[Federal Register Volume 72, Number 241 (Monday, December 17, 2007)]
[Rules and Regulations]
[Pages 71231-71245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-24318]


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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: Final rule.

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SUMMARY: The Minerals Management Service (MMS) is amending the existing 
regulations regarding valuation, for royalty purposes, of oil produced 
from Indian leases. These amendments will clarify and update the 
existing regulations.

DATES: Effective February 1, 2008.

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 final rule are John Barder of Minerals 
Revenue Management, MMS, Department of the Interior, and Geoffrey Heath 
of the Office of the Solicitor, Department of the Interior, Washington, 
DC.

SUPPLEMENTARY INFORMATION:

I. Background

    The MMS published a proposed rule in the Federal Register on 
February 13, 2006 (71 FR 7453), referred to in this rule as the 2006 
Indian Oil Proposed Rule or, simply, the proposed rule, that would 
amend the regulations governing the valuation for royalty purposes of 
crude oil produced from Indian leases. Before developing the proposed 
rule, MMS held a series of eight public meetings in March and June 2005 
to consult with Indian tribes and individual Indian mineral owners and 
to obtain information from interested parties. The intent of the 
proposed rulemaking was 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--in 
particular, the major portion provision. Because of the response from 
Indian tribes and industry to the proposed rule, MMS plans to convene a 
negotiated rulemaking committee that will make recommendations 
regarding the major portion provision in Indian tribal and allotted 
leases.
    For clarification, relevant rulemaking activity is listed below.

--------------------------------------------------------------------------------------------------------------------------------------------------------
           Publication date              Federal  Register  reference              Publication title                Referred to in this final rule as
--------------------------------------------------------------------------------------------------------------------------------------------------------
July 7, 2006..........................  71 FR 38545...................  Reporting Amendments Proposed Rule.....  2006 Reporting Amendments Proposed
                                                                                                                  Rule.
February 13, 2006.....................  71 FR 7453....................  Indian Oil Valuation Proposed Rule.....  2006 Indian Oil Proposed Rule.
March 10, 2005........................  70 FR 11869...................  Federal Gas Valuation Final Rule.......  2005 Federal Gas Final Rule.
                                                                        Public Workshop on Proposed Rule--
                                                                         Establishing Oil Value for Royalty Due
                                                                         on Indian Leases.
February 22, 2005.....................  70 FR 8556....................  (Proposed Rule of February 12, 1998 (63  2005 Establishing Oil Value for Royalty
                                                                         FR 7089) and Supplementary Proposed      Due on Indian Leases--Workshop.
                                                                         Rule of January 5, 2000 (65 FR 403 are
                                                                         withdrawn).
May 24, 2004 Effective August 1, 2004.  69 FR 29432...................  Federal Oil Valuation..................  2004 Federal Oil Final Rule Technical
                                                                        Final Rule Technical Amendment.........   Amendment.
May 5, 2004 Effective August 1, 2004..  69 FR 24959...................  Federal Oil Valuation..................  2004 Federal Oil Final Rule.
                                                                        Final Rule.............................
September 28, 2000....................  65 FR 58237...................  Establishing Oil Value for Royalty Due   2000 Indian Oil Proposed Rule.
                                                                         on Indian Leases: Proposed Rule.
March 15, 2000 Effective June 1, 2000-- 65 FR 14022...................  Establishing Oil Value for Royalty Due   2000 Federal Oil Final Rule.
 Amended 2004.                                                           on Federal Leases: Final Rule.
February 28, 2000.....................  65 FR 10436...................  Establishing Oil Value for Royalty Due   2000 Indian Oil Revised Supplementary
                                                                         on Indian Leases.                        Proposed Rule.
                                                                        Supplementary Proposed Rule and Notice
                                                                         of Extension of Comment Period.
January 5, 2000.......................  65 FR 403.....................  Establishing Oil Value for Royalty Due   2000 Indian Oil Supplementary Proposed
                                                                         on Indian Leases.                        Rule.
                                                                        Supplementary Proposed Rule............
August 10, 1999: Effective January 1,   64 FR 43506...................  Amendments to Gas Valuation Regulations  1999 Indian Gas Final Rule.
 2000.                                                                   for Indian Leases.
                                                                        Final Rule.............................
April 9, 1998.........................  63 FR 17349...................  Establishing Oil Value for Royalty Due   1998 Indian Oil Proposed Rule Comment
                                                                         on Indian Leases: Proposed Rule.         Period Extension.
                                                                        Extension of Public Comment Period.....
February 12, 1998.....................  63 FR 7089....................  Establishing Oil Value for Royalty Due   1998 Indian Oil Proposed Rule.
                                                                         on Indian Leases.
                                                                        Proposed Rule..........................
January 15, 1988......................  53 FR 1184....................  Part 3--Revision of Oil Product          1988 Oil Valuation Final Rule.
                                                                         Valuation Regulations and Related
                                                                         Topics.
                                                                        Final Rule.............................
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[[Page 71232]]

II. Comments on the Proposed Rule

    The MMS received comments from the following entities: Two Indian 
tribes, three industry trade associations, eight oil and gas producers, 
and one individual. The comments were generally not supportive of the 
changes outlined in the 2006 Indian Oil Proposed Rule. The most 
controversial topics were the proposed modification of Form MMS-2014, 
Report of Sales and Royalty Remittance, as part of the proposed major 
portion calculations, and the proposed transportation allowance 
changes.

A. Definitions

    The following chart summarizes the changes to definitions adopted 
in this final rule. The comments addressing the specific issues are 
summarized in the discussion that follows the chart.

                                     Changes to Definitions at 30 CFR 206.51
----------------------------------------------------------------------------------------------------------------
                                  Change proposed in 2006 Indian
           Definition                    Oil Proposed Rule                        This final rule
----------------------------------------------------------------------------------------------------------------
Affiliate......................  Add new definition..............  Adds new definition as proposed.
Area...........................  Revise definition...............  Not adopted as proposed.
Arm's-length contract..........  Revise definition...............  Adopts as proposed.
Designated area................  Add new definition..............  Not adopted as proposed.
Exchange agreement.............  Add new definition..............  Adds new definition as proposed.
Gross proceeds.................  Revise definition...............  Revises as proposed.
Indian tribe...................  Revise definition...............  Revises as proposed.
Individual Indian mineral owner  Add new definition..............  Adds new definition as proposed.
Lessee.........................  Revise definition...............  Revises proposed definition.
Lessor.........................  Add new definition..............  Adds new definition as proposed.
Like-quality lease products....  Eliminate.......................  Eliminates as proposed.
Like-quality oil...............  Replace and modify existing       Adds new definition as proposed.
                                  definition of Like-Quality
                                  Lease Products.
Load oil.......................  Eliminate.......................  Eliminates as proposed.
Location differential..........  Add new definition..............  Adds new definition as proposed.
Marketable condition...........  Revise definition...............  Revises proposed definition in light of
                                                                    comments.
Marketing affiliate............  Eliminate.......................  Eliminates as proposed.
Minimum royalty................  Eliminate.......................  Eliminates as proposed.
Net profit share...............  Eliminate.......................  Eliminates as proposed.
Net-back method................  Eliminate.......................  Eliminates as proposed.
Oil............................  Revise definition...............  Revises as proposed.
Oil shale......................  Eliminate.......................  Eliminates as proposed.
Oil type.......................  Add new definition..............  Not adopted as proposed.
Operating rights owner.........  Add new definition..............  Adds new definition as proposed.
Posted price...................  Eliminate.......................  Eliminates as proposed.
Quality differential...........  Add new definition..............  Adds new definition as proposed.
Selling arrangement............  Eliminate.......................  Not eliminated as proposed.
Tar sands......................  Eliminate.......................  Eliminates as proposed.
----------------------------------------------------------------------------------------------------------------

    In the 2006 Indian Oil Proposed Rule, MMS proposed to add a 
definition of the term affiliate and revise the definition of arm's-
length contract in Sec.  206.51 to conform to the 2004 Federal Oil 
Final Rule and to align the rule with the court's decision in National 
Mining Association v. Department of the Interior, 177 F.3d 1 (DC Cir. 
1999).
    Comment: The MMS received one comment regarding the proposed change 
to the definition of affiliate. The industry association commenter 
stated that ``[o]pposing economic interest is not a defined term, and 
MMS does not state any factors that will be considered in determining 
whether parties to a contract have opposing economic interest. MMS 
should define the term `opposing economic interests' and incorporate 
determining factors from the Vastar decision in the definition.''
    MMS Response: The MMS examines whether two parties have opposing 
economic interests on a case-by-case basis under existing precedents. 
We have included the undefined phrase ``opposing economic interest'' in 
our definition of ``arm's-length contract'' since the oil royalty 
valuation rules were first issued in 1988.
    The definition of ``arm's-length contract'' as originally proposed 
in 1987 did not include the requirement for ``opposing economic 
interests.'' Our 1987 proposal defined ``arm's-length contract'' simply 
to include ``a contract or agreement between independent, nonaffiliated 
persons.'' 52 FR 1858 (January 15, 1987). However, at the urging of a 
state commenter, MMS included the ``opposing economic interest'' 
concept in the final rule in 1988. The state commenter stressed that 
even though the inclusion of additional criteria such as ``adverse 
economic interest'' would increase subjectivity, ``the appeals process 
is in place to provide protection against arbitrary decisions.''
    The 1988 rule established the basic principles of MMS royalty 
valuation that have not changed over time. See Revision of Oil Product 
Valuation Regulations and Related Topics, 53 FR 1184 (Jan. 15, 1988) 
(``Although the parties may have common interests elsewhere, their 
interests must be opposing with respect to the contract in issue. The 
general presumption is that persons buying or selling products from 
Federal and Indian leases are willing, knowledgeable, and not obligated 
to buy or sell.'') We affirm those principles today.
    As was predicted by the commenter in 1988, the appeals process has 
not only provided protection against arbitrary decisions, but it has 
also resulted in administrative precedent interpreting the phrase 
``opposing economic interest.'' For example, through appeals such as 
Vastar Resources, Inc., 167 IBLA 17 (2005), the Department of the 
Interior has determined that ``opposing economic interests'' need not 
be absolute in order to meet the definition of an ``arm's-length 
contract.'' Accordingly, MMS will focus on the parties' economic 
interests in the specific contract at issue,

[[Page 71233]]

and the fact that the parties may have common interests elsewhere does 
not necessarily negate their ability to have opposing economic 
interests with respect to the contract under view. Further, opposing 
economic interests are rarely absolute even within a single contract. 
For example, between two parties to an oil and gas lease, some economic 
interests are common and some are opposed. When oil is taken in kind, 
the common economic interest of production may appear to outweigh the 
remaining opposing economic interests. In Vastar, the Interior Board of 
Land Appeals considered objective factors such as the contentious 
negotiations leading to the execution of the contract, the terms of the 
contract, and the parties' subsequent conduct as evidence of the 
parties' opposing economic interests regarding the particular sales 
contract.
    For purposes of interpreting the definition of ``opposing economic 
interests,'' MMS will follow the decisions of the Interior Board of 
Land Appeals until further rulemaking prescribes otherwise.
    This final rule adopts the proposed definitions of affiliate and 
arm's-length contract. The MMS believes the existing definitions at 
Sec.  206.51, should be amended to be consistent with the DC Circuit's 
decision in National Mining Association v. Department of the Interior, 
177 F.3d 1 (DC Cir. 1999). The new definition of affiliate and the 
clarification to the definition of arm's-length contract will also make 
the definitions consistent with the 2004 Federal Oil Final Rule.
    As we explained in amending the definition of ``affiliate'' in the 
Federal crude oil valuation rule promulgated on March 15, 2000 
(effective June 1, 2000):

    In National Mining Association v. Department of the Interior, 
177 F.3d 1 (DC Cir. 1999) (decided May 28, 1999), the United States 
Court of Appeals for the District of Columbia Circuit addressed the 
Office of Surface Mining Reclamation and Enforcement's (OSM's) so-
called ``ownership and control'' rule at 30 CFR 773.5(b). That rule 
presumed ownership or control under six identified circumstances. 
One of those circumstances was where one entity owned between 10 and 
50 percent of another entity. The court found that OSM had not 
offered any basis to support the rule's presumption ``that an owner 
of as little as ten per cent of a company's stock controls it.'' 177 
F.3d at 5. The court continued, ``While ten percent ownership may, 
under specific circumstances, confer control, OSM has cited no 
authority for the proposition that it is ordinarily likely to do 
so.'' Id. * * *
    In the final rule, MMS is revising the definition of 
``affiliate'' in light of the National Mining Association decision. 
In the event of ownership or common ownership of between 10 and 50 
percent, paragraph (2) of the definition in the final rule, instead 
of creating a presumption of control, identifies a number of factors 
that MMS will consider in determining whether there is control under 
the circumstances of a particular case.

    65 FR 14022, 14039 (Mar. 15, 2000). We adopt the same amendment 
here for Indian leases. Thus, the final rule replaces the presumption 
of control (and the consequent presumption of a non-arm's-length 
relationship) in the current rule, in the event of ownership or common 
ownership of 10 through 50 percent of the voting stock, with a case-by-
case examination of the circumstances.
    We emphasize that MMS will not presume control in the event of 
ownership or common ownership of 10 through 50 percent. MMS anticipates 
that in considering the factors identified in paragraph (2) of the 
definition, the facts of a particular case would demonstrate control 
(and therefore affiliation) only in exceptional circumstances. MMS 
anticipates that the facts will show that the relationship between 
corporate entities with minority ownership or common ownership is an 
arm's-length relationship in the vast majority of cases. MMS presumes 
in the absence of other evidence that transactions between corporate 
entities with minority ownership or common ownership are undertaken in 
good faith. The applicable rule is generally expressed in State Public 
Utilities Commission ex rel. Springfield v. Springfield Gas and 
Electric Company, 291 Ill. 209, 234.
    Whether a contract or arrangement between the lessee and its 
purchaser should be regarded as arm's length or non-arm's length does 
not depend on whether the lease is a Federal lease or an Indian lease.
    The MMS proposed to change the definition of area as part of the 
proposed major portion value calculation changes. This final rule does 
not include the proposed change to the definition of area. That term is 
still used in the major portion valuation provisions, which remain 
unchanged in this final rule for the reasons explained below. 
Therefore, the definition of area at Sec.  206.51 is retained.
    This final rule does not include the proposed definition of 
designated area because, as explained below, this final rule does not 
adopt the proposed major portion valuation provisions.
    This final rule adopts the proposed definition of exchange 
agreement, which is used in the new valuation provisions at Sec.  
206.52(e).
    This final rule includes the proposed changes to the definition of 
gross proceeds. This change is consistent with the 2004 Federal Oil 
Final Rule and makes helpful technical clarifications. There were no 
comments on this proposed change.
    This final rule adopts the proposed definitions of Indian tribe and 
individual Indian mineral owner. The new wording clarifies that this 
rule applies to Indian tribes for whom the U.S. holds a mineral in 
trust or to individual Indians who hold title to a mineral subject to a 
restriction against alienation. This is more specific than the former 
reference to lands held in trust or subject to a restriction against 
alienation.
    This final rule adopts the proposed definitions of lessee and 
operating rights owner, except that the final rule does not adopt 
clause (3) of the proposed definition of ``lessee.'' With one 
exception, the changes in wording that are adopted are technical 
corrections and clarifications.
    As the Court noted in Fina Oil and Chemical Corp. v. Norton, 332 
F.3d 672 (DC Cir. 2003), regarding gross proceeds and the definition of 
``lessee,'' the term ``lessee'' was defined by Federal statute as ``any 
person to whom the United States, an Indian tribe, or an Indian 
allottee issues a lease, or any person who has been assigned an 
obligation to make royalty or other payments required by the lease.'' 
Public Law No. 97-451 Sec.  3(7), 96 Stat. 2447, 2449 (amended in 1996 
to read ``any person to whom the United States issues an oil and gas 
lease or any person to whom operating rights in a lease have been 
assigned''), codified at 30 U.S.C. 1702(7). The 1988 regulations 
followed this statutory definition. In the Fina case, the court found 
that MMS improperly sought to use a wholly-owned subsidiary's arm's-
length resale proceeds as the measure of the lessee's gross proceeds in 
conflict with the regulation's plain language. (Under the 1988 
valuation rules, the affiliate's resale proceeds were used as value 
only if the affiliate was a ``marketing affiliate,'' defined as an 
affiliate of the lessee whose function was to acquire only the lessee's 
production and market that production. The royalty value of oil 
transferred non-arm's length to the marketing affiliate was the 
affiliate's gross proceeds, provided the marketing affiliate sold the 
oil at arm's length.) The Fina court suggested that if MMS believes 
that basing value on the intra-corporate transfer is too favorable to 
producers, it should amend the regulations through notice-and-comment 
rulemaking, not under the

[[Page 71234]]

guise of interpretation. MMS is doing so in this final rule in the 
revised 30 CFR 206.52(a).
    In this respect, this rule is making the same change made in the 
Federal crude oil valuation rule in 2004 at 30 CFR 206.102(a). In many 
respects, this final Indian oil valuation rule follows the same 
organization and structure as the Federal oil valuation rule 
promulgated on March 15, 2000, as amended May 5, 2004. The final 
Federal oil valuation rule adopted in March 2000 did not distinguish 
between ``marketing affiliates,'' as defined in 1998, and other 
affiliates, because MMS adopted an altogether new valuation approach. 
That is, the value of oil produced from a Federal lease and transferred 
to any affiliate is now determined by the affiliate's ultimate 
disposition of that oil or, at the lessee's option under certain 
conditions, at an index-based value or other applicable measure. The 
definition of ``marketing affiliate'' therefore was removed from the 
Federal oil valuation rule.
    In the Indian lease context, MMS did not propose, and this final 
rule does not include, an index-based valuation option because for the 
vast majority of Indian leases, it is either impractical or impossible 
to derive reliable adjustments for location and quality between the 
lease and a market center with reliable published index prices. 
Further, in view of the lower volumes and number of transactions 
involved for most Indian leases, such an option would serve little 
purpose. As explained elsewhere in this preamble, the final rule simply 
adopts the proposal to replace the ``benchmarks'' originally 
promulgated in 1988, which have proven to be difficult to apply in 
practice, with the first arm's-length sale (minus any transportation 
costs) as the basis of value in the event of a non-arm's-length 
transfer by the lessee, and where the oil is sold at arm's-length 
before refining--a rare circumstance in the context of Indian leases 
that produce crude oil.
    Since the general valuation approach adopted today eliminates the 
``marketing affiliate'' distinction by focusing on the first arm's-
length sale, it is appropriate that the definition of ``marketing 
affiliate'' be removed from these regulations. However, it does not 
follow that the definition of ``lessee'' needs to be amended. Moreover, 
MMS has written this rule in plain English format, using the term 
``you'' to mean a lessee, operator, or other person who pays royalties 
under this subpart. In all, particularly in light of the removal of the 
definition of ``marketing affiliate,'' MMS is adopting the definition 
of ``lessee'' as proposed without proposed clause (3) incorporating 
affiliates. As the term ``lessee'' is used throughout the final rule, 
it either refers to the royalty payor or is specifically distinguished 
from the term ``affiliate.'' This change continues to support the 
general valuation approach adopted today and is consistent with 
statutory interpretation principles set out in United States v. 
Bestfoods, 524 U.S. 51, 61 (1998).
    Currently, there is no definition of the term lessor in any of the 
Indian valuation regulations. Because this term is used in numerous 
places in the regulations, MMS proposed to add a definition in the 2006 
Indian Oil Proposed Rule. This final rule adopts the proposed 
definition of lessor.
    This final rule does not include the proposed definition of oil 
type because the final rule does not adopt the proposed major portion 
provisions. As explained further below, MMS plans to refer the major 
portion issue to a negotiated rulemaking committee. In this final rule, 
the term like-quality lease products will be changed to like-quality 
oil, and the reference to similar legal characteristics in the current 
definition of like-quality lease products will be deleted. The term 
like-quality lease products is not used in the regulations governing 
Indian oil valuation at Sec. Sec.  206.50 through 206.55. The 
definition at Sec.  206.51 is identical to the definitions in the 2005 
Federal Gas Final Rule and 1999 Indian Gas Final Rule (see Sec. Sec.  
206.151 and 206.171). The existing regulations at Sec.  206.51 and the 
changes made in this final rule, however, refer to like-quality oil; 
and this final rule therefore will define that term. The existing 
definition refers to ``similar chemical, physical, and legal 
characteristics.'' Crude oil has not been price-controlled in the last 
25 years, and there are no legal classifications of crude oil that have 
any bearing on royalty valuation issues. We therefore have deleted the 
reference to similar legal characteristics.
    This final rule includes the proposed definitions of location 
differential and quality differential because those terms are used in 
the provisions governing valuation of oil disposed of under arm's-
length exchange agreements.
    In the 2006 Indian Oil Proposed Rule, MMS proposed 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.

    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.

    Summary of Comments: Three industry associations commented on this 
proposed change. With respect to the proposed change in the definition 
of marketable condition to add a reference to transportation contracts, 
one industry association said:

    We do accept that MMS has the authority to require the lessee to 
put the oil in the condition that contracts for the sale and 
purchase of oil typical in a field or area require, or to pay MMS on 
the value that oil in such condition would realize. * * *
    We believe it is clear that it would not be reasonable for a 
producer of sour oil on the outer continental shelf to be required 
to sweeten oil simply because the pipeline in the area happens to be 
unwilling to transport any sour oil. Similarly, if oil is of a 
viscosity that allows it to be transported by truck, but which is 
too viscous to be transported by the local pipeline without 
blending, blending is not needed to put the oil in marketable 
condition. The oil is marketable in exactly the form it is in. It is 
acceptable to the party who will ultimately use it. * * *
* * * * *
    [W]e strongly disagree with the proposal to require a lessee to 
meet the requirements of transportation contracts at no cost to the 
lessor. MMS has given no reasons for this proposed change and we 
believe that it is clear that the requirements of transportation 
contracts are different in kind from the requirements of sales 
contracts and that such costs are costs associated with 
transportation and should be deductible.

    Another industry association opposes the proposed change to the 
definition of marketable condition because, in the association's view, 
it arbitrarily classifies certain deductible transportation costs as 
nondeductible costs of placing production in marketable condition. The 
third commenting industry association stated that it did not understand 
the proposed change.
    MMS Response: The marketable condition rule has always required 
lessees to remove basic sediment and water to the level required for 
the relevant pipeline. There appears to be no controversy in this 
respect. It is not our intention to require a lessee to sweeten sour 
oil at its own expense simply because a particular pipeline does not 
accept sour oil and the marketable condition rule has never been 
interpreted to impose such a requirement.
    MMS is not adopting the proposed change to the definition of 
``marketable condition'' in this final rule because it

[[Page 71235]]

is not necessary to do so, particularly in the context of crude oil 
production and sales. MMS will continue to use the existing definition, 
which is the same as the definition used in the Federal oil valuation 
rule. MMS continues to follow the marketable condition principle set 
out in United States v. General Petroleum Corp. of California, 73 
F.Supp. 225, aff'd, Continental Oil Co. v. United States, 184 F.2d 802 
(9th Cir. 1950).
    This final rule eliminates the definitions of the terms load oil, 
minimum royalty, net profit share, oil shale, and tar sands because 
none of those terms is used either in the existing regulations 
governing Indian oil valuation at Sec. Sec.  206.51 through 206.55 or 
in this final rule. This final rule also deletes the last sentence of 
the existing definition of oil, because neither the existing Sec.  
206.51 definition nor this final rule refers to or uses the term tar 
sands.
    This final rule also eliminates the definitions of marketing 
affiliate, net-back method, and posted price because the regulations no 
longer contain those terms.
    This final rule retains the definition of selling arrangement in 
the existing Sec.  206.51, which the 2006 Indian Oil Proposed Rule 
would have eliminated, because the transportation allowance provisions 
of the existing regulations at Sec.  206.55 are not changed in this 
final rule, as explained below. Those provisions use the term selling 
arrangement. The MMS recognizes that payors no longer report royalties 
or allowances by selling arrangement. The MMS published the 2006 
Reporting Amendments Proposed Rule that would amend the transportation 
allowance rules and eliminate that term. However, a final rule has not 
been published. Therefore, MMS has not eliminated the term selling 
arrangement in this final rule.

B. General Valuation Approach

    The 2006 Indian Oil Proposed Rule first analyzed where oil is 
produced from Indian leases and how it is marketed. Among other things, 
the discussion in the preamble to the 2006 Indian Oil Proposed Rule 
noted that the overwhelming majority of crude oil produced from Indian 
leases is reported as being sold at arm's length at the lease. There 
are relatively few non-arm's-length dispositions of oil reported and 
only one situation in which the lessee or its affiliate refines oil 
produced from the lessee's leases. In all other instances, it appears 
that oil is sold at arm's length at some point before it is refined. 
There are also very few instances in which lessees are reporting 
transportation allowances. At the present time, only two lessees of 
Indian leases are reporting transportation allowances for crude oil. 
One of those involves a non-arm's-length transportation arrangement. 
Currently, one of the major producing tribes takes more than 90 percent 
of its royalty oil in-kind.
    In addition, Indian tribal and allotted leases are distributed 
geographically much differently than Federal leases, and oil produced 
from Indian leases is marketed much differently than oil produced from 
Federal leases. Except for the possibility of some oil sold in 
Oklahoma, which accounts for only about 10 percent of the oil sold from 
Indian leases, oil produced from Indian leases apparently does not flow 
to, and is not exchanged to, Cushing, Oklahoma, where New York 
Mercantile Exchange (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, almost all the oil sold from Indian leases is reported to MMS 
as sold at arm's length.
    In light of these facts, and in contrast to the earlier 1998 Indian 
Oil Proposed Rule Comment Period Extension and the 2000 Indian Oil 
Supplementary Proposed Rule, in the 2006 Indian Oil Proposed Rule, MMS 
proposed not 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 
proposed in the 2006 Indian Oil Proposed Rule to value oil at the gross 
proceeds the lessee or its affiliate receives in an arm's-length sale. 
In the event a lessee first transfers its oil to an affiliate and the 
oil is sold at arm's length before being refined, MMS proposed to use 
the arm's-length sale by the affiliate as the basis for royalty 
valuation. In addition to the fact that the first arm's-length sale is 
the best measure of the value of the oil, the proposed approach also 
would resolve the issue created by the DC Circuit's interpretation of 
the gross proceeds rule and the term lessee in the Federal gas royalty 
valuation rules in Fina Oil and Chemical Corp. v. Norton, supra.
    In the rare situations in which the sale occurs away from the 
lease, the 2006 Indian Oil Proposed Rule provided for transportation 
allowances. The MMS also proposed to specify that if a lessee sells oil 
produced from a lease under multiple arm's-length contracts instead of 
just one contract, the value of the oil would be the volume-weighted 
average of the total consideration for all contracts for the sale of 
oil produced from that lease.
    Further, in the event that the lessee or its affiliate enters into 
one or more arm's-length exchanges, and, 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.
    Finally, if the lessee transports the oil produced from the lease 
to its own or its affiliate's refinery, the 2006 Indian Oil Proposed 
Rule 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.
    Comment: The principal comment received regarding the general 
valuation approach described above was from an Indian tribe. The tribe 
would prefer that MMS adopt the 2000 Indian Oil Supplementary Proposed 
Rule that MMS withdrew in February 2005 in the 2005 Establishing Oil 
Value for Royalty Due on Indian Leases--Workshop Federal Register 
notice. Failing that, the tribe would prefer that MMS continue to value 
its oil under the existing regulations at Sec. Sec.  206.50 through 
206.55. The tribe's comments focus on the unreliability of posted 
prices and the consequent prior proposals to look to NYMEX or spot 
market index values. The tribe argued that ``MMS does not describe the 
`environment' that it

[[Page 71236]]

believes justifies continuing its gross proceeds/posted prices 
methodology. It provides absolutely no findings of how the environment 
has changed from the year 2000 to the present year, and how this change 
justifies its policy reversal.'' The tribe further asks, ``Why does MMS 
cite a high percentage of arm's-length transactions as a justification 
for never using market pricing benchmarks?'' None of the industry 
commenters expressed any objection to using the gross proceeds derived 
from the affiliate's arm's-length resale as the measure of value if the 
lessee first transfers oil to an affiliate.
    MMS Response: The MMS agrees that posted prices are not a reliable 
measure of value in the current market environment. Contrary to these 
comments, the 2006 Indian Oil Proposed Rule does not rely on posted 
prices. Whether a sales price happens to be established with reference 
to a posted price in any particular case is irrelevant if the contract 
was negotiated at arm's length. The 2006 Indian Oil Proposed Rule would 
not establish value with reference to posted prices independent of 
actual gross proceeds. The tribe appears to object to using arm's-
length gross proceeds if the price set in an arm's-length contract 
happens to refer to or be based on a posted price. However, it does not 
explain why the negotiated arm's-length gross proceeds derived by a 
lessee or its affiliate is an improper or insufficient measure of 
value.
    Further, the tribe's apparent preference for use of NYMEX or spot 
market index prices overlooks the fact that oil produced from Indian 
leases in the San Juan Basin is not generally transported or exchanged 
to Cushing, Oklahoma, or to another market center with an established 
spot market price. The tribe's comments thus overlook the consequent 
difficulty in determining reliable location and quality differentials 
that would be essential in using NYMEX or spot market index prices as a 
basis for valuation.
    Comment: With respect to oil that is exchanged for other oil under 
exchange agreements, the tribe commented:

    Under the law [i.e., the 1988 rules], the Nation's royalty is to 
be a share of the gross proceeds from the sale of oil from Navajo 
leases. In the 1988 Rule, MMS determined that the value of tribal 
oil for royalty purposes could reasonably be calculated using a 
company's actual gross proceeds based on posted prices. * * * 
Instead the companies entered into elaborate transfer and exchange 
agreements with affiliates, which allowed the companies to sell oil 
produced from Navajo leases for prices that were significantly 
higher than a company's posted price * * * the Nation's royalty 
share did not reflect the premium prices the companies received for 
Navajo oil.

    The tribe further comments:

    Simply put, MMS has forgotten why it sought to amend its 
valuation policies beginning with its draft rule in 1997. And those 
reasons are as valid today as they were in 1997: To eliminate the 
practices of the oil and gas industry to undervalue production 
through artificially posted prices for oil at the wellhead, when oil 
is actually exchanged/ transferred and/or valued at other locations 
to the benefit of oil companies.

    MMS Response: The 2006 Indian Oil Proposed Rule addresses the 
commenter's concern regarding exchange agreements. Under the proposed 
rule, any ``premium'' realized through an arm's-length exchange would 
be captured in the royalty value because value would be based on the 
gross proceeds derived from an arm's-length sale of the oil received in 
exchange (unless the oil is exchanged to Cushing, Oklahoma). If oil is 
first exchanged not at arm's length, i.e., with an affiliate, the 
proposed rule would require valuing the oil on the basis of the 
affiliate's arm's-length resale price in any event.
    Comment: One industry association said that it ``supports the use 
of comparable purchases and sales from the same field or area in the 
situation where the lessee refines its own oil, and the exclusion of 
off-lease purchases that cannot be normalized.''
    MMS Response: No commenter expressed objections to using 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 area, adjusted for transportation 
costs, if the lessee or the lessee's affiliate refines the lessee's 
oil.
    This final rule therefore adopts the 2006 Indian Oil Proposed Rule 
approach to replace the ``benchmarks'' currently outlined at Sec.  
206.52(c) for valuing oil not sold at arm's length. If such oil is sold 
before being refined, value will be based on the affiliate's arm's-
length resale price. If the lessee or its affiliate refines the oil 
without an arm's-length sale, value will be based on the volume-
weighted average of the gross proceeds paid or received for arm's-
length purchases and sales of other like-quality oil produced from the 
same field or area.
    Further, by adopting the proposed provisions for valuing production 
disposed of through arm's-length exchange agreements, this final rule 
ensures that any ``premium'' realized in the sale of oil received in 
exchange will be included in the royalty value. This final rule 
therefore addresses the tribe's comment that MMS should ``close a 
loophole that allows the oil companies to circumvent congressional 
intent and MMS's rules.''

C. Major Portion Valuation

    The 2006 Indian Oil Proposed Rule would have made a number of 
changes to the major portion valuation provisions of the rule. The 
proposed rule would have used values reported on Form MMS-2014 for 
arm's-length sales (and affiliate's arm's-length resales) of Indian 
oil, and values reported for oil taken in kind, produced from a 
designated area that MMS would identify. Values reported for oil that 
is refined without being sold at arm's length would not have been 
included in the calculation. The proposed rule would not have changed 
the percentile at which the major portion value is determined, i.e., 
the 50th percentile by volume plus one barrel of oil.
    Under the 2006 Indian Oil Proposed Rule, to normalize reported 
values for each oil type produced from the designated area to a common 
quality basis, MMS would have adjusted for API gravity using applicable 
posted price gravity adjustment tables. The MMS would have calculated 
separate major portion values for different oil types because the lease 
provision expressly refers to ``like-quality'' oil. The MMS would have 
designated oil types that are produced from each designated area.
    To obtain the information necessary to make these calculations and 
adjustments, the 2006 Indian Oil Proposed Rule would have required the 
royalty payors to report API gravity and oil type on Form MMS-2014. The 
MMS then would have arrayed 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 the 50th percentile by volume plus one barrel 
of oil, starting from the bottom.
    Under the 2006 Indian Oil Proposed Rule, lessees initially would 
have reported on Form MMS-2014 the value of production at the value 
determined under the other provisions of the rule and would pay royalty 
on that value. The MMS then would have calculated the major portion 
values and notified lessees of the major portion values by publishing a 
notice in the Federal Register and making them available on the MMS Web 
site, together with the normalized gravity and the adjustment

[[Page 71237]]

tables. The lessee then would have compared 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 were higher 
than the value initially reported, normalized and adjusted for gravity 
and transportation, the lessee would have had to submit an amended Form 
MMS-2014, reporting the value as the major portion value, and pay any 
additional royalty owed.
    Comments: The majority of the comments MMS received on the 2006 
Indian Oil Proposed Rule addressed the major portion issue. Both of the 
Indian tribal commenters and all the industry commenters opposed the 
proposed changes, but for different reasons.
    In general, the tribal commenters believed that the percentile at 
which the major portion should be measured should be consistent with 
the Indian gas royalty valuation provisions (i.e., the 25th percentile 
starting from the top of the array, rather than the 50th percentile 
plus one unit of production starting from the bottom of the array). The 
tribal commenters also argued that the major portion calculation should 
not be limited to Indian leases in a ``designated area.'' One tribal 
commenter argued that MMS should retain the existing reference to a 
``field,'' and include all Indian, Federal, state, and private leases 
that may be within the field. The other tribal commenter argued that 
the calculation either should be expanded to include at least Federal 
leases outside the designated area or that the designated area should 
be expanded to include Federal leases in the area. The tribal 
commenters supported the concept of normalizing oil prices to a uniform 
quality before calculating the major portion value.
    Industry commenters vigorously opposed the proposed requirements to 
report oil gravity and type. They also opposed any expansion of a 
designated area to include Federal leases, particularly because the 
requirement to report oil gravity and type would extend to those 
Federal leases identified as being within a designated area. The 
industry commenters asserted that the systems changes that these 
requirements would necessitate, including both programming changes and 
the development of different reporting systems for Federal and Indian 
leases, would be prohibitively expensive and out of proportion to any 
difference in royalty value that might result. One industry association 
also argued that including Federal leases in the major portion 
calculation would result in application to those Federal leases certain 
records retention requirements that now apply only to Indian leases, 
causing further disruptions to lessees' recordkeeping and systems 
operations. Industry commenters agreed with retaining the 50th 
percentile by volume plus one barrel of oil as the measure of what 
constitutes the major portion and opposed any suggestion to change that 
measure to a higher level.
    MMS Response: There appears to be almost no issue regarding major 
portion valuation on which the tribal and industry commenters agree, 
and none of the commenters support the major portion provisions of the 
proposed rule. As a consequence, MMS has decided not to promulgate any 
amendment to the current major portion provisions at the existing Sec.  
206.52(a)(2) in this final rule and to convene a negotiated rulemaking 
committee to consider all aspects of major portion valuation.
    Because of the way the amended valuation provisions for arm's-
length sales and non-arm's-length dispositions are codified, paragraphs 
(a)(2)(i) and (ii) of the existing Sec.  206.52 are redesignated in 
this final rule as a new Sec.  206.54(a) and (b).

D. Transportation Allowances

    The MMS made several proposals regarding transportation allowances 
in the 2006 Indian Oil Proposed Rule. If the transportation arrangement 
is at arm's length, the proposed rule would incorporate the provisions 
of the 2000 Federal Oil Final Rule, as amended in 2004, in calculating 
that allowance. That allowance is based on the actual cost paid to an 
unaffiliated transportation provider. For arm's-length transportation 
allowances, MMS also proposed to eliminate the requirement at Sec.  
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 proposed change mirrors the elimination of the 
requirement to file the analogous Form MMS-4295 for arm's-length 
transportation allowances under the 1999 Indian Gas Final Rule.
    For non-arm's-length transportation arrangements, the lessee would 
have to calculate its actual costs. Under the 2006 Indian Oil Proposed 
Rule, Form MMS-4110 would 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 proposal also mirrors the change made in the 1999 Indian Gas Final 
Rule at Sec.  206.178(b)(1)(ii).
    The MMS also proposed 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 Final 
Rule.
    The 2000 Federal Oil Final 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 (Sec.  
206.111(b)). The MMS proposed to incorporate the same cost allowance 
structure into the 2006 Indian Oil 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. The 2000 
Federal Oil Final 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 and because it had been used in very 
few, if any, situations.
    The 2000 Federal Oil Final Rule also set forth the basis for the 
depreciation schedule to be used in the depreciation calculation. See 
Sec.  206.111(h). The MMS proposed to adopt identical provisions for 
this rule through incorporation, except that the relevant date would 
have been the effective date of a final rule that adopted those 
provisions.
    In the 2000 Federal Oil Final 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

[[Page 71238]]

proposed to apply the same principle in the context of Indian leases.
    Finally, the 2004 Federal Oil Final Rule, which amended Sec.  
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 2005 Federal Gas Final Rule, which amended Sec.  
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 Final Rule and 2005 Federal Gas Final Rules 
(i.e., 1.3 times the BBB bond rate more accurately reflects the 
lessees' cost of capital).
    Comments: One of the two tribal commenters offered specific 
comments on the transportation allowance provisions of the proposed 
rule. The tribe expressed concern ``that the MMS would ultimately apply 
transportation allowance criteria established for Federal leases upon 
Indian leases, without due consideration for certain Indian lease 
provisions and policies.'' However, the tribe did not explain which 
cost elements it believed to be improper and did not identify any 
difference in relevant lease terms between Indian and Federal leases. 
The tribe opposes eliminating the Form MMS-4110 filing requirement. The 
tribe ``believes that Indian lessors should and must receive prior 
notification of all allowance deductions from its [sic] royalty and, if 
MMS is correct in that transportation allowances are limited for Indian 
leases, then it should not be burdensome for the few royalty reporters 
to continue to submit Form MMS-4110.'' The tribe opposes changing rate 
of return used in calculating actual transportation costs under non-
arm's-length transportation arrangements and wants MMS to retain the 
BBB rate in the existing rule at Sec.  206.55(v).
    The other tribal commenter appears to oppose the transportation 
allowance provisions as part of its general opposition to the entire 
proposed rule.
    One of the industry association commenters supports using the same 
transportation cost elements for Indian and Federal leases. The 
commenter agrees with the proposed elimination of Form MMS-4110 and 
supports the proposed change in the rate of return used in calculating 
actual transportation costs to 1.3 times the BBB bond rate. However, 
the commenter expresses concerns about the accessibility of that rate 
and wants MMS to post the rate.
    Another industry association commenter says that there is no reason 
to treat oil pipeline costs differently depending on lessor ownership. 
That commenter also supports changing the rate of return to 1.3 times 
the BBB bond rate for the same reason that the rate was changed in the 
2004 Federal Oil Final Rule and 2005 Federal Gas Final Rule. This 
commenter further suggests (presumably referring to non-arm's-length 
situations) that reporting actual transportation costs in the 
production month in which they occur is burdensome. The commenter notes 
that the Royalty Reporting Subcommittee of the Royalty Policy Committee 
(an MMS advisory committee) developed several options for making prior-
period adjustments, but none of the options were adopted because the 
stakeholders couldn't reach consensus. This commenter also supports 
eliminating the requirement to pre-file Form MMS-4110 for non-arm's-
length transportation arrangements and eliminating any form filing for 
arm's-length transportation arrangements. The commenter also opposes 
having to file arm's-length transportation contracts and amendments 
with MMS as unnecessarily burdensome because lessees have to retain 
those documents and provide them on request in any event.
    MMS Response: At the present, lessees are reporting only three 
transportation allowances on Indian leases. Two are arm's-length 
transportation arrangements on certain Ute tribal leases and the other 
is a non-arm's-length transportation arrangement for production from 
certain Shoshone and Arapaho leases on the Wind River Reservation.
    The issues involved in the proposed amendments to the 
transportation allowance provisions are difficult and have generated an 
unusual degree of controversy relative to the very limited number of 
transactions to which they apply. The MMS believes that further 
analysis of these questions is appropriate and has decided to reserve 
the transportation allowance issue for a possible future supplemental 
final rulemaking. If MMS decides to seek further comment on the 
transportation allowance provisions of the proposed rule, it will 
publish an appropriate notice.
    In view of the change to the structure of the codified sections of 
the rule resulting from the changes to the valuation provisions, the 
existing transportation allowance rules (Sec. Sec.  206.54 and 206.55 
of the existing rule) are redesignated in this final rule as Sec. Sec.  
206.56 and 206.57. Certain conforming amendments are also made to 
correct cross-references to other sections. Otherwise, the existing 
rules remain unchanged.

E. Other Issues

    In proposed Sec.  206.50, MMS proposed adding 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 ``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 MMS received no comments opposed to this 
provision, and this final rule adopts it.
    Regarding records retention, the proposed rule explained that 
proposed Sec.  206.64 is adapted from Sec.  206.105, and that 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), as 
originally enacted. That requirement 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 and applies only to 
Federal leases. The referenced regulations in proposed Sec.  206.64 
reflect this difference. The MMS received no comments opposed to this 
provision, and this final rule adopts it.

III. Procedural Matters

1. Summary Cost and Royalty Impact Data

    There will be no additional administrative costs/savings or royalty 
impacts as a result of this final rule. There will be no change in 
royalties or administrative burdens to industry, state and local 
governments, Indian tribes, individual Indian mineral owners, or the 
Federal Government.
    All administrative costs/savings and royalty impacts listed in the 
2006 Indian Oil Proposed Rule were the result of the proposed major 
portion provision, the additional information collection required by 
that provision, and the transportation allowance provision. The 
majority of the costs under the 2006 Indian Oil Proposed Rule were

[[Page 71239]]

associated with the proposed major portion provision. Neither the 
proposed major portion provision nor the proposed transportation 
allowance provision is adopted under this final rule. As a result, the 
existing provisions at Sec.  206.50 through 206.55 will be retained. In 
Section II, Comments on the Proposed Rule, MMS explains plans to 
convene a negotiated rulemaking committee that will make 
recommendations regarding the implementation of the major portion 
provision found in most Indian tribal and allotted leases. Also, under 
Section II D, Transportation Allowance, MMS is reserving the 
transportation allowances issues for a possible future supplemental 
final rulemaking.
    There are no administrative costs and royalty impacts of this final 
rule to industry, state and local governments, Indian tribes and 
individual Indian mineral owners, or the Federal Government.

2. Regulatory Planning and Review, Executive Order 12866

    This final rule is not a significant regulatory action. However, in 
view of the subject matter of the regulation, the Office of Management 
and Budget has reviewed this rule under Executive Order 12866.
    1. This rule will 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.
    2. This rule will not create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency.
    3. This rule will not materially affect entitlements, grants, user 
fees, loan programs, or the rights and obligations of their recipients.
    4. This rule does not raise novel legal or policy issues.

3. Regulatory Flexibility Act

    The Department of the Interior certifies that this final 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.

4. Small Business Regulatory Enforcement Fairness Act (SBREFA)

    This final rule is not a major rule under 5 U.S.C. 804(2), the 
Small Business Regulatory Enforcement Fairness Act. This final rule:
    1. Will not have an annual effect on the economy of $100 million or 
more.
    2. Will not cause a major increase in costs or prices for 
consumers, individual industries, Federal, state, Indian, or local 
government agencies, or geographic regions.
    3. Will 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.

5. Unfunded Mandates Reform Act

    In accordance with the Unfunded Mandates Reform Act (2 U.S.C. 1501 
et seq.):
    1. This final rule will not significantly or uniquely affect small 
governments. Therefore, a Small Government Agency Plan is not required.
    2. This final rule will 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. An analysis 
was prepared for the 2006 Indian Oil Proposed Rule; however, because 
certain provisions of the proposed rule were not adopted under this 
final rule, there are no apparent cost and royalty impacts to industry, 
state and local governments, Indian tribes and individual Indian 
mineral owners, and the Federal Government. Therefore, an analysis for 
this final rule was not necessary under Executive Order 12866. See 
Section III, Procedural Matters, Summary Cost and Royalty Impact Data.

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

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

7. Federalism, Executive Order 13132

    In accordance with Executive Order 13132, this final rule will not 
have significant federalism implications. A federalism assessment is 
not required. It will not substantially and directly affect the 
relationship between 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 final rule will not 
alter that relationship.

8. Civil Justice Reform, Executive Order 12988

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

9. Paperwork Reduction Act of 1995 (PRA)

    Based on comments received on the proposed rule, MMS is not 
revising major portion provisions in the current regulations at 30 CFR 
206.50 through 206.55. We have deleted from the final rule all proposed 
changes to the major portion provisions. We also have revised sections 
in the proposed rule containing changes to transportation allowances 
that would have necessitated additional information collections.
    During the proposed rulemaking stage, we submitted an information 
collection request to OMB; OMB did not approve the collection at that 
time. Because there are no longer any new information collection 
requirements in the final rule, no further submission to OMB is 
required. Any information collections remaining in the rulemaking have 
already been approved under the following OMB Control Numbers:
     1010-0103 regarding the MMS Indian oil and gas program--
current burden hours are 1,276 (expires June 30, 2009); and
     1010-0140 regarding MMS's primary financial form, the Form 
MMS-2014, Report of Sales and Royalty Remittance--current burden hours 
are 158,821 (expires November 30, 2009).
    We received comments on the proposed changes to Form MMS-2014 and 
filing requirements. Commenters primarily objected to the cost of 
system changes that the proposed changes would have required. These 
comments are addressed in the preamble of this final rule, and none of 
the proposed changes are included in the final rulemaking.

[[Page 71240]]

    The PRA (44 U.S.C. 3501, et seq.) provides that an agency may not 
conduct or sponsor a collection of information unless it displays a 
currently valid OMB control number. Until OMB approves a collection of 
information, you are not obligated to respond.

10. National Environmental Policy Act (NEPA)

    This final rule deals with financial matters and has 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. None of the 
exceptions to the categorical exclusion applies.

11. 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 promulgating will not have any apparent impact on 
tribes and individual Indian mineral owners. During the writing of this 
final 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 final 
rule. See Section I, Background, for additional information regarding 
public meetings and consultation with tribes and individual Indian 
mineral owners. Also see Section III, 13, below.

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

    In accordance with Executive Order 13211, this regulation will not 
have a significant effect on the Nation's energy supply, distribution, 
or use. The changes better reflect the way industry accounts internally 
for its oil valuation and provides a number of technical 
clarifications. None of these changes will affect significantly the way 
industry does business and, accordingly, will not affect industry's 
approach to energy development or marketing. Nor will the rule 
otherwise impact energy supply, distribution, or use.

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

    This final rule does not have tribal implications that will 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 in the 2005 Establishing Oil Value for Royalty Due 
on Federal Leases--Workshop, 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 hear and discuss 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.

14. 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.
    (5) What is the purpose of this part?
    (6) Is the description of the rule in the ``Supplementary 
Information'' section of the preamble helpful in understanding the 
rule?
    (7) 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 27, 2007.
C. Stephen Allred,
Assistant Secretary for Land and Minerals Management.

0
For the reasons set forth in the preamble, MMS amends 30 CFR part 206 
as follows:

PART 206--PRODUCT VALUATION

0
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, 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.


0
2. The table of contents for 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 Transportation allowances--general.
206.57 Determination of transportation allowances.
206.58 What must I do if MMS finds that I have not properly 
determined value?
206.59 May I ask MMS for valuation guidance?
206.60 What are the quantity and quality bases for royalty 
settlement?
206.61 What records must I keep and produce?

[[Page 71241]]

206.62 Does MMS protect information I provide?


Sec. Sec.  206.54 and 206.55  [Redesignated]

0
3. Sections 206.54 and 206.55 are redesignated as Sec. Sec.  206.56 and 
206.57.

0
4. In redesignated Sec.  206.56, the reference to ``Section 206.52'' in 
paragraph (a) and the reference to ``Sec.  206.52'' in paragraph (b)(1) 
are revised to read ``Sec.  206.52 or Sec.  206.53.'' The reference to 
``Sec.  206.55'' in paragraph (c) is revised to read ``Sec.  206.57.''

0
5. Sections 206.50 through 206.53 are revised, and Sec. Sec.  206.54 
and 206.55 are added, to read as follows:


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 that is 
between the United States and a lessee, or between an individual Indian 
mineral owner and a lessee and 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) The 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 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 at least as large as the defined 
limits of an oil and/or gas field in which oil and/or gas lease 
products have similar quality, economic, and legal 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.
    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., WTI); 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

[[Page 71242]]

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); and
    (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
    Lessor means an Indian tribe or individual Indian mineral owner who 
has entered into a lease.
    Like-quality oil means oil that has similar chemical and physical 
characteristics.
    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 typical for 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.
    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).
    Processing means any process designed to remove elements or 
compounds (hydrocarbon and nonhydrocarbon) from gas, including 
absorption, adsorption, or refrigeration. Field processes that normally 
take place on or near the lease, such as natural pressure reduction, 
mechanical separation, heating, cooling, dehydration, and compression, 
are not considered processing. The changing of pressures and/or 
temperatures in a reservoir is not considered processing.
    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.
    Selling arrangement means the individual contractual arrangements 
under which sales or dispositions of oil are made. Selling arrangements 
are described by illustration in the MMS Oil and Gas Payor Handbook, 
Volume III--Product Valuation.
    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.

[[Page 71243]]

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 and 206.57. 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 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 paragraph (e)(4) of this section and 
Sec. Sec.  206.56 and 206.57.
    (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 
paragraph (e)(4) of this section and Sec. Sec.  206.56 and 206.57.
    (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 value oil under this paragraph, MMS will allow a 
deduction, under Sec. Sec.  206.56 and 206.57, for the reasonable, 
actual costs to transport the oil:
    (i) From the lease to a point where oil is given in exchange; and
    (ii) 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.
    (5) 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, MMS 
will 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 may not deduct any costs of gathering as part of a 
transportation deduction or allowance.
    (g) 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 paragraph (c) of 
this section and Sec. Sec.  206.56 and 206.57 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 paragraph 
(c) of this section and Sec. Sec.  206.56 and 206.57, 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 affiliate's arm's-
length purchases or sales to the same gravity as that of the oil 
produced from the lease. Use applicable gravity adjustment tables for 
the field (or the same general area for like-quality oil if you do not 
have gravity adjustment tables for the specific field) to normalize for 
gravity.

    Example to paragraph (b): 1. 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

[[Page 71244]]

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.
----------------------------------------------------------------------------------------------------------------

    2. 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 $0.02 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] = $0.20 deducted).
9,000 bbl..........................  23.0[deg].............  33.35.................  (0.5[deg] difference under 23.5[deg] = $0.10 added).
4,000 bbl..........................  22.0[deg].............  33.30.................  (1.5[deg] difference under 23.5[deg] = $0.30 added).
--------------------------------------------------------------------------------------------------------------------------------------------------------

    3. 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 and refined prior to an arm's-length sale, under this 
section.

    (c) If you value oil under this section, MMS will allow a 
deduction, under Sec. Sec.  206.56 and 206.57, for the reasonable, 
actual costs:
    (1) That you incur to transport oil that you or your affiliate 
sell(s), which 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), which 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. You may not deduct any costs of 
gathering as part of a transportation deduction or allowance.
    (d) If 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.
    (e) 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?

    (a) For any Indian leases that provide that the Secretary may 
consider the highest price paid or offered for a major portion of 
production (major portion) in determining value for royalty purposes, 
if data are available to compute a major portion, MMS will, where 
practicable, compare the value determined in accordance with this 
section with the major portion. The value to be used in determining the 
value of production, for royalty purposes, will be the higher of those 
two values.
    (b) For purposes of this paragraph, major portion means the highest 
price paid or offered at the time of production for the major portion 
of oil production from the same field. The major portion 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) for each month. All such oil production will be 
arrayed from highest price to lowest price (at the bottom). The major 
portion is that price at which 50 percent by volume plus one barrel of 
oil (starting from the bottom) is sold.


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.

0
6. Sections 206.58 through 206.62 are added to read as follows:


Sec.  206.58  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 Sec.  218.54 of 
this chapter.
    (b) If you are entitled to a credit due to overpayment on Indian 
leases, see Sec.  218.53 of this chapter. The credit will be without 
interest.


Sec.  206.59  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. We will 
promptly review your proposal and provide you with non-binding 
guidance.


Sec.  206.60  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 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.  206.61  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 field or area. You must make this data available to MMS, 
Indian

[[Page 71245]]

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 Sec. Sec.  207.5, 212.50, and 212.51 of this chapter. 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.  206.62  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 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. E7-24318 Filed 12-14-07; 8:45 am]
BILLING CODE 4310-MR-P