amended Form MMS-2014. Further, MMS would not change the major 
portion values for a specific time period after it publishes those 
values on the Web site, unless an administrative or judicial decision 
requires MMS to make a change. The MMS will continue to calculate and 
publish major portion values for subsequent time periods.

IV. Transportation Allowances

    As explained above, lessees report very few transportation 
allowances on oil produced from Indian leases. Only two royalty payors 
on Indian leases claimed transportation allowances for oil in 2004 on 
their initial royalty reports (Form MMS-2014) before later adjustments. 
The allowances reported by one of those payors on tribal leases in one 
area constituted approximately 98 percent of the claimed allowances in 
2004.
    If the transportation arrangement is at arm's length, the proposed 
rule would incorporate the provisions of the 2000 Federal Oil Rule that 
became effective on June 1, 2000 (as amended in 2004), in calculating 
that allowance. That allowance is based on the actual cost paid to an 
unaffiliated transportation provider. While the 2004 Federal Oil Rule 
did not change the consistent historical approach of using the actual 
costs paid to the unaffiliated transporter, the Federal rule, at 30 CFR 
206.110, specifies more precisely what costs are allowable as 
transportation costs and what costs are not. As has been the case 
historically, MMS is proposing to continue to treat arm's-length 
transportation arrangements for oil produced from Indian leases 
identically to arm's-length transportation arrangements for oil 
produced from Federal leases.
    For arm's-length transportation allowances, MMS also proposes to 
eliminate the requirement in the current Indian rule, at 30 CFR 
206.55(c)(1), to file Form MMS-4110, Oil Transportation Allowance 
Report. Instead of Form MMS-4110, the lessee would have to submit 
copies of its transportation contract(s) and any amendments thereto 
within 2 months after the lessee reported the transportation allowance 
on Form MMS-2014. This change mirrors the elimination of the 
requirement to file the analogous Form MMS-4295 for arm's-length 
transportation allowances under the Indian Gas Valuation Rule, 
published on August 10, 1999 (64 FR 43506) (1999 Indian Gas Rule), and 
effective January 2000.
    For non-arm's-length transportation arrangements, the lessee would 
have to calculate its actual costs. Under the proposed rule, Form MMS-
4110 would

[[Page 7457]]

still be required, but the requirement to submit a Form MMS-4110 in 
advance with estimated information would be eliminated. Instead, the 
lessee would submit the actual cost information to support the 
allowance on Form MMS-4110 within 3 months after the end of the 12-
month period to which the allowance applies. This also mirrors the 
change made in the 1999 Indian Gas Rule at 30 CFR 206.178(b)(1)(ii).
    As MMS explained when it proposed these changes in the 1999 Indian 
Gas Rule, in the case of oil valuation, MMS ``believes this change will 
ease the burden on industry and still provide MMS with documents useful 
to verify the allowance claimed.''
    The MMS is proposing that the non-arm's-length allowance 
calculation, and the costs that would be allowable and non-allowable 
under the non-arm's-length transportation allowance provisions, be 
revised to incorporate the provisions of the 2004 Federal Oil Rule. See 
proposed Sec.  206.59(b). The MMS proposes treatment of costs identical 
to the treatment of costs in the 2004 Federal Oil Rule because it does 
not perceive any reason to treat oil pipeline transportation costs 
differently depending on lessor ownership. The MMS seeks comments on 
the question of whether allowable and non-allowable costs under this 
Indian oil valuation proposed rule should be different than the 
allowable and non-allowable costs under the 2004 Federal Oil Rule. 
Based on the comments, MMS may adopt all, part, or none of the changes 
that are different from the current Indian oil valuation regulations or 
the 1999 Indian Gas Rule.
    The 2000 Federal Oil Rule provides that the lessee must base its 
transportation allowance in a non-arm's-length or no-contract 
situation, on the lessee's actual costs. These include (1) operating 
and maintenance expenses; (2) overhead; (3) depreciation; (4) a return 
on undepreciated capital investment; and (5) a return on 10 percent of 
total capital investment once the transportation system has been 
depreciated below 10 percent of total capital investment (30 CFR 
206.111(b)). The MMS proposes to incorporate the same cost allowance 
structure into this proposed rule, as discussed in more detail below.
    Before June 1, 2000, the regulations for Federal oil valuation 
provided (as do current Indian oil valuation regulations) that, in the 
case of transportation facilities placed in service after March 1, 
1988, actual costs could include either depreciation and a return on 
undepreciated capital investment or a cost equal to the initial 
investment in the transportation system multiplied by the allowed rate 
of return. The regulations before June 1, 2000, did not provide for a 
return on 10 percent of total capital investment once the system has 
been depreciated below 10 percent of total capital investment. See 
former 30 CFR 206.105(b)(2)(iv)(A) and (B) (1999), and current 30 CFR 
206.55(b)(2)(iv)(A) and (B). The 2000 Federal Oil Rule eliminated the 
alternative of a cost equal to the initial investment in the 
transportation system multiplied by the allowed rate of return, because 
it became unnecessary in view of the other changes made in the rule 
(discussed below), and because it had been used in very few, if any, 
situations. The MMS proposes to make the same change in this rule for 
the same reason the change was made to the 2000 Federal Oil Rule. The 
MMS knows of no instance in which the alternative has been used for any 
transportation system for oil produced from Indian leases.
    Further, the 2000 Federal Oil Rule also set forth the basis for the 
depreciation schedule to be used in the depreciation calculation. See 
30 CFR 206.111(h). The MMS proposes to adopt identical provisions for 
this rule through incorporation, except that the relevant date would be 
the effective date of a final rule that adopts these provisions. In the 
2000 Federal Oil Rule, the depreciation schedule for a transportation 
system depended on whether the lessee owned the system on, or acquired 
the system after, the effective date of the final rule. The MMS 
proposes to apply the same principle in the context of Indian leases.
    Finally, the 2004 Federal Oil Rule, which amended 30 CFR 
206.111(i)(2), changed the allowed rate of return used in the non-
arm's-length actual cost calculations from the Standard & Poor's BBB 
bond rate to 1.3 times the BBB bond rate. In March 2005, MMS 
promulgated an identical change to the allowed rate of return used in 
the calculation of actual costs under non-arm's-length transportation 
arrangements in the Federal Gas Valuation Rule, published March 10, 
2005 (70 FR 11869) (2005 Federal Gas Rule), which amended 30 CFR 
206.157(b)(2)(v). The proposed change to this rule would incorporate 
this same change, for the same reasons the rate of return was changed 
in the 2004 Federal Oil and 2005 Federal Gas Rules (i.e., the 1.3 times 
BBB rate more accurately reflects the lessees' cost of capital).
    At the present time (and as has been the case for at least the last 
few years), there is only one lessee producing oil from Indian leases 
who reports transportation of oil under a non-arm's-length arrangement. 
Therefore, only one non-arm's-length oil transportation allowance 
currently is being reported to MMS. However, in 2004, that arrangement 
accounted for more than 98 percent of total oil transportation 
allowances initially reported for Indian leases. In 2005 to date, it is 
the only Indian oil transportation allowance of any kind that any 
lessee is claiming on royalty reports submitted to MMS.

V. Other Issues

    In proposed Sec.  206.50, MMS would add a provision that, if the 
regulations are inconsistent with a Federal statute, a settlement 
agreement or written agreement, or an express provision of a lease, 
then the statute, settlement agreement, written agreement, or lease 
provision would govern to the extent of the inconsistency. A 
``settlement agreement'' would mean a settlement agreement resulting 
from either administrative or judicial litigation. A ``written 
agreement'' would mean a written agreement between the lessee and the 
MMS Director (and approved by the tribal lessor for tribal leases), 
establishing a method to determine the value of production from any 
lease that MMS expects at least would approximate the value established 
under the regulations.
    The proposed provision is similar to provisions that have been 
included in the 2000 Federal Oil Rule and 2005 Federal Gas Rule. See 30 
CFR 206.100(c) (2000-present) and 206.150(b) (2005). As explained in 
the preamble to the 2005 Federal Gas Rule, ``this provision is intended 
to provide flexibility to both MMS and the lessee in those few unusual 
circumstances where a separate written agreement is reached, while at 
the same time maintaining the integrity of the regulations. The MMS 
used this provision in the June 2000 Federal Oil Valuation Rule to 
address unexpectedly difficult royalty valuation problems.''
    The MMS also proposes to add a definition of the term ``affiliate'' 
and revise the definition of ``arm's-length contract'' in Sec.  206.51 
to be identical to the 2000 Federal Oil Rule and to conform the rule to 
the court's decision in National Mining Association v. Department of 
the Interior, 177 F.3d 1 (D.C. Cir. 1999). The MMS recently made the 
same change to the 2005 Federal Gas Rule at 30 CFR 206.151.
    The MMS also proposes to modify the format of the definition of 
``Exchange agreement'' in Sec.  206.51 from the way that it is 
formatted in the 2000 Federal Oil Rule. The MMS is proposing to make 
this change only for the purpose of readability. The MMS does not 
intend

[[Page 7458]]

to change the meaning of the term ``Exchange agreement'' in any 
respect.
    The MMS is also considering whether to change the definition of the 
term ``marketable condition'' in Sec.  206.51 to mean lease products 
``that are sufficiently free from impurities and otherwise in a 
condition that they will be accepted by a purchaser under a sales 
contract or transportation contract typical for disposition of 
production from the field or area.'' This change is incorporated in the 
proposed rule. The current definition refers to lease products ``that 
are sufficiently free from impurities and otherwise in a condition that 
they will be accepted by a purchaser under a sales contract typical for 
the field or area.'' We request your comments regarding this change.
    In proposed Sec.  206.57, MMS is also seeking comments on whether 
presenting certain information in a table versus text format would be 
preferable to the reader. In the proposed table format, MMS would also 
change the grouping of the information by presenting the main ideas in 
a table and then listing the considerations applicable to that 
information below the table in text format. The MMS wishes to use the 
format that makes the regulations the most clear and easily accessible.
    Finally, proposed Sec.  206.64 regarding records retention is 
adapted from 30 CFR 206.105. The time for which records must be 
maintained is governed by Sec.  103(b) of the Federal Oil and Gas 
Royalty Management Act, 30 U.S.C. 1713(b), and is not affected by the 
change in 30 U.S.C. 1724(f), which was enacted as part of the Federal 
Oil and Gas Royalty Simplification and Fairness Act of 1996 (RSFA), 
because RSFA applies only to Federal leases. The referenced regulations 
in proposed Sec.  206.64 reflect this difference.

VI. 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 Web 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 Royalty Impact Data

    Summarized below are the estimated administrative costs and royalty 
impacts of this proposed rule to all potentially affected groups: 
industry, state and local governments, Indian tribes and individual 
Indian mineral owners, and the Federal Government. The administrative 
costs and royalty collection impacts are segregated into two 
categories--those that would accrue in the first year after the 
proposed rule becomes effective and those that would accrue on a 
continuing basis each year thereafter.
A. Industry
    For industry, we anticipate a royalty increase of $416,000 in the 
first year and each subsequent year. We also anticipate an 
administrative cost increase of $4,810,000 in the first year and, for 
subsequent years, a cost increase of $22,000 per year. In addition, we 
estimate administrative cost savings of $4,500 in the first and 
subsequent years. The following chart shows the royalty impact increase 
and summarizes the net expected change in administrative costs to 
industry.

         Net Administrative Cost and Royalty Impact to Industry
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Increase....................        $416,000        $416,000
(2) Administrative Cost Increase........       4,810,000          22,000
(3) Administrative Cost Savings.........          -4,500          -4,500
                                         -----------------
    Net Expected Change in                     4,805,500          17,500
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Industry royalty increase. The MMS estimates that the oil 
valuation changes proposed in this proposed rule would increase the 
annual royalties that industry must pay to Indian tribes and individual 
Indian mineral owners by approximately $416,000. Based on revenues 
reported by companies in calendar year 2003, we calculate that small 
businesses (by U.S. Small Business Administration criteria) would pay 
approximately $162,240, or roughly 39 percent, of the increase. The 
computations of the additional mineral revenues payable to Indian 
tribes and individual Indian mineral owners can be found in Section 
VI.2.C, Indian Tribes and Individual Indian Mineral Owners.
    (2) Industry administrative cost increase. The MMS estimates 
administrative costs to industry of $4,810,000 in the first year: (a) 
$4,788,000 for one-time equipment/software costs; (b) $200 for arm's-
length contract submission costs; (c) $21,700 for additional reporting 
requirements; and (d) $100 for recordkeeping. The MMS estimates costs 
to industry in subsequent years of $22,000 ($200 for submission of all 
contract amendments; $21,700 for additional reporting requirements; and 
$100 for recordkeeping.)
    (2a) Industry administrative cost increase--Equipment/software. 
Industry would incur a one-time cost increase for equipment/software 
modifications in order to conform to the new reporting requirements on 
Form MMS-2014. We estimate the following one-time cost to industry to 
comply with the proposed rule:

[[Page 7459]]



            Administrative Cost Detail for Equipment/Software
------------------------------------------------------------------------
                                            Cost/royalty impact amount
                                         -------------------------------
               Description                                  Subsequent
                                            First year         year
------------------------------------------------------------------------
Software development/modification:
    Electronic reporters--large               $3,000,000               0
     companies..........................
Software development/modification:
    Electronic reporters--mid-level            1,780,000               0
     companies..........................
Spreadsheet software:                     ..............
    Paper reporters.....................           8,000               0
                                         -----------------
        Total Net Cost Increase to             4,788,000               0
         Industry.......................
------------------------------------------------------------------------

    The above figures are calculated as follows: There are 
approximately 200 oil royalty reporters on Indian leases that fall into 
three groups: (1) Large companies (electronic reporters); (2) mid-level 
companies (electronic reporters); and (3) small companies (paper 
reporters). For each of the three groups of reporters, administrative 
costs are calculated as follows: large companies, $3,000,000 (6 x 
$500,000); mid-level companies, $1,780,000 (178 x $10,000); and paper 
reporters, $8,000 (16 x $500).
    (2b) Industry administrative cost increase--Filing arm's-length 
transportation contracts and amendments. Industry would also incur $200 
per year to submit a copy of each arm's-length transportation contract 
and any amendments thereto within 2 months after the date the payor 
reported the transportation allowance on Form MMS-2014. Analysis of the 
most recent information reported to MMS on Form MMS-2014 indicates that 
there are only two payors claiming transportation allowances against 
royalties, and one of the payors has an arm's-length transportation 
arrangement.
    On average, a payor would have one transportation contract to 
transport oil off the lease to a point of value determination. We 
estimate that a payor would need about 4 hours on average to gather the 
necessary contract information, copy, and submit it to MMS. Therefore, 
MMS estimates that the annual cost to industry would be $200, 
calculated as follows:
    (2b-1) Industry administrative cost increase--Filing initial year 
arm's-length contract. The first year cost is estimated at $200, 
calculated as follows: 1 payor x 1 arm's-length contract submission per 
year x 4 hours per submission = 4 burden hours per year x $50 per hour 
= $200 per year in the initial year.
    (2b-2) Industry administrative cost increase--Filing subsequent 
year arm's-length-contract amendments. In subsequent years, we estimate 
the payor would submit amendments once per year due to contract 
changes. The subsequent annual cost is estimated at $200, calculated as 
follows: 1 payor x 1 arm's-length contract amendment submission per 
year x 4 hours per submission = 4 burden hours per year x $50 per hour 
= $200 per year in subsequent years.
    (2c) Industry administrative cost increase--Filing revised Form 
MMS-2014 for major portion. The total annual estimated cost for filing 
additional Form MMS-2014 lines would be $21,700 for the entire universe 
of 200 reporters.
    Under the proposed rule, MMS would calculate a major portion value 
by oil type for each designated area. The major portion value would be 
based on arm's-length reported values from Form MMS-2014. If the MMS-
calculated major portion value is greater than what the lessee 
initially reported, the lessee would have to file a revised Form MMS-
2014 and pay additional royalties.
    Industry would incur an administrative burden as a result of filing 
revised Form MMS-2014 lines to comply with the proposed rule's major 
portion provision. The MMS analyzed reported royalty data for Indian 
leases and determined there are approximately 31,000 individual lines 
reported for oil and condensate on Form MMS-2014 annually. We estimate 
that, under the proposed rule using recent data, there would be as many 
as 12,400 additional lines reported annually, or 1,033 lines monthly. 
This estimate includes backing out previously reported lines and 
reporting new lines. The MMS bases potential impact to reporting on our 
assumption that 40 percent of Indian payors would report on initial 
value less than the major portion value and would therefore have to 
make adjustments (31,000 x 40 percent = 12,400).
    (2c-1) Industry administrative cost increase--Electronic reporting. 
Electronic reporting accounts for about 98 percent of the lines 
reported to MMS by Indian lessees on Form MMS-2014. Based on an average 
of 2 minutes per line at a cost of $50 per hour, we estimate the 
administrative burden would be $20,250 annually calculated as follows: 
98 percent electronic reporting lines x 12,400 additional royalty lines 
= 12,152 lines per year x 2 minutes per line = 24,304/60 minutes = 405 
hours per year x $50 per hour = $20,250 per year.
    (2c-2) Industry administrative cost increase--Paper reporting. The 
MMS estimates there would be 248 additional royalty lines reported 
manually (2 percent of reported Indian oil lines) and that this effort 
would stay the same in the future. Based on an average of 7 minutes per 
line at $50 per hour, the administrative burden for manual payors would 
be $1,450 annually, calculated as follows: 2 percent paper reporting 
lines x 12,400 additional royalty lines = 248 lines per year x 7 
minutes per line = 1,736/60 minutes = 29 hours per year x $50 per hour 
= $1,450 per year.
    (2d) Industry administrative cost increase--Recordkeeping for 
transportation submissions. The recordkeeping burden for transportation 
submissions, related to transportation allowances, is estimated at 2 
hours for a total cost of $100 ($50 for 1 arm's-length submission and 
$50 for 1 non-arm's-length submission), and calculated as follows: 1 
payor x 1 arm's-length submission per year x 1 hour per submission = 1 
burden hour per year x $50 per hour = $50 per year; and 1 payor x 1 
non-arm's-length submission per year x 1 hour per submission = 1 burden 
hour per year x $50 per hour = $50 per year.
    (3) Industry administrative cost savings. Industry would realize 
administrative savings because of the reduced complexity in royalty 
determination and payment in this proposed rule. Altogether, with the 
limited information we can collect and the gross estimates we made, we 
anticipate total administrative savings to industry would be $4,500. 
This includes

[[Page 7460]]

industry savings for the following: (a) $2,400 for simplified reporting 
and (b) $2,100 for reduced reporting on Form MMS-4110, Specifically, 
the proposed rule would result in:
    (3a) Industry administrative cost savings--Simplified reporting and 
valuation, coupled with certainty. We estimate the cost savings would 
be $2,400 for simplified reporting and valuation, coupled with 
certainty. We anticipate that the proposed rule would significantly 
reduce the time involved in the royalty calculation process. In the 
proposed framework, in almost all cases, the lessee would ultimately 
pay royalties based on either its (or its affiliate's) arm's-length 
gross proceeds or the major portion value applicable to its production. 
The need to work through and apply the current benchmarks for non-
arm's-length transactions would be eliminated. Further, once MMS 
calculates a major portion value, the lessee would compare this price 
to the major portion value and make adjustments as necessary. The 
lessee's reporting/pricing procedures thus should be fairly 
straightforward.
    In addition, the proposed rule parallels the transportation 
allowance requirements of the current Federal oil valuation regulations 
in many respects. It thereby would further reduce the complexity of 
valuation between Federal and Indian leases.
    The estimated savings to industry are based on the current amount 
of time spent calculating royalties. This varies greatly by company, 
depending on many variables such as the complexity of the disposition 
or sale of the product, the amount of production to account for, and 
the computation of any necessary adjustments.
    However, we assume simplified reporting in the proposed rule would 
save each payor who reports based on a non-arm's-length disposition at 
least 30 minutes per month to report. This figure realizes a reduction 
of 6 hours per year per payor at $50 per year for a savings of $300 per 
year per payor.
    Eight of the 200 oil payors reported a non-arm's-length Sales Type 
Code on the Form MMS-2014. For these payors, we estimate a total 
savings of $2,400, calculated as follows: 6 annual burden hour savings 
per payor x 8 payors = 48 hours industry savings x $50 per hour = 
$2,400 total annual industry savings.
    (3b) Industry administrative cost savings--Reduction in filing Form 
MMS-4110, Oil Transportation Allowance Report. We estimate the cost 
savings to be $2,100 for a reduction in filing Form MMS-4110. Under 
arm's-length transportation arrangements, MMS proposes to eliminate the 
requirement to file Form MMS-4110. Under non-arm's-length 
transportation arrangements, the lessee would continue to submit actual 
costs, but the requirement to submit estimated allowance information 
would be eliminated. We estimate the savings at $2,100.
    The MMS used the current information collection request data to 
calculate the estimated savings for allowance form filing under the 
proposed rule.
    (3b-1) Arm's-length transportation. Proposed requirements would 
eliminate filing both estimated and actual costs, calculated as 
follows: 3 payors x 4 hours per submission x 2 submissions per year = 
24 burden hours per year x $50 per hour = $1,200 per year savings.
    (3b-2) Non-arm's-length transportation. Proposed requirements would 
eliminate filing estimated costs, calculated as follows: 3 payors x 6 
hours per submission x 1 submission per year = 18 burden hours per year 
x $50 per hour = $900 per year savings. The requirement would continue 
for filing actual costs on Form MMS-4110, for payors with non-arm's-
length transportation arrangements.
    Summary of Impacts to Industry. The royalty impact of the proposed 
rule on industry would be $416,000 annually. Industry's administrative 
costs would increase by $4,810,000 ($4,788,000 + $200 + $21,700 + $100) 
in the first year and $22,000 ($200 + $21,700 + $100) every year 
thereafter. Industry would realize administrative cost savings of 
$4,500 ($2,400 + $2,100) in the first year and every year thereafter. 
The net expected increase in administrative costs would be $4,805,500 
($4,810,000 - $4,500) in the first year and $17,500 ($22,000 - $4,500) 
in subsequent years.
B. State and Local Governments
    No additional cost or royalty impact would be incurred by state and 
local governments as a result of the proposed rule for the first year 
or any subsequent year.
C. Indian Tribes and Individual Indian Mineral Owners
    We estimate that our proposed oil valuation regulations would 
result in increased annual Indian oil royalties of approximately 
$416,000 related to the calculation of major portion values. We do not 
estimate any decrease or increase in royalties related to the 
elimination of the current benchmarks for valuing Indian oil not sold 
at arm's-length. The proposed rule instead requires the value to be 
based on the affiliate's arm's-length resale price which should 
approximate the value determined under the benchmarks. Additionally, 
because there is only one Indian payor with a non-arm's-length 
transportation situation and that one pipeline is fully depreciated, we 
estimate no impact on Indian royalties from the change in the rate of 
return to 1.3 times the Standard & Poor's BBB bond rate.

   Net Royalty Increase to Indian Tribes and Individual Indian Mineral
                                 Owners
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Increase....................        $416,000        $416,000
(2) Administrative Cost Increase........               0               0
(3) Administrative Cost Savings.........               0               0
                                         -----------------
    Net Expected Change in                             0               0
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Indian royalty increase. (1a) Data analyzed. For the analysis 
of the potential royalty impact on the Indian tribes and individual 
Indian mineral owners or additional mineral revenues associated with 
the proposed rule, we used year 2003 royalty information reported on 
Form MMS-2014 because it (1) represents a typical production year with 
no major market interruptions, and (2) reflects data where reporting 
edits and some compliance activities have been performed.
    We performed the major portion calculations for the top designated 
areas

[[Page 7461]]

which accounted for 95.75 percent of all royalty received in value for 
oil and condensate on Indian lands. We projected the royalty impact on 
all Indian tribes and Indian mineral owners to the remaining designated 
areas.
    (1b) Determining the major portion value at the 50-percent level. 
Under the proposed rule, MMS would calculate monthly major portion 
values by arraying reported arm's-length sales and associated volumes 
from highest to lowest price and applying the price associated with the 
sale where accumulated volumes exceed 50 percent plus 1 barrel of oil 
of the total, starting from the bottom.
    In order to calculate this major portion value for the analysis, we 
used arm's-length sales of oil and condensate reported on Form MMS-2014 
for Indian leases. For each oil type in the designated areas, we 
normalized the reported prices in the array for API gravity using 
applicable posted price gravity adjustment tables for the area and 
adjusted for transportation.
    The proposed rule provides for API gravity and oil type information 
to be gathered via Form MMS-2014. In the analysis, we used the API 
gravity reported on Form MMS-4054, Oil and Gas Operations Report, and 
made assumptions in order to correlate the API gravity data to Form 
MMS-2014 royalty information. Because oil type data is not currently 
reported to MMS, we assumed different oil types by analyzing the 
reported API gravity and price differences in an attempt to 
differentiate between oil types.
    (1c) Comparison of values. We calculated the major portion 
liabilities for individual payors by comparing the major portion value 
to the reported value per barrel (normalized and adjusted for API 
gravity and transportation). If the reported value per barrel was less 
than the major portion value, the difference was multiplied times the 
associated volume subject to royalty times the royalty rate. The 
resulting amount was the additional royalties owed to the Indian tribe 
or individual Indian mineral owner.
    In the analysis, we totaled the additional royalties for both oil 
and condensate. Under the provisions of the proposed rule, the total 
additional royalties for all tribal and allotted leases is estimated at 
approximately 1.6 percent of the total royalties reported in 2003.
    Typically, the additional royalty associated with the major portion 
calculation increases as the number of payors on the reservation 
increases. We observed that, for designated areas with few payors, 
little additional royalty resulted from the major portion calculation. 
On the other hand, when many payors reported, the additional royalty 
associated with the major portion calculation increased.
    (1d) Projection of gains to all tribes and individual Indian 
mineral owners. To estimate the total annual dollar impact for all 
tribal and allotted leases from oil and condensate in 2003, MMS used 
the combined dollar increase calculated for the top nine designated 
areas in terms of royalty receipts. Royalties received by these nine 
designated areas ($24,866,256) represented 95.75 percent of the total 
Indian oil and condensate in value royalties actually reported in 2003. 
We estimated that under the proposed rule total royalties for the nine 
designated areas would increase by about 1.6 percent (percentage from 
the major portion analysis performed for 2003) or $397,860. We 
projected the increase for all Indian recipients, as follows:

($397,860 x 100)/95.75 = $415,520

    We estimated that the total increase for all Indian royalty 
recipients under the proposed rule would be approximately $416,000 
(rounded up from $415,520) or about 1.6 percent of the total royalties 
reported for Indian properties.
    (2) Indian administrative cost impact. There is no administrative 
cost to Indian tribes or individual Indian mineral owners.
    (3) Indian administrative cost savings. There is no administrative 
cost savings to Indian tribes or individual Indian mineral owners.
    Summary of Impacts to Indian Tribes and Individual Indian Mineral 
Owners. The proposed rule would result in an annual increase of 
$416,000 in royalties owed to Indian tribes and individual Indian 
mineral owners. There would be no administrative cost impacts to Indian 
tribes and individual Indian mineral owners.
D. Federal Government
    The proposed rule has no royalty impact to the Federal Government. 
We anticipate that the proposed rule would result in increased 
administrative costs to the Federal Government of $998,100 in the first 
year and $312,100 for subsequent years. The Federal Government would 
realize administrative costs savings of $900 in the first year and in 
subsequent years. The net expected change in administrative costs would 
be an increase of $997,200 for the first year and $311,200 for 
subsequent years.
    In addition, since the proposed rule would eliminate the use of the 
non-arm's-length benchmarks, the need for audit work associated with 
applying the benchmarks would also be eliminated. Any resources that 
would be designated for this audit work could be reallocated to other 
audits and increase overall coverage on Indian properties.

 Net Administrative Cost and Administrative Cost Savings to the Federal
                               Government
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Impact......................               0               0
(2) Administrative Cost Increase........        $998,100        $312,100
(3) Administrative Cost Savings.........            -900            -900
                                         -----------------
    Net Expected Change in                       997,200         311,200
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Federal Government royalty impact. There is no royalty impact 
to the Federal Government.
    (2) Federal Government administrative cost increase. (2a) 
Implementation of the proposed rule--First year administrative costs 
(ICR 1010-0140, Form MMS-2014). These costs are estimated at $998,000 
($500,000 + $450,000 + $36,000 + $12,000 = $998,000). The MMS estimates 
that the initial set-up of the major portion calculation would be the 
greatest burden. This set-up would primarily involve researching the

[[Page 7462]]

quality aspects of the oil and condensate produced on tribal and 
allotted leases and writing the programming code to calculate the major 
portion figures for all designated areas. The initial cost of systems 
development and modification to Form MMS-2014 is estimated at $500,000. 
In addition, developing an automated tool to calculate major portion 
and identify potential underpayments is estimated at $450,000.
    There are costs associated with implementing the new rule in 
addition to systems costs. The MMS must conduct training sessions, 
update manuals, issue Dear Payor letters, etc. We estimate an 
additional $36,000 for training and $12,000 for manual updates, Dear 
Payor letters, etc. These implementation costs are associated with the 
initial year after the publication of the rule.
    (2b) MMS Major portion value calculations--Subsequent years 
administrative costs (ICR 1010-0140, Form MMS-2014). After the first 
year of implementation and set up, MMS would incur ongoing costs of 
$312,000 annually in subsequent years to calculate major portion value. 
The proposed rule would define 12 MMS-designated areas, typically 
corresponding to reservation boundaries, and require separate major 
portion calculations by oil type. Additionally, of the 12 designated 
areas, about 7 of those would require distinct oil major portion 
calculations for condensate. Considering a separate monthly price by 
oil type and product (oil/condensate), MMS would calculate over 300 
major portion values annually.
    The number of producing oil leases, payors, and complexities of 
each area would directly affect the burden of performing the major 
portion calculations. There would be an ongoing burden to MMS to 
perform the calculations for each month and update the programming code 
and quality aspects, as production is added or abandoned. There also 
would be administrative costs associated with notifying the tribes and 
payors of the major portion calculations as well as additional workload 
in performing oil major portion compliance reviews. This cost is 
estimated to involve three full time employees' time or $312,000 per 
annum (3 FTE x 2,080 hours per year x $50 per hour = $312,000).
    (2c) Processing arm's-length contracts and amendments. The MMS 
would also incur $100 per year to process companies' arm's-length 
transportation contract or amendment submissions, calculated as 
follows: 1 arm's-length contract or amendment submission per year x 2 
hours per submission = 2 burden hours per year x $50 per hour = $100 
per year.
    (3) Federal Government administrative cost savings. The MMS would 
realize administrative savings because of reduced complexity in royalty 
determination and payment under this proposed rule. Specifically, the 
proposed rule would result in:
    (3a) Reduction in processing Form MMS-4110, Oil Transportation 
Allowance Report. Under arms-length transportation arrangements, MMS 
proposes to eliminate the requirement to file Form MMS-4110. For non-
arm's-length transportation arrangements, the lessee would submit the 
actual cost information to support the allowance on Form MMS-4110 
within 3 months after the end of the 12-month period to which the 
allowance applies. We propose to eliminate the requirement to submit 
estimated allowance information.
    (3a-1) Arm's-length transportation--Would eliminate filing both 
estimated and actual costs, calculated as follows: 3 payors x 2 hours 
per submission x 2 submissions per year = 12 burden hours per year x 
$50 per hour = $600 per year.
    (3a-2) Non-arm's-length transportation--Would eliminate filing 
estimated costs, calculated as follows: 3 payors x 2 hours per 
submission x 1 submission per year = 6 burden hours per year x $50 per 
hour = $300 per year.
    Summary of Impacts to the Federal Government. The proposed rule 
would have no impact on royalties owed to the Federal Government. We 
estimate an administrative cost increase of $998,100 in the first year 
and $312,100 every year thereafter. We estimate the total 
administrative cost savings to the Federal Government would be $900 
($600 + $300) in the first year and every year thereafter. The net 
expected change in administrative costs would be a net increase of 
$997,200 ($998,100 - $900) in the first year and a net increase in 
subsequent years of $311,200 ($312,100 - $900).
E. Summary of Royalty Impacts and Costs to Industry, State and Local 
Governments, Indian Tribes and Individual Indian Mineral Owners, and 
Federal Government
    In the table, a negative number means a reduction in payment or 
receipt of royalties or a reduction in costs. A positive number means 
an increase in payment or receipt of royalties or an increase in costs.

           Summary of Administrative Costs and Royalty Impacts
------------------------------------------------------------------------
                                              Administrative cost and
                                            royalty increase or royalty
                                                     decrease
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
A. Industry:
    (1) Royalty Increase................        $416,000        $416,000
    (2) Administrative Cost Increase....       4,810,000          22,000
    (3) Administrative Cost Savings.....          -4,500          -4,500
                                         -----------------
        Net Expected Change in                 4,805,500          17,500
         Administrative Costs...........
B. State and Local Governments:
    (1) Royalty Impact..................               0               0
    (2) Administrative Cost Increase....               0               0
    (3) Administrative Cost Savings.....               0               0
                                         -----------------
        Net Expected Change in                         0               0
         Administrative Costs...........
C. Indian Tribes and Individual Indian
 Mineral Owners:
    (1) Royalty Increase................         416,000         416,000
    (2) Administrative Cost Increase....               0               0
    (3) Administrative Cost Savings.....               0               0
                                         -----------------
        Net Expected Change in                         0               0
         Administrative Costs...........

[[Page 7463]]

 
D. Federal Government:
    (1) Royalty Impact..................               0               0
    (2) Administrative Cost Increase....         998,100         312,100
    (3) Administrative Cost Savings.....            -900            -900
                                         -----------------
        Net Expected Change in                   997,200         311,200
         Administrative Costs...........
------------------------------------------------------------------------


    Note: Some of the data supporting this analysis cannot be 
released because of proprietary data concerns.

3. Regulatory Planning and Review, Executive Order 12866

    This document is a significant rule and the Office of Management 
and Budget has reviewed this rule under Executive Order 12866.
    1. This rule would not have an effect of $100 million or more on 
the economy. It would not adversely affect in a material way the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities. However, we have performed an analysis of costs and 
royalty impacts, which is discussed in detail in the Procedural Matters 
section of this document.
    2. This rule would not create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency.
    3. This rule would not materially affect entitlements, grants, user 
fees, loan programs, or the rights and obligations of their recipients.
    4. This rule raises novel legal or policy issues.

4. Regulatory Flexibility Act

    I certify that this proposed rule will not have a significant 
economic effect on a substantial number of small entities as defined 
under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). An initial 
Regulatory Flexibility Analysis is not required. Accordingly, a Small 
Entity Compliance Guide is not required.
    Your comments are important. The Small Business and Agricultural 
Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were 
established to receive comments from small businesses about Federal 
agency enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to small 
business. If you wish to comment on the enforcement actions in this 
rule, call 1-800-734-3247. You may comment to the Small Business 
Administration without fear of retaliation. Disciplinary action for 
retaliation by an MMS employee may include suspension or termination 
from employment with the Department of the Interior.

5. Small Business Regulatory Enforcement Act (SBREFA)

    This proposed rule is not a major rule under 5 U.S.C. 804(2), the 
Small Business Regulatory Enforcement Fairness Act. This proposed rule:
    1. Would not have an annual effect on the economy of $100 million 
or more.
    2. Would not cause a major increase in costs or prices for 
consumers, individual industries, Federal, state, Indian, or local 
government agencies, or geographic regions.
    3. Would not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
United States-based enterprises to compete with foreign-based 
enterprises.

6. Unfunded Mandates Reform Act

    In accordance with the Unfunded Mandates Reform Act (2 U.S.C. 1501 
et seq.):
    1. This proposed rule would not significantly or uniquely affect 
small governments. Therefore, a Small Government Agency Plan is not 
required.
    2. This proposed rule would not produce a Federal mandate of $100 
million or greater in any year; i.e., it is not a significant 
regulatory action under the Unfunded Mandates Reform Act. The analysis 
prepared for Executive Order 12866 will meet the requirements of the 
Unfunded Mandates Reform Act. See the analysis in Section VI.2, Summary 
Cost and Royalty Impact Data.

7. Governmental Actions and Interference With Constitutionally 
Protected Property Rights (Takings), Executive Order 12630

    In accordance with Executive Order 12630, this proposed rule would 
not have significant takings implications. A takings implication 
assessment is not required.

8. Federalism, Executive Order 13132

    In accordance with Executive Order 13132, this proposed rule would 
not have significant federalism implications. A federalism assessment 
is not required. It would not substantially and directly affect the 
relationship between the Federal and state governments. The management 
of Indian leases is the responsibility of the Secretary of the 
Interior, and all royalties collected from Indian leases are 
distributed to tribes and individual Indian mineral owners. This 
proposed rule would not alter that relationship.

9. Civil Justice Reform, Executive Order 12988

    In accordance with Executive Order 12988, the Office of the 
Solicitor has determined that this proposed rule would not unduly 
burden the judicial system and meets the requirements of sections 3(a) 
and 3(b)(2) of the Order.

10. Paperwork Reduction Act of 1995

    This proposed rule, RIN 1010-AD00, would contain new information 
collection requirements (ICR). The title of the new ICR is ``30 CFR 
206--PRODUCTION VALUATION, Subpart B--Indian Oil.''
    The proposed rule would affect two existing ICRs: ICR 1010-0140 
(expires October 31, 2006) and ICR 1010-0103 (expires April 30, 2006). 
The net estimated proposed burden hour change for the two ICRs is 338 
burden hours. For ICR 1010-0140, there is an estimated net increase of 
386 burden hours per year and, for ICR 1010-0103, an estimated net 
decrease of 48 burden hours per year, both due to program changes.

[[Page 7464]]

    The intent of this proposed rulemaking is to add more certainty to 
the valuation of oil produced from Indian lands, eliminate reliance on 
oil posted prices, and address the unique terms of Indian (tribal and 
allotted) leases--specifically, the major portion provision. Most 
Indian leases include a major portion provision, stating that value for 
royalty purposes may, in the discretion of the Secretary, be the 
highest price paid or offered at the time of production for the major 
portion of oil produced from the same field. The additional information 
collection requirements in this proposed rulemaking would allow MMS and 
the tribes to ensure that Indian mineral lessors receive the proper 
value for oil produced from their land under the lease terms and these 
proposed rules.
    We have submitted an ICR to the Office of Management and Budget 
(OMB) for review and approval under section 3507(d) of the Paperwork 
Reduction Act of 1995. If this proposed rule is adopted as a final 
rule, we will prepare the required Forms OMB 83-C and transfer the 
burden hours and costs to their respective primary collections. As part 
of our continuing effort to reduce paperwork and respondent burden, we 
will invite the public and other Federal agencies to comment on any 
aspect of the reporting burden through the information collection 
process.
    Submit written comments by either fax (202) 395-6566 or e-mail 
([email protected]) directly to the Office of Information and 
Regulatory Affairs, OMB, Attention: Desk Officer for the Department of 
the Interior [OMB Control Numbers ICR 1010-0140 (expires October 31, 
2006) and ICR 1010-0103 (expires April 30, 2006), as they relate to the 
proposed Indian oil valuation rule].
    Also submit copies of written comments to Sharron L. Gebhardt, Lead 
Regulatory Specialist, Minerals Management Service, Minerals Revenue 
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225. If you 
use an overnight courier service, our courier address is Building 85, 
Room A-614, Denver Federal Center, Denver, Colorado 80225. You may also 
e-mail your comments to us at [email protected]. Include the title 
of the information collection and the OMB control number in the 
``Attention'' line of your comment. Also include your name and return 
address. Submit electronic comments as an ASCII file avoiding the use 
of special characters and any form of encryption. If you do not receive 
a confirmation that we have received your e-mail, contact Ms. Gebhardt 
at (303) 231-3211.
    The OMB has up to 60 days to approve or disapprove this collection 
of information but may respond after 30 days. Therefore, public 
comments should be submitted to OMB within 30 days in order to assure 
their maximum consideration. However, we will consider all comments 
received during the comment period for this notice of proposed 
rulemaking.
Information Collection Requests
    The net estimated annual hour burden cost is 338 hours (386 - 48 
hours = 338 hours) or, using $50 per hour, $16,900 ($19,300 - $2,400). 
For ICR 1010-0140, there would be an increase of 386 burden hours or 
$19,300. For ICR 1010-0103, there would be a decrease of 48 burden 
hours or $2,400. Computation details are shown below.
ICR 1010-0140 Hour Burden Cost
    The net impact of changes related to ICR 1010-0140 is estimated at 
386 hours (434 - 48 hours = 386 hours) or, using an average of $50 per 
hour, $19,300 ($21,700 - $2,400 = $19,300).
    The proposed rule would require the collection of new information 
under ICR 1010-0140 on Form MMS-2014, Report of Sales and Royalty 
Remittance. There are approximately 200 payors on Indian oil-producing 
leases, who report on Form MMS-2014. We estimate that this new 
reporting requirement would result in 12,400 additional royalty line 
submissions per year (12,152 lines from electronic reporters and 248 
lines from paper reporters). For electronic reporters, we estimate an 
increase of 405 burden hours annually (12,152 lines x 2 minutes per 
line = 24,304 minutes/60 minutes per hour = 405 hours). For paper 
reporters, we estimate an increase of 29 burden hours annually (248 
lines x 7 minutes per line = 1,736 minutes/60 minutes per hour = 29 
hours). The total additional annual burden is 434 hours (405 + 29). 
Using an average of $50 per hour, the total cost to respondents would 
be $21,700 (434 hours x $50) for the additional reporting requirements.
    Further, we estimate that the provisions of the rule would result 
in additional savings of $2,400 for simplified reporting and pricing, 
coupled with certainty, for 8 payors with non-arm's-length dispositions 
of their oil. For 96 annual submissions of Form MMS-2014 (8 payors x 12 
report months), we estimate that respondents would save 30 minutes per 
response, or 48 hours annually (96 submissions x 30 minutes = 2,880 
minutes/60 minutes = 48 hours per year savings). Using an average cost 
of $50 per hour, the total savings to respondents would be $2,400 (48 
hours x $50).

           Proposed Increase in Burden Hours for ICR 1010-0140
    [Includes only proposed citation 30 CFR 206 burden hour changes]
------------------------------------------------------------------------
                                          Average number
                                             of annual       Estimated
        Burden hours per response            responses     annual burden
                                              (lines)          hours
------------------------------------------------------------------------
Electronic Reporting (98 percent):
    2 minutes...........................          12,152             405
Paper Reporting (2 percent):
    7 minutes...........................             248              29
                                         -----------------
        Total Estimated Burden Increase.          12,400             434
------------------------------------------------------------------------


    Note: The above burden hours relate to 200 payors on Indian oil-
producing leases.


[[Page 7465]]



           Proposed Decrease in Burden Hours for ICR 1010-0140
    [Includes only proposed citation 30 CFR 206 burden hour changes]
------------------------------------------------------------------------
                                          Average number     Estimated
    Annual burden hours per response         of annual     annual burden
                                             responses         hours
------------------------------------------------------------------------
Simplified Reporting:
    30 minutes savings per month........              96             -48
        Total Estimated Burden Decrease.              96             -48
------------------------------------------------------------------------


    Note: The above burden hours relate to 8 payors with non-arm's-
length dispositions on Indian oil-producing leases.

ICR 1010-0103 Hour Burden Cost
    In addition, the proposed changes would affect ICR 1010-0103. The 
changes in filing requirements for Form MMS-4110, Oil Transportation 
Allowance Report, would result in a small overall reduction in the 
burden hours for both arm's-length contracts and non-arm's-length or no 
contract. In ICR 1010-0103, MMS estimated that six Indian lessees would 
report on the Form MMS-4110. The current OMB-approved annual hours for 
Form MMS-4110 are 60, and the proposed hours are estimated to be 12, 
for a net estimated decrease of 48 burden hours annually. This would 
result in a net estimated savings of $2,400 (48 hours x $50), detailed 
as follows:
     $1,200 annual decrease for arm's-length transportation 
proposed requirements that would eliminate filing both estimated and 
actual costs (6 submissions per year x 4 burden hours per submission = 
24 burden hours per year x $50 per hour = $1,200 annual decrease);
     $900 annual decrease for non-arm's-length transportation 
proposed requirements that would eliminate filing estimated costs (3 
submissions per year x 6 burden hours per submission = 18 burden hours 
per year x $50 per hour = $900 annual decrease);
     $600 annual decrease for an adjustment in the number of 
responses for actual-cost reporting requirements for payors with non-
arm's-length situations (reduction in number of responses from 3 to 1 = 
2-response reduction x 6 burden hours per response = 12 burden hours 
per year x $50 = $600 annual decrease);
     $200 annual increase related to reporting arm's-length 
contracts (1 response per year x 4 burden hours per submission x $50 
per hour = $200 annual increase); and
     $100 annual increase related to recordkeeping (1 response 
per year x 2 burden hours per year x $50 per hour = $100 annual 
increase).
    The following chart shows the estimated burden hours by CFR section 
and paragraph.

                                    Respondents' Estimated Burden Hour Chart
----------------------------------------------------------------------------------------------------------------
                                                                                 Average number
Citation 30 CFR 206 subpart B    Reporting and recordkeeping     Hour burden       of annual      Annual burden
                                         requirement                               responses          hours
----------------------------------------------------------------------------------------------------------------
                                      Indian Oil Transportation Allowances
----------------------------------------------------------------------------------------------------------------
Proposed Rule Eliminates Sec.  Arm's-length transportation           See Sec.   206.55(c)(1)(i) and (iii).
   206.55(a)(1)(i).             contracts. * * * Before any                 Proposed Rule Eliminates
                                deduction may be taken, the
                                lessee must submit a
                                completed page one of Form
                                MMS-4110 (and Schedule 1),
                                Oil Transportation Allowance
                                Report. * * *.
------------------------------
Proposed Rule Eliminates Sec.  Non-arm's-length or no                See Sec.   206.55(c)(2)(i), and (iii).
   206.55(b)(1).                contract. * * * Before any                  Proposed Rule Eliminates
                                estimated or actual deduction
                                may be taken, the lessee must
                                submit a completed Form MMS-
                                4110 in its entirety. * * *.
------------------------------
Proposed Rule Eliminates Sec.  Reporting requirements. Arm's-              -4               -3              -12
   206.55(c)(1)(i).             length contracts. With the
                                exception of those
                                transportation allowances
                                specified in paragraphs
                                (c)(1)(v) and (c)(1)(vi) of
                                this section, the lessee
                                shall submit page one of the
                                initial Form MMS-4110 (and
                                Schedule 1), Oil
                                Transportation Allowance
                                Report, prior to, or at the
                                same time as, the
                                transportation allowance
                                determined under an arm's-
                                length contract, is reported
                                on Form MMS-2014, Report of
                                Sales and Royalty Remittance.
                                * * *.
------------------------------
Proposed Rule Eliminates Sec.  Arm's-length contracts. After               -4               -3              -12
   206.55(c)(1)(iii).           the initial reporting period
                                and for succeeding reporting
                                periods, lessees must submit
                                page one of Form MMS-4110
                                (and Schedule 1) within 3
                                months after the end of the
                                calendar year, or after the
                                applicable contract or rate
                                terminates or is modified or
                                amended, whichever is
                                earlier, unless MMS approves
                                a longer period (during which
                                period the lessee shall
                                continue to use the allowance
                                from the previous reporting
                                period).
------------------------------
Proposed Rule Eliminates Sec.  Arm's-length contracts. MMS     Produce Records--The Office of Regulatory Affairs
   206.55(c)(1)(iv).            may require that a lessee        (ORA) determined that the audit process is not
                                submit arm's-length              covered by the PRA because MMS staff asks non-
                                transportation contracts,          standard questions to resolve exceptions.
                                production agreements,
                                operating agreements, and
                                related documents. Documents
                                shall be submitted within a
                                reasonable time, as
                                determined by MMS.

[[Page 7466]]

 
                                                                            Proposed Rule Eliminates
------------------------------
Proposed Rule Eliminates Sec.  Non-arm's-length or no                      -6               -3              -18
   206.55(c)(2)(i).             contract. With the exception
                                of those transportation
                                allowances specified in
                                paragraphs (c)(2)(v),
                                (c)(2)(vii) and (c)(2)(viii)
                                of this section, the lessee
                                shall submit an initial Form
                                MMS-4110 prior to, or at the
                                same time as, the
                                transportation allowance
                                determined under a non-arm's-
                                length contract or no-
                                contract situation is
                                reported on Form MMS-2014 * *
                                * The initial report may be
                                based upon estimated costs.
------------------------------
Proposed Rule Revises Sec.     Non-arm's-length or no                      -6               -3              -18
 206.55(c)(2)(iii) and Moves    contract. For calendar-year     Proposed Rule    Proposed Rule    Proposed Rule
 the Citation to Sec.           reporting periods succeeding      Revises and      Revises and      Revises and
 206.60.                        the initial reporting period,           Moves            Moves            Moves
                                the lessee shall submit a
                                completed Form MMS-4110
                                containing the actual costs
                                for the previous reporting
                                period. If oil transportation
                                is continuing, the lessee
                                shall include on Form MMS-
                                4110 its estimated costs for
                                the next calendar year * * *
                                MMS must receive the Form MMS-
                                4110 within 3 months after
                                the end of the previous
                                reporting period, unless MMS
                                approves a longer period
                                (during which period the
                                lessee shall continue to use
                                the allowance from the
                                previous reporting period).
------------------------------
Proposed Rule Eliminates Sec.  Non-arm's-length or no                     See Sec.   206.55(c)(2)(i).
   206.55(c)(2)(iv).            contract. For new                           Proposed Rule Eliminates
                                transportation facilities or
                                arrangements, the lessee's
                                initial Form MMS-4110 shall
                                include estimates of the
                                allowable oil transportation
                                costs for the applicable
                                period. * * *.
------------------------------
Proposed Rule Eliminates Sec.  Non-arm's-length or no                           Produce Records
   206.55(c)(2)(vi).            contract. Upon request by       The ORA determined that the audit process is not
                                MMS, the lessee shall submit     covered by the PRA because MMS staff asks non-
                                all data used to prepare its        standard questions to resolve exceptions
                                Form MMS-4110. The date shall
                                be provided within a
                                reasonable period of time, as
                                determined by MMS.
                                                                            Proposed Rule Eliminates
------------------------------
                               Total Hour Burden Eliminated..  ...............  ...............             -60
------------------------------
Proposed Rule Sec.             How do I calculate royalty                      See Sec.   206.58
 206.52(e)(4).                  value for oil that I or my
                                affiliate sell(s) or
                                exchange(s) under an arm's-
                                length contract? (e)(4) * * *
                                you must request that MMS
                                establish a value for the oil
                                based on relevant matters. *
                                * *.
------------------------------
Proposed Rule Sec.             How do I determine value for     Covered under renewal for ICR 1010-0103 (expires
 206.53(c).                     oil that I or my affiliate                      April 30, 2006).
                                do(es) not sell under an
                                arm's-length contract? (c) If
                                you demonstrate to MMS's
                                satisfaction that. * * *.
------------------------------
Proposed Rule Sec.   206.54..  How do I fulfill the lease                      See Sec.   206.58.
                                provision regarding valuing
                                production on the basis of
                                the major portion of like-
                                quality oil? * * * The MMS
                                will presume that all Indian
                                leases have at least one of
                                these provisions unless you
                                demonstrate otherwise. * * *.
------------------------------
Proposed Rule Sec.             How do I calculate a                            See Sec.   206.58.
 206.57(a).                     transportation allowance
                                under an arm's-length
                                transportation contract? * *
                                * You must be able to
                                demonstrate that you or your
                                affiliate's contract is at
                                arm's length. * * *.
------------------------------
Proposed Rule Sec.             How do I calculate a                            See Sec.   206.58.
 206.57(d)(3).                  transportation allowance
                                under an arm's-length
                                transportation contract?
                                (d)(3) You may propose to MMS
                                a cost allocation method on
                                the basis of the values of
                                the products transportated. *
                                * *.
------------------------------
Proposed Rule Sec.             How do I calculate a                            See Sec.   206.58
 206.57(e) and (e)(2).          transportation allowance
                                under an arm's-length
                                transportation contract? (e)
                                * * * then you must propose
                                an allocation procedure to
                                MMS. * * * (2) You must
                                submit your initial proposal.
                                * * *.
------------------------------
Proposed Rule Sec.             How do I calculate a                            See Sec.   206.58.
 206.57(g)(2).                  transportation allowance
                                under an arm's-length
                                transportation contract?
                                (g)(2) You must obtain MMS
                                approval before claiming a
                                transportation factor in
                                excess of 50 percent of the
                                base price.
------------------------------

[[Page 7467]]

 
Proposed Rule Sec.   206.58..  What are my reporting                        4                1                4
                                requirements under an arms-
                                length transportation
                                contract? You have the burden
                                of demonstrating that your
                                contract is arms-length. You
                                must submit to MMS a copy of
                                your arm's-length
                                transportation contract(s)
                                and all subsequent amendments
                                to the contract(s) within 2
                                months of the date MMS
                                receives your Form MMS-2014
                                on which a transportation
                                allowance is reported.
------------------------------
Proposed Rule Sec.   206.60..  What are my reporting                        6                1                6
                                requirements under a non-
                                arm's-length transportation
                                arrangement? All
                                transportation allowances
                                deducted under a non-arm's-
                                length or no-contract
                                situation are subject to
                                monitoring, review, audit,
                                and adjustment. You must
                                submit the actual cost
                                information to support the
                                allowance to MMS on Form MMS-
                                4110, Oil Transportation
                                Allowance Report, within 3
                                months after the end of the
                                12-month period to which the
                                allowance applies.
------------------------------
Proposed Rule Sec.   206.62..  May I ask MMS for valuation      Covered under renewal for ICR 1010-0103 (expires
                                guidance? * * * You may                         April 30, 2006).
                                produce a value method to
                                MMS. Submit all available
                                data related to your proposal
                                and any additional
                                information MMS deems
                                necessary. * * *.
------------------------------
Proposed Rule Sec.             What record must I keep and                      Produce Records
 206.64(a).                     produce? (a) On request, you    The ORA determined that the audit process is not
                                must make available sales,       covered by the PRA because MMS staff asks non-
                                volume, and transportation         standard questions to resolve exceptions.
                                data. * * *.
------------------------------
Proposed Rule Sec.             What records must I keep and                 1                2                2
 206.64(b).                     produce? (b) You must retain
                                all data relevant data to the
                                determination of royalty
                                value. * * *.
------------------------------
Proposed Rule Sec.             What records must I keep and                     Produce Records
 206.64(b).                     produce? (b) * * * The MMS,     The ORA determined that the audit process is not
                                Indian representatives, or       covered by the PRA because MMS staff asks non-
                                other authorized persons may       standard questions to resolve exceptions.
                                review and audit such data
                                you possess, and * * *.
------------------------------
                               Total Hour Burden for Proposed  ...............  ...............              12
                                Rule.
                               Total Net Hour Burden Decrease  ...............  ...............             -48
----------------------------------------------------------------------------------------------------------------


    Note: The current OMB-approved burden hours are 60 for Form MMS-
4110 and transportation contracts (previously on ICR 1010-0061, 
recently consolidated into ICR 1010-0103). The new burden hours for 
this program change are estimated to be 12, for a net decrease of 48 
burden hours annually due to program change.

Summary Administrative Non-Hour Cost Data
    The net estimated first year non-hour burden cost is $4,788,000. 
There are no other non-hour burden costs associated with this ICR for 
the first year or future years. Computation details are shown below.
    ICR 1010-0140 Non-Hour Burden Cost: This proposed rule would impose 
a non-hour cost burden on industry. Industry would incur a one-time 
cost increase of $4,788,000 for equipment/software modifications in 
order to conform to the new reporting requirements on Form MMS-2014. If 
the final rule adopts the proposed program changes, MMS would revise 
the reporting requirements and Form MMS-2014 to require lessees to 
report oil types and their associated API gravity for Indian oil-
producing leases. These reporting changes are discussed in the proposed 
30 CFR 206.54, and they would be further detailed in the final 
rulemaking, if adopted. We estimate the following one-time cost to 
industry to comply with the proposed rule:

            Administrative Cost Detail for Equipment/Software
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         year
------------------------------------------------------------------------
Software development/modification:
    Electronic reporters--large               $3,000,000               0
     companies..........................
Software development/modification:
    Electronic reporters--mid-level            1,780,000               0
     companies..........................
Spreadsheet software:
    Paper reporters.....................           8,000               0
                                         -----------------

[[Page 7468]]

 
        Total Net Cost Increase to             4,788,000               0
         Industry.......................
------------------------------------------------------------------------

    The above figures are calculated as follows: There are 
approximately 200 oil royalty reporters on Indian leases that fall into 
three groups: (1) Large companies (electronic reporters); (2) mid-level 
companies (electronic reporters); and (3) small companies (paper 
reporters). For each of the three groups of reporters, administrative 
costs are calculated as follows: large companies, $3,000,000 (6 x 
$500,000); mid-level companies, $1,780,000 (178 x $10,000); and paper 
reporters, $8,000 (16 x $500).
    ICR 1010-0103 Non-Hour Burden Cost: There is no identified non-hour 
burden cost.
    Public Comment Policy. The PRA (44 U.S.C. 3501, et seq.) provides 
that an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. Before submitting an ICR to OMB, 
PRA Sec.  3506(c)(2)(A) requires each agency ``* * * to provide notice 
* * * and otherwise consult with members of the public and affected 
agencies concerning each proposed collection of information * * *.'' 
Agencies must specifically solicit comments to: (a) Evaluate whether 
the proposed collection of information is necessary for the agency to 
perform its duties, including whether the information is useful; (b) 
evaluate the accuracy of the agency's estimate of the burden of the 
proposed collection of information; (c) enhance the quality, 
usefulness, and clarity of the information to be collected; and (d) 
minimize the burden on the respondents, including the use of automated 
collection techniques or other forms of information technology.
    The PRA also requires agencies to estimate the total annual 
reporting ``non-hour cost'' burden to respondents or recordkeepers 
resulting from the collection of information. If you have costs to 
generate, maintain, and disclose this information, you should comment 
and provide your total capital and startup cost components or annual 
operation, maintenance, and purchase of service components. You should 
describe the methods you use to estimate major cost factors, including 
system and technology acquisition, expected useful life of capital 
equipment, discount rate(s), and the period over which you incur costs. 
Capital and startup costs include, among other items, computers and 
software you purchase to prepare for collecting information; 
monitoring, sampling, and testing equipment; and record storage 
facilities. Generally, your estimates should not include equipment or 
services purchased: (i) Before October 1, 1995; (ii) to comply with 
requirements not associated with the information collection; (iii) for 
reasons other than to provide information or keep records for the 
Government; or (iv) as part of customary and usual business or private 
practices.
    We will summarize written responses to this proposed information 
collection and address them in our final rule. We will provide a copy 
of the ICR to you without charge upon request and the ICR will also be 
posted on our Web site at 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 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 deals with financial matters and would have no 
direct effect on MMS decisions on environmental activities. Pursuant to 
516 DM 2.3A(2), Section 1.10 of 516 DM 2, Appendix 1 excludes from 
documentation in an environmental assessment or impact statement 
``policies, directives, regulations and guidelines of an 
administrative, financial, legal, technical or procedural nature; or 
the environmental effects of which are too broad, speculative, or 
conjectural to lend themselves to meaningful analysis and will be 
subject later to the NEPA process, either collectively or case-by-
case.'' Section 1.3 of the same appendix clarifies that royalties and 
audits are considered to be routine financial transactions that are 
subject to categorical exclusion from the NEPA process.

12. Government-to-Government Relationship With Tribes

    In accordance with the President's memorandum of April 29, 1994, 
``Government-to-Government Relations with Native American Tribal 
Governments'' (59 FR 22951) and 512 DM 2, we have evaluated potential 
effects on federally recognized Indian tribes and have determined that 
the changes we are proposing may have an impact on tribes and 
individual Indian mineral owners. During the writing of this proposed 
rule, we have consulted extensively with tribal representatives and 
individual Indian mineral owners regarding the regulatory changes 
affecting tribes and individual Indian mineral owners in this proposed 
rule. The MMS will determine how to proceed with this rulemaking based 
on comments received.

13. Effects on the Nation's Energy Supply, Executive Order 13211

    In accordance with Executive Order 13211, this regulation would not 
have a significant effect on the Nation's energy supply, distribution, 
or use. The proposed changes better reflect the way industry accounts 
internally for its oil valuation and provides a number of technical 
clarifications. None of these proposed changes would impact 
significantly the way industry does business and, accordingly, would 
not affect their approach to energy

[[Page 7469]]

development or marketing. Nor would the proposed rule otherwise impact 
energy supply, distribution, or use.

14. Consultation and Coordination With Indian Tribal Governments, 
Executive Order 13175

    This proposed rule does not have tribal implications that would 
impose substantial direct compliance costs on Indian tribal 
governments. In accordance with Executive Order 13175, and with the 
Department's policy to consult with individual Indian mineral owners on 
all policy changes that may affect them, MMS scheduled public meetings 
in three different locations, announced February 22, 2005, in a Federal 
Register notice (70 FR 8556), for the purpose of consulting with Indian 
tribes and individual Indian mineral owners and to obtain public 
comments from other interested parties. The public meetings were held 
on March 8, 2005, in Oklahoma City, Oklahoma; on March 9, 2005, in 
Albuquerque, New Mexico; and on March 16, 2005, in Billings, Montana. 
The MMS also held five additional consultation sessions with tribes and 
individual Indian mineral owners to discuss and hear comments, 
including sessions in Window Rock, Arizona, on June 7, 2005; Fort 
Duchesne, Utah, on June 9, 2005; Fort Washakie, Wyoming, on June 15, 
2005; Muskogee, Oklahoma, on June 16, 2005; and Anadarko, Oklahoma, on 
June 17, 2005.

15. 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].

List of Subjects in 30 CFR Part 206

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

    Dated: November 3, 2005.
Chad Calvert,
Acting Assistant Secretary for Land and Minerals Management.

    For the reasons set forth in the preamble, MMS proposes to amend 30 
CFR part 206 as follows:

PART 206--PRODUCT VALUATION

    1. The authority citation for part 206 continues to read as 
follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et 
seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et 
seq., 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq., 1331 et 
seq., and 1801 et seq.

    2. Subpart B--Indian Oil is revised to read as follows:
Subpart B--Indian Oil
Sec.
206.50 What is the purpose of this subpart?
206.51 What definitions apply to this subpart?
206.52 How do I calculate royalty value for oil that I or my 
affiliate sell(s) or exchange(s) under an arm's-length contract?
206.53 How do I determine value for oil that I or my affiliate 
do(es) not sell under an arm's-length contract?
206.54 How do I fulfill the lease provision regarding valuing 
production on the basis of the major portion of like-quality oil?
206.55 What are my responsibilities to place production into 
marketable condition and to market the production?
206.56 What transportation allowances apply in determining the value 
of oil?
206.57 How do I calculate a transportation allowance under an arm's-
length transportation contract?
206.58 What are my reporting requirements under an arm's-length 
transportation contract?
206.59 How do I calculate a transportation allowance under a non-
arm's-length transportation arrangement?
206.60 What are my reporting requirements under a non-arm's-length 
transportation arrangement?
206.61 What must I do if MMS finds that I have not properly 
determined value?
206.62 May I ask MMS for valuation guidance?
206.63 What are the quantity and quality bases for royalty 
settlement?
206.64 What records must I keep and produce?
206.65 Does MMS protect information I provide?

Subpart B--Indian Oil


Sec.  206.50  What is the purpose of this subpart?

    (a) This subpart applies to all oil produced from Indian (tribal 
and allotted) oil and gas leases (except leases on the Osage Indian 
Reservation, Osage County, Oklahoma). This subpart does not apply to 
Federal leases, including Federal leases for which revenues are shared 
with Alaska Native Corporations. This subpart:
    (1) Establishes the value of production for royalty purposes 
consistent with the Indian mineral leasing laws, other applicable laws, 
and lease terms;
    (2) Explains how you as a lessee must calculate the value of 
production for royalty purposes consistent with applicable statutes and 
lease terms; and
    (3) Is intended to ensure that the United States discharges its 
trust responsibilities for administering Indian oil and gas leases 
under the governing Indian mineral leasing laws, treaties, and lease 
terms.
    (b) If the regulations in this subpart are inconsistent with a 
Federal statute, a settlement agreement or written agreement as these 
terms are defined in this paragraph, or an express provision of an oil 
and gas lease subject to this subpart, then the statute, settlement 
agreement, written agreement, or lease provision will govern to the 
extent of the inconsistency. For purposes of this paragraph:
    (1) ``Settlement agreement'' means a settlement agreement between 
the United States and a lessee, or between an Indian mineral owner and 
a lessee that is approved by the United States, resulting from 
administrative or judicial litigation; and
    (2) ``Written agreement'' means a written agreement between the 
lessee and the MMS Director (and approved by the tribal lessor for 
tribal leases) establishing a method to determine the value of 
production from any lease that MMS expects at least would approximate 
the value established under this subpart.
    (c) MMS or Indian tribes may audit, or perform other compliance 
reviews, and require a lessee to adjust royalty payments and reports.


Sec.  206.51  What definitions apply to this subpart?

    For purposes of this subpart:
    Affiliate means a person who controls, is controlled by, or is 
under common control with another person.
    (1) Ownership or common ownership of more than 50 percent of the 
voting

[[Page 7470]]

securities, or instruments of ownership, or other forms of ownership, 
of another person constitutes control. Ownership of less than 10 
percent constitutes a presumption of noncontrol that MMS may rebut.
    (2) If there is ownership or common ownership of 10 through 50 
percent of the voting securities or instruments of ownership, or other 
forms of ownership, of another person, MMS will consider the following 
factors in determining whether there is control in a particular case:
    (i) The extent to which there are common officers or directors;
    (ii) With respect to the voting securities, or instruments of 
ownership, or other forms of ownership:
    (A) The percentage of ownership or common ownership;
    (B) The relative percentage of ownership or common ownership 
compared to the percentage(s) of ownership by other persons;
    (C) Whether a person is the greatest single owner; and
    (D) Whether there is an opposing voting bloc of greater ownership;
    (iii) Operation of a lease, plant, or other facility;
    (iv) The extent of participation by other owners in operations and 
day-to-day management of a lease, plant, or other facility; and
    (v) Other evidence of power to exercise control over or common 
control with another person.
    (3) Regardless of any percentage of ownership or common ownership, 
relatives, either by blood or marriage, are affiliates.
    Area means a geographic region in which oil has similar quality and 
economic characteristics.
    Arm's-length contract means a contract or agreement between 
independent persons who are not affiliates and who have opposing 
economic interests regarding that contract. To be considered arm's-
length for any production month, a contract must satisfy this 
definition for that month, as well as when the contract was executed.
    Audit means a review, conducted in accordance with generally 
accepted accounting and auditing standards, of royalty payment 
compliance activities of lessees or other interest holders who pay 
royalties, rents, or bonuses on Indian leases.
    BLM means the Bureau of Land Management of the Department of the 
Interior.
    Condensate means liquid hydrocarbons (generally exceeding 40 
degrees of API gravity) recovered at the surface without resorting to 
processing. Condensate is the mixture of liquid hydrocarbons that 
results from condensation of petroleum hydrocarbons existing initially 
in a gaseous phase in an underground reservoir.
    Contract means any oral or written agreement, including amendments 
or revisions thereto, between two or more persons and enforceable by 
law that with due consideration creates an obligation.
    Designated area means an area specified by MMS for valuation 
purposes.
    Exchange agreement means an agreement where one person agrees to 
deliver oil to another person at a specified location in exchange for 
oil deliveries at another location, and other consideration. Exchange 
agreements:
    (1) May or may not specify prices for the oil involved;
    (2) Frequently specify dollar amounts reflecting location, quality, 
or other differentials;
    (3) Include buy/sell agreements, which specify prices to be paid at 
each exchange point and may appear to be two separate sales within the 
same agreement, or in separate agreements; and
    (4) May include, but are not limited to, exchanges of produced oil 
for specific types of oil (e.g., West Texas Intermediate); exchanges of 
produced oil for other oil at other locations (location trades); 
exchanges of produced oil for other grades of oil (grade trades); and 
multi-party exchanges.
    Field means a geographic region situated over one or more 
subsurface oil and gas reservoirs encompassing at least the outermost 
boundaries of all oil and gas accumulations known to be within those 
reservoirs vertically projected to the land surface. Onshore fields 
usually are given names and their official boundaries are often 
designated by oil and gas regulatory agencies in the respective states 
in which the fields are located.
    Gathering means the movement of lease production to a central 
accumulation or treatment point on the lease, unit, or communitized 
area, or to a central accumulation or treatment point off the lease, 
unit, or communitized area as approved by BLM operations personnel.
    Gross proceeds means the total monies and other consideration 
accruing for the disposition of oil produced. Gross proceeds also 
include, but are not limited to, the following examples:
    (1) Payments for services, such as dehydration, marketing, 
measurement, or gathering that the lessee must perform at no cost to 
the lessor in order to put the production into marketable condition;
    (2) The value of services to put the production into marketable 
condition, such as salt water disposal, that the lessee normally 
performs but that the buyer performs on the lessee's behalf;
    (3) Reimbursements for harboring or terminaling fees;
    (4) Tax reimbursements, even though the Indian royalty interest may 
be exempt from taxation;
    (5) Payments made to reduce or buy down the purchase price of oil 
to be produced in later periods, by allocating those payments over the 
production whose price the payment reduces and including the allocated 
amounts as proceeds for the production as it occurs; and
    (6) Monies and all other consideration to which a seller is 
contractually or legally entitled, but does not seek to collect through 
reasonable efforts.
    Indian tribe means any Indian tribe, band, nation, pueblo, 
community, rancheria, colony, or other group of Indians for which any 
minerals or interest in minerals is held in trust by the United States 
or that is subject to Federal restriction against alienation.
    Individual Indian mineral owner means any Indian for whom minerals 
or an interest in minerals is held in trust by the United States or who 
holds title subject to Federal restriction against alienation.
    Lease means any contract, profit-share arrangement, joint venture, 
or other agreement issued or approved by the United States under an 
Indian mineral leasing law that authorizes exploration for, development 
or extraction of, or removal of lease products. Depending on the 
context, ``lease'' may also refer to the land area covered by that 
authorization.
    Lease products means any leased minerals attributable to, 
originating from, or allocated to Indian leases.
    Lessee means any person to whom the United States, a tribe, or 
individual Indian mineral owner issues a lease, and any person who has 
been assigned an obligation to make royalty or other payments required 
by the lease. ``Lessee'' includes:
    (1) Any person who has an interest in a lease (including operating 
rights owners);
    (2) An operator, purchaser, or other person with no lease interest 
who makes royalty payments to MMS or the lessor on the lessee's behalf; 
and
    (3) All affiliates, including but not limited to a company's 
production, marketing, and refining arms.

[[Page 7471]]

    Lessor means an Indian tribe or individual Indian mineral owner 
that has entered into a lease.
    Like-quality oil means oil of a particular oil type.
    Location differential means an amount paid or received (whether in 
money or in barrels of oil) under an exchange agreement that results 
from differences in location between oil delivered in exchange and oil 
received in the exchange. A location differential may represent all or 
part of the difference between the price received for oil delivered and 
the price paid for oil received under a buy/sell exchange agreement.
    Marketable condition means lease products that are sufficiently 
free from impurities and otherwise in a condition that they will be 
accepted by a purchaser under a sales contract or transportation 
contract typical for disposition of production from the field or area.
    MMS means the Minerals Management Service of the Department of the 
Interior.
    Net means to reduce the reported sales value to account for 
transportation instead of reporting a transportation allowance as a 
separate entry on Form MMS-2014.
    NYMEX price means the average of the New York Mercantile Exchange 
(NYMEX) settlement prices for light sweet oil delivered at Cushing, 
Oklahoma, calculated as follows:
    (1) Sum the prices published for each day during the calendar month 
of production (excluding weekends and holidays) for oil to be delivered 
in the nearest month of delivery for which NYMEX futures prices are 
published corresponding to each such day; and
    (2) Divide the sum by the number of days on which those prices are 
published (excluding weekends and holidays).
    Oil means a mixture of hydrocarbons that existed in the liquid 
phase in natural underground reservoirs and remains liquid at 
atmospheric pressure after passing through surface separating 
facilities and is marketed or used as such. Condensate recovered in 
lease separators or field facilities is considered to be oil.
    Oil type means a general classification of oil that has generally 
similar chemical and physical characteristics. For example, oil types 
may include classifications such as New Mexico sour, Wyoming sweet, 
Wyoming asphalt sour, black wax, yellow wax, etc. The MMS will 
designate oil types for each designated area.
    Operating rights owner, also known as a working interest owner, 
means any person who owns operating rights in a lease subject to this 
subpart. A record title owner is the owner of operating rights under a 
lease until the operating rights have been transferred from record 
title (see Bureau of Land Management regulations at 43 CFR 3100.0-
5(d)).
    Person means any individual, firm, corporation, association, 
partnership, consortium, or joint venture (when established as a 
separate entity).
    Quality differential means an amount paid or received under an 
exchange agreement (whether in money or in barrels of oil) that results 
from differences in API gravity, sulfur content, viscosity, metals 
content, and other quality factors between oil delivered and oil 
received in the exchange. A quality differential may represent all or 
part of the difference between the price received for oil delivered and 
the price paid for oil received under a buy/sell agreement.
    Sale means a contract between two persons where:
    (1) The seller unconditionally transfers title to the oil to the 
buyer and does not retain any related rights such as the right to buy 
back similar quantities of oil from the buyer elsewhere;
    (2) The buyer pays money or other consideration for the oil; and
    (3) The parties' intent is for a sale of the oil to occur.
    Transportation allowance means a deduction in determining royalty 
value for the reasonable, actual costs of moving oil to a point of sale 
or delivery off the lease, unit area, or communitized area. The 
transportation allowance does not include gathering costs.
    WTI means West Texas Intermediate.
    You means a lessee, operator, or other person who pays royalties 
under this subpart.


Sec.  206.52  How do I calculate royalty value for oil that I or my 
affiliate sell(s) or exchange(s) under an arm's-length contract?

    (a) The value of oil under this section is the gross proceeds 
accruing to the seller under the arm's-length contract, less applicable 
allowances determined under Sec. Sec.  206.56, 206.57, and 206.59. If 
the arm's-length sales contract does not reflect the total 
consideration actually transferred either directly or indirectly from 
the buyer to the seller, you must value the oil sold as the total 
consideration accruing to the seller. Use this section to value oil 
that:
    (1) You sell under an arm's-length sales contract; or
    (2) You sell or transfer to your affiliate or another person under 
a non-arm's-length contract and that affiliate or person, or another 
affiliate of either of them, then sells the oil under an arm's-length 
contract.
    (b) If you have multiple arm's-length contracts to sell oil 
produced from a lease that is valued under paragraph (a) of this 
section, the value of the oil is the volume-weighted average of the 
total consideration established under this section for all contracts 
for the sale of oil produced from that lease.
    (c) If MMS determines that the value under paragraph (a) of this 
section does not reflect the reasonable value of the production due to 
either:
    (1) Misconduct by or between the parties to the arm's-length 
contract; or
    (2) Breach of your duty to market the oil for the mutual benefit of 
yourself and the lessor, MMS will establish a value based on other 
relevant matters.
    (i) The MMS will not use this provision to simply substitute its 
judgment of the market value of the oil for the proceeds received by 
the seller under an arm's-length sales contract.
    (ii) The fact that the price received by the seller under an arm's-
length contract is less than other measures of market price is 
insufficient to establish breach of the duty to market unless MMS finds 
additional evidence that the seller acted unreasonably or in bad faith 
in the sale of oil produced from the lease.
    (d) You must base value on the highest price that the seller can 
receive through legally enforceable claims under the oil sales 
contract. If the seller fails to take proper or timely action to 
receive prices or benefits to which it is entitled, you must base value 
on that obtainable price or benefit.
    (1) In some cases the seller may apply timely for a price increase 
or benefit allowed under the oil sales contract, but the purchaser 
refuses the seller's request. If this occurs, and the seller takes 
reasonable documented measures to force purchaser compliance, you will 
owe no additional royalties unless or until the seller receives monies 
or consideration resulting from the price increase or additional 
benefits. This paragraph (d)(1) does not permit you to avoid your 
royalty payment obligation if a purchaser fails to pay, pays only in 
part, or pays late.
    (2) Any contract revisions or amendments that reduce prices or 
benefits to which the seller is entitled must be in writing and signed 
by all parties to the arm's-length contract.
    (e) If you or your affiliate enter(s) into an arm's-length exchange 
agreement, or multiple sequential arm's-length exchange agreements, 
then you must value your oil under this paragraph.
    (1) If you or your affiliate exchange(s) oil at arm's length for 
WTI or equivalent

[[Page 7472]]

oil at Cushing, Oklahoma, you must value the oil using the NYMEX price, 
adjusted for applicable location and quality differentials under 
paragraph (e)(3) of this section and any transportation costs under 
Sec. Sec.  206.56, 206.57, and 206.59.
    (2) If you do not exchange oil for WTI or equivalent oil at 
Cushing, but exchange it at arm's-length for oil at another location 
and following the arm's-length exchange(s) you or your affiliate 
sell(s) the oil received in the exchange(s) under an arm's-length 
contract, then you must use the gross proceeds under your or your 
affiliate's arm's-length sales contract after the exchange(s) occur(s), 
adjusted for applicable location and quality differentials under 
paragraph (e)(3) of this section and any transportation costs under 
Sec. Sec.  206.56, 206.57, and 206.59.
    (3) You must adjust your gross proceeds for any location or quality 
differential, or other adjustments, you received or paid under the 
arm's-length exchange agreement(s). If MMS determines that any exchange 
agreement does not reflect reasonable location or quality 
differentials, MMS may adjust the differentials you used based on 
relevant information. You may not otherwise use the price or 
differential specified in an arm's-length exchange agreement to value 
your production.
    (4) If you or your affiliate exchange(s) your oil at arm's-length, 
and neither paragraph (e)(1) nor (e)(2) of this section applies, you 
must request that MMS establish a value for the oil based on relevant 
matters. After MMS establishes the value, you must report and pay 
royalties and any late payment interest owed based on that value.
    (f) You must also comply with Sec.  206.54.


Sec.  206.53  How do I determine value for oil that I or my affiliate 
do(es) not sell under an arm's-length contract?

    (a) The unit value of your oil not sold under an arm's-length 
contract is the volume-weighted average of the gross proceeds paid or 
received by you or your affiliate, including your refining affiliate, 
for purchases or sales under arm's-length contracts.
    (1) When calculating that unit value, use only purchases or sales 
of other like-quality oil produced from the field (or the same area if 
you do not have sufficient arm's-length purchases or sales of oil 
produced from the field) during the production month.
    (2) You may adjust the gross proceeds determined under paragraph 
(a) of this section for transportation costs under Sec. Sec.  206.56, 
206.57, and 206.59, as applicable, before including those proceeds in 
the volume-weighted average calculation.
    (3) If you have purchases away from the field(s) and cannot 
calculate a price in the field because you cannot determine the 
seller's cost of transportation that would be allowed under Sec. Sec.  
206.56, 206.57, and 206.59, you must not include those purchases in 
your weighted-average calculation.
    (b) Before calculating the volume-weighted average, you must 
normalize the quality of the oil in your or your affiliates' arm's-
length purchases or sales to the same gravity as that of the oil 
produced from the lease. Use the applicable gravity adjustment tables 
published on MMS's Web site (http://www.mrm.mms.gov) for the designated 
area and type of oil produced from the lease to normalize for gravity.

    Example to paragraph (b): Assume that a lessee, who owns a 
refinery and refines the oil produced from the lease at that 
refinery, purchases like-quality oil from other producers in the 
same field at arm's-length for use as feedstock in its refinery. 
Further assume that the oil produced from the lease that is being 
valued under this section is Wyoming general sour with an API 
gravity of 23.5[deg]. Assume that the refinery purchases at arm's 
length oil (all of which must be Wyoming general sour) in the 
following volumes of the API gravities stated at the prices and 
locations indicated:

10,000 bbl....................................    24.5[deg]   $34.70/bbl  Purchased in the field.
8,000 bbl.....................................    24.0[deg]   $34.00/bbl  Purchased at the refinery after the
                                                                           third-party producer transported it
                                                                           to the refinery, and the lessee does
                                                                           not know the transportation costs.
9,000 bbl.....................................    23.0[deg]   $33.25/bbl  Purchased in the field.
4,000 bbl.....................................    22.0[deg]   $33.00/bbl  Purchased in the field.
 

    Because the lessee does not know the costs that the seller of 
the 8,000 bbl incurred to transport that volume to the refinery, 
that volume will not be included in the volume-weighted average 
price calculation. Further assume that the gravity adjustment scale 
provides for a deduction of $.02 per \1/10\ degree API gravity below 
34[deg]. Normalized to 23.5[deg] (the gravity of the oil being 
valued under this section), the prices of each of the volumes that 
the refiner purchased that are included in the volume-weighted 
average calculation are as follows:

10,000 bbl....................................    24.5[deg]       $34.50  (1.0[deg] difference over 23.5[deg] =
                                                                           $.20 deducted).
9,000 bbl.....................................    23.0[deg]       $33.35  (0.5[deg] difference under 23.5[deg] =
                                                                           $.10 added).
4,000 bbl.....................................    22.0[deg]       $33.30  (1.5[deg] difference under 23.5[deg] =
                                                                           $.30 added).
 

    The volume-weighted average price is ((10,000 bbl x $34.50/bbl) 
+ (9,000 bbl x $33.35/bbl) + (4,000 bbl x $33.30/bbl)) / 23,000 bbl 
= $33.84/bbl. That price will be the value of the oil produced from 
the lease valued under this section.

    (c) If you demonstrate to MMS's satisfaction that paragraphs (a) 
and (b) of this section result in an unreasonable value for your 
production as a result of circumstances regarding that production, the 
MMS Director may establish an alternative valuation method.
    (d) You must also comply with Sec.  206.54.


Sec.  206.54  How do I fulfill the lease provision regarding valuing 
production on the basis of the major portion of like-quality oil?

    This section applies if your lease either has a major portion 
provision or provides for the Secretary to determine value. The MMS 
will presume that all Indian leases have at least one of these 
provisions unless you demonstrate otherwise.
    (a) When MMS will calculate a major portion value. The MMS will 
calculate a major portion value for each designated area for each type 
of oil produced from that area. The MMS will notify lessees by 
publishing these values in the Federal Register and making them 
available on MMS's Web site (http://www.mrm.mms.gov), as set forth in 
this section.
    (b) Designated areas. Each designated area includes all Indian 
leases in that area. The MMS will publish in the Federal Register and 
make available on MMS's Web site (http://www.mrm.mms.gov) a list of the 
lease number prefixes in each designated area. If in the future there 
are new area designations, MMS will publish them in the Federal 
Register and make them available on MMS's Web site (http://

[[Page 7473]]

www.mrm.mms.gov). The designated areas are:
    (1) Alabama-Coushatta;
    (2) Blackfeet Reservation;
    (3) Crow Reservation;
    (4) Fort Berthold Reservation;
    (5) Fort Peck Reservation;
    (6) Jicarilla Apache Reservation;
    (7) MMS-designated groups of counties in the State of Oklahoma;
    (8) Navajo Reservation;
    (9) Southern Ute Reservation;
    (10) Ute Mountain Ute Reservation;
    (11) Uintah and Ouray Reservation;
    (12) Wind River Reservation; and
    (13) Any other area that MMS designates.
    (c) Source of information. The MMS will calculate the major portion 
value using the values reported as arm's-length sales (which does not 
include values reported under Sec.  206.52(e)(4)) for production of 
each oil type from Indian leases in the designated area on Form MMS-
2014, Report of Sales and Royalty Remittance. In calculating the major 
portion value, MMS will not use any values reported under Sec.  206.53.
    (d) Calculation methodology. (1) The MMS will normalize the 
reported values to a common quality basis, adjusting for API gravity 
using applicable posted price gravity adjustment tables. The MMS also 
will adjust the reported values for reported transportation allowances. 
The MMS will array the normalized and adjusted values by oil type in 
order from the highest to the lowest, together with the corresponding 
volumes reported at those values.
    (2) The major portion value is the normalized and adjusted price in 
the array in paragraph (d)(1) of this section corresponding to 50 
percent (by volume) plus one barrel of the oil (starting from the 
bottom).
    (e) Example of how the methodology works. (1) For example, assume 
that reported sales volumes of the same oil type from the Indian leases 
in a designated area total 100,000 barrels. Further assume that this 
volume and the corresponding normalized and adjusted reported values 
are set out in an array as follows:

------------------------------------------------------------------------
                                                           Percentage of
                                           Price per bbl      volume
      Reported sales volume  (bbl)        normalized and  (Starting from
                                            adjusted to     the lowest
                                              40[deg]       unit value)
------------------------------------------------------------------------
17,109..................................          $25.50         100.000
21,485..................................           25.40          82.891
12,225..................................           25.30          61.486
21,150..................................           25.20          49.181
18,210..................................           25.10          28.031
9,821...................................           25.00           9.821
------------------------------------------------------------------------

    (2) Under paragraph (d)(2) of this section, MMS would begin at the 
lowest value in the array and would take away 50,000 barrels (50 
percent of the total sales of sweet oil from Indian leases in the 
designated area). The next barrel higher in the array is valued at 
$25.30. That value, $25.30/bbl, would be the major portion value. In 
this example, three lessees must pay the difference between their 
normalized and adjusted value and the major portion value, namely, the 
lessees whose normalized and adjusted reported values were $25.00, 
$25.10 and $25.20. The other three lessees had already reported and 
paid on a value equal to or greater than the major portion value and, 
therefore, would not owe additional royalties.
    (f) How to adjust initially reported values and pay any additional 
royalties due. (1) On Form MMS-2014, you must initially report and pay 
the value of production at the value determined under Sec.  206.52 or 
Sec.  206.53.
    (2) The MMS will determine the major portion value by oil type 
under this section and publish that value in the Federal Register and 
make that value available on MMS's Web site http://www.mrm.mms.gov. 
That value will be at the normalized gravity, and MMS will include the 
normalized gravity and the adjustment tables on the Web site. The Web 
site also will include a due date by which you must submit an amended 
Form MMS-2014 together with any additional royalty due, if you owe 
additional royalty as a result of the major portion calculation.
    (3) You must compare the major portion value to the value that you 
initially reported on Form MMS-2014, normalized and adjusted for 
gravity and transportation. If the major portion value is higher than 
the reported value, normalized and adjusted for gravity and 
transportation, you must calculate the difference and multiply the 
volume subject to royalty by the royalty rate. This is the additional 
royalty owed. You must submit an amended Form MMS-2014 and pay any 
additional royalty owed by the due date specified on the Web site.
    (4) Example. For example, assume that the lessee whose normalized 
and adjusted value in the array is $25.10 produced sweet oil with API 
gravity of 38.5 degrees. Further assume that the oil was subject to an 
adjustment scale that provides for a deduction of $.015 per \1/10\ 
degree below API gravity of 40[deg]. (This implies that the lessee's 
original reported value was $24.875 because it was \15/10\ths below 
40[deg].) When MMS publishes the major portion value on the Web site, 
normalized to 40[deg], the lessee would then compare the major portion 
value ($25.30/bbl) to the normalized and transportation-adjusted 
reported value ($25.10/bbl). The difference ($0.20/bbl) would be 
multiplied by the volume subject to royalty times the royalty rate to 
determine the additional royalty owed.
    (g) Late payment interest. Late payment interest will not begin to 
accrue under 30 CFR 218.54 on any underpayment based on any additional 
amount owed as a result of the higher major portion value until after 
the due date of your amended Form MMS-2014.
    (h) No changes to major portion value after publication. The MMS 
will not change the major portion value after it publishes that value 
in the Web site publication, unless an administrative or judicial 
decision requires MMS to make a change.
    (i) Additional reporting guidance. The MMS may specify, in the MMS 
Minerals Revenue Reporter Handbook or otherwise, additional guidance 
for reporting under this section and Sec. Sec.  206.52 and 206.53.


Sec.  206.55  What are my responsibilities to place production into 
marketable condition and to market the production?

    You must place oil in marketable condition and market the oil for 
the mutual benefit of yourself and the Indian lessor at no cost to the 
lessor, unless the lease agreement provides otherwise. If in the 
process of marketing the oil or placing it in marketable condition, 
your gross proceeds are reduced because services are performed on your 
behalf that would be your responsibility; and, if you valued the oil 
using your or your affiliate's gross proceeds (or gross proceeds 
received in the sale of oil received in exchange) under Sec.  206.52, 
you must increase value to the extent that your gross proceeds are 
reduced.


Sec.  206.56  What transportation allowances apply in determining the 
value of oil?

    (a) If you value oil under Sec.  206.52(a) or (b) based on the 
gross proceeds that you or your affiliate receive(s) from a sale at a 
point off the lease, unit, or communitized area where the oil is 
produced, MMS will allow a deduction, under Sec.  206.57 or Sec.  
206.59, as applicable, for the reasonable, actual costs to transport 
oil from the lease to the point off the lease, unit, or communitized 
area where the oil is sold at arm's length.
    (b) If you value oil under Sec.  206.52(e)(1) through (e)(3) 
because you or your affiliate enter into one or more arm's-length 
exchange agreements, MMS will allow a deduction, under Sec.  206.57 or 
Sec.  206.59, as applicable, for the reasonable, actual costs to 
transport the oil:

[[Page 7474]]

    (1) From the lease to a point where oil is given in exchange; and
    (2) If oil is not exchanged to Cushing, Oklahoma, from the point 
where oil is received in exchange to the point where the oil received 
in exchange is sold.
    (c) If you value oil under Sec.  206.53, MMS will allow a 
deduction, under Sec.  206.57 or Sec.  206.59, as applicable, for the 
reasonable, actual costs:
    (1) That you incur to transport oil that you or your affiliate 
sell(s), that is included in the weighted-average price calculation, 
from the lease to the point where the oil is sold; and
    (2) That the seller incurs to transport oil that you or your 
affiliate purchase(s), that is included in the weighted-average cost 
calculation, from the property where it is produced to the point where 
you or your affiliate purchase(s) it.
    (d) You may not deduct any costs of gathering as part of a 
transportation deduction or allowance.
    (e) Limits on transportation allowances. (1) Except as provided in 
paragraph (e)(2) of this section, your transportation allowance may not 
exceed 50 percent of the value of the oil as determined under Sec.  
206.52 before the deduction of allowances, or 50 percent of each price 
against which the transportation cost is deducted before the 
computation of the weighted average price used to calculate value under 
Sec.  206.53 of this part. You may not use transportation costs 
incurred to move a particular volume of production to reduce royalties 
owed on production for which those costs were not incurred.
    (2) You may ask MMS to approve a transportation allowance in excess 
of the limitation in paragraph (e)(1) of this section. You must 
demonstrate that the transportation costs incurred were reasonable, 
actual, and necessary. Your application for exception (using Form MMS-
4393, Request to Exceed Regulatory Allowance Limitation) must contain 
all relevant and supporting documentation necessary for MMS to make a 
determination. You may never reduce the royalty value of any production 
(or the price of particular production used in calculating the weighted 
average price under Sec.  206.53) to less than 1 percent of the value 
of the production (or the price used in the weighted average 
calculation) before the deduction of allowances.
    (f) Allocation of transportation costs. You must allocate 
transportation costs among all products produced and transported as 
provided in Sec. Sec.  206.56 or 206.57 of this part. You must express 
transportation allowances for oil as dollars per barrel.
    (g) Liability for additional payments. (1) If MMS determines that 
you took an excessive transportation allowance, then you must pay any 
additional royalties due, plus interest under 30 CFR 218.54.
    (2) If you or your affiliate net a transportation allowance rather 
than report it as a separate entry against the royalty value on Form 
MMS-2014, you will be assessed an amount up to 10 percent of the netted 
allowance, not to exceed $250 per lease per sales type code per sales 
period.
    (3) If you or your affiliate deduct a transportation allowance on 
Form MMS-2014 that exceeds 50 percent of the value of the oil 
transported without obtaining MMS's prior approval under paragraph 
(e)(2) of this section, you must pay interest on the excess allowance 
amount taken, up to the date you or your affiliate file an exception 
request that MMS approves. If you do not file an exception request, or 
if MMS does not approve your request, you must pay interest on the 
excess allowance amount taken from the date that amount is taken until 
the date you pay the additional royalties owed.


Sec.  206.57  How do I calculate a transportation allowance under an 
arm's-length transportation contract?

    (a) If you or your affiliate incur transportation costs under an 
arm's-length transportation contract, you may claim a transportation 
allowance for the reasonable, actual costs incurred as more fully 
explained in paragraph (b) of this section, except as provided in 
paragraphs (a)(1) and (a)(2) of this section and subject to the 
limitation in Sec.  206.56(e). You must be able to demonstrate that 
your or your affiliate's contract is at arm's length. You do not need 
MMS approval before reporting a transportation allowance for costs 
incurred under an arm's-length transportation contract.
    (1) If MMS determines that the contract reflects more than the 
consideration actually transferred either directly or indirectly from 
you or your affiliate to the transporter for the transportation, MMS 
may require that you calculate the transportation allowance under Sec.  
206.59, or may limit your allowance to the actual consideration, at 
MMS's sole discretion.
    (2) You must calculate the transportation allowance under Sec.  
206.59 if MMS determines that the consideration paid under an arm's-
length transportation contract does not reflect the reasonable value of 
the transportation due to either:
    (i) Misconduct by or between the parties to the arm's-length 
contract; or
    (ii) Breach of your duty to market the oil for the mutual benefit 
of yourself and the lessor.
    (A) The MMS will not use this provision to simply substitute its 
judgment of the reasonable oil transportation costs incurred by you or 
your affiliate under an arm's-length transportation contract.
    (B) The fact that the cost you or your affiliate incur in an arm's-
length transaction is higher than other measures of transportation 
costs, such as rates paid by others in the field or area, is 
insufficient to establish breach of the duty to market unless MMS finds 
additional evidence that you or your affiliate acted unreasonably or in 
bad faith in transporting oil from the lease.
    (b) You may deduct any of the actual costs you (including your 
affiliates) incur for transporting oil allowed under 30 CFR 206.110(b), 
except that for the cost of carrying inventory as line fill under 
paragraph (b)(4) of that section you must use the value calculated 
under Sec.  206.52 or Sec.  206.53, as applicable.
    (c) You may not deduct any costs that are not actual costs of 
transporting oil, including but not limited to, those identified in 
Sec.  206.110(c).
    (d) If your arm's-length transportation contract includes more than 
one liquid product, and the transportation costs attributable to each 
product cannot be determined from the contract, then you must allocate 
the total transportation costs to each of the liquid products 
transported.
    (1) Your allocation must use the same proportion as the ratio of 
the volume of each product (excluding waste products with no value) to 
the volume of all liquid products (excluding waste products with no 
value).
    (2) You may not claim an allowance for the costs of transporting 
lease production that is not royalty-bearing.
    (3) You may propose to MMS a cost allocation method on the basis of 
the values of the products transported. The MMS will approve the method 
unless it is not consistent with the purposes of the regulations in 
this subpart.
    (e) If your arm's-length transportation contract includes both 
gaseous and liquid g62 products, and the transportation costs 
attributable to each product cannot be determined from the contract, 
then you must propose an allocation procedure to MMS.
    (1) You may use your proposed procedure to calculate a 
transportation allowance until MMS accepts or rejects your cost 
allocation. If MMS rejects your cost allocation, you must amend your 
Form MMS-2014 for the months that you used the rejected method and pay 
any additional royalty and interest due.
    (2) You must submit your initial proposal, including all available 
data, within 3 months after first claiming the

[[Page 7475]]

allocated deductions on Form MMS-2014. If you do not submit your 
proposal, you may be subject to civil penalties.
    (f) If your payments for transportation under an arm's-length 
contract are not on a dollar-per-unit basis, you must convert whatever 
consideration is paid to a dollar-value equivalent.
    (g) If your arm's-length sales contract includes a provision 
reducing the contract price by a transportation factor, do not 
separately report the transportation factor as a transportation 
allowance on Form MMS-2014.
    (1) You may use the transportation factor in determining your gross 
proceeds for the sale of the product.
    (2) You must obtain MMS approval before claiming a transportation 
factor in excess of 50 percent of the base price of the product.


Sec.  206.58  What are my reporting requirements under an arm's-length 
transportation contract?

    You have the burden of demonstrating that your contract is arm's-
length. You must submit to MMS a copy of your arm's-length 
transportation contract(s) and all subsequent amendments to the 
contract(s) within 2 months of the date MMS receives your Form MMS-2014 
on which a transportation allowance is reported.


Sec.  206.59  How do I calculate a transportation allowance under a 
non-arm's-length transportation arrangement?

    (a) This section applies where you or your affiliate do not have an 
arm's-length transportation contract, including situations where you or 
your affiliate provide(s) your own transportation services. Calculate 
your transportation allowance based on your or your affiliate's 
reasonable, actual costs for transportation during the reporting period 
using the procedures prescribed in this section.
    (b) Your or your affiliate's actual costs include the costs allowed 
under Sec.  206.111, except that:
    (1) For the cost of carrying inventory as line fill under paragraph 
(b)(6)(ii) of that section you must use the value calculated under 
Sec.  206.52 or Sec.  206.53, as applicable; and
    (2) For purposes of paragraphs (h) and (j) of that section, use 
[THE EFFECTIVE DATE OF THE FINAL RULE] instead of June 1, 2000.


Sec.  206.60  What are my reporting requirements under a non-arm's-
length transportation arrangement?

    All transportation allowances deducted under a non-arm's-length or 
no-contract situation are subject to monitoring, review, audit, and 
adjustment. You must submit the actual cost information to support the 
allowance to MMS on Form MMS-4110, Oil Transportation Allowance Report, 
within 3 months after the end of the 12-month period to which the 
allowance applies.


Sec.  206.61  What must I do if MMS finds that I have not properly 
determined value?

    (a) If MMS finds that you have not properly determined value, you 
must:
    (1) Pay the difference, if any, between the royalty payments you 
made and those that are due, based upon the value MMS establishes; and
    (2) Pay interest on the difference computed under 30 CFR 218.54.
    (b) If you are entitled to a credit due to overpayment on Indian 
leases, see 30 CFR 218.53. The credit will be without interest.


Sec.  206.62  May I ask MMS for valuation guidance?

    You may ask MMS for guidance in determining value. You may propose 
a value method to MMS. Submit all available data related to your 
proposal and any additional information MMS deems necessary. MMS will 
promptly review your proposal and provide you with a non-binding 
determination of the guidance you requested.


Sec.  206.63  What are the quantity and quality bases for royalty 
settlement?

    (a) You must compute royalties on the quantity and quality of oil 
as measured at the point of settlement approved by BLM for the lease.
    (b) If you determine the value of oil under Sec. Sec.  206.52, 
206.53 or 206.54 of this subpart based on a quantity or quality 
different from the quantity or quality at the point of royalty 
settlement approved by the BLM for the lease, you must adjust the value 
for those quantity or quality differences.
    (c) You may not deduct from the royalty volume or royalty value 
actual or theoretical losses incurred before the royalty settlement 
point unless BLM determines that any actual loss was unavoidable.


Sec.  206.64  What records must I keep and produce?

    (a) On request, you must make available sales, volume, and 
transportation data for production you sold, purchased, or obtained 
from the designated area. You must make this data available to MMS, 
Indian representatives, or other authorized persons.
    (b) You must retain all data relevant to the determination of 
royalty value. Document retention and recordkeeping requirements are 
found at 30 CFR 207.5, 212.50, and 212.51. The MMS, Indian 
representatives, or other authorized persons may review and audit such 
data you possess, and MMS will direct you to use a different value if 
it determines that the reported value is inconsistent with the 
requirements of this subpart or the lease.


Sec.  206.65  Does MMS protect information I provide?

    The MMS will keep confidential, to the extent allowed under 
applicable laws and regulations, any data or other information that you 
submit that is privileged, confidential, or otherwise exempt from 
disclosure. All requests for information must be submitted under the 
Freedom of Information Act regulations of the Department of the 
Interior, 43 CFR part 2.

[FR Doc. 06-1285 Filed 2-10-06; 8:45 am]
BILLING CODE 4310-MR-P