[Federal Register Volume 76, Number 103 (Friday, May 27, 2011)]
[Proposed Rules]
[Pages 30878-30881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13287]


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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1202 and 1206

[Docket No. ONRR-2011-0005]
RIN 1012-AA01


Federal Oil and Gas Valuation

AGENCY: Office of Natural Resources Revenue (ONRR), Interior.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Office of Natural Resources Revenue (ONRR) requests 
comments and suggestions from affected parties and the interested 
public before proposing changes to the existing regulations governing 
the valuation of oil and gas produced from Federal onshore and offshore 
oil and gas leases, for royalty purposes. The existing Federal oil 
valuation regulations have been in effect since 2000, with a subsequent 
amendment relating primarily to the use of index pricing in some 
circumstances. The existing Federal gas valuation regulations have been 
in effect since March 1, 1988, with various subsequent amendments 
relating primarily to the transportation allowance provisions. These 
regulations have not kept pace with significant changes that have 
occurred in the domestic gas market during the last 20-plus years. This 
notice is intended to solicit comments and suggestions for possible new 
methodologies to establish the royalty value of oil and gas produced 
from Federal leases. The ONRR plans to hold public workshops to discuss 
possible changes to the oil and gas valuation regulations after the 
written comment period closes and ONRR has had a reasonable time to 
review and analyze the comments. The ONRR will announce any public 
workshops in a future Federal Register notice.
    Getting feedback upfront and involving all affected stakeholders in 
the rulemaking process are the hallmarks of good government and smart 
business practice. The intention of this rulemaking process is to 
provide regulations that would offer greater simplicity, certainty, 
clarity, and consistency in production valuation for mineral lessees 
and mineral revenue recipients; be easy to understand; decrease 
industry's cost of compliance; and provide early certainty to industry 
and ONRR that companies have paid every dollar due. The ONRR intends 
that the final regulations will be revenue neutral.

[[Page 30879]]


DATES: You must submit your comments by July 26, 2011.

ADDRESSES: You may submit comments on this advance notice by any of the 
following methods. Please use the Regulation Identifier Number (RIN) 
1012-AA01 as an identifier in your message.
     Federal eRulemaking Portal: http://www.regulations.gov. In 
the entry titled ``Enter Keyword or ID,'' enter ONRR-2011-0005, then 
click search. Follow the instructions to submit public comments and 
view supporting and related materials available for this advanced 
notice of proposed rulemaking. The ONRR will post all comments.
     Mail comments to Hyla Hurst, Regulatory Specialist, Office 
of Natural Resources Revenue, P.O. Box 25165, MS 61013C, Denver, 
Colorado 80225.
     Hand-carry comments or use an overnight courier service. 
Our courier address is Building 85, Room A-614, Denver Federal Center, 
West 6th Ave. and Kipling St., Denver, Colorado 80225.

FOR FURTHER INFORMATION CONTACT: For questions on procedural issues, 
contact Hyla Hurst, Regulatory Specialist, ONRR, telephone (303) 231-
3495. For questions on technical issues, contact Richard Adamski, Asset 
Valuation, ONRR, telephone (303) 231-3410.

SUPPLEMENTARY INFORMATION:

I. Background

    The Secretary of the Interior's authority to establish the value of 
Federal oil and gas production through regulations is contained in the 
mineral leasing statutes (43 U.S.C. 1334; 30 U.S.C. 189 and 359). In 
addition, virtually all Federal oil and gas leases expressly reserve to 
the Secretary the authority to establish the reasonable value of oil 
and gas production or provide that the royalty value of oil and gas be 
set by regulation.
    The existing Federal oil valuation regulations have been in place 
since 2000, with amendments that primarily (1) affected the basis for 
valuation; and (2) made changes to the calculation of transportation 
deductions (69 FR 24959, May 5, 2004). The existing Federal gas 
valuation regulations have been in place since 1988, with amendments to 
transportation provisions (61 FR 5448, February 12, 1996) and 
additional amendments that primarily (1) affected the calculation of 
transportation deductions; and (2) made changes necessitated by 
judicial decisions (70 FR 11869, March 10, 2005). These regulations 
were written to establish value based on transactions between 
independent, non-affiliated parties. As ONRR continues to evaluate the 
effectiveness and efficiency of our regulations, we take into account 
the changes that have occurred in the oil and gas market over the past 
20 years, our 10 years of experience with taking royalties in kind, and 
our experience with changes to regulations relating to valuation of gas 
produced from Indian leases (64 FR 43515, August 10, 1999; 75 FR 61066, 
October 4, 2010; and 75 FR 61069, October 4, 2010).
    Further, ONRR's experience in enforcing the regulations indicates 
that they can be cumbersome because, to properly determine the value 
for royalty purposes, ONRR must analyze literally hundreds of thousands 
of sales, transportation, and processing transactions each month. 
Performing this analysis is costly and burdensome for both the Federal 
Government and the regulated industry and can lead to disputes 
regarding valuation methodologies.
    Most Federal leases provide that the Secretary will determine the 
value of production for royalty purposes. The Department of the 
Interior has long held the view that the prices agreed to in arm's-
length transactions are the best indication of market value. The 2000 
oil valuation regulations and 1988 gas valuation regulations reflect 
that view. See 30 CFR 1206.152(b) (unprocessed gas) and 1206.153(b) 
(processed gas). If oil or gas is not sold according to an arm's-length 
contract, the regulations look to certain external indicia of market 
value. Under these ``benchmarks,'' as they are popularly known, the 
gross proceeds accruing to a lessee under a non-arm's-length sales 
contract will be accepted as value if those gross proceeds are 
equivalent to the gross proceeds derived from, or paid under, 
comparable arm's-length contracts. The regulations also prescribe 
criteria for evaluating comparability (30 CFR 1206.152(c)(1) and 
1206.153(c)(1)).
    Under the 1988 gas regulations, if this first benchmark does not 
apply, the regulations require that value be established by considering 
other information relevant in valuing like-quality gas, including 
``gross proceeds under arm's-length contracts for like-quality gas in 
the same field or nearby fields or areas, posted prices for gas, prices 
received in arm's-length spot sales of gas [or] other reliable public 
sources of price or market information * * *'' (30 CFR 1206.152(c)(2) 
and 1206.153(c)(2)). If value cannot be established through such 
information, then the final benchmark is ``a net-back method or any 
other reasonable method to determine value'' (30 CFR 1206.152(c)(3) and 
1206.153(c)(3)).
    When oil and gas is not sold at or near the lease, unit, or 
communitized area, the regulations also provide for allowances for the 
cost of transporting production to the point of sale (30 CFR 1206.110 
and 1206.111 for oil and 30 CFR 1206.156 and 1206.157 for gas). If the 
lessee processes gas to remove valuable products such as heavier liquid 
hydrocarbons, the regulations prescribe how to calculate an allowance 
for the costs of processing (30 CFR 1206.158 and 1206.159).
    In 2007, the Royalty Policy Committee (RPC) Subcommittee on Royalty 
Management issued a report titled ``Mineral Revenue Collection from 
Federal and Indian Lands and the Outer Continental Shelf.'' The 
Subcommittee's report recommended clarification of the regulations 
governing onshore gas and transportation deductions to provide more 
certainty for ONRR, BLM, and industry, which should result in better 
compliance. More specifically, the Subcommittee recommended revisions 
to the gas valuation regulations and guidelines to address the cost-
bundling issue and to facilitate the calculation of gas transportation 
and gas processing deductions. The Subcommittee also recommended the 
use of market indices for gas valuation in the context of non-arm's-
length transactions in lieu of benchmarks, which have been used since 
1988.

II. Public Comment Procedures

    The ONRR may not be able to consider comments that we receive after 
the close of the comment period for this advance notice of proposed 
rulemaking, or comments that are delivered to an address other than 
those listed in the ADDRESSES section of this notice. After the comment 
period for this advance notice closes and ONRR has considered the 
comments, we plan to open a second public comment period, which we will 
announce in the Federal Register. The notice will focus on issues 
identified in the first public comment period and will include 
information about the public workshops.

A. Written Comment Guidelines

    We are particularly interested in receiving comments and 
suggestions about the topics identified in section III, Description of 
Information Requested. Your written comments should: (1) Be specific; 
(2) explain the reason for your comments and suggestions; (3) address 
the issues outlined in this notice; and (4), where possible, refer to 
the specific provision, section, or paragraph of statutory law, case 
law, lease term, or

[[Page 30880]]

existing regulations that you are addressing.
    The comments and recommendations that are most useful and have 
greater likelihood of influencing decisions on the content of a 
possible future proposed rule are: (1) Comments and recommendations 
supported by quantitative information or studies; and (2) comments that 
include citations to, and analyses of, the applicable laws, lease 
terms, and regulations.

B. Public Comment Policy

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

III. Description of Information Requested

    We are interested in submission of proposals that will lead to 
improved efficiencies for both lessees and ONRR auditors. In 
considering potential proposed changes to the existing Federal oil and 
gas royalty valuation regulations at 30 CFR part 1206, subpart D, we 
have three goals in mind, as follows:
     Provide clear regulations that are easy to understand and 
that are consistent with fulfilling the Secretary's responsibility to 
ensure fair value for the public's resources.
     Provide methodologies that are as efficient as possible 
for lessees to use.
     Provide early certainty that correct payment has been 
made.
    In August 2004, ONRR amended the Federal oil valuation regulations 
(now codified at 30 CFR part 1206, subpart C) to use index pricing 
applicable to particular regions of the country, in some circumstances, 
to determine the value of production for royalty purposes. This 
amendment to Federal oil valuation regulations followed the successful 
use of a published index price methodology for valuing gas produced 
from Indian leases that are located in an ``index zone,'' i.e., a field 
or area with a spot market and acceptable published indices applicable 
to that field or area (30 CFR 1206.171 and 1206.172). We are seeking 
comment on the existing use of index pricing to determine the value of 
production for oil royalty purpose and whether the use of index pricing 
should be expanded or altered. We are also exploring the circumstances 
under which it may be appropriate to apply index-based valuation 
methodologies to gas produced from Federal leases.
    There appear to be circumstances in which the value of gas for 
royalty purposes could be established using publicly available gas 
index prices. In addition to the Indian gas regulations, ONRR has used 
index prices to determine value under the second Federal gas benchmark 
and to sell gas taken as royalty in kind. It appears that, in the past 
several years, the gas spot market has become much more widely used and 
is more robust and transparent, with numerous buyers and sellers 
engaging in, and reporting their transactions to, third-party 
publications. Those publications, in turn, calculate and publish 
geographically based index prices.
    In addition, certain provisions of the current Federal oil and gas 
regulations have presented challenges that led to disputes between 
lessees and ONRR auditors, particularly in situations involving non-
arm's-length sales and non-arm's-length transportation and gas 
processing allowances. For some Federal oil and gas production, changes 
in the oil and gas transportation industry have made it difficult for 
lessees to obtain the information they need to comply with ONRR 
regulations that require the use of actual costs in determining 
transportation allowances. Additionally, pipeline operators often 
bundle transportation and processing charges, including charges that 
the regulations do not allow lessees to deduct in calculating royalty 
value, such as marketing costs and costs of placing gas into marketable 
condition.
    Accordingly, ONRR is seeking public comment and recommendations on 
the following specific issues:

A. Use of Index Prices To Value Oil and Gas

    The ONRR is seeking comment on the existing use of index pricing to 
determine the value of production for oil royalty purposes and whether 
the use of index pricing should be expanded or altered. Additionally, 
the ONRR is considering the use of index pricing in valuing Federal gas 
for royalty purposes. Please consider the following:
     We seek input on how well index prices currently represent 
the value for oil and gas produced in different regions or areas of the 
country, such as states on the Gulf of Mexico coast (including Texas, 
Louisiana, Mississippi, and Alabama, as well as onshore areas within 
those states), the Midwest (including Oklahoma and North Dakota), the 
Southwest (including New Mexico and the Permian and San Juan Basin 
areas), the Rocky Mountain area (including Wyoming, Montana, and 
Colorado and Utah outside the San Juan Basin), the West Coast states 
(primarily California), and Alaska. Please identify what index 
publications you believe apply to what parts of these areas and the 
relative advantages and disadvantages, and strengths and weaknesses, of 
using each of the identified published index prices.
     We also seek input on whether value should be based on 
first-of-month prices, daily spot prices, or some mixture of the two 
when considering the use of index prices.
     In addition, we seek input on how to best value this gas 
for royalty purposes in situations where gas from Federal leases is 
produced in areas not covered by index pricing, or where limited 
reported spot market activity exists.
     Does the concentration of Federal production in some areas 
of the country create any potential problems with relying on index 
prices in those areas, now or in the future?
     Finally, we request comment on whether ONRR should use 
published index prices to value Federal oil and gas sold under non-
arm's-length contracts as well as arm's-length contracts.

B. Transportation Allowances

    The ONRR is examining possible alternatives to the requirement to 
track actual costs for determining transportation and to address the 
bundling issue. Please consider the following:
     If ONRR were to adopt index-based valuation, the point at 
which the index prices are compiled and published may or may not be the 
point of actual sale for particular gas, and the costs of 
transportation to the actual point of sale may not be relevant. 
However, the index pricing point would be remote from the lease or unit 
in virtually all circumstances, and value at the index pricing point 
may not reflect value at or near the lease or unit. If ONRR employed 
index prices to value Federal oil and gas for royalty purposes, what 
methods should be considered that

[[Page 30881]]

would adjust for location differences between the lease or unit and the 
index pricing and publication point?
     In the interest of simplifying the determination and 
verification of location adjustments, should ONRR consider prescribing 
either a fixed differential amount per unit volume (thousand cubic feet 
(Mcf) or million British thermal units (MMBtu)) or a fixed percentage 
to be deducted from the index value to account for location 
differences?
     Should ONRR apply a fixed differential amount per unit 
volume to all production in a particular area or that is transported 
through a particular pipeline? Would a flat percentage of the index 
value (perhaps with a cap) be preferable, either on a regional or 
nationwide basis?

C. Processed Gas and Processing Allowances

    The ONRR is considering accounting for the value of liquid 
hydrocarbons contained in the gas stream by applying an adjustment or 
``bump'' to the index price, applicable to residue gas when gas is 
processed, in lieu of valuing residue gas and extracted liquid products 
separately, calculating the actual processing costs, and deducting 
those costs from the value of the extracted liquids (the procedure 
required under 30 CFR 1206.153(a) and 1206.158 through 1206.159). This 
adjustment could be based on, or could incorporate, a number of 
components, including the following:
     Gas quality (either Btu content or gallons per Mcf (GPM)).
     The differential between the gas price and the oil or 
natural gas liquids (NGL) price similar to a ``frac spread'' or a 
``processing margin.''
     Certain plant operation factors, such as shrinkage, 
producer processing costs, and plant operations costs.
    We also seek input regarding whether such an approach could 
eliminate the burden of accounting for allowable costs to process gas 
and reduce or eliminate the potential for disputes over unbundling of 
gas plant charges, without reduction in royalty value. The ONRR could 
calculate this adjustment on a monthly basis and make it available on 
our website expressed in the form of a price per unit volume (MMBtu or 
Mcf).
    ONRR could maintain current reporting requirements for processed 
gas and NGLs but establish a fixed processing allowance. This fixed 
allowance could be either on a nationwide basis for all Federal gas or 
on a narrower basis, such as offshore and onshore leases; offshore 
regions and onshore basins; or gas-plant-specific.
    We seek input regarding the advantages and disadvantages of 
simplifying processed gas royalty reporting and payment by either of 
the aforementioned methods. We also are interested in other 
methodologies that would simplify the reporting associated with gas 
processing allowances or, if possible, eliminate the allowances by 
substituting a market-based proxy to reflect the value of liquid 
hydrocarbons contained in the gas stream.

D. Other Alternatives

    The ONRR also is interested in receiving comments on any other 
alternative methodologies. If you propose a methodology different from 
those discussed above, please explain how the suggested methodology 
would meet the goals outlined above and why you believe your 
methodology is the best alternative.
    In addition, ONRR requests your input on how the various 
methodologies would affect your business practices, bookkeeping, etc.

    Dated: May 23, 2011.
Rhea Suh,
Assistant Secretary for Policy, Management and Budget.
[FR Doc. 2011-13287 Filed 5-26-11; 8:45 am]
BILLING CODE 4310-MR-P