[Federal Register Volume 86, Number 10 (Friday, January 15, 2021)]
[Rules and Regulations]
[Pages 4612-4659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00217]



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Vol. 86

Friday,

No. 10

January 15, 2021

Part VII





Department of the Interior





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Office of Natural Resources Revenue





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30 CFR Parts 1206 and 1241





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ONRR 2020 Valuation Reform and Civil Penalty Rule; Final Rule

  Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules 
and Regulations  

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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1206 and 1241

[Docket No. ONRR-2020-0001; DS63644000 DRT000000.CH7000 212D1113RT]
RIN 1012-AA27


ONRR 2020 Valuation Reform and Civil Penalty Rule

AGENCY: Department of the Interior, Office of the Secretary, Office of 
Natural Resources Revenue.

ACTION: Final rule.

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SUMMARY: The Office of Natural Resources Revenue (``ONRR'') is amending 
certain regulations on how it values oil and gas produced from Federal 
leases for royalty purposes, values coal produced from Federal and 
Indian leases for royalty purposes, and assesses civil penalties for 
violations of certain statutes, regulations, leases, and orders 
associated with mineral leases. In addition, it is making some minor, 
non-substantive corrections to its regulations.

DATES: Effective date: This rule is effective February 16, 2021.
    Compliance date: With respect to the amendments to 30 CFR part 1206 
only, compliance is required for production that occurs on or after May 
1, 2021. Compliance with the amendments to 30 CFR part 1241 is required 
on the effective date.

FOR FURTHER INFORMATION CONTACT: For questions on procedural issues, 
contact Dane Templin, Regulations Supervisor, at (303) 231-3149 or 
[email protected]. For questions on technical issues related to 
royalty valuation, contact Amy Lunt, Supervisor Royalty Valuation Team 
A, at (303) 231-3746 or [email protected], or Peter Christnacht, 
Supervisor Royalty Valuation Team B, at (303) 231-3651 or 
[email protected]. For questions on technical issues related 
to civil penalties, contact Michael Marchetti, Program Manager Office 
of Enforcement, at (303) 231-3125 or [email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. ONRR's Rulemaking Authority
    B. Rulemaking Objectives
    C. Executive Discretion is a Permissible Initiative for 
Rulemaking
    D. ONRR's Relevant Prior Rulemakings and Associated Litigation
    E. Public Comment Overview
II. Amendment Discussion--Part 1206 Product Valuation
    A. Index-Based Valuation Method To Value Federal Gas
    B. Transportation Allowance for Certain Offshore Federal Oil and 
Gas Gathering Costs
    C. Allowance Limits for Federal Oil and Gas
    D. The Default Provision for Federal Oil, Gas, and Coal and 
Indian Coal
    E. ``Misconduct'' Definition for Federal Oil, Gas, and Coal and 
Indian Coal
    F. Contract Signature Requirement for Federal Oil, Gas, and Coal 
and Indian Coal
    G. Citation to Legal Precedent as Part of a Valuation 
Determination Request
    H. Coal Valued for Royalty Purposes Based on an Electricity Sale
    I. ``Coal Cooperative'' Definition
III. Amendment Discussion--Part 1241 Penalties
    A. Civil Penalties for Payment Violations
    B. Consideration of Aggravating and Mitigating Circumstances 
When ONRR Assesses a Civil Penalty
    C. Forfeiture of a Stay of the Civil Penalty Accrual Under 
Limited Circumstances
IV. Non-Substantive Corrections
V. Economic Analysis
VI. Severability Statement
VII. Procedural Matters
    A. Regulatory Planning and Review (Executive Orders 12866 and 
13563)
    B. Regulatory Flexibility Act
    C. Small Business Regulatory Enforcement Fairness Act
    D. Unfunded Mandates Reform Act
    E. Takings (Executive Order 12630)
    F. Federalism (Executive Order 13132)
    G. Civil Justice Reform (Executive Order 12988)
    H. Consultation With Indian Tribal Governments (Executive Order 
13175)
    I. Paperwork Reduction Act (44 U.S.C. 3501 et seq.)
    J. National Environmental Policy Act
    K. Effects on the Energy Supply (Executive Order 13211)
    L. Clarity of this Regulation
    M. Congressional Review Act

     Table of Abbreviations and Commonly Used Acronyms in This Rule
------------------------------------------------------------------------
           Abbreviation                         What it means
------------------------------------------------------------------------
2016 Valuation Rule...............  ONRR's Consolidated Federal Oil and
                                     Gas and Federal and Indian Coal
                                     Valuation Reform Rule, 81 FR 43338
                                     (July 1, 2016).
2016 Civil Penalty Rule...........  ONRR's Amendments to Civil Penalty
                                     Regulations, 81 FR 50306 (August 1,
                                     2016).
2017 Postponement Notice..........  ONRR's Notice of Postponement, 82 FR
                                     11823 (February 27, 2017) (sought
                                     to stay implementation of the 2016
                                     Valuation Rule).
2017 Repeal Rule..................  ONRR's Repeal of the 2016 Valuation
                                     Rule, 82 FR 36934 (August 7, 2017).
2020 Proposed Rule................  ONRR's 2020 proposed rule titled:
                                     ONRR 2020 Valuation Reform and
                                     Civil Penalty Rule, 85 FR 62054
                                     (October 1, 2020).
ALJ...............................  Administrative Law Judge.
APA...............................  Administrative Procedure Act of
                                     1946, as amended.
API...............................  American Petroleum Institute.
APD...............................  Application for a Permit to Drill.
BLM...............................  Bureau of Land Management.
BLS...............................  Bureau of Labor Statistics.
BOEM..............................  Bureau of Ocean Energy Management.
BSEE..............................  Bureau of Safety and Environmental
                                     Enforcement.
Department........................  U.S. Department of the Interior.
Deepwater Policy..................  MMS's May 20, 1999, memorandum
                                     titled ``Guidance for Determining
                                     Transportation Allowances for
                                     Production from Leases in Water
                                     Depths Greater Than 200 Meters''.
E.O...............................  Executive Order.
FCCP..............................  Failure to Correct Civil Penalty.
FERC..............................  Federal Energy Regulatory
                                     Commission.
FLPMA.............................  Federal Land Policy and Management
                                     Act of 1976.
FOGRMA............................  Federal Oil and Gas Royalty
                                     Management Act of 1982.
FY................................  Fiscal Year.
GOM...............................  Gulf of Mexico.
IBLA..............................  Interior Board of Land Appeals.
ILCP..............................  Immediate Liability Civil Penalty.

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MLA...............................  Mineral Leasing Act of 1920.
MMS...............................  Minerals Management Service.
NEPA..............................  National Environmental Policy Act of
                                     1970.
NGL...............................  Natural Gas Liquids.
OCS...............................  Outer Continental Shelf.
OCSLA.............................  Outer Continental Shelf Lands Act of
                                     1953.
ONRR..............................  Office of Natural Resources Revenue.
Secretary.........................  Secretary of the U.S. Department of
                                     the Interior.
S.O...............................  Secretarial Order.
------------------------------------------------------------------------

I. Introduction

    This final rule amends ONRR's regulations under 30 CFR Chapter XII, 
Parts 1206 (product valuation) and 1241 (penalties). In 30 CFR part 
1206, this final rule amends certain definitions (Subpart A) and 
provisions used to value Federal oil (Subpart C), Federal gas (Subpart 
D), Federal coal (Subpart F), and Indian coal (Subpart J). In 30 CFR 
part 1241, this final rule amends ONRR's regulations on the practices 
it uses to assess civil penalties (Subparts A and C).
    This rule is effective 30 days after its publication in the Federal 
Register. However, ONRR recognizes that lessees typically report and 
pay royalties based on monthly production, sales, and costs. In 
addition, compliance with the requirements of the Rule will require 
system modifications by ONRR to accept reports and for industry 
reporters in order to submit reports. These system modifications will 
take some time to program. For those reasons, a separate compliance 
date is provided under the DATES caption to establish that--for the 
amendments to 30 CFR part 1206 only--lessees must conform to the 
amended requirements under this final rule beginning with production 
that occurs on and after May 1, 2021.
    As stated under the DATES caption, the amendments to 30 CFR part 
1241 shall become effective on and compliance is required by February 
16, 2021.
    ONRR explained in the 2020 Proposed Rule that, with regard to 30 
CFR part 1206, several of ONRR's proposed amendments would extend, 
revise, or remove regulations that ONRR had adopted through the 2016 
Valuation Rule. See 85 FR 62054-62062. ONRR also explained the factors 
it was considering in its decision making, including: (1) Executive 
Orders (E.O.s) and Secretarial Orders (S.O.s) issued after the 2016 
Valuation Rule's effective date; (2) specific to coal cooperatives and 
coal valuation based on electricity sales, ONRR's consideration of the 
parties' briefs filed in litigation challenging the 2016 Valuation Rule 
and the court's decision in that litigation to stay implementation of 
the rule's Federal and Indian coal provisions; and (3) ONRR's continued 
work to consider and implement regulatory changes that simplify or 
better explain ONRR's processes, and to provide early clarity regarding 
royalties owed. See 85 FR 62054-62057.
    For 30 CFR part 1241, ONRR explained in the 2020 Proposed Rule 
that, in addition to some of the reasons listed above, ONRR was 
considering changes to its civil penalty practices to conform with a 
(subsequently-vacated) Federal District Court's decision on an industry 
challenge to ONRR's 2016 Civil Penalty Rule and to conform the civil 
penalty regulations to certain IBLA decisions. See 85 FR 62055 and 
62056.
    ONRR finds that those reasons, additional reasons raised in public 
comments, and additional information (identified by ONRR or provided to 
ONRR by its sister agencies) warrant the amendments adopted in this 
final rule on the following topics:
    1. Allowing a lessee producing Federal oil and gas from the OCS 
under leases in water depths of 200 meters or greater to take a 
deduction for certain gathering costs as part of its transportation 
allowance.
    2. Allowing a lessee to apply to ONRR for approval to claim an 
extraordinary processing allowance for Federal gas in situations where 
the gas stream, plant design, and/or unit costs were extraordinary, 
unusual, or unconventional relative to standard industry conditions and 
practice.
    3. Removing the definition of ``misconduct'' from 30 CFR part 1206 
as it applies to Federal oil and gas, and Federal and Indian coal.
    4. Removing the default provision and references thereto from the 
regulations applying to Federal oil and gas, and Federal and Indian 
coal.
    5. Removing the requirement that a lessee have contracts signed by 
all parties in order for those contracts to be recognized valid and 
binding with respect to the valuation of Federal oil and gas, and 
Federal and Indian coal.
    6. Removing the requirement for a lessee to cite legal precedent 
when seeking a valuation determination for Federal oil and gas or a 
valuation decision for Federal or Indian coal.
    7. Expanding the option to use index-based valuation to arm's-
length Federal gas sales, which, under the 2016 Valuation Rule, was 
only available for non-arm's-length Federal gas sales.
    8. For unprocessed and residue gas valued using the index-based 
valuation method, changing from the high index price to the average 
index price.
    9. Changing the transportation deductions allowed under an index-
based valuation method to reflect more recent transportation cost data 
reported to ONRR.
    10. Amending other regulation language to make non-substantive 
corrections so as to make the regulations more clear and workable.
    11. Amending ONRR's Federal and Indian coal valuation regulations 
to remove the requirement to value certain coal based on the sale of 
electricity.
    12. Amending ONRR's Federal and Indian coal valuation regulations 
to remove the definition of ``coal cooperative'' and the method to 
value sales between members of a ``coal cooperative.''
    13. Amending ONRR's civil penalty regulations to clarify that ONRR 
will consider the unpaid, underpaid, or late payment amounts in the 
severity analysis for payment violations only.
    14. Amending ONRR's civil penalty regulations to clarify that ONRR 
may consider aggravating and mitigating circumstances when calculating 
the amount of a civil penalty.
    15. Amending ONRR's civil penalty regulations to remove an ALJ's 
ability to vacate the benefit of a stay of an accrual of penalties if 
the ALJ later determines that a violator's defense to a notice of 
noncompliance was frivolous.
    This rule does not adopt three amendments that ONRR proposed in the 
2020 Proposed Rule. This rule does not:
    1. Remove or otherwise amend the regulatory cap on transportation 
allowances for Federal oil and gas.

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    2. Remove or otherwise amend the regulatory cap on processing 
allowances for Federal gas.
    3. Allow a lessee producing oil or gas on the OCS in waters 
shallower than 200 meters to file an application seeking ONRR's 
permission to include certain gathering costs in its transportation 
allowance.

A. ONRR's Rulemaking Authority

    ONRR's royalty program is ``a complex and highly technical 
regulatory program, in which the identification and classification of 
relevant criteria necessarily require significant expertise and entail 
the exercise of judgment grounded in policy concerns.'' Amoco Prod. Co. 
v. Watson, 410 F.3d 722, 729 (D.C. Cir. 2005) (internal quotations and 
citation omitted). FOGRMA grants the Secretary authority to ``prescribe 
such rules and regulations as he deems reasonably necessary to carry 
out this chapter.'' See 30 U.S.C. 1751(a); see also, e.g., 30 U.S.C. 
1719. Re-evaluating the best means of balancing these statutory 
priorities within the bounds of the specific commands of the statute, 
as called for in the Executive and Secretarial Orders, is well within 
the scope of authority that Congress granted to the Secretary under 
FOGRMA and which was delegated by the Secretary to ONRR.

B. Rulemaking Objectives

    The E.O.s explained below do not prescribe an outcome, rather, they 
note policy positions that are well within the specific authorities 
outlined in the relevant statutes, namely the MLA and the OCSLA. 
Specifically, 43 U.S.C. 1332(3) states that: ``It is hereby declared to 
be the policy of the United States that . . . the [OCS] is a vital 
national resource reserve held by the Federal Government for the 
public, which should be made available for expeditious and orderly 
development, subject to environmental safeguards, in a manner which is 
consistent with the maintenance of competition and other national 
needs. . . .'' Moreover, the MLA, at 30 U.S.C. 201, states that ``[t]he 
Secretary of the Interior is authorized to divide any lands subject to 
this chapter which have been classified for coal leasing into leasing 
tracts of such size as he finds appropriate and in the public interest 
and which will permit the mining of all coal which can be economically 
extracted in such tract and thereafter he shall, in his discretion, 
upon the request of any qualified applicant or on his own motion, from 
time to time, offer such lands for leasing and shall award leases 
thereon by competitive bidding.'' With respect to oil and gas, the MLA, 
at 30 U.S.C. 226, states that ``[a]ll lands subject to disposition 
under this chapter which are known or believed to contain oil or gas 
deposits may be leased by the Secretary'' and provides that ``[l]ease 
sales shall be held for each State where eligible lands are available 
at least quarterly and more frequently if the Secretary of the Interior 
determines such sales are necessary.''
    While neither of these statutes define or employ the term ``fair 
return,'' both the OCSLA and the MLA make use of the term ``fair market 
value.'' OCSLA, at 43 U.S.C. 1331(o), defines ``fair market value'' as 
``the value of any mineral (1) computed at a unit price equivalent to 
the average unit price at which such mineral was sold pursuant to a 
lease during the period for which any royalty or net profit share is 
accrued or reserved to the United States pursuant to such lease, or (2) 
if there were no such sales, or if the Secretary finds that there were 
an insufficient number of such sales to equitably determine such value, 
computed at the average unit price at which such mineral was sold 
pursuant to other leases in the same region of the [OCS] during such 
period, or (3) if there were no sales of such mineral from such region 
during such period, or if the Secretary finds that there are an 
insufficient number of such sales to equitably determine such value, at 
an appropriate price determined by the Secretary[.]'' FOGRMA built upon 
the royalty provisions of the MLA and the OCSLA by stating that the 
Secretary shall: ``establish a comprehensive inspection, collection and 
fiscal and production accounting and, auditing system to provide the 
capability to accurately determine oil and gas royalties, interest, 
fines, penalties, fees, deposits, and other payments owed and to 
collect and account for such amounts in a timely manner.'' 30 U.S.C. 
1711(a).
    Both of the statutes provide for minimum royalty rates when leasing 
areas for energy and mineral development and offer some direction on 
royalty collection. The mineral leasing authorities granted to the 
Secretary by Congress provide broad authorities to ``prescribe 
necessary and proper rules and regulations and to do any and all things 
necessary to carry out and accomplish the purposes of [the leasing 
statutes]'' including the collection of all revenues associated with 
such activities (bonus bids, royalties, rentals and other fees). See 25 
U.S.C. 396, 396d (tribal lands); 30 U.S.C. 189 (public lands); 30 
U.S.C. 1751 (FOGRMA); 43 U.S.C. 1334(a) (OCS lands).
    In addition to these policy goals, ONRR's objectives include 
implementing court decisions and analyses, making changes that reduce 
regulatory burdens while maintaining royalty value and ONRR's ability 
to provide oversight, and making regulations more simple, clear, and 
workable. Further, ONRR explains additional reasons to adopt or not 
adopt the specific proposed amendments in the amendment discussion 
sections that follow.
    The 2020 Proposed Rule, at 85 FR 62054 and 62056-62057, explained 
that ONRR's objective for this rulemaking included furtherance of the 
policy goals described in:
1. E.O. 13783, ``Promoting Energy Independence and Economic Growth.''
    In E.O. 13783, the President emphasized that ``[i]t is in the 
national interest to promote clean and safe development of our Nation's 
vast energy resources, while at the same time avoiding regulatory 
burdens that unnecessarily encumber energy production, constrain 
economic growth, and prevent job creation.'' The President further 
directed executive departments and agencies to immediately review 
existing regulations that potentially burden the development or use of 
domestically produced energy resources and appropriately suspend, 
revise, or rescind those that unduly burden the development of domestic 
energy resources beyond the degree necessary to protect the public 
interest or otherwise comply with the law. Pursuant to E.O. 13783, 
agency heads are required to review all existing regulations that 
potentially burden the development or use of domestically produced 
energy resources, ``with particular attention to oil, natural gas, 
coal, and nuclear energy resources.'' E.O. 13783 further explained that 
``burden'' means to unnecessarily obstruct, delay, curtail, or 
otherwise impose significant costs on the siting, permitting, 
production, utilization, transmission, or delivery of energy resources.
2. E.O. 13795, ``Implementing an America-First Offshore Energy 
Strategy.''
    Through E.O. 13795, the President stated his policy goal of 
emphasizing ``the energy needs of American families and businesses 
first'' and to ``continue implementing a plan that ensures energy 
security and economic vitality for decades to come.'' E.O. 13795 stated 
that ``[i]ncreased domestic energy production on Federal lands and 
waters strengthens the Nation's security and

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reduces reliance on imported energy'' and ``help[s] reinvigorate 
American manufacturing and job growth.'' Accordingly, E.O. 13795 stated 
that ``[i]t shall be the policy of the United States to encourage 
energy exploration and production, including on the [OCS], in order to 
maintain the Nation's position as a global energy leader and foster 
energy security and resilience for the benefit of the American people. 
. . .''
3. E.O. 13892, ``Promoting the Rule of Law Through Transparency and 
Fairness in Civil Administrative Enforcement and Adjudication.''
    Through E.O. 13892, the President stated his policy goal of 
emphasizing that ``[a]gencies shall act transparently and fairly with 
respect to all affected parties, as outlined in this order, when 
engaged in civil administrative enforcement or adjudication.'' E.O. 
13892 stated that ``the Federal Government should, where feasible, 
foster greater private-sector cooperation in enforcement, promote 
information sharing with the private sector, and establish predictable 
outcomes for private conduct. . . .'' With emphasis on fairness and 
transparency, E.O. 13892 also reinforced that ``regulated parties must 
know in advance the rules by which the Federal Government will judge 
their actions,'' and required that agencies provide ``prior public 
notice'' of any legal standards the agency will be applying.
4. S.O.s 3306, 3350, and 3360.
    Three Secretarial Orders are also relevant to this rulemaking. S.O. 
3306, Organizational Changes Under the Assistant Secretary--Policy, 
Management and Budget, signed on September 30, 2010, created ONRR and 
reorganized this office under the Assistant Secretary for Policy, 
Management and Budget to: ``discharge the duties of the Secretary for 
management of revenues from Federal and Indian onshore and offshore 
mineral and energy resource leases . . . to assure full and timely 
collection, distribution, and disbursement of bonuses, rentals, 
royalties, and other revenues and coordination of related Departmental 
policy.''
    Through S.O. 3350, America-First Offshore Energy Strategy, the 
Secretary of the Interior (``Secretary'') took specific steps to 
implement E.O. 13795. Significant to the proposed rule, the Secretary 
specifically stated that S.O. 3350 is designed to implement the 
President's directives as set forth in E.O. 13795 to ``ensure that 
responsible OCS exploration and development is promoted and not 
unnecessarily delayed or inhibited.'' The Order directed BOEM and BSEE 
to take specific actions, but also more generally expressed a desire 
for active coordination of energy policy in order to enhance 
opportunities for energy exploration, leasing, and development on the 
OCS. S.O. 3360 is likewise directed at continuing to implement E.O. 
13783 and the directive to the Department to review existing 
regulations that ``potentially burden the development or utilization of 
domestically produced energy resources.''
    These statutes, Executive Orders and Secretarial Orders make clear 
that it is in the national interest to promote domestic energy 
development for a variety of reasons, including stimulating the 
economy, job creation, and national security. They also emphasize the 
importance of reducing regulatory burdens so that energy producers, and 
particularly oil, natural gas, and coal producers, are incentivized to 
produce more energy. Through this rulemaking, ONRR furthers these 
policy objectives by several means, including providing mechanisms that 
simplify reporting and compliance, and promoting domestic energy 
production.

C. Executive Discretion is a Permissible Initiative for Rulemaking

    As described in greater detail in the discussion of each amendment 
that follows, this rule is, in part, founded upon new factual findings 
that, in some instances, contradict those upon which the 2016 Valuation 
Rule was based. In some instances, the operative facts have changed 
since 2016. In other instances, ONRR has reconsidered the weighing of 
different policy priorities and values as they apply to the relevant 
facts. See generally F.C.C. v. Fox Television Stations, Inc., 556 U.S. 
502, 514 (2009); Nat'l Ass'n of Home Builders v. EPA, 682 F.3d 1032, 
1038, 1043 (D.C. Cir. 2012); Dana Corp. v. ICC, 703 F.2d 1297, 1305 
(D.C. Cir. 1983). With respect to the latter category and as explained 
further herein, ONRR is implementing this rule, in part, because policy 
directives issued after July 1, 2016, give different weight to the 
factual findings, and also set other policy-based priorities. Agency 
action representing a policy change ``is not subject to a more 
searching review.'' F.C.C. v. Fox Television Stations, Inc., 556 U.S. 
502, 514 (2009).
    Indeed, ``regulatory agencies do not establish rules of conduct to 
last forever.'' Am. Trucking Assoc., Inc. v. Atchison, T. & S.F.R. Co., 
387 U.S. 397, 416 (1967). An agency must be given ample latitude to 
``adapt their rules and policies to the demands of changing 
circumstances.'' Permian Basin Area Rate Cases, 390 U.S. 747, 784 
(1968). A revised rulemaking based on ``a reevaluation of which policy 
would be better in light of the facts'' is ``well within an agency's 
discretion.'' Nat'l Ass'n of Home Builders v. EPA, 682 F.3d 1032, 1038 
(D.C. Cir. 2012) (citing F.C.C. v. Fox Television Stations, Inc., 556 
U.S. 502, 514-15 (2009)). Further, ``[a] change in administration 
brought about by the people casting their votes is a perfectly 
reasonable basis for an executive agency's reappraisal of the costs and 
benefits of its programs and regulations.'' Id. at 1043 (quoting Motor 
Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. 
Co., 463 U.S. 29, 59 (1983) (Rehnquist, J., concurring in part and 
dissenting in part)). An ``agency is entitled to have second thoughts, 
and to sustain action which it considers in the public interest upon 
whatever basis more mature reflection suggests.'' Dana Corp. v. ICC, 
703 F.2d 1297, 1305 (D.C. Cir. 1983). An agency is entitled to give 
more weight to socioeconomic concerns than it may have under a 
different administration. Am. Trucking Associations v. Atchison, T. & 
S.F. Ry. Co., 387 U.S. 397, 416, 87 S. Ct. 1608, 1618 (1967); see also, 
Fox, 556 U.S. at 515-516, 129 S. Ct. at 1811.

D. ONRR's Relevant Prior Rulemakings and Associated Litigation

1. Federal Oil and Gas, and Federal and Indian Coal
i. The 2016 Valuation Rule and Industry Lawsuit
    On July 1, 2016, ONRR published the 2016 Valuation Rule, which 
extensively updated the royalty valuation framework for Federal oil and 
gas and Federal and Indian coal. The effective date of the 2016 
Valuation Rule was January 1, 2017.
ii. The 2017 Postponement Notice
    On February 27, 2017, ONRR published the 2017 Postponement Notice, 
which attempted to postpone the effective date of the 2016 Valuation 
Rule. In response, the States of California and New Mexico filed suit 
in the United States District Court for the Northern District of 
California to challenge the 2017 Postponement Notice. See Becerra v. 
U.S. Dep't. of the Interior, 276 F. Supp. 3d 953 (N.D. Cal. 2017).
iii. The 2017 Repeal Rule
    On August 7, 2017, ONRR published the 2017 Repeal Rule, which 
attempted to repeal the 2016 Valuation Rule in its entirety. On October 
7, 2017, the States

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of California and New Mexico filed a second suit in the United States 
District Court for the Northern District of California to challenge the 
2017 Repeal Rule. On March 29, 2019, the District Court issued a 
decision that vacated the 2017 Repeal Rule. Becerra v. U.S. Dep't of 
the Interior, 381 F. Supp. 3d 1153 (N.D. Cal. 2019). The decision 
reinstated the 2016 Valuation Rule, including the rule's original 
effective date of January 1, 2017. Id. at 1179. See also Becerra v. 
U.S. Dep't of the Interior, Case No. C 17-5948 SBA, Order at page 3 
(July 30, 2020).
    ONRR included mention of the District Court's findings in the 2020 
Proposed Rule (85 FR 62054, 62055-62056), and discusses those findings 
further below.
    Several months after the 2016 Valuation Rule was reinstated, 
industry filed litigation in the United States District Court for the 
District of Wyoming, challenging the 2016 Valuation Rule. See Cloud 
Peak Energy, Inc. v. U.S. Dep't of the Interior, Case No. 19-CV-120-SWS 
(D. Wyo.). On October 8, 2019, the Wyoming District Court entered an 
Order granting in part and denying in part industry's request for a 
preliminary injunction with respect to the 2016 Valuation Rule. The 
Order stayed all portions of the 2016 Valuation Rule applicable to 
Federal and Indian coal. Cloud Peak, 415 F. Supp. 3d 1034, 1053 (D. 
Wyo. 2019). Thus, Federal and Indian coal lessees continue to report 
and pay royalties under the 1989 Federal and Indian Coal Valuation 
Regulations (54 FR 1492) while the Cloud Peak case is being litigated.
2. Civil Penalties
    ONRR previously amended portions of its civil penalty regulations, 
at 30 CFR part 1241, on August 1, 2016 (81 FR 50306) in order to 
clarify the civil penalty regulations and increase transparency about 
how ONRR assesses civil penalties. API challenged the 2016 Civil 
Penalty Rule in the United States District Court for the District of 
Wyoming. The District Court upheld the 2016 Civil Penalty Rule, except 
as to one issue. See API v. U.S. Dep't. of the Interior, 366 F. Supp. 
3d 1292, 1309-10 (D. Wyo. 2018). The exception was 30 CFR 
1241.11(b)(5), which provides that a petitioner may forfeit the benefit 
of a stay of the accrual of civil penalties if an ALJ determines that 
the petitioner's defense to a previously issued civil penalty is 
frivolous. The District Court held that the provision was an abuse of 
discretion and facially not in accordance with the law. See API, 366 F. 
Supp. 3d at 1310.
    API appealed to the United States Court of Appeals for the Tenth 
Circuit, which vacated the District Court's decision, finding API 
lacked standing to pursue its facial challenge to the 2016 Civil 
Penalty Rule. See API v. U.S. Dep't of the Interior, 823 Fed. Appx. 583 
(10th Cir. 2020). Upon remand, the District Court dismissed API's claim 
for lack of jurisdiction. API, Case No. 17-cv-83-NDF, D. Wyo., Order 
dated Sept. 29, 2020.

E. Public Comment Overview

1. Public Comment Period
    On August 7, 2020, the Department issued a press release to notify 
the public of the 2020 Proposed Rule and, on the same day, ONRR 
published the text of the 2020 Proposed Rule on its website for the 
public to view in advance of the 2020 Proposed Rule's publication in 
the Federal Register.
    On October 1, 2020, ONRR published the 2020 Proposed Rule in the 
Federal Register. The 2020 Proposed Rule provided a 60-day comment 
period that closed on Monday, November 30, 2020. See 85 FR 62054. ONRR 
received comments from numerous industry members, trade associations, 
public interest groups, members of Congress, members of the public, and 
state and local entities. ONRR received a total of 40,456 pages of 
comments, of which 38,150 pages were a similar form comment. If the 
38,150 pages of form comments are treated as a single comment, ONRR 
received 2,307 unique pages of comment materials.
2. Specific Comments Requested by ONRR in the 2020 Proposed Rule
    In section F of the 2020 Proposed Rule, ONRR requested comments on 
specific topics (85 FR 62070-62071). This rule addresses those comments 
in the applicable amendment discussions herein.
3. General Comments
    Public Comment: One commenter claimed that ONRR's 2020 Proposed 
Rule is arbitrary and capricious. ONRR's claim that the 2020 Proposed 
Rule will increase natural resource production is arbitrary and 
capricious because it is unsupported in the rulemaking record, the 
commenter said. The commenter stated that ONRR failed to provide any 
analysis or record to demonstrate that production increases will occur. 
According to the commenter, ONRR also contradicted itself by stating 
that the 2020 Proposed Rule would not materially alter natural resource 
exploration, production, or transportation.
    ONRR Response: In the 2020 Proposed Rule, ONRR provided its 
rationale for proposing the amendments. ONRR acknowledged instances 
where it believed additional information could improve its analyses. 
Consequently, ONRR posed a list of specific, targeted questions in the 
2020 Proposed Rule to solicit additional information from public 
commenters for ONRR's consideration. ONRR reviewed and considered all 
substantive comments it received, and, where appropriate, revised its 
analysis in this final rule based on the information provided by the 
public comments.
    The commenter is correct that the 2020 Proposed Rule does not 
quantify an increase in domestic energy production--neither does this 
final rule. This rule is not premised on increasing the production of 
oil, gas, or coal by some measured amount. Instead, this rule, in part, 
is meant to incentivize both the conservation of natural resources (by 
extending the life of current operations) and domestic energy 
production over foreign energy production. The Department typically 
conducts economic analyses regarding changes in leasing fiscal terms or 
increased/decreased regulatory burdens. The margin of error for 
estimating this rule's negligible or marginal impact on actual 
production is beyond the capability of the Department's existing 
models, and the Department does not know of other economic models that 
are sufficiently sensitive to accurately measure these changes. The 
Department's models are designed to analyze newly available geologic 
information, changes in prices and fiscal changes to future lease 
terms. The model results provide estimates of the downstream impact on 
public lands leasing and production, and it would not be appropriate 
for ONRR to use these results to estimate to estimate any production 
changes due to the provisions of this rulemaking because these 
provisions impact leases currently in production.
    ONRR disagrees with the commenter that ONRR contradicted itself in 
the 2020 Proposed Rule. ONRR believes the commenter misunderstood the 
separate activities of (1) ONRR's explanation of the rule's objectives 
and estimating its royalty and administrative impacts, and (2) ONRR's 
application of certain criteria to determine whether it must make an 
additional statement or analysis to comply with NEPA requirements.
    Public Comment: A commenter also claimed that if production does 
increase as a result of the rule, then ONRR's failure to address the 
environmental

[[Page 4617]]

costs associated with such production increase is arbitrary and 
capricious. According to the commenter, increased production will 
result in negative environmental externalities, which ONRR must 
consider under Federal land management statutes and the APA. The 
commenter specifically cites to FLPMA, MLA, and OCSLA as authorities 
that require ONRR to consider environmental impacts when promulgating 
regulations involving energy production on Federal lands. As the 
commenter pointed out, the APA also requires agencies to ``examine the 
relevant data and articulate a satisfactory explanation for its 
action.'' Motor Vehicle Assn. v. State Farm Mut. Auto. Ins. Co., 463 
U.S. 29, 43 (1983).
    Another commenter raised additional environmental concerns with 
ONRR's 2020 Proposed Rule. This commenter requested that ONRR consider 
environmental impacts alongside the effects on the oil and gas industry 
as a result of this rule. The commenter stated that ONRR is supposed to 
consider and consult with more stakeholders when engaging in the 
rulemaking process. The commenter explained that the list of 
stakeholders should include government agencies, environmentalists, 
private companies, actors in the fossil fuel industries that operate on 
Federal and Indian land, and people who consume oil and gas. The 
commenter stated that this type of stakeholder engagement would make 
ONRR's rulemakings more comprehensive.
    ONRR Response: The environmental impacts of energy and mineral 
development are analyzed at other stages in the development process, 
including the land use planning stage, the lease sale stage, and the 
project-specific development stage when more specific details of the 
potential environmental impacts and use on the leased area by a 
proposed project would be readily available. Further environmental 
review of these projects in the context of this rulemaking is thus 
duplicative and unnecessary. Generally, an agency's promulgation of 
regulations must be based within the agency's specific legal mandate 
and cannot extend beyond the intended reach of the agency's statutory 
and delegated authority. Similarly, an agency's primary rulemaking 
objective and goal must align with the stated purpose of the Acts 
governing the agency's rulemaking. Congress gave the Secretary 
authority to promulgate regulations concerning ``a comprehensive 
inspection, collection and fiscal and production accounting and 
auditing system to provide the capability to accurately determine oil 
and gas royalties, interest, fines, penalties, fees, deposits, and 
other payments owed, and to collect and account for such amounts in a 
timely manner.'' 30 U.S.C. 1701(a) (emphasis added). See also 30 U.S.C. 
1701(b)(2) (``It is the purpose of this chapter . . . to clarify, 
reaffirm, expand and define the authorities and responsibilities of the 
Secretary of the Interior to implement and maintain a royalty 
management system for oil and gas leases on Federal lands, Indian 
lands, and the [OCS]. . . .''). A similar broad grant of authority to 
promulgate regulations is provided to the Secretary under the MLA at 30 
U.S.C. 189 and OCSLA at 43 U.S.C. 1334. ONRR is amending its royalty 
valuation and civil penalty regulations, and has considered all 
relevant information within this context in accordance with the 
Department's statutory mandate, as set forth under the MLA, OCSLA, and 
FOGRMA.
    Regarding the commenter's reference to FLPMA, that Act governs 
leasing activities primarily carried out by other Department bureaus 
and offices. For energy leasing, exploration, and development 
activities to be conducted on Federal or Indian land, these Department 
bureaus and offices evaluate the environmental impacts by conducting 
NEPA analyses. Thus, environmental impacts associated with newly 
proposed projects or operations are evaluated during the leasing and 
permitting stages by the appropriate bureau or office. If a project or 
operation is significantly modified or expanded beyond the initial 
approvals and corresponding NEPA analysis, the responsible agency will 
reevaluate any additional environmental impacts and conduct the 
appropriate NEPA analysis. This rule does not lessen the obligation 
borne by other Department bureaus and offices to perform NEPA analyses 
at all appropriate stages in the leasing and lease administration 
process.
    In response to the commenter's statement pertaining to stakeholder 
involvement, ONRR solicited input from all interested persons and 
stakeholders, including environmental organizations, as part of this 
rulemaking. Through the publication of the 2020 Proposed Rule in the 
Federal Register on October 1, 2020, ONRR provided ``interested persons 
an opportunity to participate in the rule making through submission of 
written data, views, or arguments'' as required under the APA. 5 U.S.C. 
553(c). The 2020 Proposed Rule provided all interested persons with a 
60-day public comment period to submit information for ONRR's 
consideration.
    Public Comment: Another public commenter stated that ONRR likely 
will be required to once again change its regulations as a result of a 
change in Administrations. The commenter cites to statements suggesting 
that a future Administration would modify or reverse the E.O.s 
currently relied upon by ONRR for this rulemaking.
    ONRR Response: The commenter cited general environmental policy 
objectives of a new Administration, which are not in place at the time 
of this rulemaking, and failed to identify any specific conflicts 
between any such policies and the proposed amendments. ONRR bases its 
policies on statutory dictates and its current priorities, rather than 
speculation about what a future administration might do. ONRR, in part, 
based the 2020 Proposed Rule on E.O.s and S.O.s in effect at the time 
of its publication, and on the policies underlying those directives. 
Those same E.O.s and S.O.s are still in effect for ONRR to consider in 
this final rule. Moreover, the underlying policies are valid, and 
deserve weight, aside from the particulars of the E.O.s and S.O.s. 
Please refer to Sec. I.A. for a general overview of this rule's 
objectives and the amendment discussion sections for additional 
explanations specific to each amendment.

II. Amendment Discussion--Part 1206 Product Valuation

A. Index-Based Valuation Method To Value Federal Gas

General Comments
    Public Comment: ONRR requested and received comments on the index-
based valuation method amendments. Specifically, ONRR asked for 
alternatives to requiring a lessee to evaluate all pricing points where 
a lessee's gas may flow. Several commenters from or representing the 
regulated community suggested that ONRR use the pricing point where a 
lessee's gas actually flows, rather than evaluate all possible pricing 
points. These commenters suggested this would lessen the burden on a 
lessee to research all possible index points and create greater 
certainty that a lessee did not overlook any possible index points.
    ONRR Response: As ONRR monitors reporting and payments under the 
index-based valuation methods adopted in the 2016 Valuation Rule and in 
this final rule, and systematically examines actual transaction data, 
ONRR will continue to look for alternatives to evaluating all 
accessible index pricing points, including alternatives that require 
tracing production to determine the actual index pricing point. 
However,

[[Page 4618]]

at this time, ONRR does not have the data to support the suggested 
change. Accordingly, ONRR is not making the change in this final rule.
    Public Comment: ONRR received several comments requesting ONRR 
update the transportation and fractionation (``T&F''), and processing 
adjustments, published at https://www.ONRR.gov, for the NGL index-based 
valuation method. These commenters stated that the values are outdated 
and do not reflect current markets or FERC published rates. The 
commenters also expressed concerns that the NGL index-based method does 
not allow for deductions for pre-plant transportation and the 
transportation deductions for unprocessed and residue gas should apply 
to NGLs.
    ONRR Response: ONRR did not propose amendments to the adjustments 
to the NGL index-based valuation method. While these comments are 
beyond the scope of this rulemaking, ONRR regulations state the T&F 
adjustments will be periodically updated (Sec.  1206.142(d)(2)(ii)), as 
outlined in the preamble to the 2016 Valuation Rule. ONRR will continue 
to periodically review and update these adjustments, as necessary. 
However, at this time, ONRR is not amending the proposed unprocessed 
and residue gas transportation deductions to apply to NGLs.
    Public Comments: A commenter requested that ONRR develop a 
valuation method for areas that do not have access to index-pricing 
points, specifically for gas produced in Alaska.
    ONRR Response: Currently, ONRR is not incorporating a specific 
valuation method for areas that do not have access to index-pricing 
points. A lessee cannot elect to use an index-based method in these 
areas, and the lessee must continue using the first arm's-length sale 
to value Federal gas.
    Public Comments: Some commenters requested that ONRR modify the 
index-based valuation method, and some commenters specifically 
submitted comments for consideration during future rulemakings. These 
comments include: (1) ONRR should consider extending the election 
period to value Federal gas, under the index-based valuation method, 
from two years to a minimum of three years; (2) ONRR should require or 
mandate a lessee value Federal gas using the index-based valuation 
method; (3) ONRR should develop an index-based method to value gas at 
the wellhead; and (4) ONRR should allow a lessee to propose an 
alternative valuation method under certain situations that force a 
lessee to value gas under the index-based valuation method (e.g. gas 
sold under a keepwhole contract with no arm's-length gross proceeds 
sales from the same lease, flared gas).
    ONRR Response: In this final rule, ONRR will not adopt these 
suggested changes as these changes are outside of the scope of this 
rulemaking. Additionally, ONRR will not act to implement suggestions 
for an extended election period or mandatory use of index-based 
valuation methods. At this time, both ONRR and lessees are best served 
in implementation of new valuation methods by shorter commitments and 
optional use.
1. Expansion of the Federal Gas Index Pricing Valuation Method Under a 
Non-Arm's-Length Contract to Federal Gas Sold Under Arm's-Length 
Contracts (Sec. Sec.  1206.141(c) and 1206.142(d))
    The 2016 Valuation Rule amended 30 CFR part 1206 to allow a lessee 
two valuation methods to value its non-arm's-length Federal gas sales. 
The first valuation method was to value Federal gas based on the first 
arm's-length sale occurring after a non-arm's-length sale or transfer 
of the gas to the lessee's affiliate. The second valuation method was 
to elect to use an index-based valuation method. This index-based 
valuation method aligns with a provision from the 2000 Federal Oil 
Valuation Rule, ``Establishing Oil Value for Royalty Due on Federal 
Leases'' (65 FR 14022, March 15, 2000), that allowed a lessee to elect 
to value Federal oil using index prices when it sells or transfers oil 
to an affiliate that, in turn, then sells the oil at arm's-length. The 
2020 Proposed Rule would extend optional use of the index-based 
valuation method to arm's-length sales of Federal gas.
Comments on the Proposed Amendment
    Public Comment: Several commenters supported the expansion of the 
index-based valuation method for Federal gas sold under an arm's-length 
contract. Commenters agreed that having the option to elect an index-
based method lessens the burden and provides early certainty for all 
payors. Commenters noted that a lessee is more likely to use the index-
based method if it is applicable to all its Federal gas sales and that 
this valuation method will truly lessen the administrative burden by 
allowing a lessee to use one approach to value gas sold under multiple 
contracts. The commenters reiterated that extending the index-based 
method to all Federal gas sales will further eliminate the burden to 
unbundle and comply with marketable condition regulations. One 
commenter stated that the index-based valuation method should be 
mandatory instead of being a method that gas producers can select for 
non-arm's-length sales for two-year periods.
    ONRR Response: Many commenters were in favor of the proposed 
changes published in the 2020 Proposed Rule. In this final rulemaking, 
ONRR is adopting the amendment as proposed in the 2020 Proposed Rule to 
allow a lessee with an arm's-length sale to elect to value its gas 
production under the index-based valuation method. Regarding the 
commenter's statement that the index-based valuation method should be 
mandatory, ONRR is not choosing to make it mandatory at this time for 
all sales, but will collect data based on optional use to inform 
possible future rulemaking.
    Public Comment: Some commenters opposed the extension of the index-
based method, and stated that ONRR has not provided enough data to 
modify the position it took in the 2016 Valuation Rule, including that 
arm's-length sales are the best indicator of value.
    ONRR Response: ONRR maintains that arm's-length sales are generally 
the best indicator of value. Index prices are derived from arm's-length 
sales reported to index pricing publications. The index-based valuation 
method simplifies the current valuation method and, in addition, 
provides transparency and early certainty to a lessee. The index-based 
method provides early certainty because the elements of the index-based 
formula are all known at the time royalty reports are first due, which 
is the end of the month following the month of production, and not 
subject to subsequent adjustment. In contrast, when royalty value is 
based on actual sales prices, transportation costs, and, for gas, 
processing costs, adjustments to those prices and costs in subsequent 
months change royalty values and require re-reporting. Also, the sales 
prices, transportation costs, and processing costs may be disputed 
through an ONRR audit or other ONRR compliance activity.
    The index-based method, in contrast, uses transparent, certain 
prices published prior to the royalty due date, and a fixed percentage 
of those published prices as an ``allowance'' to cover the costs of 
transportation. ONRR recognizes that ONRR and all Federal lessees can 
benefit from the certainty and transparency that the index-based 
valuation method provides. Additionally, complex valuation situations 
are not limited to non-arm's-length dispositions. In arm's-length 
transactions, many third-party pipeline

[[Page 4619]]

and service providers now charge lessees ``bundled'' fees that include 
costs to place production into marketable condition. Both ONRR and 
lessees with arm's-length sales, transportation, and/or processing 
contracts have found allocating the costs between allowed and 
disallowed costs is necessary for valuation based on gross proceeds, 
but administratively costly and time consuming. These are not required 
with index-based royalty reporting and payment cost allocations.
    Public Comment: A commenter suggested that ONRR require a lessee to 
pay on whichever value is higher between gross proceeds and the index-
based valuation method to eliminate the temptation to manipulate index 
prices.
    ONRR Response: Requiring a lessee each and every month to value gas 
by both gross proceeds and the index-based valuation method forces a 
lessee to use two valuation methods and increases the burden of either 
method individually. This would not achieve the mutual goal of a simple 
or certain valuation method for ONRR or a lessee. While there have been 
instances of traders attempting to manipulate index prices in recent 
years, these have been infrequent and involve limited volumes. ONRR 
believes that index prices are an acceptable method to value royalties 
for the following reasons: (1) The FERC must approve pricing 
publications used as the source of index prices for Federal gas royalty 
reporting and payments; (2) index publishers have protections to 
prevent and discourage price manipulation; (3) ONRR maintains 
discretion to disallow the use of an index point; and (4) index prices 
already influence royalty valuation, as they are used as the sales 
price or as part of a sales price formula in many arm's-length sales 
contracts. Further, as discussed in the preamble to the 2020 Proposed 
Rule, even when a lessee elects to use the index-based valuation method 
to report and pay royalties, ONRR retains the right and ability to from 
time to time examine, review, analyze, and audit the lessee's actual 
transaction data--including sales, transportation, processing, and 
contracts for services required to place production in marketable 
condition. By periodically examining actual transaction data, ONRR will 
be well positioned to ascertain the continuing validity of both the 
index prices and ONRR's continued use of an index-based valuation 
method. If ONRR finds an index price unreliable, ONRR will have the 
opportunity to stop using that index price. And if ONRR finds that its 
index-based valuation method needs adjustment, ONRR will have the 
opportunity to change the method through future rulemaking.
    ONRR appreciates the comments supporting, seeking modification to, 
and opposing the proposed amendments to Sec. Sec.  1206.141(c) and 
1206.142(d). After careful consideration, and for the reasons explained 
in the 2020 Proposed Rule and this final rule, ONRR is adopting the 
proposed changes to Sec. Sec.  1206.141(c) and 1206.142(d) as part of 
this final rule.
2. Published Average Bidweek Price (Sec. Sec.  1206.141(c)(1)(i) and 
(ii); and 1206.142(d)(1)(i) and (ii))
    For unprocessed gas and residue gas, the 2016 Valuation Rule's 
index-based valuation method requires use of the highest monthly 
bidweek price for the index pricing points that a lessee's gas can flow 
to, whether or not there is a constraint for that production month, 
less a specified deduction. The 2020 Proposed Rule proposed to amend 
the 2016 Valuation Rule to use the highest of the monthly bidweek 
average prices for the index pricing points that a lessee's gas can 
flow to, whether or not there is a constraint for that production 
month, instead of the highest of the monthly bidweek high prices. See 
85 FR 62058.
    When ONRR uses the term in the 2020 Proposed Rule, ``published 
average bidweek price,'' or ``bidweek average'' for short, it refers to 
what many publications call the ``index'' or ``average'' price. For 
example, the Platts Inside FERC's Gas Market Report labels this price 
as the ``index,'' while the Natural Gas Intelligence's (``NGI'') 
Bidweek Survey labels this price as the ``average.''
    An index-based valuation method using bidweek average prices still 
results in a royalty value comparable to the fair market value a lessee 
could receive under the typical arm's-length contract, and ONRR 
anticipates this method will be used by more lessees, because it better 
reflects the average price the average lessee receives, rather than the 
high price only one lessee receives. Greater use of the index-based 
valuation method will ease both the lessee's administrative burden and 
ONRR's.
    Lastly, using the bidweek average price for unprocessed gas and 
residue gas aligns with the use of average prices used in the NGL 
index-based valuation method (Sec.  1206.142(d)(2)(i)) and the Federal 
oil regulations (Sec.  1206.102). Using average prices for all the 
index-based valuation methods provides consistency and transparency, 
increases accuracy, and avoids confusion and potential errors.
Comments on the Proposed Amendment
    Public Comment: ONRR received several comments that support using 
the bidweek average price rather than the bidweek high price in the 
index-based valuation method. Commenters stated that the bidweek 
average price more closely reflects the price a lessee could obtain and 
is closer to the value of gross proceeds. Commenters stated the bidweek 
average price results in a more reasonable value for royalty purposes 
and that a lessee is more likely to elect the index-based valuation 
method. Another commenter stated that bidweek average prices are more 
certain and reliable because they represent many transactions at the 
same pricing point. On the contrary, the highest bidweek price may only 
represent a single transaction, which may or may not reflect normal 
market dynamics.
    ONRR Response: The bidweek high price is the highest price reported 
for any transaction that qualifies for reporting, which may or may not 
reflect usual market dynamics. The bidweek average price is just that--
an average price from many arm's-length transactions at the same 
pricing point. For the reasons discussed above, ONRR is adopting the 
use of the bidweek average price in this final rule.
    Public Comment: A commenter supported using the bidweek average 
prices since a lessee could more easily access the bidweek average 
price based on its own contract pricing but would have to pay a third-
party publication to access the high bidweek prices.
    ONRR Response: If a lessee chooses to use contract prices that 
reference an index price, rather than a price found in a subscription 
or publication, it is up to the lessee to verify that the contract 
price is accurate, and that it reflects all possible index pricing-
points. ONRR will rely on ONRR's subscriptions to verify pricing in any 
compliance activity. ONRR is not aware of any difference in 
subscription costs between publications identifying the bidweek average 
and the bidweek high prices.
    Public Comment: Several commenters stated that ONRR should require 
the highest of the bidweek high prices, because it better protects the 
interests of the taxpayers and States. Additionally, commenters opposed 
adopting any amendment that would decrease royalties paid to ONRR.
    ONRR Response: ONRR disagrees that using the bidweek high price 
better protects the lessor's interest than using the bidweek average 
price. While the bidweek average price is lower than the bidweek high 
price, the bidweek average more closely reflects the gross

[[Page 4620]]

proceeds that a lessee would typically receive in an arm's-length 
transaction, and therefore is more likely to actually be used by 
lessees. ONRR maintains that other protections are still in place, such 
as requiring the lessee to choose this option for a minimum of two 
years and requiring the lessee to use the highest bidweek average price 
to which the gas could flow when multiple pricing points are involved.
    Furthermore, in the context of the overall rulemaking, it is 
possible that the index-based valuation method (if actually used) may 
increase royalties paid under this method. As outlined in the 
Procedural Matters section, overall royalty values under the 2020 
Valuation Rule's index-based valuation method are around $0.04/MMBtu 
higher than the prices reported to ONRR for arm's-length sales, even 
with the use of average rather than high bidweek prices.
    ONRR appreciates the comments supporting, seeking the modification 
to, and opposing the proposed amendments to Sec. Sec.  
1206.141(c)(1)(i) and (ii) and 1206.142(d)(1)(i) and (ii). After 
careful consideration, and for the reasons stated in the 2020 Proposed 
Rule and this final rule, this final rule adopts the proposed amendment 
in full.
3. Transportation Deductions (Sec. Sec.  1206.141(c)(1)(iv) and 
1206.142(d)(1)(iv))
    The 2016 Valuation Rule amended ONRR's regulations to allow a 
lessee that elects to use the index-based valuation method to include 
an adjustment for transportation based on the location of its lease 
(e.g., OCS, GOM, or all other areas). The rule further constrained the 
transportation adjustment to a specified range measured in cents per 
MMbtu. The 2016 Valuation Rule adjustments and minimum-to-maximum 
ranges were as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                   Minimum rate    Maximum rate
                            Location                              Transportation    (cents per      (cents per
                                                                  adjustment (%)      MMbtu)          MMbtu)
----------------------------------------------------------------------------------------------------------------
OCS, GOM........................................................               5           $0.10           $0.30
All Other Areas.................................................              10            0.10            0.30
----------------------------------------------------------------------------------------------------------------

    ONRR based the transportation adjustment and minimum-to-maximum 
constraint on its analysis of transportation allowances reported to 
ONRR for production months in calendar years 2007 to 2010 (proposed 
2016 Valuation Rule, 80 FR 618, January 6, 2015).
    In the 2020 Proposed Rule, ONRR performed the same analysis for 
production months in calendar years 2014 through 2018. Based on this 
analysis of more recent time periods, ONRR proposed to revise the 
allowed transportation adjustments and minimum-to-maximum constraints 
as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                   Minimum rate    Maximum rate
                            Location                              Transportation    (cents per      (cents per
                                                                  adjustment (%)      MMbtu)          MMbtu)
----------------------------------------------------------------------------------------------------------------
OCS, GOM........................................................              10           $0.10           $0.40
All Other Areas.................................................              15            0.10            0.50
----------------------------------------------------------------------------------------------------------------

    The 2020 Proposed Rule explained that these values more closely 
reflect the actual costs a lessee will incur to transport gas to an 
index-pricing point. See 85 FR 62058. ONRR will continue to monitor 
reported transportation allowances to ensure that the adjustments under 
its regulations for the index-based valuation method continue to be 
representative of the actual costs that lessees report to ONRR.
Comments on the Proposed Amendment
    Public Comment: ONRR received comments supporting the proposal to 
update the transportation adjustment values in order to more accurately 
reflect the current markets and rates charged for arm's-length 
transportation.
    ONRR Response: ONRR agrees with these comments that the 
transportation adjustment amounts should more closely reflect the 
average cost a lessee incurs to transport gas to an index pricing 
point. ONRR will continue to monitor transportation allowances reported 
by lessees, including those who have not elected to report under the 
index price valuation method but under gross proceeds, and will 
periodically review, examine, analyze, or audit actual transportation 
transactions and the costs of placing gas into marketable condition to 
ensure that the adjustments under these regulations remains 
representative of the costs a lessee incurs on average.
    Public Comment: Commenters stated that ONRR should not update the 
transportation adjustments for the index-based valuation method. These 
commenters opposed any amendment that will result in lower royalties 
paid to the Federal Government and disbursed to State and local 
governments.
    ONRR Response: While ONRR understands these concerns, ONRR's 
analysis of data supports modifying the adjustments to more closely 
reflect the average costs a lessee incurs to transport gas to an index 
pricing point. ONRR will continue to monitor transportation 
adjustments, and will periodically review, examine, analyze, or audit 
actual transportation contracts and the costs of placing gas into 
marketable condition to ensure that the adjustments remain reflective 
of the average cost lessees incur.
    Public Comment: An industry commenter stated that because the 
transportation adjustments were calculated using data from calendar 
years 2014 through 2018, they are already outdated. Most transportation 
contracts have moved to fixed-fee rates since that time and with lower 
commodity prices, transportation can exceed the updated adjustments. 
The commenter suggested ONRR find alternatives to a set percentage or 
evaluate transportation adjustments more frequently.
    ONRR Response: ONRR will monitor and review the transportation 
adjustments. If ONRR finds that the transportation adjustments cease to 
reflect typical costs, ONRR can take action to update the 
transportation adjustment to ensure that its index-based valuation 
method captures a reasonable value for royalty purposes.
    Public Comment: A commenter expressed concern that ONRR failed to 
document and explain its calculations of the revised index-based

[[Page 4621]]

transportation adjustments. The commenter expressed a need for greater 
transparency to ensure that ONRR is accountable to the public for its 
decisions.
    ONRR Response: ONRR identified the weighted per unit transportation 
rate and imputed the transportation percentage from the data reported 
on the form ONRR-2014 for the months in the noted calendar years for 
properties reporting a transportation allowance. Using this method, 
ONRR identified a maximum, minimum, and average range for both OCS and 
all other properties. ONRR used these values to establish the updated 
transportation deductions in the 2020 Proposed Rule.
    ONRR appreciates the comments supporting, seeking the modification 
to, and opposing the proposed amendments to Sec. Sec.  
1206.141(c)(1)(iv) and 1206.142(d)(1)(iv). After careful consideration, 
and for the reasons set out in the 2020 Proposed Rule and this final 
rule, this final rule will adopt the proposed amendment in full.
4. Zero Value (Sec. Sec.  1206.141(f) and 1206.142(g))
    In the 2020 Proposed Rule, ONRR proposed to add language to the 
unprocessed (Sec.  1206.141(f)) and processed (Sec.  1206.142(g)) gas 
regulations clarifying ONRR's long-standing policy that the value of 
any product cannot be reported as less than zero. Consistent with 
language included in lease documents, including a lessee's duty to 
market gas at no cost to the Federal Government, lessees have never 
been permitted to report negative royalty values. Adding this to the 
regulatory language promotes consistent and clear regulations.
    When ONRR published the 2020 Proposed Rule, its systems were unable 
to accept a reporting line with a $0.00 royalty value. In instances 
where the royalty value would correctly be $0.00, ONRR instructed 
reporters to code the reporting line using Transaction Code 20 and 
report a royalty value less allowances of $0.01. The 2020 Proposed 
Rule's proposed regulatory text reflected this constraint by including 
language that, for example, prevented a lessee from reducing ``the 
royalty value of any production to zero.'' Emphasis added.
    ONRR now has the system capability to accept a report with a $0.00 
royalty value, and no longer has a need to include a workaround for 
that constraint in this final rule. Thus, in the example above, this 
final rule will modify the proposed amendment to Sec. Sec.  1206.141(f) 
and 1206.142(g) to state that ``Under no circumstances may your gas be 
valued for royalty purposes at less than zero.'' Emphasis added.
Comments on the Proposed Amendment
    Public Comment: A commenter requested ONRR clarify this provision. 
The commenter stated that payors received guidance from ONRR stating, 
``for those situations where your value for royalty purposes, plus any 
disallowed costs or additional consideration under your sales contract, 
is less than or equal to $0.00, ONRR's regulations and your Federal 
lease require you to report and value any Federal gas production 
removed or sold from your lease, even if the value is zero or less than 
zero.'' The guidance further instructed reporters to report those zero 
royalty values, where the proposed rule does not allow a zero-royalty 
value. The inconsistency in guidance and the proposed rule changes 
create confusion and uncertainty, the commenter said.
    ONRR Response: ONRR acknowledges that its guidance and the proposed 
amendment may be inconsistent. However, the purpose of the amendment is 
to resolve any confusion that may have arisen under ONRR's prior 
regulations and guidance. If there is an inconsistency between the 
amendments adopted in this final rule and any prior guidance, this 
final rule will control. ONRR recognizes that, in the absence of the 
clarifying language in this final rule, a lessee might seek to report a 
royalty value of zero in instances where gross proceeds or index prices 
are at or below zero, after adding back any disallowed costs or 
additional considerations. However, this final rule clarifies that 
products cannot be valued, for royalty purposes, less than zero, but 
can be valued at zero. This regulatory change is consistent with 
language included in most lease documents, including a lessee's duty to 
market gas at no cost to the Federal Government. Lessees have never had 
the ability to report negative royalty values.
    ONRR appreciates the comments supporting, seeking the modification 
to, and opposing the proposed amendments to Sec. Sec.  1206.141(f) and 
1206.142(g). After careful consideration, and for the reasons stated in 
the 2020 Proposed Rule and this final rule, this final rule adopts the 
proposed amendment with the modification described above to clarify 
that a lessee can report a $0.00 royalty value. This modification 
between the 2020 Proposed Rule and this final rule impacts a limited 
number of instances to change the reported royalty value from $0.01 to 
$0.00. As such, ONRR finds there will be no material change to the 
royalties it collects, and it does not further distinguish the 
modification in this rule's economic analysis.
5. Providing Sales Records (Sec. Sec.  1206.141(g) and 1206.142(h))
    The 2020 Proposed Rule proposed to add new regulation language to 
reinforce ONRR's statutory authority under 30 U.S.C. 1713(a), which 
expressly requires ``a lessee, operator, or other person directly 
involved in developing, producing, transporting, purchasing, or selling 
oil or gas . . . through the point of first sale or the point of 
royalty computation, whichever is later, establish and maintain any 
records, . . . and provide any information'' required by rule to ONRR 
when it is ``conducting an audit or investigation.'' ONRR proposed the 
addition of regulatory language to clarify that it may continue to 
request and receive a lessee's and its affiliate's sales and expense 
records, even when a lessee pays royalties under an index-based 
valuation method.
    The ability to continue to evaluate sale and expense records will 
ensure the index-based valuation method remains a fair market value for 
Federal oil and gas lessees' production. ONRR has the authority to 
request this information when conducting an audit or investigation, and 
the new regulatory text will preserve the ability to obtain a lessee's 
records in order to evaluate whether the index-based valuation method 
remains a fair value for royalty purposes.
Comments on the Proposed Amendment
    Public Comment: Several commenters acknowledge ONRR already has the 
authority to collect records from a lessee during the normal course of 
audit and compliance activity. However, the commenters expressed 
concern that frequent and persistent requests for data will create an 
unnecessary burden. The commenters referenced the preamble language in 
the 2020 Proposed Rule and ONRR's suggestion that the index-based 
method should create simplicity and early certainty when reporting 
royalties. Commenters expressed concern that ONRR will continue to 
request and audit these records and eliminate any of the simplicity 
that the index-based method affords.
    ONRR Response: ONRR does not believe that adding this language to 
regulatory text will create an unnecessary burden on a lessee that 
elects to use the index-based method. Further, any burden to a lessee 
is outweighed by the certainty of knowing that ONRR will have access to 
information needed to periodically evaluate the reliability of 
individual

[[Page 4622]]

index prices. Finally, if ONRR requires a lessee to provide information 
under this section, and that information establishes that the index-
based method is no longer representative of fair market value, any 
change to or repeal of the method would be done through rulemaking, and 
would only have prospective application.
    ONRR appreciates the comments supporting, seeking the modification 
to, or opposing the proposed amendments to Sec. Sec.  1206.141(g) and 
1206.142(h). After careful consideration, and for the reasons explained 
in the 2020 Proposed Rule and this final rule, ONRR is adopting the 
proposed changes to Sec. Sec.  1206.141(g) and 1206.142(h) as part of 
this final rule.

B. Transportation Allowance for Certain Offshore Federal Oil and Gas 
Gathering Costs

    In the 2020 Proposed Rule, ONRR explained the origins of its 
current ``gathering'' definition and how ONRR and MMS have considered 
over the years whether to allow the cost of certain offshore gathering 
activities to be included in a lessee's transportation allowance. See 
85 FR 62054. Central to this amendment's discussion are the Deepwater 
Policy (https://www.onrr.gov/Laws_R_D/pubcomm/PDFDocs/990520.pdf) and 
the 2016 Valuation Rule, which rescinded the Deepwater Policy. See 81 
FR 43338.
    Because of the unique nature of the OCS, particularly in the 
deepwater OCS, the 2020 Proposed Rule proposed to amend ONRR's 
regulations to permit the same deductions previously taken under the 
Deepwater Policy. Under the Deepwater Policy, a lessee could claim 
certain gathering costs in its transportation allowance if certain 
criteria were met, including:
     A part of the lease must lie in waters deeper than 200 
meters.
     The transportation allowance must otherwise be determined 
in accordance with ONRR's regulations.
     The costs must be allocated between the royalty bearing 
and non-royalty bearing substances (for example, water or production 
subject to a zero royalty rate).
     The leases and units must be treated similarly.
     Movement prior to a central accumulation point is still 
disallowed from a transportation allowance. A central accumulation 
point, for purposes of the Deepwater Policy, may be a single well, a 
subsea manifold, the last well in a group of wells connected in series, 
or a platform extending above the water's surface.
     The movement must be to a facility not located on a lease 
adjacent to the lease on which the production originated. An adjacent 
lease is defined as a lease with at least one point of contact with the 
producing lease or unit.
    The 2020 Proposed Rule proposed to permit a lessee to request, and 
ONRR to approve, an application of the deepwater gathering-as-
transportation principles in shallow waters under certain 
circumstances.
    The 2020 Proposed Rule also proposed to remove certain language 
that the 2016 Valuation Rule added to ONRR regulations. Specifically, 
through the 2020 Proposed Rule, ONRR removed (1) the language under 
Sec. Sec.  1206.110(a)(2)(ii) and 1206.152(a)(2)(ii), which provided 
``[f]or [production from] the OCS, the movement of [production] from 
the wellhead to the first platform is not transportation,'' and (2) the 
portion of the ``gathering'' definition at Sec.  1206.20, which stated 
that ``any movement of bulk production from the wellhead to a platform 
offshore.''
    While the 2020 Proposed Rule's preamble fully explained ONRR's 
intent behind its proposal to adopt regulatory text that is consistent 
with the former Deepwater Policy, the proposed regulatory text failed 
to include all of the Deepwater Policy's requirements. Specifically, 
the proposed regulatory text was not consistent across the oil and gas 
sections and did not include the adjacency limitation or the 
requirement for a lessee to identify a central accumulation point at or 
near the subsea wellheads (explained in the 6th and 5th bulleted points 
respectively, supra.).
Comments on the Proposed Amendment
    Public Comment: Industry commenters endorsed ONRR's attempt to 
adopt regulations consistent with the Deepwater Policy. These 
commenters argued that the Deepwater Policy supported innovative 
technology development that minimized surface facilities, reduced 
environmental risks, and increased ultimate recovery. They also argued 
that adopting regulations consistent with the Deepwater Policy would 
return a longstanding ONRR practice that lessees relied on to inform 
their business decisions.
    ONRR Response: Based on public comments such as these, adoption of 
regulations consistent with the Deepwater Policy may reduce a lessee's 
total royalty burden, resulting in a lower total cost to operate on the 
OCS, and thereby potentially encouraging continued production and 
conservation of resource. Additionally, consistent and transparent 
regulations reduce uncertainty for investors, which provides a 
competitive advantage for development of domestic production. Recent 
Executive and Secretarial Orders call on Federal agencies to 
appropriately promote and unburden domestic energy production, 
especially OCS resources. See E.O. 13783, ``Promoting Energy 
Independence and Economic Growth,'' E.O. 13795, ``Implementing an 
America-First Offshore Energy Strategy,'' and S.O. 3350, which promotes 
the America-First Offshore Energy Strategy.
    Public Comment: One industry commenter, while supportive of the 
Deepwater Policy, argued that adoption of regulations consistent with 
the Deepwater Policy is moot. This commenter suggested that ONRR 
intends to disallow deductions for any movement of production that is 
not fully in marketable condition, and cited DCOR, LLC, ONRR-17-0074-
OCS (FE), 2019 WL 6127405 (Aug. 26, 2019) (``DCOR'').
    ONRR Response: The fact pattern and analysis in DCOR are 
distinguishable from the amendments in this rule to allow a lessee to 
claim certain OCS gathering costs. For example, no part of the leases 
in DCOR were located in water depths deeper than 200 meters. These 
amendments provide a specific exception to the general principle that a 
lessee may not include gathering costs in its transportation allowance.
    Public Comment: Several commenters noted the inconsistency between 
the oil and gas sections of the proposed rule. The oil section at Sec.  
1206.110 included the following language: ``For oil produced on the OCS 
in waters deeper than 200 meters, the movement of oil from the wellhead 
to the first platform is transportation for which a transportation 
allowance may be claimed'' and ``On a case-by-case basis, you may apply 
to ONRR to have your actual, reasonable and necessary costs of the 
movement of oil produced on the OCS in waters shallower than 200 meters 
from the wellhead to the first platform to be treated as transportation 
for which a transportation allowance may be claimed.'' See 85 FR 62080. 
The gas section of the proposed rule, however, included no such 
language. See 85 FR 62084.
    ONRR Response: In the final rule, ONRR is correcting for the 
omissions in its proposed regulation text at Sec.  1206.110 to clearly 
adopt regulations consistent with the Deepwater Policy, except for the 
provision that would have allowed a lessee to apply for treatment of 
shallow water gathering as deductible transportation. ONRR is inserting 
parallel language in the gas regulations at Sec.  1206.152.

[[Page 4623]]

    Public Comment: One commenter suggested that the language at Sec.  
1206.110(a)(1)(i) should end with ``including'' instead of ``except.''
    ONRR Response: In the final rule, ONRR restructured the regulation 
text. The movement of bulk production from or near subsea wellheads to 
the first platform is gathering. However, this regulatory amendment 
provides an exception to the general application of the gathering and 
transportation regulations, allowing subsea gathering costs to be 
included in a transportation allowance when the regulatory requirements 
are met.
    Public Comment: One commenter requested that, when a lessee submits 
a request to apply the deepwater gathering-as-transportation principles 
to a lease in shallow waters, the regulation include a time limit for 
ONRR to respond and require ONRR to provide an explanation if the 
request is denied.
    ONRR Response: This final rule does not allow a lessee to apply for 
treatment of shallow water gathering as deductible transportation. A 
lessee may not submit, nor may ONRR approve, such a request under this 
final rule. Accordingly, there is no need for ONRR to adopt a time 
limit for its action on a shallow water request. However, ONRR intends 
to continue studying any need for, and the economic impact of, a 
shallow water gathering allowance, and may propose a future rulemaking 
on this subject.
    Public Comment: Public interest groups opposed the effort, arguing 
the policy permitted, in the form of a transportation allowance, is an 
improper deduction under ONRR's regulatory scheme. A commenter argued 
that ONRR does not have the authority to incentivize production and 
should not attempt to do so using a policy like this to minimize a 
lessee's royalty obligations. Another commenter stated that the oil and 
gas industry has received several royalty relief measures for offshore 
production and that the government should not be further helping 
industry at the taxpayers' expense.
    ONRR Response: Although ONRR's primary focus is the collection, 
verification, and disbursement of natural resources revenues, it shares 
the Department's policy goals to promote the development of natural 
resources and to obtain for the public a reasonable financial return on 
assets that belong to the public. See S.O. 3350 and S.O. 3360. ONRR has 
the statutory authority to promulgate regulations and to carry out the 
stated purposes of the Acts as explained further in the introduction of 
this final rule. The mineral leasing authorities granted to the 
Secretary by Congress provide broad authorities to ``prescribe 
necessary and proper rules and regulations and to do any and all things 
necessary to carry out and accomplish the purposes of [the leasing 
statutes]'', including the collection of all revenues associated with 
such activities, including the OCS. 30 U.S.C. 189 (MLA); 30 U.S.C. 1751 
(FOGRMA); 43 U.S.C. 1334(a) (OCSLA).
    Public Comment: The States of California and New Mexico opposed 
this change, arguing it will cause companies to improperly deduct costs 
that should be considered gathering and is inconsistent with the 
definition of gathering clarified in conjunction with the rescission of 
the Deepwater Policy in the 2016 Valuation Rule. These States asserted 
the 2016 Valuation Rule allowed for a more consistent and reliable 
application of the regulations.
    ONRR Response: Historically, the regulatory framework for gathering 
and transportation did not recognize the unique technology and 
development model, higher risk and substantial cost of developing and 
producing oil and gas in unique environments, like the deepwater OCS. 
However, by practice from 1999 until the 2016 Valuation Rule, these 
types of developments were allowed as part of a lessee's transportation 
deduction.
    The commenters are correct that subsea movement of bulk production 
before the royalty measurement point would be defined, under the 2016 
Valuation Rule and this final rule, as gathering. However, in this 
final rule, pursuant to the Secretary's authority to create rules and 
definitions for royalty collection purposes and to provide for the 
expeditious and orderly development of the OCS, ONRR is creating a new 
regulatory exception to the rules for gathering and transportation in 
order to provide a deduction for a lessee that carries the higher risk 
and cost of production in the deepwater OCS.
    This change from the 2016 Valuation Rule is being made at this time 
because the GOM is currently viewed as a mature hydrocarbon province; 
most of the acreage available for leasing has received multiple seismic 
surveys, has been offered for lease a number of times, or is under 
lease. Many of the remaining reserves are located in smaller fields 
that do not warrant stand-alone development and are unlikely to be 
developed, unless using subsea completions with tiebacks to existing 
platforms. The risks and costs of subsea tiebacks are significant, 
especially when developing a resource within a high pressure and high 
temperature reservoir, and many of the remaining undiscovered 
technically recoverable resources in the GOM are within this type of 
reservoir. The actual discovery, development, and production of oil and 
natural gas results not from the inventory and data compiled by the 
government, but from efforts by a diverse set of companies working to 
identify oil and gas prospects that warrant investment. When examining 
alternative investment opportunities, companies will consider not only 
the oil and gas potential of an area, but also the expected costs of 
development, as compared to alternative investments. The expected 
profitability of specific projects will be affected by a company's 
determinations of geologic and economic risk.
    Public Comment: A few public interest groups and States noted that 
in the 2016 Valuation Rule, ONRR explained the Deepwater Policy had 
served its purpose and is no longer necessary. These commenters argued 
that ONRR has not sufficiently explained the reason for adopting 
regulations consistent with the Deepwater Policy.
    ONRR Response: When the Deepwater Policy was written in 1999, the 
Department's intent was to acknowledge that: ``new technologies 
involved in deepwater development were not specifically contemplated'' 
in the regulations at that time. See 63 FR 56217. In the 2016 Valuation 
Rule, based on the significant deepwater development that had occurred 
since 1999, and consistently high commodity prices during the years the 
2016 Valuation Rule was in development, the Department determined that 
the Deepwater Policy had served its purpose and was no longer needed. 
More recently, however, commodity prices have once again significantly 
changed. Rather than make policy decisions based on commodity prices 
that are nearly impossible to predict, the Department has reassessed 
the statutory direction provided clearly in the OCSLA which states 
that: ``the [OCS] is a vital national resource reserve held by the 
Federal Government for the public, which should be made available for 
expeditious and orderly development, subject to environmental 
safeguards, in a manner which is consistent with the maintenance of 
competition and other national needs,'' (see 43 U.S.C. 1332), and has 
assessed concrete data provided by BOEM and BSEE on permitting activity 
as well as geologic prospects on the OCS. Consequently, the decision to 
adopt regulations consistent with the Deepwater Policy has been made 
for several reasons.

[[Page 4624]]

    First, from 2010-2014, the average NYMEX oil price was 
approximately $92/bbl and the average natural gas price was 
approximately $3.85/MMBTU, while over the last five years (July 2015 to 
June 2020), the average NYMEX oil price was approximately $51/bbl and 
the average natural gas price was approximately $2.67/MMBTU.
    In addition to the decreases in commodity prices, APDs in the GOM 
have declined, from an average of 173 in FY 2016 through FY 2019 to 140 
in FY 2020. During the same time period, onshore APDs have 
significantly increased, from an average of 3,548 in FY 2016 through FY 
2019 to 6,234 in FY 2020.
    Also, when ONRR's 2016 Valuation Rule was promulgated, BOEM had 
published its 2011 National Assessment of Undiscovered Oil and Gas 
Resources of the U.S. Outer Continental Shelf. BOEM's 2016 version of 
the same assessment--which was not available when the 2016 Valuation 
Rule was promulgated--showed declines in the GOM's economically 
recoverable oil resources and significant declines in the economically 
recoverable natural gas resources. Information from BOEM shows the 
remaining economically and technically recoverable oil and gas 
resources are all significantly lower than the 2016 estimates. The 
estimated number of large GOM oil pools has been reduced and the 
estimated remaining natural gas resources has been further scaled back.
    Regarding other input on this topic, in the 2020 Proposed Rule, 
ONRR sought comments on how its regulations could be revised to address 
deductions for other remote areas, like Alaska's North Slope. ONRR 
thanks several commenters for their helpful responses. ONRR did not 
include provisions specific to remote areas in this final rule but will 
continue examining the issue.
    In this final rule, ONRR retains the provision allowing lessees to 
deduct certain offshore deepwater gathering costs in its transportation 
allowance when certain criteria are met. Certain production 
environments, like the deepwater OCS, require unique technology and 
carry more risk and costs than onshore environments, resulting in a 
deepwater OCS development model that is drastically different from 
onshore counterparts. Additionally, the GOM is currently viewed as a 
maturing hydrocarbon province; most of the acreage available for 
leasing has received multiple seismic surveys and has been leased. Many 
of the remaining reserves are located in smaller fields that do not 
warrant stand-alone development and will be developed, if at all, using 
subsea completions with tiebacks to existing platforms. However, the 
risks and costs of subsea tiebacks are significant, especially when 
developing a resource within a high pressure and high temperature 
reservoir. Many of the remaining undiscovered technically recoverable 
resources in the GOM are within this type of reservoir. See https://www.boem.gov/sites/default/files/oil-and-gas-energy-program/Energy-Economics/Fair-Market-Value/2018-GOM-International-Comparison.pdf.
    The regulations adopting language consistent with the deepwater 
policy recognize the benefits that offshore production offers the 
American public in meeting U.S. demand for oil and gas when compared to 
onshore U.S. production by allowing for a smaller surface footprint 
with increased well productivity and longer lifespans. See https://www.nap.edu/read/25439/chapter/4#14. Additionally, deepwater economic 
limits are expected to be greater than shallow water economic limits 
because deepwater structures are larger, more complex, further from 
shore, and almost all structures are manned. This further emphasizes 
the impact that granting an allowance for deepwater gathering costs, 
when applied over the life of a facility, offers by increasing net 
revenue to shift the break-even cost curve and extend the life of the 
reservoir. See Mark J. Kaiser, in Decommissioning Forecasting and 
Operating Cost Estimation, 2019.
    Offshore oil and gas production is of strategic national 
importance, as it has accounted for between 15-20 percent of domestic 
oil production over the past decade and generates billions of dollars 
in revenue for the U.S. Treasury, various conservation initiatives, and 
revenue sharing for four Gulf states. Crude oil produced from the OCS 
is generally of heavier quality and refined in the Gulf Coast for use 
throughout the country to meet U.S. national energy needs.
    ONRR and its predecessor, MMS, recognized the increased risk, cost, 
and national importance of producing in the deepwater OCS, but 
historically did not provide a regulatory mechanism for a lessee to 
deduct appropriate expenses. In 1999, MMS adopted the Deepwater Policy, 
which granted deductions for the higher costs of moving production in 
the deepwater OCS while also creating some confusion about the 
authority of the policy (provided through Departmental memorandum) and 
its relationship to MMS' valuation regulations. This final rule 
resolves that confusion by clearly articulating the elements of the 
Deepwater Policy in the regulatory text.
    ONRR's current regulations prohibit a lessee from including 
gathering costs in its transportation allowance for all Federal oil and 
gas production. See Sec. Sec.  1206.110(a) and 1206.152(a). The 
regulations define gathering as ``the movement of lease production to a 
central accumulation or treatment point on the lease, unit, or 
communitized area, or to a central accumulation or treatment point off 
of the lease, unit, or communitized area that BLM or BSEE approves for 
onshore and offshore leases, respectively, including any movement of 
bulk production from the wellhead to a platform offshore.'' See 30 CFR 
1206.20. Gathering does not end and transportation does not begin 
before a lessee moves production to the point where it is measured for 
royalty purposes. See 30 CFR 1206.20 and 1206.171; 53 FR 1184 at 1190-
1191 (January 15, 1988); DCOR, ONRR-17-0074-OCS (FE), 2019 WL 6127405. 
In adopting regulations consistent with the Deepwater Policy, ONRR is 
amending Sec.  1206.110(a) and Sec.  1206.152(a) to permit a lessee to 
include, in its transportation allowance, costs incurred in moving 
offshore production upstream of the royalty measurement point when 
certain requirements are satisfied. Solely for purposes of this 
amendment, ONRR is defining central accumulation point to include a 
single well, a subsea manifold, the last well in a group of wells 
connected in a series, or a platform extending above the surface of the 
water, even when prior to the royalty measurement point, and only to 
the extent all other regulation requirements are met. See, infra., 
Sec. Sec.  1206.110(a)(2)(ii) and 1206.152(a)(2)(ii). In all other 
situations, the central accumulation point remains at or downstream of 
the royalty measurement point.
    The 2020 Proposed Rule included a provision allowing a lessee to 
request, and ONRR to approve, an application of the deepwater 
gathering-as-transportation principles in water depths of 200 meters 
and shallower. ONRR is not adopting the specific provision relating to 
shallow water gathering in the final rule. While there was such a 
provision in ONRR's Deepwater Policy in effect from 1999 through 2016, 
no lessee ever requested an allowance for its shallow water gathering. 
The fact lessees did not request such relief shows the provision did 
not effectively incentivize shallow water production, nor did it 
provide ONRR with a foundation for estimating the economic impact of a 
shallow water gathering allowance. While ONRR

[[Page 4625]]

invited public comment on a possible shallow water gathering allowance 
in the 2020 Proposed Rule, the public comments received also did not 
provide sufficient information to justify or quantify the impact of 
such an allowance. ONRR intends to further examine the matter and, if 
determined to be appropriate, may make shallow water gathering the 
subject of a future rulemaking.
    In this final rule, ONRR removed the proposed language at Sec.  
1206.110. In its place, ONRR is adding regulatory text that is largely 
consistent with the Deepwater Policy except for the shallow water 
provision. This language is included in the final rule under both 
Sec. Sec.  1206.110(a) and 1206.152(a), and references thereto in the 
definition of ``gathering'' under Sec.  1206.20.

C. Allowance Limits for Federal Oil and Gas

    The MLA requires a lessee to pay royalties at a minimum of 12.5 
percent in amount or value of production removed or sold from the 
leased lands. 30 U.S.C. 226(b)(1)(A). OCSLA requires a royalty of not 
less than 12.5 percent in amount or value of production saved, removed, 
or sold from the leases. 43 U.S.C. 1337(a)(1)(A). Although the MLA and 
OCSLA do not define the term ``value,'' it is well-established that the 
Secretary has the authority and considerable discretion to establish 
the value for royalty purposes of production from Federal oil and gas 
leases. United States v. Ohio Oil Co., 163 F.2d 633 (10th Cir. 1947); 
Cont'l Oil Co. v. United States, 184 F.2d 804 (9th Cir. 1950); Marathon 
Oil Co. v. United States, 604 F. Supp. 1375 (D. Alaska 1985); Amoco 
Prod. Co., 29 IBLA 234 (1977).
    The regulations at 30 CFR part 1206 govern value and, under these 
regulations, the Secretary allows deductions for transportation and 
processing. See, e.g., 30 CFR 1206.110, 1206.152, and 1206.159. 
Secretarial discretion, augmented by case law, supports the Federal 
lessor sharing in the increased value to the royalty share and costs of 
the royalty share when a lessee transports production to a market off 
the lease or processes natural gas into gas plant products.
    From the late 1980s to December 30, 2016, ONRR regulations 
permitted a lessee to request that ONRR allow it to exceed the 
regulatory limits for transportation allowances (50 percent limit for 
Federal oil and Federal gas) or processing allowances (66\2/3\ percent 
limit for Federal gas) (``request to exceed''). Under a different 
process, a lessee could provide data and documentation to support its 
request to claim an extraordinary processing allowance (``request to 
claim''). The 2016 Valuation Rule converted the prior regulatory limits 
from a soft cap (that is, one that could be exceeded upon application 
to and approval by ONRR) to a hard cap (one that could not be exceeded) 
and terminated all currently-existing approvals. At that time, a 
significant number of companies had received approvals to exceed the 
transportation and processing allowance limits and ONRR had approved 
two applications for extraordinary processing allowances.
    In the 2020 Proposed Rule, ONRR proposed to remove the hard caps on 
transportation and processing costs and revert to soft caps, and also 
to allow a lessee to once again request an extraordinary processing 
allowance. As before the 2016 Valuation Rule, the lessee would submit 
to ONRR a request to exceed form (form ONRR-4393) and ONRR would review 
and approve the request before the lessee could properly report 
allowances in excess of soft regulatory limits. Similarly, a lessee 
requesting ONRR approval for an extraordinary processing allowance 
would submit documentation supporting its claim for ONRR to review and 
either approve or deny.
    Based on comments ONRR received on the 2020 Proposed Rule and the 
economic analysis in this final rule, ONRR finds that this final rule 
should retain the hard caps on transportation and processing allowances 
but reinstate the provision allowing a lessee to request approval for 
an extraordinary processing allowance. ONRR's economic analysis shows 
that the financial impact to the Federal lessor, states, and industry 
arising from the retention of the hard caps is less than $500,000 per 
year. This represents a significant change from ONRR's economic 
analysis in the 2020 Proposed Rule, and the benefit to lessees and 
financial impact to states is considerably less than ONRR originally 
estimated. In broad terms, the updated royalty impact associated with 
changing the hard caps to soft caps is insufficient to support making 
the change when considered in combination with public comments on this 
issue and, to a lesser extent, the potential increased administrative 
burden on ONRR and lessees. Section VII, entitled ``Procedural 
Matters,'' of this final rule describes a breakdown of the royalty 
impacts associated with gas transportation, oil transportation, and gas 
processing. ONRR addresses public comments on the 2020 Proposed Rule in 
the Public Comments section of this final rule below.
    Finally, with respect to reinstating the language allowing a lessee 
to request an extraordinary processing allowance, ONRR reviewed 
comments from industry and the State of Wyoming where the facilities 
that were the subject of the two prior approvals for extraordinary 
processing allowances were located. Both were supportive of the 
proposed change. For the reasons outlined in the extraordinary 
processing allowance section below, this final rule reinstates a 
lessee's ability to request approval for an extraordinary processing 
allowance.
    Several commenters provided comments on portions of the 2016 
Valuation Rule that were beyond the scope of the 2020 Proposed Rule. 
The comments ranged in support of continuing to value arm's-length 
percent-of-proceeds contracts as processed gas, to supporting the 
requirement that transportation and processing pricing factors be 
reported as allowances, instead of being netted from the gross sales 
price or value. Other comments related to the 2016 Valuation Rule 
included objection to the removal of a provision that allowed a lessee 
to use FERC or state-approved tariffs to calculate transportation rates 
in non-arm's-length transportation allowances, the removal of line fill 
costs in the calculation of arm's-length transportation allowances, and 
the removal of transportation factors in the price of the product. 
Several commenters recommended that ONRR restore the 1.3 multiplier to 
the BBB bond rate used to calculate non-arm's-length transportation 
costs. These commenters also suggested that, in light of Standard and 
Poor's decision to no longer provide its BBB bond rate free to 
industry, ONRR select a different rate and publish the rate on ONRR.gov 
to alleviate confusion and inconsistency when calculating non-arm's-
length transportation allowances. Lastly, ONRR received comments 
asserting that valuing sales of arm's-length unprocessed gas as 
processed gas, such as in the case of percent-of-index and percent-of-
proceeds contracts, is arbitrary. ONRR appreciates the comments but 
does not address the comments in the sections below because the 
comments are outside the scope of this rulemaking.
1. Transportation Allowance Limits for Federal Oil and Gas (Sec. Sec.  
1206.110(d)(1) and (2) and 1206.152(e)(1) and (2))
    In the 2016 Valuation Rule, ONRR eliminated the regulations that 
allowed it to approve oil (Sec.  1206.110) and gas (Sec.  1206.152) 
transportation allowances

[[Page 4626]]

in excess of 50 percent of the value of a lessee's production.
    In the 2020 Proposed Rule, ONRR proposed to revert to the 
historical practice of treating the 50 percent cap as a soft cap on oil 
and gas transportation costs. As discussed in the background above, 
ONRR retains the hard caps from the 2016 Valuation Rule in this final 
rule.
Comments on the Proposed Amendment
    Public Comment: Several commenters supported ONRR's authority to 
approve transportation allowances in excess of the 50 percent allowance 
cap. These commenters stated that the option to request approval to 
exceed the 50 percent cap is necessary because it allows a lessee to 
deduct its actual, reasonable, and necessary transportation costs, even 
if those costs exceed 50 percent, which is especially important in a 
low commodity price environment.
    ONRR Response: ONRR agrees that the oil and gas markets changed 
between the adoption of the 2016 Valuation Rule and the 2020 Proposed 
Rule. ONRR understands that market volatility and the global pandemic 
have adversely affected the oil and gas industry. However, it may be 
counterproductive to make regulatory changes based on market volatility 
because frequent regulatory changes may decrease early certainty to 
lessees and make Federal leases less attractive to current and 
potential lessees. Retaining the hard caps on allowances supports a 
fair return to the public on their non-renewable natural resources.
    Public Comment: A commenter suggested that ONRR approve exceptions 
to the 50 percent limit prospectively for a two-year or three-year 
period to reduce the administrative burden associated with applying for 
and approving or denying these requests. Another commenter stated that 
ONRR could offset the administrative burden associated with reviewing 
and approving requests to exceed the transportation allowance limits by 
approving allowances for more than a single year at a time.
    ONRR Response: ONRR appreciates comments and suggestions related to 
reducing administrative burden. ONRR is retaining the hard caps in this 
final rule, which eliminates any associated increase in administrative 
burdens.
    Public Comment: A commenter suggested that ONRR modify the 
allowance to include a 120-day time limit for ONRR to respond to a 
request and that ONRR provide a detailed explanation if ONRR denies a 
request. The commenter argues these actions provide certainty to the 
lessee regarding their allowance calculations.
    ONRR Response: ONRR appreciates these suggestions. However, since 
ONRR is retaining the hard caps rather than removing them in this final 
rule, there will not be any application to which a 120-day mandate 
could apply, nor will there be a need to provide a detailed explanation 
for a denial.
    Public Comment: A commenter recommended that ONRR reinstate any 
approval to exceed the 50 percent transportation allowance limits for 
oil and gas that was in place prior to the reinstatement of the 2016 
Valuation Rule.
    ONRR Response: The 2016 Valuation Rule terminated all approvals to 
exceed the transportation allowance limits prior to its January 1, 
2017, effective date. ONRR has no authority to grant future 
applications retroactively, and is retaining the hard caps in this 
final rule.
    Public Comment: A commenter asserted that ONRR should eliminate 
transportation allowances entirely because they amount to an uncapped 
subsidy of the oil, gas, and coal industries.
    ONRR Response: Transportation allowances are a well-established 
standard supported by case law and precedent. See, e.g. 30 CFR 1206.110 
and 1206.152 and United States v. Gen. Petroleum Corp. of California, 
73 F. Supp. 225, 262 (S.D. Cal. 1946). This final rule retains the hard 
caps on transportation and processing allowances.
    Public Comment: A commenter asserted that ONRR should eliminate 
allowances entirely because providing a lessee the option to deduct 
transportation or processing allowances in excess of the caps 
disincentivizes lessees to reduce their costs. Another commenter 
asserted that allowing lessees to request to exceed the limits does not 
incentivize the lessee to lower operational costs and negatively 
impacts royalty payments, which in some instances support local 
schools.
    ONRR Response: Transportation and processing allowances are 
intended to benefit both a lessee and the Federal lessor because of 
typically higher market values found off the lease, or from recovering 
NGLs. Courts have upheld the use of allowances to calculate the value 
of Federal oil and gas production for royalty purposes. See United 
States v. Gen. Petroleum Corp. of California, 73 F. Supp. 225, 262 
(S.D. Cal. 1946) (stating ``It has been held that if there is no open 
market in the place where an article ordinarily would be sold, the 
market value of such article in the nearest open market less cost of 
transportation to such open market becomes the market value of the 
article in question.''), aff'd sub nom. Cont'l Oil Co. v. United 
States, 184 F.2d 802 (9th Cir. 1950).
    Also, a lessee already has an incentive to minimize its 
transportation and processing costs. Typically, the Federal 
Government's royalty share of production is 12\1/2\ or 16\2/3\ percent. 
The lessee retains the remaining 87\1/2\ or 83\1/3\ percent 
respectively, and has every incentive to minimize the transportation 
and processing costs borne by its sizable share. The Federal Government 
benefits from the lessee's incentive to be cost-conscious on its 
greater share. ONRR does not expect limiting the transportation and 
processing allowances on a smaller share of production to change lessee 
behavior in incurring transportation and processing expenses borne by 
the lessee's greater share. In this final rule, ONRR retains the hard 
caps on allowances, consistent with the commenter's request. ONRR 
acknowledges that market conditions and the global pandemic have 
negatively impacted many budgets, including for schools.
    Public Comment: A commenter asserted that ONRR did not provide 
justification for incentivizing production in low-quality reservoirs, 
which the commenter suggested may cause harmful environmental 
externalities. A second commenter suggested ONRR did not address any 
environmental consequences associated with reinstating the requests to 
exceed the transportation limit. Another commenter asserted that ONRR 
did not fully perform its due diligence to ensure consistency with 
multiple use management laws.
    ONRR Response: Allowing a lessee to request to exceed the hard caps 
may not provide sufficient economic incentive for that lessee to 
continue producing or seek additional production from Federal lands. 
The Federal Government's royalty share of production is typically 12\1/
2\ or 16\2/3\ percent; the lessee's share of production is typically 
the remaining 87\1/2\ or 83\1/3\ percent. Small changes in the 
calculation of the value of the Federal Government's 12\1/2\ or 16\2/3\ 
percent share become even smaller when spread over the value of the 
lessee's 87\1/2\ or 83\1/3\ percent share, making it difficult for the 
Federal Government to effectively incentivize industry action. While 
allowing a lessee to request to exceed the hard caps could provide some 
economic incentive to the lessee, such action would also increase the 
lessee's administrative cost burden. See Section V for ONRR's economic 
analysis. ONRR has determined that, on

[[Page 4627]]

balance, removing the hard caps is not warranted, and is retaining the 
hard caps in its regulations.
    ONRR addresses public comments about environmental considerations 
in the introduction to this rule. As to the comment regarding 
consistency with multiple use management laws, the commenter failed to 
specify which multiple use management laws ONRR failed to consider. 
While ONRR cannot respond directly to this comment, it has addressed 
the specific acts raised by other commenters in the introduction.
    Oil: ONRR retained the current language in Sec.  1206.110(d)(1) and 
(2), which limits transportation allowances to 50 percent of the value 
of oil transported. Despite the current market volatility, ONRR 
believes that it is in the public interest to retain the hard cap.
    Gas: ONRR retained the current language in Sec.  1206.152(e)(1) and 
(2), which limits transportation allowances to 50 percent of the value 
of unprocessed gas, residue gas, or gas plant products transported. 
Despite the current market volatility, ONRR believes that it is in the 
public interest to retain the hard cap.
2. Processing Allowance Limits for Federal Gas (Sec.  1206.159(c)(2) 
and (3))
    In the 2016 Valuation Rule, ONRR eliminated the regulation allowing 
it to approve gas processing allowances in excess of 66\2/3\ percent of 
the value of a lessee's gas production.
    In the 2020 Proposed Rule, ONRR proposed to revert to historical 
practices by treating the regulatory limit as a ``soft cap'' on gas 
processing costs (66\2/3\ percent regulatory limit). As discussed in 
the background above, ONRR retains the hard caps from the 2016 
Valuation Rule in this final rule.
Comments on the Proposed Amendment
    Public Comment: Several commenters supported the 2020 Proposed 
Rule's provision for ONRR to approve requests to exceed the 66\2/3\ 
percent limit on processing allowances. The commenters stated that the 
right to request approval to exceed the 66\2/3\ percent cap needs to be 
reinstated because its removal denied lessees the ability to deduct all 
of their actual, reasonable, and necessary processing costs when those 
costs exceed 66\2/3\ percent. The commenters asserted that this is 
especially true when the physical make-up of the gas necessitates 
complex plant designs which result in higher processing costs. Last, a 
commenter took issue with ONRR terminating any approval that it 
previously issued for a lessee to exceed the 66\2/3\ percent 
limitation.
    ONRR Response: Although the oil and gas market clearly changed 
between the drafting of the 2016 Valuation Rule and the 2020 Proposed 
Rule, and ONRR understands that the oil and gas industry, like many 
industries, has been adversely affected by market volatility and the 
global pandemic, ONRR's regulations are designed to continue to 
function during uncommon or unavoidable circumstances affecting costs 
and value. ONRR believes retaining the hard caps on allowances supports 
a fair return to the public on non-renewable natural resources.
    Public Comment: A commenter suggested ONRR reduce administrative 
costs arising from processing the requests to exceed by approving the 
exception for periods of two or more years for lessees with contracts 
that have been reviewed and which are consistently over the limits.
    ONRR Response: ONRR appreciates the suggestion. Because ONRR is 
retaining the hard caps in this final rule, there are no associated 
administrative costs.
    Public Comment: A commenter suggested that ONRR modify the 
allowance to include a 120-day mandate for ONRR to respond to a request 
and that ONRR provide a detailed explanation if ONRR denies a request.
    ONRR Response: ONRR appreciates the suggestions and responded to a 
parallel suggestion in the discussion of transportation costs, above. 
That response is applicable here, as well.
    Public Comment: A commenter stated they oppose ONRR's approval to 
exceed the 66\2/3\ percent cap on processing allowances and allowances 
in general. Another commenter stated that allowing a lessee to request 
to exceed the 66\2/3\ percent limitation on processing allowances is a 
savings for industry at the expense of taxpayers due to a reduction in 
royalty payments.
    ONRR Response: The comments regarding the 66\2/3\ percent 
processing allowance mirror the comments that ONRR received for the 50 
percent limitation on transportation allowances for oil. Please refer 
to ONRR's responses regarding the 50 percent transportation cap.
    ONRR retained the current language in Sec.  1206.159(c)(2) and (3), 
which limits processing allowances to 66\2/3\ percent of the value of 
the gas plant products recovered. Despite the current volatile market 
conditions, ONRR believes that it is in the public interest to retain 
the hard cap on processing allowances.
3. Extraordinary Processing Allowances for Federal Gas (Sec.  
1206.159(c)(4))
    The 2016 Valuation Rule removed the provision that was in place 
between March 1, 1988 (53 FR 1230, January 15, 1988), and December 31, 
2016 (81 FR 43338, July 1, 2016), under Sec.  1206.158(d)(2), which 
allowed a lessee to request an extraordinary processing allowance. 
Under the prior Sec.  1206.158(d)(2), on application to and with ONRR's 
approval, a lessee could deduct its actual and reasonable processing 
costs up to 99 percent of the value of the gas plant products extracted 
and up to 50 percent of the value of the residue gas. See 81 FR 43353, 
July 1, 2016. For ONRR's approval, a lessee's application must have 
demonstrated that the gas stream, plant design, and/or unit costs were 
extraordinary, unusual, or unconventional relative to standard industry 
conditions and practice. See e.g. Amoco Prod. Co. v. Baca, 300 F. Supp. 
2d 1, 13-14 (D.D.C. 2003); see also Exxon Corp., 118 IBLA 221, n. 7 
(1991). In justifying the elimination of extraordinary processing 
allowances, ONRR stated in the 2016 Valuation Rule that ``the markets 
and the technology have changed sufficiently such that this provision 
and these approvals are no longer necessary.'' See 81 FR 43353 (July 1, 
2016).
    The 2016 Valuation Rule terminated the two existing ONRR-approved 
extraordinary processing allowance claims for lessees processing gas at 
two facilities in Wyoming. In response to the 2020 Proposed Rule, the 
Governor of Wyoming and the members of Wyoming's Congressional 
delegation submitted comments stating that this allowance is essential 
for two major gas-processing facilities in Wyoming. The commenter 
further explained that this process is challenging and expensive. 
According to the commenter, these gas processing operations provide an 
important source of valuable gasses, including helium, which is relied 
upon by consumers in Wyoming and the rest of the country. The 
commenters representing Wyoming argued that extraordinary processing 
allowances are warranted because certain Wyoming gas processing 
facilities face a serious competitive disadvantage without them, which 
may cause those plants to be prematurely retired.
    Upon receipt of those comments, ONRR reexamined the facts and the 
assertion in the 2016 Valuation Rule that there were technological 
advances that rendered the extraordinary processing allowances 
unnecessary. While gas markets have indisputably

[[Page 4628]]

changed since MMS added the extraordinary processing allowance 
provision to the regulations (53 FR 1230, January 15, 1988), and gas 
processing technologies have improved overall, the technology necessary 
to process these two gas streams, characterized by high concentrations 
of nitrogen, carbon dioxide, hydrogen sulfide, methane, and almost no 
recoverable NGLs, see Exxon Corp., 118 IBLA 221, n. 7 (1991), remains 
substantially the same. See, e.g., Eow, J.S. (2002), Recovery of sulfur 
from sour acid gas: A review of the technology. Environ. Prog., 21: 
143-162, https://doi.org/10.1002/ep.670210312; Reviews in Chemical 
Engineering, Volume 29, Issue 6, Pages 449-470, eISSN 2191-0235, ISSN 
0167-8299, DOI: https://doi.org/10.1515/revce-2013-0017. Therefore, 
reinstating the provision that allowed a lessee to request approval to 
take an extraordinary processing allowance is appropriate, as the 
technology to process these unique gas streams has not changed, despite 
technological advances in processing relevant to many other areas and 
types of gas streams.
    Further, as was noted by the Governor of Wyoming and Wyoming's 
Congressional delegation, one of these unique gas streams contains 
recoverable quantities of helium, an element that is vital to the 
Nation's security and economic prosperity. See Final List of Critical 
Minerals 2018, https://www.usgs.gov/news/interior-releases-2018-s-final-list-35-minerals-deemed-critical-us-national-security-and, 
published May 18, 2018 (83 FR 23295). Helium production is governed by 
the Helium Stewardship Act of 2013, Public Law 113-40, codified at 50 
U.S.C. 167-167q, and is administered by the BLM. See https://www.blm.gov/programs/energy-and-minerals/helium. Accordingly, the U.S. 
has important economic and national security interests in ensuring the 
continuation of a reliable supply of helium, including that recovered 
from unique gas streams requiring costly equipment to remove carbon 
dioxide and hydrogen sulfide before helium can be extracted. See, e.g., 
https://www.nap.edu/read/9860/chapter/7#41. In instances where a lessee 
might not otherwise choose to produce a gas resource containing helium, 
allowing a lessee to apply for an extraordinary processing allowance 
approval for the natural gas portion of their production stream, may 
lower natural gas production costs and incentivize new or continued 
production of helium. However, the extraordinary processing allowance 
does not apply to helium and to obtain a reduction in helium rates, the 
helium extractor would need to request this separately with the BLM 
Amarillo Federal Leased Lands Team.
    In light of the foregoing, and after careful consideration of the 
public comments discussed in more detail below, this final rule reverts 
to ONRR's long-standing historical practice and reinstates the 
provision that was in place between March 1, 1988 (53 FR 1230, January 
15, 1988), and December 31, 2016 (81 FR 43338, July 1, 2016), under 30 
CFR 1206.158(d)(2)(i) to the updated Sec.  1206.159(c)(4). Adoption of 
this amendment will allow a lessee to apply to ONRR for approval to 
claim an extraordinary processing allowance.
Comments on the Proposed Amendment
    Public Comment: Several commenters stated that ONRR should restore 
the option for lessees to request approval for extraordinary processing 
allowances. The commenters argued that ONRR's prior limited approvals 
were for gas streams with unique gas compositions that were processed 
at gas plants with complex plant designs and extremely high unit costs. 
The commenters stated that the lessees with those approvals made 
investment decisions based on the approvals. Without the ability to 
deduct additional, extraordinary processing costs against the value of 
the residue gas recovered, the economic viability of lease operations 
was questionable. These commenters further asserted that ONRR was 
incorrect in the 2016 Valuation Rule when it stated that technological 
advancements since the 1990s meant that these approvals were no longer 
necessary.
    ONRR Response: Reinstating this provision may remove the potential 
disincentive for a lessee to develop Federal lands disadvantaged by gas 
streams requiring complex and costly facilities, which, like the 
composition of the gas streams, are unique, extraordinary, or 
unconventional. Receiving an approval under this provision may also 
provide a lessee an incentive to continue producing through uncommon or 
unavoidable circumstances affecting costs and value. As already 
discussed, ONRR concedes that, despite other technological advances 
relevant to processing, the technology necessary to process unique gas 
streams such as that used at the two Wyoming facilities discussed above 
has not changed appreciably since the prior approvals were given in the 
1990s.
    Public Comment: Several commenters requested that ONRR reinstate 
the extraordinary processing allowance approvals terminated by the 2016 
Valuation Rule.
    ONRR Response: The 2016 Valuation Rule terminated the prior 
approvals that ONRR granted before January 1, 2017. 81 FR 43338 (July 
1, 2016). This final rule will add language allowing a lessee to again 
request an approval. However, ONRR will apply this final rule 
prospectively, beginning with its effective date. ONRR cannot reinstate 
the two extraordinary processing allowance approvals that the 2016 
Valuation Rule terminated, nor can ONRR grant such allowances for the 
period between January 1, 2017, and the effective date of this final 
rule. Rather, each of the lessees will need to reapply to ONRR for 
approval. And, as before the 2016 Valuation Rule, ONRR may only approve 
a lessee's request after reviewing the lessee's documentation for 
adequacy, reasonableness, and accuracy. ONRR anticipates that it will 
again receive few requests and will rarely grant approval under this 
provision, as was the case when the language was in place between March 
1, 1988, and December 31, 2016.
    Public Comment: A commenter stated that ONRR should not restore the 
ability for a lessee to request an extraordinary processing allowance 
approval because the 2016 Valuation Rule ensured a fair return to the 
public.
    ONRR Response: ONRR is committed to ensuring a fair return to the 
American public for oil and gas produced from Federal lands. Allowing a 
lessee to deduct actual, reasonable, extraordinary post-production 
processing costs is part of ensuring a fair return. Prior to the 2016 
Valuation Rule, just two approvals for extraordinary processing 
allowances were in effect. Both were for leases in Wyoming. The State 
of Wyoming receives about half of the royalties reported and paid for 
Federal leases in Wyoming, and shares in any reduction in those 
royalties, including reductions occasioned by an extraordinary 
processing allowance. Nonetheless, the comments submitted by the 
Governor of Wyoming and Wyoming's Congressional delegation urge ONRR to 
adopt regulations restoring a lessee's ability to apply for 
extraordinary processing allowances, and state that the positive 
overall economic impact to Wyoming of continuing operation of the 
Federal leases that historically benefitted from extraordinary 
processing allowances outweighs any reduction in royalties Wyoming 
receives. Further, in more than 30 years, ONRR has received fewer than 
10 requests to approve extraordinary processing allowances (and 
approved only two), which

[[Page 4629]]

indicates that such requests are very rare.
    Public Comment: One commenter stated that, if there is a potential 
danger to local communities if extraction of high sulfur gas streams 
goes wrong, the company should pay the taxpayers a fair share (and no 
less) for the resources.
    ONRR Response: As discussed above, allowing a lessee to deduct 
actual, reasonable post-production processing costs is part of ensuring 
a fair return for the right to produce Federal resources. And ``if 
extraction of high sulfur gas streams goes wrong,'' other laws 
potentially hold the responsible party liable for personal, property, 
and environmental damage. ONRR's regulations governing the method of 
calculating the amount of a lessee's royalty payment were never 
intended to compensate for accidental personal, property, or 
environmental damages should someone or something suffer injury or 
damage as a result of a failure associated with the processing of a 
natural resource. ONRR further addressed public comments regarding 
environmental concerns in the General Comments section in this rule's 
introduction.
    ONRR appreciates the comments supporting, seeking the modification 
to, or opposing the proposed amendment to allow a lessee to apply to 
ONRR for approval to claim an extraordinary processing allowance. After 
careful consideration, and for the reasons explained in the 
introduction above, this final rule will adopt the proposed amendment 
to Sec.  1206.159(c)(4). In the 2020 Proposed Rule, this paragraph was 
designated as Sec.  1206.159(c)(4). To account for other changes to 
Sec.  1206.159, paragraph (c)(4) is redesignated as Sec.  
1206.159(c)(5) in this final rule.

D. The Default Provision for Federal Oil, Gas, and Coal and Indian Coal

    The 2016 Valuation Rule introduced a provision on how ONRR will 
exercise the Secretary's authority to establish royalty value when 
typical valuation methods are unavailable, unreliable, or unworkable. 
This provision, which appears in several places in the 2016 Valuation 
Rule, is generally referred to as ``the default provision.'' ONRR's 
intent in 2016 was to increase clarity, consistency, and predictability 
on when and how ONRR would exercise the Secretary's discretion to 
determine royalty value when other royalty valuation methods fail.
    The 2020 Proposed Rule sought to amend 30 CFR part 1206 to 
eliminate the default provision from four sections and a number of 
references thereto. The amendment, if adopted, would effectively revert 
ONRR's practices to those in place prior to publication of the 2016 
Valuation Rule. ONRR premised the proposed change on E.O.s 13783 and 
13795 and the policies reflected in those directives, and on ONRR's 
consideration of continuing concerns from regulated entities with 
respect to how ONRR would apply the default provision, as most recently 
expressed by industry members in the Petitioners' Joint Opening Brief 
(ECF No. 89), filed December 4, 2020, in API v. U.S. Dept. of the 
Interior, et al, Case No. 19-cv-120-S, U.S. District Court for the 
District of Wyoming.
    In the 2016 Valuation Rule and 2020 Proposed Rule, ONRR determined 
that inserting and subsequently removing the default provision will not 
affect royalty values because neither the default provision nor its 
absence changes ONRR's goal, which is to determine the value of the 
produced commodity for royalty purposes based on the best or a 
reasonable measure of market value. Further, removing the default 
provision does not affect ONRR's ability to establish a royalty value 
in those infrequent instances where a typical valuation method is 
unavailable, unreliable, or unworkable because the Secretary's 
discretion to establish a royalty value does not derive from ONRR's 
regulations. See, e.g., 17 U.S.C. 1751 and BOEM OCS lease form, section 
6(b)(``The value of production for purposes of computing royalty shall 
be the reasonable value of the production as determined by the 
Lessor.'').
    In this final rule, ONRR amends 30 CFR part 1206 to eliminate the 
default provision found in Sec. Sec.  1206.105, 1206.144, 1206.254, and 
1206.454, and a number of references thereto, effectively returning 
ONRR's practices to those that were in place for decades prior to the 
adoption of the 2016 Valuation Rule.
Comments on the Proposed Amendments
    Public Comment: Several commenters supported the default 
provision's elimination because the commenters opine that the default 
provision introduces ambiguity as to who within ONRR has the authority 
to invoke the default provision. There was also concern that the 
default provision would be applied inconsistently. Further, commenters 
expressed concerns about the lack of criteria for determining 
``reasonable'' sales prices and transportation costs, which could 
theoretically result in a lessee not being allowed to value royalties 
based upon arm's-length sales contracts or deduct all reasonable, 
actual transportation, and processing costs. These commenters assert 
that the default provision is overly broad and open-ended, allowing 
ONRR to determine the value of production or the amount of allowance in 
instances where a lessee cannot provide documentation requested by ONRR 
the lessee asserts it has no legal or practical ability to obtain. 
These commenters support regulations with more certainty in valuation, 
because they lead to less risk, efficiency in reporting and audits, and 
improved planning for ONRR and lessees.
    ONRR Response: Prior to the adoption of the 2016 Valuation Rule, 
ONRR successfully performed compliance activities and, when 
appropriate, exercised Secretarial discretion, to establish royalty 
values, even in the absence of an express default provision. 
Considering the recent direction given by E.O.s 13783 and 13795, which 
promote domestic energy production and reduce regulatory burden, 
together with the confusion around when and how the default provision 
would be applied, ONRR has reevaluated whether the default provision is 
necessary. ONRR intended the provision to be used in situations where 
determination of value was unclear, and not to determine the value of 
production in cases where reasonable, actual transportation and 
processing costs are well supported. ONRR agrees that the default 
provision is unnecessary. Further, the default provision invites 
litigation over what are the ``lowest reasonable measures of market 
price,'' ``highest reasonable measure of transportation costs,'' 
``highest reasonable measure of processing costs,'' and ``highest 
reasonable measure of washing allowances.'' See, e.g., 30 CFR 
1206.104(c)(2), 1206.110(f)(2), 1206.143(c)(2), 1206.153(g)(2), 
1206.159(e)(2), 1206.253(c)(2) 1206.260(g)(2), 1206.267(d)(2). Also, 
arguably, the default provision allows a lessee in certain 
circumstances to report and pay royalties based on sales prices up to 
ten percent less than the lowest reasonable measure of market price; 
transportation costs up to ten percent higher than the highest 
reasonable measure of transportation costs; processing costs up to ten 
percent higher than the highest reasonable measure of processing costs; 
and washing allowances up to ten percent higher than the highest 
reasonable measure of washing allowances. See, e.g., 30 CFR 
1206.104(c)(2), 1206.110(f)(2), 1206.143(c)(2), 1206.153(g)(2), 
1206.159(e)(2), 1206.253(c)(2), 1206.260(g)(2),

[[Page 4630]]

1206.267(d)(2). The default provision does not best protect the United 
States against inadequate royalty payments and is being removed from 
ONRR regulations by this final rule.
    Public Comment: Some commenters expressed concern over reporting 
errors causing ONRR to ``penalize'' a lessee and impose an entirely 
different (and presumable higher) valuation for royalty purposes 
through the application of the default provision without first allowing 
the lessee to correct its reporting to conform to the applicable 
regulations.
    ONRR Response: Where royalty value cannot be determined under the 
regulations, such as instances of breach of a lessee's duty to market, 
ONRR will use statutory authority to determine Federal oil and gas 
royalty value in accordance with the lease terms, statutes, and 
regulations in the same manner as ONRR did prior to adoption of the 
2016 Valuation Rule.
    Public Comment: Many commenters expressed concerns over the ten 
percent variance, arguing that it does not take into account arm's-
length sales and transportation contracts, particularly where the lack 
of fully-developed transportation and processing infrastructure could 
vary by more than 10 percent from ``reasonable measures.'' The 
commenters also stated that the ten percent test is too broadly written 
and could be triggered by transactions that have the same economic 
effect but are structured differently.
    ONRR Response: ONRR is to capture a reasonable measure of fair 
market value for production. See, e.g., 43 U.S.C. 1344(a)(4). Fair 
market value is influenced by sales prices, transportation costs, 
processing costs, and the costs of placing production in marketable 
condition. The ten percent variance is problematic, but for reasons 
other than expressed in these public comments. The ten percent variance 
is from the lowest reasonable sales price and the highest reasonable 
transportation and processing costs. For this reason, the default 
provision is in conflict with ONRR's mandate to capture full, 
reasonable fair market value, not up to ten percent less.
    Public Comment: Several commenters suggested that, if ONRR elects 
to retain the default provision, it should be narrowly tailored to 
address the most blatant of reporting discrepancies, and defined in 
such a way that a lessee is not left to guess if and when ONRR will 
decide to insert itself into regular business transactions and what the 
results of such intervention might be. One commenter further asserted 
that ONRR should indicate when its judgment will or will not be 
substituted, how such discretion would or would not be wielded, and 
what factors would or would not be used. The commenters added that ONRR 
should also clarify how the provision would establish pricing for 
misconduct, breach of duty to market, or instances where ONRR cannot 
verify value.
    ONRR Response: ONRR appreciates the suggestions to tailor and 
further define when and how it would use the default provision. 
However, ONRR believes that the default provision has created 
uncertainty and unintended consequences in the valuation of production, 
as discussed above. Therefore, this final rule eliminates the default 
provision.
    Public Comment: One commenter stated that ONRR should give proper 
notice to a payor so that additional information or justification as to 
the valuation could be provided first. The commenter further asserted 
that the default provision should not be triggered by simple or 
inadvertent reporting errors, nor by some arbitrary percentage below 
the lowest ``reasonable'' measure of value in arm's-length situations, 
or above the highest ``reasonable'' measure of transportation or 
processing cost as under the 2016 Valuation Rule.
    ONRR Response: In this final rule, ONRR eliminates the default 
provision contained in the 2016 Valuation Rule because the default 
provision created uncertainty and a regulatory burden, as well as 
unintended consequences adverse to the lessor. The final rule reverts 
to historical practices under which MMS and ONRR successfully performed 
compliance activities. Where appropriate, ONRR will exercise 
Secretarial discretion to establish royalty values in the absence of 
the default provision. ONRR believes that it unintentionally increased 
uncertainty due to lessees' perception that ONRR might apply the 
default provision in place of accurate lessee reporting, thereby 
creating a regulatory burden for lessees.
    Public Comment: One commenter suggested that a lessee should be 
allowed to fix a mis-reported value to conform to ONRR's regulations 
rather than the agency unilaterally setting its preferred value.
    ONRR Response: In the future, ONRR may request more information 
and/or specific proposals regarding ways to address reporting errors. 
Lessees are currently required to correct any reporting errors within 
30 days of the date the lessee learns of the error. See 30 CFR 1210.30.
    Public Comment: A commenter suggested that because several phrases 
relating to the default provision were not addressed by the 2020 
Proposed Rule that ONRR may still exercise seemingly unfettered 
discretion to review a lessee's royalty valuation that is based on bona 
fide arm's-length contract. This commenter requested that ONRR issue a 
separate rulemaking to target the remaining default provisions to meet 
the intent of the 2020 Proposed Rule.
    ONRR Response: ONRR appreciates the suggestions to address the 
other phrases that were not the subject of the 2020 Proposed Rule. 
However, it is outside of the scope of this rulemaking.
    Public Comment: One commenter stated that ONRR did not provide a 
reasoned explanation for removing the default provision, and thus 
creates uncertainty surrounding the valuation of oil, gas, and coal. 
The commenter went on to say that removal of this provision will 
reintroduce uncertainty by leaving a lessee unsure when ONRR will 
exercise the Secretary's discretion. The commenter also stated that 
ONRR fails to recognize the lessee's right to appeal any order issued 
by or on behalf of the Secretary regarding royalty valuation, even 
though those appeals create an important check on the Secretary's 
power. Further, this commenter argued that ONRR did not consider 
alternatives and chose to repeal the default provision without 
providing justification other than broad executive policies. 
Accordingly, the commenter concluded that removing the default 
provision is arbitrary and capricious.
    ONRR Response: ONRR disagrees with the suggestion that the default 
provision is necessary or that its removal will cause uncertainty. ONRR 
used its delegated Secretarial discretion, lease terms, statutes, and 
regulations to determine Federal oil and gas royalties prior to 
adoption of the 2016 Valuation Rule, and will continue to do so after 
the default provision's removal from ONRR regulations. The default 
provision created uncertainty and unintended consequences as discussed 
above, and the regulations did not best define the situations when ONRR 
should apply a default provision.
    Public Comment: Another commenter stated that the default provision 
should be retained because its removal would undermine ONRR's ability 
to ensure proper royalty collection.
    ONRR Response: ONRR disagrees that the default provision is 
necessary or that its removal will adversely affect its ability to 
ensure proper royalty collection. In fact, as discussed above, the 
default provision may have restricted ONRR's ability to use

[[Page 4631]]

Secretarial discretion when a lessee reports royalties significantly 
lower than the lowest reasonable value.
    ONRR appreciates the commenters supporting, seeking the 
modification to, and opposing the proposed amendment to Sec. Sec.  
1206.101, 1206.102, 1206.104, 1206.105, 1206.110, 1206.141, 1206.142, 
1206.143, 1206.144, 1206.152, 1206.160, 1206.252, 1206.253, 1206.254, 
1206.256, 1206.260, 1206.267, 1206.451, 1206.452, 1206.453, 1206.454, 
1206.460, 1206.461, 1206.467, and 1206.468. For the reasons explained 
in the 2020 Proposed Rule and this final rule, this final rule will 
adopt the proposed amendments to Sec. Sec.  1206.101, 1206.102, 
1206.104, 1206.105, 1206.110, 1206.141, 1206.142, 1206.143, 1206.144, 
1206.152, 1206.160, 1206.252, 1206.253, 1206.254, 1206.256, 1206.260, 
1206.267, 1206.451, 1206.452, 1206.453, 1206.454, 1206.460, 1206.461, 
1206.467, and 1206.468 in full.

E. ``Misconduct'' Definition for Federal Oil, Gas, and Coal and Indian 
Coal

    In the 2016 Valuation Rule, ONRR added a definition of the term 
``misconduct'' under Sec.  1206.20 to mean: ``any failure to perform a 
duty owed to the United States under a statute, regulation, or lease, 
or unlawful or improper behavior, regardless of the mental state of the 
lessee or any individual employed by or associated with the lessee.'' 
In the preamble to the 2016 Valuation Rule, ONRR explained that it 
added the misconduct definition in conjunction with the adoption of the 
``default'' provision. ``This new definition will apply to--and in 
conjunction with the--default provision. Misconduct, in this subpart, 
is different than--and in addition to--any violations subject to civil 
penalties under . . . FOGRMA . . . . Behavior that constitutes 
misconduct under part 1206 does not need to be willful, knowing, 
voluntary, or intentional. This is a valuation mechanism, not an 
enforcement tool.''
    ONRR is eliminating the default provision from its regulations in 
this final rule. Accordingly, the definition of ``misconduct'' added to 
ONRR regulations in conjunction with and for the operation of the 
default provision is also being eliminated.
Comments on the Proposed Amendment
    Public Comment: Some commenters stated that the 2016 Valuation Rule 
generated uncertainty for royalty reporters by creating a broad 
definition of ``misconduct.'' The commenters argued this definition 
could be misapplied, leading to the imposition of civil penalties under 
the 2016 Civil Penalty Rule. The commenters explained that they 
interpreted the 2016 Valuation Rule's definition of ``misconduct'' to 
allow ONRR to penalize a lessee under the ``default provision'' for 
reporting an incorrect product code, sales type, or other non-value-
based field on a royalty report (form ONRR-2014), without an 
opportunity to correct the error. Additionally, penalizing a lessee for 
non-value-based errors is not reasonable, the commenters said, because 
there are many fields on form ONRR-2014 that do not affect ONRR's 
ability to ensure that it has collected every dollar due. Thus, these 
commenters support the 2020 Proposed Valuation Rule's elimination of 
the definition of ``misconduct.''
    One commenter stated that the definition of misconduct was 
expansive enough to capture even inadvertent paperwork errors. 
Furthermore, the commenter stated that the 2016 definition of 
misconduct duplicates existing regulations to the extent that a lessee 
is required to correct reporting errors under Sec.  1206.30.
    ONRR Response: The definition of ``misconduct'' in 30 CFR 1206.20 
is no longer needed because the default provision is being eliminated 
by this final rule.
    Public Comment: Some commenters suggested that ONRR amend the 
definition of ``misconduct'' in Sec.  1206.20 by including the words 
``intentional'' or ``knowing or willful'' before ``misconduct'' where 
it appears in 30 CFR part 1206. Alternatively, the commenters 
suggested, ONRR could insert a provision such as ``ONRR will not allege 
misconduct absent some intent by the lessee to lower its royalty 
payments to the government beyond what is reasonable'' to ensure that, 
for example, the failure of the lessee to conform to formal or informal 
agency guidance does not establish misconduct, while good faith efforts 
to comply constitutes mitigating circumstances and should not result in 
the issuance of a penalty. Another commenter said that intentional 
conduct aimed at reducing royalties owed should be an aggravating 
factor, while innocent reporting mistakes, a favorable compliance 
record, and adherence to ONRR guidance should be mitigating factors.
    ONRR Response: ONRR defined ``misconduct'' in the 2016 Valuation 
Rule to clarify when ONRR would exercise the Secretary's discretion to 
determine value of production under the default provision. Because the 
default provision is being eliminated by this final rule, the related 
definition of ``misconduct'' is also being eliminated, and thus, it is 
unnecessary to amend, in any manner, the definition of misconduct.
    Public Comment: One commenter stated that ONRR did not provide a 
reasoned or substantive explanation for proposing in the 2020 Proposed 
Rule to remove the misconduct definition. The commenter asserted that 
ONRR's proposal unnecessarily reintroduces uncertainty to the 
application of the valuation regulations. Additionally, the commenter 
opined that ONRR directly contradicted its earlier position on an issue 
without properly justifying its decision. This commenter suggested that 
before removing the definition, ONRR must first provide a reasoned 
explanation for the change. Accordingly, the commenter stated that 
removing the definition for the term ``misconduct'' is arbitrary and 
capricious.
    ONRR Response: This final rule provides ONRR's reasoned explanation 
to remove the definition of ``misconduct.'' In summary, this rule 
removes the definition because: (1) ONRR originally added the 
definition in conjunction with, and for the operation of, the default 
provision that this rule also removes; (2) in light of this rule's 
objectives, ONRR gives greater weight to comments that the definition 
increased uncertainty and undue burdens in the regulated community; and 
(3) ONRR maintains and has not eroded its ability to ensure and compel 
accurate reporting including, for example, the requirement under Sec.  
1210.30 for a lessee to ``submit accurate, complete, and timely 
information,'' regardless of whether those errors were caused by 
misconduct.
    ONRR appreciates the comments supporting, seeking the modification 
to, and opposing the proposed amendment. After careful consideration, 
and for the reasons explained above, ONRR is adopting the proposed 
amendment to remove the definition of ``misconduct'' in Sec.  1206.20 
as part of this final rule.

F. Contract Signature Requirement for Federal Oil, Gas, and Coal and 
Indian Coal

    The 2016 Valuation Rule required a lessee or a lessee's ``affiliate 
[to] make all contracts, contract revisions, or amendments in writing, 
and all parties to the contract must sign the contract, contract 
revisions, or amendments'' for all valuation methods, including gross 
proceeds and index-based options, to verify the correctness of royalty 
reports and payments. See Sec. Sec.  1206.104(g)(1); 1206.143(g)(1); 
1206.253(g)(1); and 1206.453(g)(1) (2016 Valuation Rule). If a written 
contract was not signed by all parties to the contract, the 2016 
Valuation Rule directs that ONRR use

[[Page 4632]]

the default provision to determine royalty value.
    In the 2020 Proposed Rule, ONRR seeks to eliminate the requirement 
that a lessee create and maintain contracts signed by all parties where 
the lessee would not do so in the normal course of business, except as 
required by 30 CFR 1207.5, which states that a lessee must place in 
written form and retain any oral sales arrangement negotiated by the 
lessee. The proposed amendment also seeks to create greater consistency 
with ONRR's definition of contract, which includes oral contracts and 
written contracts that are not signed by all parties. See 30 CFR 
1206.20.
    Even with the amendments adopted in this final rule, ONRR will 
still be able to evaluate a lessee's course of performance under all 
contracts, oral and written, signed and unsigned, consistent with 
ONRR's historical agency practice. ONRR has long been able to request 
copies of a lessee's sales contracts and all agreements, other 
contracts, and other documents relevant to the valuation of production, 
including any written or electronic evidence of transportation 
contracts, processing contracts, and contracts for services to place 
production in marketable condition. See 30 CFR 1207.5 (``Copies of all 
sales contracts . . . and copies of all agreements, other contracts, or 
other documents which are relevant to the valuation of production are 
to be maintained by the lessee and made available upon request . . . to 
. . . ONRR . . . .''). Given this broad, long-standing authority to 
request all lessee's records that bear on royalty value, in the 2020 
Proposed Rule ONRR sought public comment on whether the new 
requirements imposed by the 2016 Valuation Rule should be retained.
    ONRR recognizes that contracts may be valid and enforceable, as a 
matter of law, despite the absence of writing or signatures. See the 
definition of ``contract'' in 30 CFR 1206.20. In this final rule, ONRR 
seeks to resolve the ambiguity that exists between its definition of 
contract--which recognizes the validity of oral agreements and of 
written agreements that have not been signed by all parties--and the 
2016 Valuation Rule's imposition of a requirement for every contract to 
be in writing and signed by all parties, despite a lessee's normal 
business practices to the contrary. ONRR has determined that the 2016 
Valuation Rule's new requirement does not align with contract law, that 
industry operates without signed documents as a matter of course 
without issue, and that ONRR can use other methods to determine the 
terms of an oral contract or a written contract that is not signed by 
all parties.
Comments on the Proposed Amendment
    Public Comment: Several industry commenters supported removal of 
the contract signature requirement, stating that real world practices 
do not always require written contracts and that there is no need for 
signatures to affirm a contractual agreement. Additionally, commenters 
noted that the 2016 Valuation Rule inadvertently contradicted the 
definition of ``contract'' in the regulation itself, which, at Sec.  
1206.20, defines ``contract'' as ``any oral or written agreement . . . 
that is enforceable by law,'' and which does not require the contract 
to be signed by the parties. Commenters also noted that eliminating the 
written contract requirement would not diminish a lessee's obligation 
to justify its Federal or Indian oil or gas valuation to ONRR, and that 
the mere absence of a written contract is not a valid reason for ONRR 
to interject itself and reestablish royalty value by using the default 
provision.
    ONRR Response: ONRR agrees that the 2016 Valuation Rule overlooked 
the fact that oral agreements and unsigned written agreements may be 
binding and legally enforceable, eliminating the need for the agency to 
implement new requirements. Additionally, the 2016 Valuation Rule's 
requirement of contract signatures is inconsistent with the definition 
of contract found in 30 CFR 1206.20. This amendment will more readily 
synchronize ONRR's regulations with the long-standing definition of 
``contract'' that is found in Sec.  1206.20, which acknowledges that a 
contract may be oral or in writing and does not have to be signed. ONRR 
also acknowledges that oral contracts are legally enforceable, making 
the signature requirement unworkable and potentially burdensome upon 
lessees by creating a heightened requirement that may not be part of 
standard business practice. ONRR also agrees that eliminating the 
signed contract requirement does not diminish the lessee's obligation 
to prove its contract terms and justify its valuation methods to the 
agency. Long-standing ONRR regulations allow ONRR to request a lessee 
provide all documents relevant to the valuation of production during 
the course of its compliance and audit efforts. ONRR believes this 
provides it with an appropriate mechanism by which to verify 
appropriate valuation.
    Public Comment: One industry commenter stated that many current 
agreements among producers and other parties active in the market exist 
electronically or via email exchanges, renew automatically, or include 
terms that require something not in written form. Further, the 
commenter indicated that the signed written contract requirement in 
2016 Valuation Rule is stricter than what is required to establish a 
contract under general commercial law. The commenter provided an 
example, stating that a course of dealing could not be used to satisfy 
ONRR's signed contract requirement, but could be sufficient to 
establish a binding arrangement in a court of law, in the event of a 
contract dispute. This commenter also believes that ONRR has decades of 
experience evaluating contracts prior to the 2016 Valuation Rule, and 
this broad authority and experience should be adequate to carry the 
agency forward.
    ONRR Response: ONRR agrees that the 2016 Valuation Rule overlooked 
the fact that many agreements renew automatically and include terms 
that require acknowledgement in some manner other than a written 
agreement signed by all parties. This amendment will eliminate 
inconsistency between this stated industry practice and ONRR's 
regulatory requirements that rely on accurate recordkeeping and how 
those records are to be maintained by lessees over time. ONRR also 
recognizes the 2016 Valuation Rule created a more stringent standard 
than what most lessees are subject to as part of their normal 
commercial transactions, and by adopting the amendment proposed in the 
2020 Valuation Rule, ONRR hopes to more readily align with standard 
commercial practices. ONRR also agrees that prior agency practice and 
expertise can inform its audit and compliance activities, and that 
eliminating the signed contract provision will not negatively impact 
these efforts. These longstanding agency practices include ONRR 
requests to lessees for documents bearing on the valuation of 
production, including any written sales, transportation, or processing 
agreements, any documentation of an oral sales agreement, and any 
documentation that reflects the existence of, or pertaining to, an oral 
or written sales, transportation, or processing agreement, or agreement 
for services to place production into marketable condition.
    Public Comment: One industry commenter stated that ONRR's assertion 
that the contract signature requirement is defective is a premature 
conclusion for the agency to make. The commenter asserted that ONRR 
should amend the definition so that it is consistent throughout all 
product valuation regulations instead of repealing the written contract 
requirement altogether.

[[Page 4633]]

Alternatively, the commenter stated that ONRR should broaden the 
definition of contract to require that all contracts be in writing. The 
commenter also expressed concern that ONRR is simply returning to an 
old regimen that, by ONRR's own admission in the preamble to the 2016 
Valuation Rule, is outdated and flawed.
    ONRR Response: The fact that oral and unsigned, written agreements 
may be legally binding and enforceable between the parties impacted 
ONRR's decision to revisit this requirement in the 2020 Proposed Rule. 
ONRR is adopting the proposed amendment for the reasons stated in this 
final rule.
    Public Comment: Several public-interest commenters stated that this 
proposed amendment directly contradicts the reason ONRR provided in the 
2016 Valuation Rule for the inclusion of contract signatures. These 
commenters also believe that ONRR has not properly justified this 
amendment, and that verification activities would suffer without 
written contracts.
    ONRR Response: In terms of ONRR's verification activities, ONRR 
believes that its compliance and audit processes will not be negatively 
impacted by eliminating the 2016 Valuation Rule's requirement for 
written contracts signed by all parties. ONRR has several methods by 
which it can confirm transaction-based information from a lessee 
without relying solely on written contracts signed by all parties. This 
includes ONRR's ongoing ability to request a full array of documents--
both signed and unsigned, hard-copy and electronic--along with its 
continuing use of Generally Accepted Government Auditing Standards 
(``GAGAS'' or ``Yellow Book Standards'') to review and audit 
transactions based on information received from a lessee. In using 
these different investigatory methods, ONRR ensures compliance and 
verification activities that meet or exceed its regulatory mandate. 
ONRR is adopting the proposed amendment for the reasons stated in this 
final rule.
    ONRR is eliminating the requirement that a lessee create and 
maintain contracts signed by all parties when the lessee would not 
otherwise do so in the normal course of business. Affected sections are 
Sec. Sec.  1206.104(g)(1), 1206.143(g)(1), 1206.253(g)(1), and 
1206.453(g)(1).

G. Citation to Legal Precedent as Part of a Valuation Determination 
Request

    The 2016 Valuation Rule introduced a requirement that a lessee 
provide, along with the lessee's valuation request, any citations to 
legal precedent, including adverse precedent, that it believes are 
persuasive as part of its analysis of the issues. These requirements 
are set forth in Sec. Sec.  1206.108(a)(5), 1206.148(a)(5), 
1206.258(a)(5), and 1206.458(a)(5).
    In the 2020 Proposed Rule, ONRR proposes to eliminate this 
requirement. More specifically, the 2020 Proposed Rule proposed to 
remove the phrase ``including citations to all relevant precedents 
(including adverse precedents)'' from Sec. Sec.  1206.108(a)(5), 
1206.148(a)(5), 1206.258(a)(5), and 1206.458(a)(5).
    ONRR is familiar with, and commonly a party to, matters that 
generate precedent for Federal oil and gas, Federal coal, and Indian 
coal royalty valuation issues. Although citations might expedite the 
processing time for a lessee's request for a valuation determination, 
it is not necessary to require a lessee to provide citations to 
precedent. Further, ONRR believes that it would be unproductive to 
attempt to enforce or litigate such a requirement, especially because a 
failure to include a citation to precedent may not, on its own, provide 
a sufficient reason to deny an otherwise valid request for a valuation 
determination. Lessees may always cite precedent when they wish to do 
so in submitting a valuation request, but it is not necessary to 
require lessees to do this.
Comments on the Proposed Amendment
    Public Comment: One industry commenter found the requirement to 
provide legal citations to be problematic because the requirement 
creates an undue burden on lessees which discourages lessees from 
seeking formal guidance from ONRR. The commenter explained that 
requiring legal citations amounts to providing a legal brief to ONRR in 
support of a lessee's request for a valuation determination, which is 
unduly burdensome and out of reach for many smaller operators with no 
legal support staff.
    ONRR Response: ONRR agrees with this commenter and believes that 
the requirement to provide legal citations creates an unnecessary 
burden on lessees. ONRR recognizes that many lessees do not employ in-
house legal counsel or have outside legal counsel on retainer who could 
assist with this degree of detailed legal research. Because of the 
significant legal costs and operational challenges that result from 
this requirement of the 2016 Valuation Rule, ONRR agrees that 
eliminating this provision removes a significant challenge for lessees 
who seek more formal guidance.
    Public Comment: One industry commenter noted that the IBLA 
oftentimes issues valuation determinations via Orders, which are 
unpublished and difficult to find using traditional electronic search 
tools. This creates an issue for lessees because ONRR may be the only 
entity privy to this information. Further, the commenter stated that it 
is ONRR's responsibility to ensure that the agency administers its 
regulations in a consistent manner, not industry's.
    ONRR Response: ONRR recognizes this limitation and agrees that the 
best way to eliminate the issue is to remove the requirement to cite to 
legal precedent. The IBLA's issuance of unpublished Orders and 
directives that cannot be accessed by the general public creates an 
unanticipated burden on lessees that this proposed amendment seeks to 
rectify. Further, ONRR conducts its own extensive legal research when 
evaluating the issues in a lessee's request for a valuation 
determination. Because ONRR already engages in this level of legal 
analysis, it is unnecessary for a lessee to duplicate efforts that the 
agency is already conducting as a matter of course.
    Public Comment: Several industry commenters were concerned that 
ONRR will require excessive data and legal analysis in order for a 
lessee to receive valuation guidance or a determination.
    ONRR Response: Although citations might expedite the processing 
time for a lessee's request, ONRR does not believe that it is necessary 
to require a lessee to provide citations to legal precedent or 
regulatory authority. This is particularly true for novel issues for 
which there may be no legal reference to cite. Therefore, ONRR is 
removing this requirement.
    Public Comment: One industry commenter expressed concern that the 
lack of sufficient legal citation would give ONRR a reason to deny a 
request for a valuation determination.
    ONRR Response: A lessee always has the option to cite to legal 
precedent in requesting a valuation determination. Even with the 
amendment adopted in this final rule, lessees may choose to include 
legal precedent to support or substantiate its arguments; but such 
citations are by no means a requisite step in the valuation 
determination or valuation guidance process.
    Public Comment: One industry commenter stated that many mid-sized 
and smaller independent ``Mom and Pop'' oil and gas oil companies do 
not have access to in-house counsel or general counsel to help them 
research case law and legal citations in support of their valuation 
determination.
    ONRR Response: ONRR addressed a substantially similar comment, 
above,

[[Page 4634]]

and refers the commenter to the responses in the preceding section.
    Public Comment: A public-interest commenter stated that the burden 
should remain on the lessee to provide ONRR with citation to legal 
precedent that bolster or support the lessee's request for a valuation 
determination.
    ONRR Response: Although citations and reference to legal authority 
might expedite the processing time for a lessee's request, ONRR does 
not believe that it is necessary to require lessees to provide 
citations for this purpose. Further, ONRR believes that maintaining 
this requirement may disincentivize lessees from seeking a valuation 
determination or valuation guidance. ONRR's position is that all 
requests for guidance and valuation determinations are welcome, and 
ONRR should not create a system that discourages lessees from 
contacting ONRR for support or assistance.
    Public Comment: A commenter indicated that citation to case law and 
other legal precedent may be a good barometer for ONRR to use to decide 
whether the lessee's request has sufficient merit, especially since a 
valuation determination may remain in effect for decades or longer.
    ONRR Response: ONRR disagrees with this commenter. Although legal 
citations may provide support for a valuation determination, ONRR must 
still undertake comprehensive factual and legal research, and a 
lessee's citation to precedent will not relieve ONRR of the obligation 
to do so for every valuation determination. Maintaining the regulation 
that requires citation to legal precedent could inadvertently prevent 
companies from seeking a valuation determination. ONRR does not want to 
place unnecessary burdens on lessees and holds that the amendment 
eliminating the requirement to cite to legal precedent should be 
adopted.
    For the reasons discussed in the 2020 Proposed Rule and this final 
rule, ONRR is removing the requirements under Sec. Sec.  
1206.108(a)(5), 1206.148(a)(5), 1206.258(a)(5), and 1206.458(a)(5) for 
a lessee to include citations to legal precedent when requesting a 
valuation determination.

H. Coal Valued for Royalty Purposes Based on an Electricity Sale

    The 2016 Valuation Rule addressed the valuation of coal at 30 CFR 
1206.252 (Federal coal) and 30 CFR 1206.452 (Indian coal). In general 
and consistent with ONRR's view that the best indicator of value is the 
gross proceeds a lessee receives under an arm's-length contract, these 
sections, with certain exceptions discussed below, value coal based on 
the gross proceeds accruing under the first arm's-length contract, less 
certain allowances.
    In a situation where a lessee or its affiliate produces and then 
uses coal in a power plant owned by the lessee or its affiliate to 
generate electricity that is sold by the lessee or its affiliate to a 
variety of customers, no coal sales contract may exist and no arm's-
length sale of the coal would have taken place prior to the sale of the 
electricity. In a situation where the electricity is sold under an 
arm's-length contract, Sec. Sec.  1206.252(b) and 1206.452(b) of the 
2016 Valuation Rule directs a lessee to value the coal based on the 
gross proceeds received for the electricity sale less certain 
allowances. If the electricity is sold under a non-arm's-length 
contract, these sections require the lessee to propose to ONRR a method 
to value the coal. ONRR may accept the lessee's proposed method or 
determine that the lessee needs to adjust its royalty reporting and 
payment because ONRR's determination resulted in a different value. 
Further, Sec. Sec.  1206.252(c)(2) and 1206.452(c)(2) extend these 
valuation requirements to a lessee who sells coal to another member of 
a coal cooperative for use in the generation and sale of electricity.
    As previously discussed, the United States District Court for the 
District of Wyoming entered a preliminary injunction which enjoined the 
implementation of the portions of the 2016 Valuation Rule applicable to 
Federal and Indian coal. The District Court stated that electricity 
sales may not be the best or a true indicator of the value of the coal 
produced from Federal or Indian properties. See Cloud Peak, 415 F. 
Supp. 3d at 1052-53. Specifically, the District Court stated, inter 
alia, that ``an electricity utility's power supply portfolio typically 
includes a range of options, from nuclear to coal to natural gas to 
hydro, wind, and solar.'' Id. at 1051 (citation omitted). ``Thus, the 
sales price of the electricity is comprised of much more than just the 
cost of coal, and that's ignoring the rabbit hole that is electricity 
sales regulation by both the federal and state governments.'' Id.
    After careful consideration, of the pleadings filed and arguments 
raised in the United States District Court for the District of Wyoming 
relating to the coal cooperative definition and the electricity netback 
method, and the District Court's rationale underlying the preliminary 
injunction, together with the public comments discussed below, ONRR 
concludes that valuing coal on the first arm's-length sale of 
electricity is unworkable and inadvisable. Many resources contribute to 
the generation of the electricity. Calculations to determine netback 
rely on the availability of information on the amount and type of fuels 
used to generate a kilowatt hour of electricity, detailed data on the 
capital costs of the plant to include the direct costs of all plant, 
materials, equipment and buildings, fixed and variable operating costs 
influenced by the age, efficiency, and limitations of all plant 
equipment and including voluntarily-supplied labor costs attributable 
to keeping the plant in operation, as well as consideration of market 
dynamics such as system load factors and peak-shaving capacity. ONRR 
lacks authority to compel a power plant to provide these data sources, 
and, even with the data, it is overly burdensome, exceedingly complex, 
and too difficult to accurately and meaningfully develop models to 
simulate individual power plant operations effectively to isolate the 
contribution of a single non-arm's-length coal source to the value of 
the electricity, let alone assume that it is an accurate proxy for the 
value of coal determined based on arm's-length sales. ONRR is removing 
this unworkable and unduly burdensome requirement from its valuation 
regulations.
    Thus, in the 2020 Proposed Rule, ONRR proposed to amend Sec. Sec.  
1206.252(b) and 1206.452(b) to remove coal valuation based on arm's-
length electricity sales. See 85 FR 62055 and 62061. With removal, a 
lessee will be required to propose a method to value all coal that it 
or its affiliate uses for the generation and sale of electricity, 
regardless of whether the electricity is sold under in an arm's-length 
or a non-arm's-length contract.
Comments on the Proposed Amendment
    Public Comment: Some industry commenters supported the removal of 
provisions that required the valuation of certain coal based on the 
sale of electricity. The commenters pointed out that it would be 
impossible to derive a meaningful value for coal from the value of 
electricity. One commenter argued that ONRR was not upholding its 
responsibility to obtain a fair market value for Federal coal since it 
did not provide a method to value coal never sold at arm's-length. 
Further, these commenters focused on the reduced complexity of 
valuation computations and reduced administrative burdens that would be 
recognized by removing this provision.
    ONRR Response: ONRR agrees that valuing coal based on the sales 
price of electricity would result in an overly

[[Page 4635]]

burdensome series of calculations resulting in a value that would be 
open to challenge and would be overly burdensome for ONRR to perform 
compliance activities and verify accurate reporting and payments. Even 
if ONRR completed such compliance activities and issued an order to the 
lessee, these audits would likely result in the issuance of orders that 
would be contested by the lessee and, potentially, modified or 
overturned by the IBLA or a reviewing court after protracted 
litigation. ONRR agrees that there is no universal solution or method 
that can be applied to value all coal used to produce electricity. ONRR 
further agrees that it is reasonable and proper for the lessee to 
identify, in the first instance, the situation-specific circumstances 
that could impact the appropriate method to values royalties. 
Fortunately, these situations are not common, resulting in only a 
handful or fewer cases that ONRR will need to review and approve. Even 
after several decades of experience, ONRR has not found a better 
solution for instances when coal is converted to another commodity 
without sales. The valuation solutions in these cases must take into 
account the lessees' rights under the lease agreements, the MLA, and 
court-established precedents in order to establish a reasonable method 
to value this coal. ONRR will work to arrive at a just valuation method 
for lessees and the lessor where these no-sale situations exist under 
Sec.  1206.252(b).
    Public Comment: Other commenters opposing this change argued that 
generated electricity is a more accurate indicator of coal's value than 
any method allowed under Sec.  1206.252. Additionally, some of these 
commenters advocated that coal should be valued further downstream 
including, in some cases, the last arm's-length electricity sale.
    ONRR Response: As stated above, valuing coal based on the first 
arm's-length sale of electricity is not a more accurate indicator of 
the value of coal in the limited circumstances affected by this rule 
change. Instead, it is a long-standing principle that royalty valuation 
of production from Federal and Indian leases typically occurs at or 
near the lease. In addition, ONRR has never looked beyond the first 
arm's-length sale to the last arm's-length sale. Most coal produced 
from Federal leases is sold at arm's-length at or near the mine 
loadout, where mined coal is loaded for shipment to the buyer. Where a 
lessee moves its production away from the lease prior to this first 
sale (where ownership of the coal passes from producer to buyer), an 
allowance for transportation may be deducted from the royalty value. If 
the lessee sells or transfers the coal to an affiliate, the point of 
sale is where the first arm's-length sale of the coal by the affiliate 
occurs. In cases where no coal sale occurs prior to the generation of 
electricity, the lessee is required to submit a proposed valuation 
method to ONRR. In turn, ONRR will review and either approve the 
lessee's method or ONRR will construct a reasonable value using the 
best information available under Sec.  1206.252(b).
    Public Comment: Several industry commenters argued that ONRR is 
acting arbitrarily and capriciously when it allows lessees the 
opportunity to propose their own valuation method.
    ONRR Response: Over time, ONRR has found that the information that 
lessees provide when requesting a valuation determination has been 
sufficient to establish a value for coal that results in a fair royalty 
value. The proposed amendments will ensure that coal used by the lessee 
or its affiliate in a power plant for the generation and sale of 
electricity is fairly valued by requiring (1) the lessee to propose to 
ONRR a method that provides a proxy for what would be the first arm's-
length sale of the coal and (2) to adjust its royalty reporting and 
payment if ONRR determines that the proposed method does not fairly 
reflect the coal's value.
    Public Comment: Two commenters offered suggestions as to how to 
value non-arm's-length coal sales. The commenters suggested that ONRR 
go back to the coal valuation regulations in effect prior to the 2016 
Valuation Rule, which used a series of benchmarks to value coal sold in 
non-arm's-length transactions. They also suggested that the first 
benchmark be changed so that a lessee could use their own arm's-length 
sales contracts to establish a range to compare their non-arm's-length 
sales contracts when determining the appropriateness of the non-arm's-
length sales price. The commenters also suggested that ONRR use a 
published index price to establish a value for coal sold non-arm's-
length.
    ONRR Response: Typically, the best indicator of value is the gross 
proceeds received under an arm's-length contract between independent 
entities who are not affiliates and who have opposing economic 
interests regarding that contract. Also, typically the best indicator 
of value under a non-arm's-length sale is the gross proceeds accruing 
to the lessee or its affiliate under the first arm's-length sale, less 
applicable allowances.
    ONRR is not currently aware of any published index prices for coal 
that covers a wide array of coal production, which indices are both 
transparent and widely traded to yield a reasonable value that would 
represent the true market value of coal.
    Public Comment: One commenter also suggested that ONRR should 
consider adopting an objectively-determinable backstop similar to the 
major-portion concept applicable to valuing oil and gas produced from 
Indian leases. Under the major portion process, lessees initially pay 
royalty based on their application of the valuation regulations 
(including using benchmarks for certain non-arm's-length transactions). 
After ONRR collects all the sales data in particular areas from 
lessees' royalty reports, ONRR calculates and publishes a major-portion 
price. Any lessee that initially paid royalty on a value less than the 
major-portion price must re-report and pay any differential.
    ONRR Response: The proposal to construct a major portion comparison 
for coal is not something ONRR is prepared to address in this 
rulemaking. ONRR may consider this idea in future rulemaking efforts. 
ONRR applies major-portion pricing based on Secretarial discretion. 
Currently, ONRR only applies major portion to certain Indian oil and 
gas leases.
    Public Comment: One commenter suggested that ONRR should not 
establish a floor price for coal. The commenter argued that lessees 
should be able to sell their coal at below-market prices in order to 
continue operations. They also argued that it is inconsistent and 
unreasonable for ONRR to chase the actual arm's-length sale price of 
coal while also suggesting that a floor value be established when it is 
to ONRR's benefit.
    ONRR Response: To be clear, ONRR does not set prices for 
commodities. Rather, ONRR ensures royalties are reported and paid based 
on values typically best reflected in the price received by the lessee 
in an arm's-length sale of the same or similar commodity. ONRR's 
regulations require a lessee to market coal for the mutual benefit of 
the lessee and the lessor. The regulations further provide that the 
best indicator of value is typically the gross proceeds received under 
an arm's-length contract between independent entities that are not 
affiliates and have opposing economic interests. Any uplift in gross 
proceeds, an increase in the contract sales price, an affiliate of the 
lessee realizes in an arm's-length sale of the same or a similar 
commodity after buying coal non-arm's-length from the lessee should be 
royalty bearing. Sales below market prices ``in order to continue 
operations'' do not reflect the value of the resource but rather

[[Page 4636]]

operating conditions experienced by the lessee.
    Public Comment: One commenter stated that the economic impact of 
removing the electricity netback method from the rule for Federal and 
Indian coal would be impossible to measure. The commenter also stated 
that using the first arm's-length sale of coal to value coal sold non-
arm's-length for Indian leases should have no economic impact.
    ONRR Response: ONRR has estimated, in past rulemakings, that the 
implementation and now removal of the electricity netback method will 
have no impact on royalties. As discussed below, ONRR believes, but has 
not estimated, that removing the electricity netback method will reduce 
administrative burden for both the lessee and ONRR.
    ONRR appreciates comments supporting, seeking modification to, and 
opposing the proposed amendment. Based on the reasons given in the 2020 
Proposed Rule (see 85 FR 62061) where ONRR stated that the valuation 
method was burdensome and controversial, the pleadings filed and 
arguments raised in the United States District Court for the District 
of Wyoming, the District Court's rationale for the preliminary 
injunction, and the public comments received, ONRR is adopting the 
amendment as proposed.

I. ``Coal Cooperative'' Definition

    The 2016 Valuation Rule amended ONRR's regulations to add a 
definition of ``coal cooperative,'' at 30 CFR 1206.20, to mean ``an 
entity organized to provide coal or coal-related services to the 
entity's members (who may or may not also be owners of the entity), 
partners, and others. The entity may operate as a coal lessee, 
operator, payor, logistics provider, or electricity generator, or any 
of their affiliates, and may be organized to be non-profit or for-
profit.'' See also 81 FR 43369.
    The 2016 Valuation Rule also added Sec. Sec.  1206.252(c)(1) 
(Federal coal) and 1206.452(c)(1) (Indian coal). Those sections require 
a lessee to value coal under Sec. Sec.  1206.252(a) and 1206.452(a), 
respectively, if the lessee sells the coal to another member of a coal 
cooperative and that member, in turn, sells the coal under an arm's-
length contract. Sections 1206.252(a) and 1206.452(a) provide that the 
value of coal is the gross proceeds accruing to the lessee or its 
affiliate under the first arm's-length contract, less allowances.
    The 2016 Valuation Rule also added Sec. Sec.  1206.252(c)(2) and 
1206.452(c)(2), which address the valuation of coal in the situation 
where a lessee sells coal to another member of a coal cooperative that 
uses the coal to generate and sell electricity. The 2016 Valuation Rule 
also explained that, principally, coal cooperatives are formed because 
of some degree of mutual economic or other business interest. See 81 FR 
43338, 43354. Thus, transactions between members of a coal cooperative 
lack the typical opposing economic interests necessary to create an 
arm's-length sale.
    In the 2020 Proposed Rule, ONRR proposed to amend 30 CFR part 1206 
to remove the ``coal cooperative'' definition under Sec.  1206.20 and 
the requirements of Sec. Sec.  1206.252(c)(1)-(2) and 1206.452(c)(1)-
(2). See 85 FR 62061. By these proposed amendments, ONRR attempts to 
relieve concerns with the meaning and effect of the coal cooperative 
amendments while maintaining the royalty value of coal.
Comments on the Proposed Amendment
    Public Comment: Numerous industry commenters agreed that ONRR 
should remove the coal cooperative definition because its inclusion in 
ONRR's regulations fails to reflect those entities' corporate 
structure, would harm small producers, and unduly complicates coal's 
royalty valuation.
    ONRR Response: For the reasons discussed above in the preamble and 
the 2020 Proposed Rule (see 85 FR 62061), ONRR agrees that the 
definition of coal cooperatives is overly broad and ambiguous, and 
would create too much confusion to be effective or enforceable. ONRR 
also agrees that the definition is unnecessary because ONRR's long-
standing definitions of ``affiliate'' and ``non-arm's length'' are 
sufficient to protect the lessor's interest. Under those existing 
definitions, any transfer of coal between entities lacking opposing 
economic interest is a non-arm's-length sale. In such cases, the lessee 
must look to either the first arm's-length sale of the coal by its 
affiliate, or the lessee must come to ONRR and request a valuation 
determination. See 81 FR 43369.
    Public Comment: Some commenters oppose the amendment to remove the 
``coal cooperative'' definition as well as its recognition that certain 
sales are not arm's-length transactions. These commenters expressed a 
concern that cooperative members could use their affiliated status to 
sell coal to each other at less than market prices, which improperly 
lowers royalty payments. Some commenters alleged that ONRR failed to 
provide a reasoned explanation as to why the removal of the ``coal 
cooperative'' definition was necessary and also stated that ONRR 
incorrectly asserted the Wyoming District Court ``offered strong 
criticism'' of its definition. These commenters concluded that ONRR's 
proposed action is arbitrary and capricious.
    ONRR Response: ONRR's regulations require coal to be valued, when 
possible, on the value realized under the first arm's-length sale. 
Removing the ``coal cooperative'' definition does not alter that 
principle or change other methods available to evaluate a coal 
transaction's nature. The overly broad definition of ``coal 
cooperatives'' draws, within its coverage, entities that are not 
affiliated and which have opposing economic interests when it comes to 
buying and selling coal. Thus, the definition results in the treatment 
of some transactions as if they were non-arm's-length when they are, in 
fact, more appropriately viewed as arm's-length transactions under 
traditional principles because ONRR's regulations identify what 
conditions constitute sales between affiliates, and treats those 
circumstances as non-arm's-length sales. And sales between entities 
that lack opposing economic interests are also treated as non-arm's-
length sales. As demonstrated in its recent filing in the United States 
District Court for the District of Wyoming, ONRR concurs with the 
ruling set forth in the District Court's preliminary injunction that 
suggested that, upon final briefing, the provisions of the 2016 
Valuation Rule that require some coal cooperatives to value coal based 
on the sales price of electricity and the definition of coal 
cooperative are arbitrary and capricious. Removing the cited provisions 
fosters the most appropriate treatment of transactions as either arm's-
length or non-arm's-length.
    ONRR appreciates comments supporting, seeking modification to, and 
opposing the proposed amendment. After careful consideration of the 
reasons given in the 2020 Proposed Rule (see 85 FR 62061) that the 
definition was confusing and unnecessary, the pleadings filed and 
arguments raised in the United States District Court for the District 
of Wyoming, the District Court's rationale for the preliminary 
injunction, and the public comments, ONRR is adopting the amendment to 
remove the ``coal cooperative'' definition from Sec.  1206.20 and the 
valuation requirements for coal sold to coal cooperatives at Sec. Sec.  
1206.252(c)(1) and (2) and 1206.452(c)(1) and (2).

III. Amendment Discussion--Part 1241 Penalties

    The first objective of the civil penalty provision of this rule is 
to increase the transparency and fairness of ONRR's current civil 
penalty practices for the

[[Page 4637]]

benefit of regulated parties and interested members of the public. On 
October 9, 2019, the President issued E.O. 13892, ``Promoting the Rule 
of Law Through Transparency and Fairness in Civil Administrative 
Enforcement and Adjudication,'' which emphasized the importance of 
transparency in agency civil penalty practices. Specifically, E.O. 
13892 directed Federal agencies to ``act transparently and fairly with 
respect to all affected parties . . . when engaged in civil 
administrative enforcement or adjudication.'' Further, E.O. 13892 
highlights the need, where feasible, to ``foster greater private-sector 
cooperation in enforcement, promote information sharing with the 
private sector, and establish predictable outcomes for private 
conduct.''
    The second objective of the civil penalty provision of this rule is 
to address the analysis of the 2016 Civil Penalty Rule within a now 
vacated Federal District Court's decision.
    In the 2020 Proposed Rule, ONRR discussed three potential 
amendments to its civil penalty regulations, set forth at 30 CFR part 
1241. First, for transparency, ONRR proposed to amend Sec.  1241.70(b) 
to explain that--for payment violations only--ONRR would consider the 
monetary impact of the violator's conduct when assessing a civil 
penalty. In Section F of the 2020 Proposed Rule, ONRR specifically 
elicited comments on how the proposed amendment to Sec.  1241.70(b) 
would impact lessees that receive a civil penalty. ONRR received no 
comments opposing but received several comments supporting this 
amendment. The supporting comments generally agreed that penalties 
should be proportionate to the unpaid, underpaid, or late paid royalty 
obligation. ONRR received no comment describing the specific impact 
this amendment might have on a lessee. As this amendment merely 
clarifies ONRR's current practice, ONRR did not anticipate a commenter 
would identify an impact.
    Second, for transparency, ONRR proposed an amendment to Sec.  
1241.70 to add Sec.  1241.70(d) to clarify that ONRR may consider 
aggravating and mitigating circumstances in determining the appropriate 
penalty. In the 2020 Proposed Rule, ONRR specifically requested 
comments on how this proposed Sec.  1241.70(d) would impact lessees 
subject to an ONRR-issued civil penalty and what facts or situations 
ONRR should treat as aggravating and mitigating circumstances. ONRR 
received comments generally supporting this amendment and no comments 
in opposition. The supporting comments generally agreed that ONRR 
should be more transparent in how it treats mitigating and aggravating 
circumstances. There was no comment describing any specific impact this 
amendment would have on a lessee. As this amendment merely clarifies 
ONRR's current practice, it did not anticipate any impacts. However, 
ONRR did receive comments suggesting alternative aggravating and 
mitigating circumstances, which are addressed below in Section III.B.
    Third, for fairness, ONRR proposed to amend Sec.  1241.11(b)(5) to 
return to its historical practice of guaranteeing an appellant the 
benefit of a stay of the accrual of a civil penalty during an appeal if 
granted by the Department's ALJ. ONRR specifically sought comments on 
how eliminating Sec.  1241.11(b)(5) would affect lessees to whom a 
civil penalty was issued. ONRR received comments generally supporting 
this amendment and no comments in opposition. The comments in support 
generally agreed that ONRR should eliminate this provision from its 
regulations. There was no comment describing any specific impact this 
amendment would cause on a lessee, other than a general concern that 
the provision, if not removed, would deter penalized parties from 
asserting their due process rights.
General Comments
    ONRR did not receive comments either supporting, opposing, or 
seeking to modify the proposed amendments to Sec. Sec.  1241.11(b)(5) 
and 1241.70(b), or to the proposed addition of Sec.  1241.70(d). Some 
commenters sought numerous other civil penalty policy changes, 
including increasing the number and size of civil penalties or 
modifying other portions of ONRR's civil penalty regulations were 
beyond the scope of the 2020 Proposed Rule. One commenter requested 
that ONRR pursue civil penalties for environmental crimes. Another 
commenter sought greater collaboration with State and Tribal Royalty 
Audit Committee members on FOGRMA compliance. This commenter also 
sought greater royalty accuracy in compliance activities--audits, 
compliance reviews, and data mining. Commenters sought an increase in 
civil penalties to pursue policy goals of decreasing emissions and 
reducing climate change. Other commenters requested that ONRR 
reconsider the definition of ``knowingly or willfully'' in Sec.  
1241.3(b). Commenters also sought to amend Sec.  1241.60(c), which 
allows ONRR to consider ``any information'' including informal email 
communications, to evaluate whether violations were committed 
``knowingly or willfully.'' One commenter requested ONRR adopt a 
regulation regarding the posting of civil penalties and enforcement 
actions on social media. ONRR appreciates these comments and may 
consider them in the future; however, these comments were beyond the 
scope of the 2020 Proposed Rule and unrelated to the proposed 
amendments to Sec. Sec.  1241.11(b)(5), 1241.70(b), and the proposed 
addition of Sec.  1241.70(d). Accordingly, ONRR is not implementing 
policies to enact the proposals in these out-of-scope comments in this 
final rule.

A. Civil Penalties for Payment Violations

    The 2016 Civil Penalty Rule added Sec.  1241.70(b) to clarify that, 
with respect to reporting violations or other violations arising from a 
failure to provide required data to ONRR, ONRR does not consider the 
monetary impact of the violation in the severity analysis performed as 
part of the determination of the amount of a penalty. The 2016 addition 
of Sec.  1247.70(b) was meant to distinguish between how ONRR treats 
non-payment violations from payment violations, the latter of which 
include a failure to pay royalties, rent, interest, fees, or other 
demands or obligations. It was ONRR's intent in the 2016 Civil Penalty 
Rule to clarify that ONRR considers the monetary impact in its severity 
analysis only when a company's conduct involves a payment violation. 
This is in addition to ONRR's consideration--in all violation types--of 
the company's history of noncompliance and business size. Specifically, 
Sec.  1241.70(b), as added in 2016, states that ONRR ``will not 
consider the royalty consequence of the underlying violation when 
determining the amount of the civil penalty for a violation under Sec.  
1241.50 or Sec.  1241.60(b)(1)(ii) or (b)(2).'' The clarification was 
necessary because most violations arising under Sec.  1241.50 (curable 
violations) are reporting violations and require correction regardless 
of amount of money that may be owed because of the reporting violation. 
Because of the need to correct violations regardless of the monetary 
amount, reporting violations are similar to failure to permit audit 
violations under Sec.  1241.60(b)(1)(ii) and knowing or willful 
submission or maintenance violations under Sec.  1241.60(b)(2).
    In the 2020 Proposed Rule, ONRR attempted to further clarify how it 
treats payment versus non-payment violations with the proposed 
amendment of Sec.  1241.70(b), stating that ONRR will consider the 
unpaid, underpaid, or late payment amount in the severity analysis for 
payment violations only.

[[Page 4638]]

    In the 2020 Proposed Rule, ONRR explained that adopting the 
proposed amendment to Sec.  1241.70(b) is consistent with E.O. 13892 
which, among the general goals of transparency and fairness in agency 
civil penalty practices, requires agencies to avoid ``unfair surprise'' 
and apply ``standards of conduct that have been publicly stated.'' See 
E.O. 13892, Section 4.
    ONRR further stated that it would not consider the monetary amount 
for non-payment obligations. To provide more clarity, ONRR is expressly 
stating that it considers the monetary impact for all payment 
violations, which includes payment violations arising under Sec.  
1241.50. In contrast, the 2016 Civil Penalty Rule only indicated that 
ONRR could consider the royalty impact for the knowing or willful 
failure to pay royalty violations under Sec.  1241.60(b)(1)(i), which 
was the only violation type left once ONRR excluded ``violation under 
Sec.  1241.50 or Sec.  1241.60(b)(1)(ii) or (b)(2).''
    ONRR believes that the proposed amendment furthers the goal of 
clarifying its civil penalty practices in order to make those practices 
transparent. Specifically, the proposed amendment adds a sentence 
clarifying that ONRR will consider the monetary impact of a penalty 
only when a company's conduct involves a payment violation.
Comments on the Proposed Amendment
    Public Comment: ONRR received comments supporting the proposed 
amendment to Sec.  1241.70(b). These commenters generally agreed that 
ONRR should consider the monetary consequence of payment violations and 
supported the proposed change to Sec.  1241.70(b). Commenters support 
the reasons ONRR outlined in the 2020 Proposed Rule and noted that the 
proposed amendment would ensure proportionality of the penalty when 
compared to the amount of the unpaid, underpaid, or late paid royalty 
obligation at issue. Generally, the commenters supported the amendment, 
arguing that penalties issued for payment violations should not be 
excessive in comparison to the monetary impact of the underlying 
payment violation. To be clear, as stated above, ONRR considers the 
unpaid, underpaid, or late-paid amount when it considers penalties for 
payment violations arising under Sec.  1241.50 and for knowing or 
willful failure to pay royalty violations under Sec.  1241.60(b)(1)(i).
    ONRR Response: ONRR appreciates the comments supporting the 
proposed amendment to 30 CFR 1241.70(b). ONRR agrees that the 2020 
Proposed Rule provides greater transparency in ONRR's civil penalty 
practice.
    After careful consideration, including for the reasons explained 
above, ONRR is adopting the proposed amendment to Sec.  1241.70(b) in 
full.

B. Consideration of Aggravating and Mitigating Circumstances When ONRR 
Assesses a Civil Penalty

    Section 1241.70(a) identifies three factors that ONRR must consider 
in assessing the amount of a civil penalty. However, this section, as 
currently written, does not include language permitting ONRR to 
consider aggravating and mitigating circumstances. In the 2020 Proposed 
Rule, ONRR proposed to add new paragraph (d) to Sec.  1241.70 stating 
that ONRR may adjust the penalty amount upward or downward in a failure 
to correct civil penalty (``FCCP'') or immediate liability civil 
penalty (``ILCP'') if ONRR finds aggravating or mitigating 
circumstances to exist.
    Consistent with E.O. 13892's transparency and fairness directives, 
the proposed addition of Sec.  1241.70(d) explains that ONRR may 
consider aggravating and mitigating circumstances when calculating the 
amount of a civil penalty. The amendment also aims to reduce or 
eliminate any undue surprise for companies in instances where ONRR 
deviates from the standard penalty assessment because of those 
circumstances. Additionally, the proposed addition of Sec.  1241.70(d) 
accomplishes the implementation of the approach directed by E.O. 13924 
and E.O. 13892.
Comments on the Proposed Amendment
    Public Comment: ONRR received comments supporting the proposed 
amendment to add Sec.  1241.70(d). The commenters generally supported 
greater transparency in ONRR's assessment of penalties. The commenters 
agreed that ONRR should consider aggravating or mitigating 
circumstances in certain cases and therefore support the addition of 
Sec.  1241.70(d). Some commenters who supported this amendment did so 
because it establishes flexibility in ONRR's civil penalty calculations 
in order to arrive at penalty amounts that are proportionate to the 
underlying monetary violation.
    Some commenters responded to ONRR's request for comment on 
circumstances that ONRR should consider to be aggravating and 
mitigating. Some commenters supported the inclusion of an aggravating 
circumstance to consider ``intentional misconduct to reduce royalties 
otherwise due.'' Some commenters suggested including additional 
mitigating factors, such as innocent reporting mistakes, lack of a 
history of prior violations of the same or more severe violations, and 
actions that adhere to guidance from ONRR. One commenter suggested that 
the proposed provision under Sec.  1241.70(d)(iii), which considers 
good faith efforts to comply with formal or informal agency guidance, 
should constitute grounds for eliminating any civil penalty from being 
assessed. Lastly, another commenter suggested that the list of 
aggravating and mitigating circumstances is not exhaustive and may lend 
to ambiguity and agency burden in making case-by-case determinations.
    ONRR Response: ONRR appreciates and agrees with the comments 
supporting the proposed amendment to Sec.  1241.70(d). ONRR 
acknowledges that the list of circumstances in the proposed regulatory 
language is not all-inclusive. Although the list is not exhaustive, it 
provides further transparency and predictability with respect to 
existing practices. ONRR possesses both the authority and expertise to 
consider aggravating or mitigating circumstances outside of the list 
proposed under Sec.  1241.70(d). These considerations do not create an 
undue or excessive burden to the agency, as one commenter suggested.
    Some commenters recommended the inclusion of additional aggravating 
or mitigating circumstances. ONRR disagrees with the suggestion to 
include an aggravating circumstance of intentional misconduct to reduce 
royalties otherwise due, because that circumstance is considered in the 
standard penalty amount for non-curable violations described under 30 
U.S.C. 1719(c) and (d) and 30 CFR 1241.60. ONRR also disagrees with the 
suggestion to include a mitigating circumstance of innocent reporting 
mistakes, because that circumstance is considered in the standard 
penalty amount of curable violations described under 30 U.S.C. 1719(a) 
and (b) and 30 CFR 1241.50. Consideration of innocent reporting 
mistakes as a mitigating circumstance would de-emphasize and undermine 
the importance of correcting the mistakes promptly as required by an 
ONRR notice of noncompliance (``NONC''). And receipt of an ONRR NONC is 
a condition precedent to ONRR's assessment of a penalty for a failure 
to correct an innocent reporting mistake. ONRR also disagrees with the 
suggestion to include a mitigating circumstance of a lack of a prior 
violation. ONRR's standard penalty

[[Page 4639]]

amounts already account for a lack of a history of noncompliance. 
Finally, ONRR is making no change in response to the suggestion to 
modify the language that no penalties are appropriate when a violator 
makes a good faith effort to comply with formal or informal agency 
guidance. Consistent with its exercise of prosecutorial discretion, 
ONRR retains the discretion to evaluate mitigating circumstances on a 
case-by-case basis and conclude that the presence of mitigating 
circumstances can justify resolving a matter without penalty. See 
Heckler v. Chaney, 470 U.S. 821 (1985). In exercising its prosecutorial 
discretion, ONRR will be guided by the principles reflected in E.O. 
13924, ``Regulatory Relief to Support Economic Recovery,'' E.O. 13892, 
``Promoting the Rule of Law Through Transparency and Fairness in Civil 
Administrative Enforcement and Adjudication,'' E.O. 13891, ``Promoting 
the Rule of Law Through Improved Agency Guidance Documents,'' and S.O. 
3385, ``Enforcement Priorities.'' Thus, ONRR already has the discretion 
to determine that no penalties are appropriate when sufficient 
mitigating circumstances are present, including a good faith effort to 
comply with formal or informal agency guidance. Because ONRR intended 
for the proposed amendment to provide transparency in how it calculates 
penalty amounts and did not intend to address when it would exercise 
its prosecutorial discretion, ONRR finds the language regarding 
guidance in the proposed provision under Sec.  1241.70(d)(2)(iii) 
sufficient.
    ONRR appreciates the comments supporting and seeking the 
modification to the proposed amendment to Sec.  1241.70(d). After 
careful consideration, and for the reasons explained above, ONRR is 
adopting the proposed addition at Sec.  1241.70(d) in full.

C. Forfeiture of a Stay of the Civil Penalty Accrual Under Limited 
Circumstances

    ONRR's 2016 Civil Penalty Rule added Sec.  1241.11(b)(5) to give an 
ALJ the ability to conclude that a petitioner had raised a frivolous 
defense and therefore should forfeit the benefit of a previously-
granted stay of the accrual of the amount of the civil penalty. 
Specifically, the 2016 Civil Penalty Rule states that 
``[n]otwithstanding paragraphs (b)(1), (2), (3), and (4) of this 
section, if the ALJ determines that your defense to a Notice is 
frivolous, and a civil penalty is owed, you will forfeit the benefit of 
the stay, and penalties will be calculated as if no stay had been 
granted.''
    In the 2020 Proposed Rule, ONRR proposed to amend Sec.  1241.11 by 
removing paragraph (b)(5). The proposed amendment followed the U.S. 
District Court for the District of Wyoming's decision to vacate Sec.  
1241.11(b)(5). See API, 366 F. Supp. 3d at 1309-1311. Although the 
Tenth Circuit subsequently vacated the District Court's decision on 
other grounds, ONRR finds the District Court's analysis relevant in its 
determination to remove paragraph (b)(5) and the mission of ONRR's 
overall civil penalty program.
    The District Court found ``unpersuasive'' the argument that due 
process rights are implicated by Sec.  1241.11(b)(5), but still found 
the provision ``an abuse of discretion and not in accordance with 
law.'' API, 366 F. Supp. 3d at 1310. Most problematic to the District 
Court was the fact that it provided ONRR with ``a second bite'' to 
argue a defense was frivolous after an optional chance to oppose the 
stay and ``the potential loss'' if a stay were nullified was 
significant. Id. This analysis is relevant because if a person obtains 
standing to challenge this provision in the future, ONRR expects it 
will be invalidated if challenged in the District of Wyoming.
    The IBLA, Office of Hearings and Appeals Division's procedural 
requirements under 43 CFR 4.21(b) establish that ``the appellant 
requesting the stay bears the burden of proof to demonstrate that a 
stay should be granted.'' If the ALJ grants a stay, the accrual of 
additional penalty amounts would be paused until there is an ALJ 
decision in ONRR's favor, coupled with a determination that the 
violation is ongoing. See 30 CFR 1241.11(a) and (b). By adopting the 
amendment, ONRR returns to its pre-2016 Civil Penalty Rule practice 
whereby penalties would not accrue during the period of a stay, even if 
an ALJ subsequently finds a petitioner's defense to the penalty to be 
frivolous.
    ONRR believes Sec.  1241.11(b)(5) is duplicative because ONRR may 
still safeguard against a frivolous defense by opposing a petition for 
a stay under Sec.  1241.11(b)(2)(i). As the District Court stated, ``If 
ONRR believes a stay is not warranted, including the argument that the 
defense is frivolous, ONRR has the right to, and should file a response 
to the stay petition rather than wait on an outcome at some 
undetermined later date and then assert frivolity.'' API, 366 F. Supp. 
3d at 1310. ONRR concurs with the District Court that ONRR has the 
right to oppose a frivolous stay petition and that it should do so. 
Additionally, removing Sec.  1241.11(b)(5) would be consistent with 
executive orders seeking to increase transparency and reduce undue 
surprise in penalty assessments. Further, by removing Sec.  
1241.11(b)(5), ONRR still retains a remedy against frivolous cases, 
while eliminating unnecessary regulations.
    ONRR anticipates that it will be rare that a frivolous defense is 
both more persuasive than ONRR's response to a petition for stay and 
ultimately sufficient to convince the ALJ that the petitioner's defense 
to the penalty was frivolous. ONRR believes that removing Sec.  
1241.11(b)(5), in light of the District Court's analysis, remains 
consistent with the purpose of assessing civil penalties, which is to 
encourage compliance and discourage noncompliance, and also is 
consistent with E.O. 13892 and the policies reflected in that order.
Comments on the Proposed Amendment
    Public Comment: Some commenters supported the removal of Sec.  
1241.11(b)(5). The commenters that supported the amendment fell into 
two general categories. First, commenters generally supported the 
reasons described in the 2020 Proposed Rule. Second, commenters 
supported the amendment because of due process concerns, including the 
possibility that Sec.  1241.11(b)(5) may discourage a petitioner from 
exercising its due process rights. ONRR also received one comment 
suggesting that the 2020 Proposed Rule did not provide sufficient 
reasons for its repeal of an ALJ's ability to revoke a stay of accrual 
upon determination of a frivolous claim. The commenters did not 
advocate for rejecting or modifying the amended regulations as 
proposed. However, the commenter asserted that the Tenth Circuit's 
vacatur of the District Court of Wyoming's decision is an insufficient 
rationale to remove the provisions found in Sec.  1241.11(b)(5).
    ONRR Response: ONRR appreciates and agrees with the comments 
supporting the proposed amendment to Sec.  1241.11(b)(5). ONRR also 
appreciates this opportunity to afford additional clarity and rationale 
in the proposed removal of this provision, which is to increase 
transparency, reduce undue surprise, remove an unnecessary regulation, 
and still have sufficient protection from frivolous defenses to civil 
penalties, as further discussed above.
    ONRR appreciates the comments supporting the proposed amendment to 
Sec.  1241.11(b)(5) and the comment indicating that additional 
rationale is needed to remove this provision. After careful 
consideration, and for the reasons and additional rationale

[[Page 4640]]

explained above, ONRR is adopting the proposed amendment to remove 
Sec.  1241.11(b)(5).

IV. Non-Substantive Corrections

    Through this final rule, ONRR is also making non-substantive 
corrections to the following sections: Sec. Sec.  1206.108, 1206.148, 
1206.252, 1206.258, 1206.261, 1206.268, 1206.452, 1206.458, 1206.460, 
1206.461, 1206.467, and 1206.468. Corrections include:
    1. ONRR reports to the Assistant Secretary for Policy, Management, 
and Budget. This final rule replaces instances of the words ``Assistant 
Secretary'' with ``Assistant Secretary for Policy, Management and 
Budget'' to clarify and specify the correct Assistant Secretary within 
the Department.
    2. 30 CFR 1206.252 and 1206.452 are titled ``How do I calculate 
royalty value for coal that I or my affiliate sell(s) under an arm's-
length or non-arm's-length contract?'' In addition to addressing the 
valuation of coal that is sold, these sections also address the 
valuation of coal that a lessee or its affiliate uses for the 
generation and sale of electricity. See Sec. Sec.  1206.252(b) and 
1206.452(b). This final rule eliminates any requirement that coal be 
based on the price received through electricity sales. Even after that 
amendment, both sections still address the valuation of coal that is 
used for the generation and sale of electricity, and thus not sold. 
Specifically, the sections require the lessee to propose a method to 
ONRR for the valuation of the coal and further require the lessee to 
use its proposed valuation method until ONRR makes a determination. Id. 
Since both sections also address situations when coal is not sold, ONRR 
is amending the title of Sec. Sec.  1206.252 and 1206.452 as part of 
this final rule to read: ``How do I calculate royalty value for coal?'' 
This amendment conforms the title of the sections to the content 
thereof.
    3. 30 CFR 1206.252(a) and 1206.452(a) provide that the value of 
coal generally is the ``gross proceeds accruing to you or your 
affiliate under the first arm's-length contract'' less certain 
allowances. Sections 1206.252(a)(1)-(2) and 1206.452(a)(1)-(2) state 
that this requirement to use gross proceeds to value the coal applies 
when a lessee sells the coal under an arm's-length contract or the 
lessee sells or transfers the coal to its ``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 coal under an 
arm's-length contract.'' Since the first arm's-length sale of the coal 
may be by a person other than the lessee or its affiliate under 
Sec. Sec.  1206.252(a)(1)-(2) and 1206.452(a)(1)-(2), ONRR is amending 
Sec. Sec.  1206.252(a) and 1206.452(a) to reflect that the gross 
proceeds used to value the coal is the ``gross proceeds accruing to 
you, your affiliate, or another person under the first arm's-length 
contract'' less allowances.
    4. The 2020 Proposed Rule also proposed amendments to change 
certain instances of ``may'' to ``must'' in Sec. Sec.  1206.252(b)(2) 
and 1206.452(b)(2). The paragraphs apply when a lessee has proposed a 
valuation method to ONRR for consideration and instruct that the lessee 
``may'' use the method it proposed until ONRR issues a determination. 
ONRR intended that the lessee would use its proposed method while its 
proposal was pending with ONRR. A change from ``may'' to ``must'' 
better reflects that intent. For the same reasons, ONRR is making the 
same change from ``may'' to ``must'' in Sec. Sec.  1206.111(d)(2); 
1206.141(e)(2)(ii); 1206.142(f)(2)(ii); 1206.153(d)(1); 1206.160(c)(1); 
1206.261(c)(1); 1206.268(c)(1); 1206.461(c)(1); and 1206.468(c)(1) 
(reporting a washing allowance using a proposed method).
    5. This final rule corrects the 2020 Proposed Rule's description of 
some leases as ``Federal'' when they should have been identified as 
``Indian'' in Sec. Sec.  1206.460 and 1206.467.
    6. ONRR is correcting a cross-reference in Sec.  1206.458(h) to 
properly refer to ``Sec.  1206.459'' rather than ``Sec.  1206.259,'' as 
was initially published in the 2020 Proposed Rule.

V. Economic Analysis

    ONRR shares the Department's statutory mandate to conserve and 
encourage domestic production of natural resources and develop 
regulations to achieve these goals. BOEM and BLM have provided 
information and documentation to ONRR demonstrating that the dynamics 
of the domestic energy markets have changed since the 2016 Valuation 
Rule was published. In the years leading up to the 2016 Valuation Rule, 
domestic energy commodity prices were nearly double those leading up to 
this rule. Given this, GOM assets have lost value and leasing is less 
attractive than previously. BOEM information shows reserves in the GOM 
are declining and GOM bidding, active leases, rig counts, and wells 
spud have declined significantly since ONRR's Economic Analysis in the 
2016 Valuation Rule.
    In the 2020 Proposed Rule, ONRR summarized the estimated changes to 
royalties and regulatory costs that the proposed rule may have on 
potentially affected groups, including industry, the Federal 
Government, and State and local governments.
    ONRR notes that changes to royalties are transfers that are 
distinguishable from regulatory costs (or cost savings). The estimated 
changes in royalties will change both the private cost to the lessee 
and the amount of revenue collected by the Federal Government and 
disbursed to State and local governments. The net impact of the 
amendments adopted by this final rule is an estimated $28.9 million 
annual decrease in royalty collections. This represents a decrease of 
less than one-half of one percent of the total Federal oil and gas 
royalties ONRR collected in 2018. The royalty impact, as evident in the 
total annual estimate reflected above, does impact the disbursements 
for the Treasury and for States that are stakeholders and recipients of 
ONRR's distributions.
    ONRR also estimates that the Federal oil and gas industry will face 
increased annual administrative costs of $2.58 million under this final 
rule. As discussed below, this is the net impact of various cost 
increasing and cost saving measures.
    ONRR estimates that this rule will have no economic impact on 
Federal and Indian coal. Please note that, unless otherwise indicated, 
numbers in the tables in this section are rounded to the nearest 
thousand, and that the totals may not match due to rounding.
General Comments on the Economic Analysis
    Public Comment: Some commenters suggested that the economic 
analysis is incorrect because it compared the proposed amendments 
relative to ONRR's current regulations which include the 2016 Valuation 
Rule amendments, which commenters suggest should have never happened.
    ONRR Response: ONRR's current regulations include the 2016 
Valuation Rule's amendments. The appropriate baseline for this rule is 
the rules that are currently in effect. Any change that would be 
affected by the rule will be measured relative to that baseline.
1. Federal Oil and Gas Industry
    This table shows the change in royalties by provision for the first 
year and each year thereafter:

[[Page 4641]]



             Summary of Changes to Oil & Gas Royalties Paid
                                [Annual]
------------------------------------------------------------------------
                                                           Net change in
                     Rule provision                       royalties paid
                                                            by lessees
------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length         $5,620,000
 Gas Sales..............................................
Index-Based Valuation Method Extended to Arm's-Length         21,141,000
 NGL Sales..............................................
High to Midpoint Index Price for Non-Arm's-Length Gas        (4,488,000)
 Sales..................................................
Transportation Deduction Non-Arm's-Length Index-Based        (7,121,000)
 Valuation Method.......................................
Extraordinary Processing Allowances.....................    (11,131,000)
Allowances for Certain OCS Deepwater Gathering Costs....    (32,900,000)
------------------------------------------------------------------------
    Total...............................................    (28,879,000)
------------------------------------------------------------------------

    ONRR estimated the administrative cost savings from optional use of 
the index-based valuation method for arm's-length gas and NGL sales and 
administrative costs from the calculation of allowances for certain OCS 
deepwater gathering. These administrative costs to industry totaled 
approximately $2.58 million annually.

          Summary of Annual Administrative Impacts to Industry
------------------------------------------------------------------------
                                                            Cost (cost
                     Rule provision                          savings)
------------------------------------------------------------------------
Administrative Cost Savings for Index-Based Valuation        (1,354,000)
 Method for Gas & NGLs..................................
Administrative Cost for Allowances for Certain OCS             3,931,000
 Deepwater Gathering....................................
------------------------------------------------------------------------
    Total...............................................       2,577,000
------------------------------------------------------------------------

    ONRR also estimated industry will incur a one-time administrative 
cost savings of $4.5 million from the simplification of reporting 
processing and transportation allowances associated with the optional 
use of the index-based valuation method. These costs are only 
calculated by a lessee once to break out allowed from disallowed costs 
in reported processing and transportation allowances. Unless there is a 
significant change in processing and transportation costs, this ratio 
of allowed to disallowed costs should not change from year to year.

               One-Time Administrative Impacts to Industry
------------------------------------------------------------------------
                     Rule provision                        Cost savings
------------------------------------------------------------------------
Administrative Cost-Savings in Lieu of Unbundling             $4,520,000
 Related to Index-Based Valuation Method for Gas & NGLs.
------------------------------------------------------------------------

    To perform this economic analysis on all the provisions adopted in 
this final rule, ONRR reviewed royalty data for Federal oil, 
condensate, residue gas, unprocessed gas, fuel gas, gas lost--flared or 
vented, carbon dioxide, sulfur, coalbed methane, and natural gas 
products (product codes 03, 04, 15, 16, 17, 19, 39, 07, 01, 02, 61, 62, 
63, 64, and 65) from the five calendar years, 2014-2018. ONRR believes 
the majority of the reporting used in this analysis was made in 
compliance with the regulations in place prior to the 2016 Valuation 
Rule. ONRR used five calendar years of royalty data because this longer 
time period helped reduce volatility caused by fluctuations in 
commodity pricing and volume swings. ONRR used this data without 
adjusting for previous rulemakings because at the time of this 
analysis, a significant number of lessees and operators had not yet 
complied with the 2016 Valuation Rule's provisions due to its 
implementation delays, including the 2017 Repeal Rule, the subsequent 
2019 Vacatur, and ONRR's two dear reporter letters providing industry 
with additional time to come into compliance with the 2016 Valuation 
Rule following its reinstatement. ONRR adjusted the historical data in 
this analysis to calendar year 2018 dollars using the Consumer Price 
Index (all items in U.S. city average, all urban consumers) published 
by the BLS. ONRR found that some companies aggregate their natural gas 
volumes from multiple leases into pools and sell that gas under 
multiple contracts. Lessees report those sales and dispositions using 
the ``POOL'' sales type code. Only a small portion of these gas sales 
are non-arm's-length. ONRR used estimates of 10 percent of the POOL 
volumes in the economic analysis of non-arm's-length sales and 90 
percent of the POOL volumes in the economic analysis of arm's-length 
sales.
Change in Royalty 1: Using Index-Based Valuation Method To Value Arm's-
Length Federal Unprocessed Gas, Residue Gas, Fuel Gas, and Coalbed 
Methane
    To estimate the royalty impact of the option to pay royalties using 
the index-based valuation method, ONRR reviewed the reported royalty 
data for all Federal gas sales except for non-arm's-length (discussed 
below), future valuation agreements, and percentage of proceeds 
(``POP'') sales. ONRR also adjusted the POOL sales down to 90 percent 
(as described above), which were spread across 10 major geographic 
areas with active index prices. The 10 areas account for over 95 
percent of all Federal gas produced. ONRR assumes the remaining five 
percent of Federal gas lessees will not elect the index-

[[Page 4642]]

based method because areas outside of major producing basins may have 
infrastructure limitations or limited access to index pricing. The 10 
geographic areas are:

----------------------------------------------------------------------------------------------------------------
     Offshore Gulf of Mexico        Big Horn Basin     Green River Basin     Permian Basin      Piceance Basin
----------------------------------------------------------------------------------------------------------------
Powder River Basin..............  San Juan Basin....  Uinta Basin.......  Williston Basin...  Wind River Basin.
----------------------------------------------------------------------------------------------------------------

    To calculate the estimated impact, ONRR:
    (1) Identified the monthly bidweek price index, published by Platts 
Inside FERC, applicable to each area--Northwest Pipeline Rockies for 
Green River, Piceance and Uinta basins; El Paso San Juan for San Juan 
basin; Colorado Interstate Gas for Big Horn, Powder River, Williston, 
and Wind River basins; El Paso Permian for Permian basin; and Henry Hub 
for the GOM. ONRR determined the price index applicability based on 
proximity to the producing area and the frequency by which ONRR's audit 
and compliance staff verify these index prices in sales contracts.
    (2) Subtracted the transportation deduction as modified by this 
rule (detailed in the transportation section below) from the midpoint 
index price identified in step (1).
    (3) Multiplied the royalty volume by the index price identified per 
region, less the transportation deduction calculated in step (2).
    (4) Totaled the reported royalties less allowances reported on the 
monthly royalty report (form ONRR-2014) and the estimated royalties 
based on the index-based valuation method calculated in step (3).
    (5) Calculated the annual average of reported royalties and 
estimated index-based royalties calculated in step (4) by dividing by 
five (number of years of reported data in the analysis).
    (6) Subtracted the difference between the totals calculated in step 
(5).
    ONRR anticipates that some lessees will choose to value their 
royalties on natural gas sales reported to ONRR using this index-based 
valuation method, saving administrative costs (described in detail 
below in Cost Savings 1 and Cost Savings 2), while other lessees will 
continue to calculate and deduct the actual costs they incur. As 
discussed above in response to a comment, ONRR cannot precisely 
estimate how many lessees will elect to use the index-based valuation 
method since many factors, that are currently unquantifiable, will 
drive a lessee's decision. For the purposes of this analysis and for 
consistency with previous similar analyses, ONRR assumed that half of 
lessees would choose the index-based valuation method to value sales 
and dispositions eligible for the election. ONRR's assumption that half 
of lessees will choose this method is an attempt to simplify the 
countless number of factors such as, unpredictable natural gas price 
changes, simpler accounting methods for lessees, company-specific 
break-even analysis in producing regions, and unbundling administrative 
calculations. ONRR also isolated the GOM from the onshore basins listed 
above because it accounts for approximately 30 percent of the total 
Federal gas sales used in this analysis, as well as having different 
complexities, when compared to onshore areas.
    ONRR estimates that the index-based valuation method will increase 
annual royalty payments on arm's-length unprocessed gas, residue gas, 
fuel gas, and coalbed methane by approximately $5.6 million. This 
estimate represents an average increase of approximately one percent, 
or $0.04 per MMBtu, based on an annualized royalty volume of 
296,440,024 MMBtu. ONRR chose not to include POP sales in the above 
method because the sales are reported inclusive of the NGL value and 
net of transportation and processing costs. To capture the change in 
value associated with POP contracts, ONRR applied the $0.04 per MMBtu 
calculated above to the annualized royalty volume for arm's-length 
percent of proceeds (``APOP'') sales of 158,772,452 MMBtu. ONRR 
recognizes that it is not accounting for the value of APOP NGLs, 
however ONRR does not have a reasonable method to break out those 
components from the available data.

             Annual Net Change in Royalties Paid Using Index-Based Method for Arm's-Length Gas Sales
----------------------------------------------------------------------------------------------------------------
                                                                                      Onshore
                                                                  Gulf of Mexico      basins           Total
----------------------------------------------------------------------------------------------------------------
Annualized Reported Royalties...................................    $235,065,000    $541,124,000    $776,189,000
Royalties Estimated using Index-Based Valuation Method..........    $250,183,000    $536,564,000    $786,747,000
Difference......................................................     $15,118,000    ($4,560,000)     $10,558,000
Change per MMBtu................................................           $0.18         ($0.02)           $0.04
% Change........................................................              6%            (1%)              1%
                                                                 -----------------------------------------------
Annualized POP Royalties using Index-Based Valuation Method.....  ..............  ..............        $682,000
                                                                 -----------------------------------------------
Annual Net Change in Royalties Paid using Index-Based Valuation   ..............  ..............     $11,240,000
 Method.........................................................
                                                                 -----------------------------------------------
50% of Lessees Choose Index-Based Valuation Method..............  ..............  ..............      $5,620,000
----------------------------------------------------------------------------------------------------------------

Comments on the Analysis of this Amendment
    Public Comment: A commenter stated that ONRR's assumption that half 
of lessees will choose to use the index-based valuation method is 
unreasonable and incorrectly overstates the estimated change in 
royalties.
    ONRR Response: ONRR acknowledges the uncertainty associated with 
predicting the number of lessees who may elect to use the index-based 
valuation methods as the commenter suggests. One major factor a lessee 
must look at when deciding whether to elect the index-based valuation 
method for two consecutive years is a prediction of future natural gas 
pricing. It is difficult

[[Page 4643]]

to accurately predict natural gas prices two years into the future at 
the precise levels required when so many market dynamics are at play. 
Current domestic natural gas prices have changed compared to recent 
years and fluctuate up and down regularly. Because of these unknowns 
and for consistency with previous similar analysis, including the 2016 
Valuation Rule, ONRR will continue to use the assumption that half of 
lessees will adopt this method to provide a baseline of understanding 
for the impacts of the provision.
    Public Comment: ONRR received a comment that claimed in the 2016 
Valuation Rule's Preamble, valuing gas transactions based on the first 
arm's-length sale would result in administrative cost savings of 
$247,000 for industry. The commenter claims ONRR ignored these 2016 
Valuation Rule calculations in the proposed rule when claiming that 
extending the index-based valuation method to all transactions reduces 
administrative burden.
    ONRR Response: ONRR believes the commenter misunderstood the 2016 
Valuation Rule analyses. In both the 2016 Valuation Rule and the 2020 
Proposed Rule, using the index-based valuation method creates an 
administrative cost savings for lessees compared to using the first 
arm's-length sale made by an affiliate of the lessee.
Change in Royalties 2: Using the Index-Based Valuation Method To Value 
Arm's-Length Sales of Federal NGLs
    Similar to the changes to Federal unprocessed gas, residue gas, 
pipeline fuel, and coalbed methane, a lessee will have the option to 
pay royalties on Federal NGLs using an index-based value less a 
processing allowance defined by regulation and be allowed an adjustment 
for transportation costs and fractionation costs, which account for the 
prices realized at the various NGL hubs. ONRR used the same 2014-2018 
calendar years for all NGL sales except for non-arm's-length and future 
valuation agreements. ONRR also adjusted the POOL sales down to 90 
percent (as described above). These sales were spread across the same 
10 major geographic areas with active index prices for this analysis. 
To calculate the estimated royalty impact of the index-based valuation 
method on Federal NGLs, ONRR:
    (1) Identified the Platts Oilgram Price Report Price Average 
Supplement (Platts Conway) or OPIS LP Gas Spot Prices Monthly (OPIS 
Mont Belvieu) for published monthly midpoint NGL prices per component 
applicable to each area--Platts Conway for Williston and Wind River 
basins; and OPIS Mont Belvieu non-TET for the Gulf of Mexico, Big Horn, 
Green River, Permian, Piceance, Powder River, San Juan, and Uinta 
basins. In ONRR's audit experience, OPIS' prices are used to value NGLs 
in contracts more frequently at Mont Belvieu, and Platts' prices are 
used more frequently at Conway.
    (2) Calculated an NGL basket price (a weighted average price to 
group the individual NGL components to a weighted price), which were 
compared to the imputed price from the monthly royalty report. The 
baskets illustrate the difference in the gas composition between 
Conway, Kansas and Mont Belvieu, Texas. The NGL basket hydrocarbon 
allocations are:

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                     Platts Conway Basket                   OPIS Mont Belvieu Basket
----------------------------------------------------------------------------------------------------------------
Ethane-propane (EP mix).......................             40%  Ethane..........................             42%
Propane.......................................             28%  Non-TET Propane.................             28%
Isobutane.....................................             10%  Non-TET Isobutane...............              6%
Normal Butane.................................              7%  Normal Butane...................             11%
Natural Gasoline..............................             15%  Natural Gasoline................             13%
----------------------------------------------------------------------------------------------------------------

    (3) Subtracted the current processing deductions, as well as 
fractionation costs and transportation costs referenced in the current 
regulations and published online at https://www.onrr.gov, as shown in 
the table below from the NGL basket price calculated in step (2):

                                                  NGL Deduction
                                                     [$/gal]
----------------------------------------------------------------------------------------------------------------
                                                                  Gulf of Mexico    New Mexico      Other areas
----------------------------------------------------------------------------------------------------------------
Processing......................................................           $0.10           $0.15           $0.15
Transportation and Fractionation................................            0.05            0.07            0.12
                                                                 -----------------------------------------------
    Total ($/gal)...............................................            0.15            0.22            0.27
----------------------------------------------------------------------------------------------------------------

    (4) Multiplied the royalty volume by the index price identified for 
each region, less the NGL deduction calculated in step (3).
    (5) Totaled the royalty value less allowances reported on the 
monthly royalty report, and the estimated royalties based off the 
index-based valuation method calculated in step (4).
    (6) Calculated the annual average of reported royalties and 
estimated index-based royalties calculated in step (5) by dividing by 
five (number of years in this analysis).
    (7) Subtracted the difference between the totals calculated in step 
(6).
    Because ONRR assumed that half of lessees would choose this option 
for eligible dispositions, ONRR reduced the total estimate by 50 
percent in the following table. ONRR estimates that this change will 
increase annual royalty payments by approximately $21.1 million. This 
estimate represents an average increase of approximately 17 percent or 
$0.0894 per gallon, based on an annualized royalty volume of 
475,257,250 gallons [($42,281,000/475,257,250 gal) = $0.0894/gal].

[[Page 4644]]



        Annual Net Change in Royalties Paid Using Index-Based Valuation Method for Arm's-Length NGL Sales
----------------------------------------------------------------------------------------------------------------
                                                  Gulf of Mexico    New Mexico      Other areas        Total
----------------------------------------------------------------------------------------------------------------
Annualized Reported Royalties...................     $74,438,000     $67,637,000     $70,072,000    $212,147,000
Royalties Estimated using Index-Based Valuation      $77,068,000     $66,397,000    $110,962,000    $254,428,000
 Method.........................................
Annual Net change in Royalties Paid using Index-      $2,630,000    ($1,240,000)     $40,891,000     $42,281,000
 Based Valuation Method for NGLs................
Change per Gallon...............................         $0.0174       ($0.0081)         $0.2439         $0.0894
% Change........................................              3%            (2%)             37%             17%
                                                 ---------------------------------------------------------------
    50% of Lessees Choose the Index-Based         ..............  ..............  ..............     $21,141,000
     Valuation Method...........................
----------------------------------------------------------------------------------------------------------------

Change in Royalties 3: Using the Average Index Price Versus the Highest 
Published Index Price To Value Non-Arm's-Length Federal Unprocessed 
Gas, Residue Gas, Coalbed Methane, and NGLs
    As noted above, the index-based valuation method will change from 
using the highest published price for a specific index-pricing point to 
using the average published bidweek price for the index-pricing point. 
To estimate the royalty impact of this change from the highest 
published index price to the average published bidweek price for the 
index-based valuation method, ONRR used reported royalty data using 
non-arm's-length (``NARM'') sales and 10 percent of the POOL sales type 
codes based on the assumption above in the same 10 major geographic 
areas with active index-pricing points, also listed above.
    To calculate the estimated impact, ONRR:
    (1) Identified the Platts Inside FERC published monthly midpoint 
and high prices for the index applicable to each area-- Northwest 
Pipeline Rockies for Green River, Piceance and Uinta basins; El Paso 
San Juan for San Juan basin; Colorado Interstate Gas for Big Horn, 
Powder River, Williston, and Wind River basins; El Paso Permian for 
Permian basin; and Henry Hub for the Gulf of Mexico.
    (2) Multiplied the royalty volume by the published index prices 
identified for each region.
    (3) Totaled the estimated royalties using the published index 
prices calculated in step (2).
    (4) Calculated the annual average index-based royalties for both 
the high and volume-weighted-average prices calculated in step (3) by 
dividing by five (number of years in this analysis).
    (5) Subtracted the difference between the totals calculated in step 
(4).
    As explained in response to a comment above, ONRR assumes that half 
of lessees would choose this method, and ONRR therefore reduced the 
total estimate by 50 percent in the following table. ONRR estimates 
that the result of this change is a decrease in annual royalty payments 
of approximately $4.5 million. This estimate represents an average 
decrease of approximately three percent or ten cents ($0.10) per MMBtu, 
based on an annualized royalty volume of 93,301,478 MMBtu (for NARM and 
10 percent POOL reported sales type codes).

 Annual Change in Royalties Paid Due to High to Midpoint Modification for Non-Arm's-Length Sales of Natural Gas
                                       Using Index-Based Valuation Method
----------------------------------------------------------------------------------------------------------------
                                                                                      Onshore
                                                                  Gulf of Mexico      basins           Total
----------------------------------------------------------------------------------------------------------------
Royalties Estimated Using High Index Price......................    $107,736,000    $198,170,000    $305,907,000
Royalties Estimated Using Published Average Bidweek Price.......     107,448,000     189,483,000     296,931,000
Annual Change in Royalties Paid due to High to Midpoint Change..       (288,000)     (8,687,000)     (8,975,000)
Change per MMBtu................................................          (0.01)          (0.14)          (0.10)
% Change........................................................              0%            (5%)            (3%)
                                                                 -----------------------------------------------
    50% of Lessees Choose the Index-Based Method................  ..............  ..............     (4,488,000)
----------------------------------------------------------------------------------------------------------------

Change in Royalties 4: Modifying the Index-Based Valuation Method 
Transportation Deduction Used To Value Non-Arm's-Length Federal 
Unprocessed Gas, Residue Gas, Coalbed Methane, and NGLs
    This rulemaking updates the transportation deductions applicable to 
the non-arm's-length index-based valuation method to reflect changes in 
industry's transportation contracts terms and more recent allowance 
data reported to ONRR. To estimate the royalty impact of the 
modification to the transportation deduction, ONRR used reported 
royalty data using NARM and 10 percent of the POOL sales type codes 
from the same 10 major geographic areas with active index-pricing 
points listed above.
    To calculate the estimated impact, ONRR:
    (1) Identified appropriate areas using Platts Inside FERC index 
prices (see list above).
    (2) Calculated the transportation deduction as published in the 
current regulations and the deduction outlined in the table below for 
each area identified in step (1).

[[Page 4645]]



 Transportation Deduction of Index-Based Valuation Method for Non-Arm's-
                               Length Gas
                                [$/MMBtu]
------------------------------------------------------------------------
                                                          2020 valuation
                                          2016 valuation    reform and
                 Element                       rule        civil penalty
                                                               rule
------------------------------------------------------------------------
Gulf of Mexico %........................              5%             10%
Gulf of Mexico Low Limit................           $0.10           $0.10
Gulf of Mexico High Limit...............           $0.30           $0.40
Other Areas %...........................             10%             15%
Other Areas Low Limit...................           $0.10           $0.10
Other Areas High Limit..................           $0.30           $0.50
------------------------------------------------------------------------

    (3) Multiplied the royalty volume by the applicable transportation 
deduction identified for each area calculated in step (2).
    (4) Totaled the estimated royalty impact based off both 
transportation deductions calculated in step (3).
    (5) Calculated the annual average royalty impact for both methods 
calculated in step (4) by dividing by five (number of years in this 
analysis).
    (6) Subtracted the difference between the totals calculated in step 
(5).
    Because ONRR estimates that half of lessees will choose this 
option, ONRR reduced the total estimate by 50 percent. Please note that 
the figures in the table below represent the difference between the 
current transportation adjustment percentage found in the 2016 
Valuation Rule and the percentage under the index-based valuation 
method in the 2020 Proposed Rule. ONRR estimates the change will result 
in a decrease in annual royalty payments of approximately $7.1 million. 
This estimate represents an average decrease in royalties paid of 
approximately 65 percent or 15 cents per MMBtu, based on an annualized 
royalty volume of 93,301,478 MMBtu (for NARM and 10 percent POOL 
reported sales type codes).

  Annual Change in Royalties Due to Transportation Deduction Modification for Non-Arm's-Length Sales of Natural
                                                       Gas
----------------------------------------------------------------------------------------------------------------
                                                                  Gulf of Mexico    Other areas        Total
----------------------------------------------------------------------------------------------------------------
Current Regulations Transport Deduction.........................      $5,387,000     $16,375,000     $21,762,000
Estimate using new Transport Deduction..........................      10,346,000      25,659,000      36,005,000
Difference......................................................       4,959,000       9,284,000      14,243,000
Change per MMBtu................................................            0.15            0.15            0.15
                                                                 -----------------------------------------------
    50% of Lessees Choose the Index-Based Valuation Method......  ..............  ..............       7,121,000
                                                                 -----------------------------------------------
        Annual Change in Royalties Due to Transportation          ..............  ..............     (7,121,000)
         Deduction Modification.................................
----------------------------------------------------------------------------------------------------------------

    Clarifying the description of the $0.04/MMBtu and $0.09/MMBtu: In 
the 2020 Proposed Rule, ONRR noted the estimated changes in royalties 
under the proposed index-based valuation method. Specifically, the 
preamble of the 2020 Proposed Rule (85 FR 62054, at 62058) provided, 
``As we outline in the Procedural Matters section, overall royalty 
values under the 2016 Valuation Rule's index-based valuation method are 
still around $0.04/MMBtu higher than the prices reported to ONRR for 
arm's-length sales. In the 2020 Proposed Rule, the average bidweek 
price would result in around $0.09 less per MMBtu.'' This section was 
unclear, and should have provided, ``As outlined in the Procedural 
Matters section, overall royalty values under the 2020 Valuation Rule's 
index-based valuation method are around $0.04/MMBtu higher than the 
prices reported to ONRR for arm's-length sales. For non-arm's-length 
dispositions valued under the proposed rule's index-based valuation 
method, using the average bidweek price instead of the bidweek high 
price would result in around $0.09 less per MMBtu'' (emphasis added). 
This clarification does not affect the economic analyses conducted in 
the 2020 Proposed Rule and this final rule.
No Change in Royalties 1: Transportation Allowances in Excess of 50 
Percent of the Royalty Value Prior to Allowances for Federal Gas
    In certain scenarios, a lessee may incur costs to transport Federal 
gas at a cost that exceeds the regulatory limit of 50 percent of the 
gas's royalty value prior to allowances. This rule does not provide a 
lessee the ability to submit a request to ONRR to exceed the 50 percent 
limit. The annual number of requests to exceed allowance limits 
submitted by lessees to ONRR has decreased since the similar analysis 
was performed for the 2016 Valuation Rule. To estimate the change in 
royalties associated with the proposed amendment, ONRR first identified 
all gas transportation allowances reported on the monthly royalty 
reports exceeding the 50 percent limit for calendar years 2014-2018. 
Next, ONRR calculated the transportation allowance claimed for each 
royalty line compared to what the transportation allowance would have 
been at the 50 percent limit. ONRR then calculated annual totals and 
averaged them over 5 years. The result in the proposed rule was an 
estimated annual decrease in royalties paid by industry of 
approximately $279,000 per year. ONRR is not adopting this regulation 
change. There is no change in estimated royalties.
No Change in Royalties 2: Transportation Allowances in Excess of 50 
Percent of the Royalty Value Prior to Allowances for Federal Oil
    Similar to the section above, a lessee may incur costs to transport 
Federal oil that exceed the regulatory limit of 50 percent of the oil's 
royalty value prior

[[Page 4646]]

to allowances. This rule does not provide a lessee the ability to 
request to exceed that limit. The annual number of requests to exceed 
allowance limits submitted by lessees to ONRR has decreased since the 
similar analysis was performed for the 2016 Valuation Rule. To estimate 
the change in royalties associated with the proposed amendment, ONRR 
first identified all oil transportation allowances reported on the 
monthly royalty report that exceeded the 50 percent limit for calendar 
years 2014-2018. As above, ONRR calculated the transportation allowance 
claimed for each royalty line compared to what the transportation 
allowance would have been at the 50 percent limit. ONRR then calculated 
annual totals and averaged them over five years. The result in the 
proposed rule was an annual estimated decrease in royalties paid by 
industry of approximately $11,000 per year. ONRR is not adopting this 
regulation change. There is no change in estimated royalties.
No Change in Royalties 3: Processing Allowances in Excess of 66\2/3\ 
Percent of the Royalty Value of Federal NGLs Prior to Allowances
    Similar to the transportation allowance amendments, a lessee may 
incur costs required to process gas that exceed the regulatory limit of 
66\2/3\ percent of the royalty value of the NGLs prior to allowances. 
This rule does not provide a lessee the ability to request to exceed 
that limit. The annual number of requests to exceed allowance limits 
submitted by lessees to ONRR has decreased since a similar analysis was 
performed for the 2016 Valuation Rule. To estimate the change in 
royalties associated with the proposed amendment, ONRR completed two 
separate calculations.
    First ONRR identified all NGL processing allowances reported on the 
monthly royalty report that exceeded the 66\2/3\ percent limit for 
calendar years 2014-2018. Next, ONRR calculated the processing 
allowance claimed for each royalty line compared to what the processing 
allowance would have been at the 66\2/3\ percent limit. ONRR then 
calculated annual totals and averaged them over five years. The result 
in the proposed rule was an annual estimated decrease in royalties paid 
by industry of approximately $135,000 per year.
    ONRR then calculated the estimated impact for processing allowances 
exceeding the 66\2/3\ percent limit for POP contract sales. ONRR 
assumed the lessee retains 85 percent of the value of the residue and 
NGLs and the processor retains 15 percent. ONRR then assumed that 60 
percent of the processor's portion was allocable to transportation and 
the remaining 40 percent was processing. The total estimated processing 
allowance attributable to POP sales was $62,390,000. The estimated 
processing allowance limit attributable to POP sales was $137,316,000. 
ONRR found the potential processing allowances did not exceed the 66\2/
3\ percent limit and there would be no additional change in royalties 
from POP contract sales. ONRR is not adopting this regulation change. 
There is no change in estimated royalties.
Comments on the Analysis of This Amendment
    Public Comment: One commenter identified to ONRR that its 
assumption to use a 70/30 split to represent POP contracts when 
estimating processing allowances in excess of 66\2/3\ percent limit 
contradicted other ONRR materials and examples used in trainings and on 
the ONRR website.
    ONRR Response: ONRR reviewed several reference documents and 
further researched the appropriate split for these POP contracts and 
ONRR agrees with the commenter. ONRR acknowledges that its previous 
analysis did not adequately account for POP contracts and breaking out 
transportation and allowances from the fee in ONRR's assumptions. ONRR 
revised its POP contract analysis of this impact in this provision. 
After using the 85/15 POP contract split, as well as applying the 60/40 
split for the processor's portion being allocable to processing versus 
transportation, the estimated allowances no longer exceed the 66\2/3\ 
percent threshold and the estimated royalty impact is eliminated. This 
change is reflected below.
Change in Royalties 5: Extraordinary Gas Processing Cost Allowances for 
Federal Gas
    This rule allows a lessee to request an extraordinary processing 
cost allowance. Using the approvals ONRR granted prior to the 2016 
Valuation Rule, ONRR identified the 127 leases claiming an 
extraordinary processing allowance for residue gas, sulfur, and 
CO2 for calendar years 2014-2018. The total processing costs 
are reported across all three products for these unique situations. For 
these leases, ONRR retrieved all form ONRR-2014 royalty lines with a 
processing allowance reported by lessees. For CO2 and sulfur 
produced from these leases, ONRR then calculated the annual average 
processing allowances which exceeded the 66\2/3\ percent limit and 
found that only two years in the analysis showed that the total 
allowances exceeded the 66\2/3\ percent limit. Under these unique 
approved exceptions, the processing allowances are also reported 
against residue gas. To account for this, ONRR added the average annual 
processing allowances taken for those same leases for residue gas. 
Based on these calculations, ONRR estimates this change will result in 
a decrease in annual royalty payments of approximately $11.1 million.

                Estimated Annual Change in Royalties Paid
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Annual Average Sulfur allowances in excess of 66\2/3\%..      ($348,000)
Annual Average Residue Gas Allowance....................    (10,783,000)
Estimated Impact on Royalties...........................    (11,131,000)
------------------------------------------------------------------------

Change in Royalties 6: Transportation Allowances for Certain OCS 
Gathering for Federal Oil and Gas
    The Deepwater Policy was in effect from 1999 until January 1, 2017. 
Under the Deepwater Policy, ONRR allowed a lessee to treat certain 
expenses for subsea gathering as transportation expenses and to deduct 
a portion of those costs from its royalty payments. The 2016 Valuation 
Rule rescinded the Deepwater Policy. To analyze the impact to industry 
of this regulation amendment, ONRR used data from the BSEE's Technical 
Information Management System database to identify 113 current subsea 
pipeline segments, and potentially 169 eligible leases, which may 
qualify for an allowance under the Deepwater Policy. ONRR assumed that 
all segments were similar (in other words, no adjustments were made to 
account for the size, length, or type of pipeline) and considered only 
the pipeline segments that were in active status and supporting leases 
in producing status. To determine the range (shown in the tables at the 
end of this section as low, mid, and high estimates) of changes to

[[Page 4647]]

royalties, ONRR estimates a 15 percent error rate in the identification 
of the 113 eligible pipeline segments. This resulted in a range of 96 
to 130 eligible pipeline segments. ONRR's audit data is available for 
13 subsea gathering segments serving 15 leases covering time periods 
from 1999 through 2010. ONRR used the data to determine an average 
initial capital investment in the pipeline segments. ONRR used the 
initial capital investment total to calculate depreciation and a return 
on undepreciated capital investment (also known as the return on 
investment or ``ROI'') for eligible pipeline segments and calculated 
depreciation using a 20-year straight-line depreciation schedule.
    ONRR calculated return on investment using the average BBB Bond 
rate (the BBB Bond rating is a credit rating used by the Standard & 
Poor's credit agency to signify a certain risk level of long-term bonds 
and other investments) for January 2018. ONRR based the calculations 
for depreciation and ROI on the first year a pipeline was in service. 
From the same audit information, ONRR calculated an average annual 
operating and maintenance (``O&M'') cost. ONRR increased the O&M cost 
by 12 percent to account for overhead expenses. ONRR then decreased the 
total annual O&M cost per pipeline segment by nine percent because, on 
average, nine percent of wellhead production volume is water which much 
be excluded from any calculation of a permissible deduction. ONRR chose 
these two percentages based on knowledge and information gathered 
during audits in the GOM. Finally, ONRR used an average royalty rate of 
14 percent, which is the volume-weighted-average royalty rate for the 
non-Section 6 (See 43 U.S.C. 1335(a)(9)) leases in the Gulf of Mexico. 
Based on these calculations, the average annual allowance per pipeline 
segment during the period when ONRR's audit data was collected was 
approximately $233,000. ONRR used this value to calculate a per lease 
cost based on the number of eligible leases during the same period. 
ONRR then applied this value to the current number of eligible leases. 
This represents the estimated amount per lease that ONRR would allow a 
lessee to take as a transportation allowance based on the Deepwater 
Policy. To calculate a range for the total cost, ONRR multiplied the 
average annual allowance by the low (96), mid (113), and high (130) 
number of eligible segments. The low, mid, and high annual allowance 
estimates are $35 million, $41.1 million, and $47.3 million, 
respectively.
    Of the eligible leases, 68 of 169, or about 40 percent, will 
qualify for a deduction under the proposed amendment. But due to 
varying lease terms, multiple royalty relief programs, price 
thresholds, volume thresholds, and other factors, ONRR estimated that 
half of the 68, or 34, leases eligible for royalty relief (20 percent 
of 169) have received royalty relief. ONRR chose to estimate half of 
lessees for consistency with previous rulemaking analyses and to 
provide a basis for understanding of this change. ONRR decreased the 
low, mid, and high annual cost-to-industry estimates by 20 percent. The 
table below shows this section's estimated royalty impact.

                           Annual Estimated Cost Savings To Allow Deepwater Gathering
----------------------------------------------------------------------------------------------------------------
                                                                     Low              Mid              High
----------------------------------------------------------------------------------------------------------------
Royalty Impact...............................................     $28,000,000      $32,900,000      $37,900,000
----------------------------------------------------------------------------------------------------------------

    The 2020 Proposed Rule proposed to allow a lessee to request, and 
ONRR to approve, applications for gathering-as-transportation 
principles in water depths of 200 meters and shallower, if there is a 
subsea completion and the other requirements of the regulations are 
met. This provision was a part of the Deepwater Policy from its 
inception in 1999 until expressly revoked by the 2016 Valuation Rule. 
Neither MMS nor ONRR received any application to apply the Deepwater 
Policy to leases producing from OCS shallow waters. ONRR is not 
adopting this regulation change. There is no change in estimated 
royalties associated with gathering in depths 200 meters or shallower.
Comments on the Analysis of This Amendment
    Public Comment: ONRR received a comment identifying what the 
commenter believed was an error in the calculation of the change in 
royalties related to transportation allowances for Deepwater gathering.
    ONRR Response: ONRR appreciates this comment and investigated 
potential errors in the formulas and data used for the calculation. 
ONRR revised the analysis for deepwater gathering. During the review of 
the proposed rule, ONRR found that calculation steps were not explained 
fully and identified that ONRR's per segment value was overstated by 
nine percent attributable to the water content. ONRR also identified a 
miscalculation in the 2020 Proposed Rule that did not accurately 
incorporate a reduction to account for the 20 percent of leases that 
were eligible and receiving royalty relief. ONRR revised the 
explanation of the formula and the calculations accordingly and it is 
reflected in the section below.
Cost 1: Transportation Allowances for Certain OCS Gathering Costs for 
Offshore Federal Oil and Gas
    This rule, by allowing transportation allowances for deepwater 
gathering systems, will result in an administrative cost to industry 
because it requires qualified lessees to monitor their costs and 
perform calculations. The cost to perform these calculations is 
significant because industry often hires outside consultants to 
calculate their subsea transportation allowances. ONRR estimates that 
each lessee with leases eligible for transportation allowances for 
deepwater gathering systems will allocate one full-time employee 
annually to perform the calculation. ONRR used data from the BLS to 
estimate the hourly cost for industry accountants in a metropolitan 
area [$42.33 mean hourly wage] with a multiplier of 1.4 for industry 
benefits to equal approximately $59.26 per hour [$42.33 x 1.4 = 
$59.26]. Using this fully-burdened labor cost per hour, ONRR estimates 
that the annual administrative cost to industry would be approximately 
$3.9 million.

[[Page 4648]]



                  Annual Administrative Cost to Industry To Calculate Deepwater Transportation
----------------------------------------------------------------------------------------------------------------
                                               Annual burden                       Companies
                                                 hours per      Industry labor     reporting      Estimated cost
                                                  company         cost/ hour    eligible leases    to industry
----------------------------------------------------------------------------------------------------------------
Allowance for Certain OCS Deepwater                    2,080           $59.26               32       $3,931,000
 Gathering Costs............................
----------------------------------------------------------------------------------------------------------------

No Administrative Cost 1: Request To Exceed Regulatory Allowance 
Limitation for Transportation and Processing
    In the proposed rule ONRR recognized the opportunity for a lessee 
to request to exceed the regulatory allowance limitation would result 
in an administrative cost to industry because qualified lessees will 
spend labor hours filling out the necessary form (form ONRR-4393). ONRR 
previously completed an Information Collection Request that included 
review of this ONRR form and identified the number of annual requests 
ONRR received and the estimated burden hours attributed to those 
requests each year. Using this information, ONRR calculated the cost to 
be: [$42.33 x 1.4 (including employee benefits) = $59.26 calculated 
mean hourly wage] x [19 average annual requests] x [57.68 labor hours 
to complete and submit form ONRR-4393]. In the proposed rule, ONRR 
estimated annual administrative costs to industry of approximately 
$65,000 but those costs will not be realized as ONRR is not adopting 
this regulation change.

              Annual Administrative Cost to Industry To Submit Requests To Exceed Allowance Limits
----------------------------------------------------------------------------------------------------------------
                                               Annual burden                     Annual number
                                                 hours per      Industry labor   of requests to   Estimated cost
                                                  company         cost/ hour         exceed        to industry
----------------------------------------------------------------------------------------------------------------
Requests to Exceed Allowances...............              58           $59.26               19          $65,000
----------------------------------------------------------------------------------------------------------------

Cost Savings 1: Administrative Cost Savings From Using Index-Based 
Valuation Method To Value Federal Unprocessed Gas, Residue Gas, Fuel 
Gas, Coalbed Methane, and NGLs
    ONRR expects that industry will realize administrative-cost savings 
if lessees choose to use the index-based valuation method to value 
sales of Federal unprocessed gas, residue gas, fuel gas, coalbed 
methane, and NGLs. A lessee will have price certainty when calculating 
its royalties--saving time it currently spends on verifying gross 
proceeds. ONRR estimates that half of lessees will use the index-based 
valuation method. Further, ONRR estimates that it will shorten the time 
burden per line reported by 50 percent (to 1.5 minutes per electronic 
line submission and 3.5 minutes per manual line submission). As with 
Cost 1, ONRR used tables from the BLS to estimate the fully-burdened 
hourly cost for an industry accountant in a metropolitan area working 
in oil and gas extraction. The industry labor cost factor for 
accountants would be approximately $59.26 per hour = [$42.33 (mean 
hourly wage) x 1.4 (including employee benefits)]. Using a labor cost 
factor of $59.26 per hour, ONRR estimates the annual administrative 
cost savings to industry will be approximately $1.4 million.

                                 Annual Administrative Cost Savings for Industry
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                                  lines reported
                                                                    Time burden    using index-    Annual burden
                                                                     per line          based           hours
                                                                     reported        valuation
                                                                                   method (50%)
----------------------------------------------------------------------------------------------------------------
Electronic Reporting (99%)......................................         1.5 min         892,620          22,315
Manual Reporting (1%)...........................................         3.5 min           9,016             526
Industry Labor Cost/hour........................................  ..............  ..............          $59.26
                                                                 -----------------------------------------------
    Total Benefit to Industry...................................  ..............  ..............      $1,354,000
----------------------------------------------------------------------------------------------------------------

Cost Savings 2: Administrative Cost Savings Using Index-Based Valuation 
Method To Value Residue Gas and NGLs Simplifying Processing and 
Transportation Cost Calculations
    ONRR expects industry will realize an additional one-time 
administrative-cost savings if they choose to use the index-based 
valuation method to value sales of Federal residue gas and NGLs, as 
this method eliminates the need to unbundle and calculate specific cost 
allocations related to processing and transportation. These cost 
allocations, referred to as ``unbundling,'' are segregated portions of 
a transportation or processing expense or fee attributable to placing 
production in marketable condition. Industry would unbundle their 
applicable plants and transportation systems one time in the absence of 
this rule and then use those unbundled cost allocations for subsequent 
royalty calculations. Industry is responsible for calculating these 
costs, however ONRR has published and calculated a limited number of 
unbundling cost allocations.

[[Page 4649]]

In ONRR's experience, it takes approximately 100 hours per gas plant. 
ONRR calculated the average number of gas plants reported per payor is 
3.4, across a total of 448 payors reporting residue gas and NGLs, 
between 2014-2018. Using the BLS labor cost per hour of $59.26 
(described above) and adjusting the assumption to half of lessees 
choosing the index-based valuation method, ONRR believes this results 
in a one-time cost savings to industry of $4.5 million dollars.
Change 1: Eliminate Reference To Default Provision Requirements for 
Federal Oil and Gas
    ONRR proposed to remove the default provision from its regulations. 
In instances of misconduct, breach of a lessee's duty to market, or 
other situations where royalty value cannot be determined under the 
rules, ONRR will use statutory authority to determine Federal oil and 
gas royalty value under lease terms, FOGRMA, and other authorizing 
legislation in the same manner--as ONRR would have prior to adoption of 
the 2016 Valuation Rule. ONRR does not believe there is any overall 
royalty impact from removing the default provision.
State and Local Governments
    ONRR estimates that States and certain local governments would 
receive an overall decrease in royalty share (which, in part, was a 
reason for California's and New Mexico's challenges to the 2017 Repeal 
Rule) based on the category the leases falls under, including offshore 
OCSLA section 8(g) leases (See 43 U.S.C. 1337(g)), Gulf of Mexico 
Energy Security Act leases (``GOMESA'') ((43 U.S.C. 1337(g))), and 
onshore Federal lands. ONRR disburses royalties based on where the oil, 
gas, or coal was produced.
    Except for Federal Alaskan production (where Alaska receives 90 
percent of the distribution), Section 8(g) leases in the OCS, and 
qualified leases under GOMESA in the OCS (more information on 
distribution percentages at https://revenuedata.doi.gov/how-it-works/gomesa/), the following distribution table generally applies:

                       ONRR Disbursements by Area
------------------------------------------------------------------------
                                            Onshore (%)    Offshore (%)
------------------------------------------------------------------------
Federal.................................              51            95.2
State...................................              49             4.8
------------------------------------------------------------------------

    Please visit https://revenuedata.doi.gov/explore/#federal-disbursements to find more information on ONRR's disbursements to any 
specific State or local government.
    The next table in this section summarizes the State and local 
government royalty decreases.
Indian Lessors
    The provisions affecting royalties in this rule only apply to 
Federal oil and gas leases and are not expected to affect Indian 
lessors.
Federal Government
    The impact of this rule to the Federal Government will be a net 
decrease in royalty collections. ONRR estimates the net yearly impact 
on the Federal Government (detailed in the next table of this section) 
would be a loss of $22,728,000 in royalties and the net effect to the 
Federal Government and the States would be a loss of $28,879,000 in 
combined royalties.
Summary of Royalty Impacts and Costs to Industry, State and Local 
Governments, Indian Lessors, and the Federal Government
    In the table below, ONRR presents the net change in royalties by 
this rulemaking provision. Changes to royalties are neither costs nor 
benefits, but transfers. The estimated changes in royalties assessed 
will change both the costs incurred by an operator/lessee and the 
amount of revenue collected by the Federal Government and the States.

                    Annual Economic Impacts for Industry, the Federal Government, and States
----------------------------------------------------------------------------------------------------------------
                                                                   Net change in      Federal
                         Rule provision                              royalties        portion      State portion
----------------------------------------------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length Gas Sales.      $5,620,000      $3,562,000      $2,058,000
Index-Based Valuation Method Extended to Arm's-Length NGL Sales.      21,141,000      14,248,000       6,893,000
High to Midpoint Index Price for Non-Arm's-Length Gas Sales.....     (4,488,000)     (2,844,000)     (1,644,000)
Transportation Deduction Non-Arm's-Length Index-Based Valuation      (7,121,000)     (4,513,000)     (2,608,000)
 Method.........................................................
Extraordinary Processing Allowance..............................    (11,131,000)     (7,054,000)     (4,077,000)
Allowance for Certain OCS Gathering Costs.......................    (32,900,000)    (26,127,000)     (6,773,000)
                                                                 -----------------------------------------------
  Total.........................................................    (28,879,000)    (22,728,000)     (6,151,000)
----------------------------------------------------------------------------------------------------------------
Note: Totals may not add due to rounding.

Federal and Indian Coal
    ONRR estimates that there will be no economic impact in terms of 
royalties to ONRR, Tribes, individual Indian mineral owners, States, or 
industry from the changes to coal valuation in this rule. The changes 
outlined in this rule should result in coal values for royalty purposes 
similar to those reported and paid to ONRR under the regulations in 
effect since 1989. Further, as of this writing, lessees have not 
submitted coal reporting under the 2016 Valuation Rule, so ONRR lacks 
data showing any changes resulting from implementation of the 
provisions of the 2016 Valuation Rule.
Change 2: Eliminating the Use of Arm's-Length Electricity Sales To 
Value Non-Arm's-Length Dispositions of Federal Coal
Comments on the Analysis of This Amendment
    Public Comment: ONRR received comments on this amendment expressing 
concerns about a potential

[[Page 4650]]

loophole where companies may be able to pay royalties on prices below 
fair market value.
    ONRR Response: ONRR appreciates the comment on this amendment but 
the commenter does not provide ONRR with enough information or evidence 
to calculate an economic impact of the loophole mentioned.
    In the 2016 Valuation Rule, ONRR estimated no impacts to industry 
for this provision. Further, because lessees have not submitted 
reporting under the 2016 Valuation Rule, ONRR lacks data showing any 
changes that may have been attributable to this provision.
Change 3: Using the First Arm's-Length Sale To Value Non-Arm's-Length 
Sales of Indian Coal
    ONRR did not estimate any impacts to industry for the proposed 
change from this provision. Currently, lessees of Indian coal sell 
their entire production at arm's-length, so this proposed change would 
have no royalty impact on lessees or lessors of Indian coal.
Change 4: Eliminating the Sales of Electricity To Value Non-Arm's-
Length Sales of Indian Coal
    ONRR did not estimate any impacts to industry for the proposed 
change for this provision. Currently, lessees of Indian coal sell their 
entire production at arm's-length so this proposed change would have no 
royalty impact on lessees or lessors of Indian coal.
Change 5: Using First Arm's-Length Sale To Value Sales of Indian Coal 
Between Parties That Lack Opposing Economic Interests
    At the present time, all producers of Indian coal sell the produced 
coal under arm's-length transactions. Accordingly, ONRR does not 
anticipate any impact to royalty collections from the proposed change.
Change 6: Elimination of the Default Provision To Value Federal Oil, 
Gas, and Coal and Indian Coal
    ONRR estimates that the royalty impact would be insignificant 
because the default provision established a reasonable value of 
production using market-based transaction data, which has always been, 
and continues to be, the basis for ONRR's royalty valuation rules.

VI. Severability Statement

    If any provision, or portion of a provision, of this rule is found, 
by a court or tribunal of competent jurisdiction, to be invalid under 
the law, it shall be regarded as stricken while the remainder of this 
rule shall continue to be in full effect.

VII. Procedural Matters

A. Regulatory Planning and Review (E.O. 12866 and 13563)

    E.O. 12866 provides that the Office of Information and Regulatory 
Affairs (``OIRA'') of the Office of Management and Budget (``OMB'') 
will review all significant rulemakings. OIRA has determined that this 
final rule is significant. Because the primary effect is on royalty 
payments, ONRR expects this final rule will largely result in 
transfers, which are described in the table below. ONRR also 
anticipates that this rule will result in $2.58 million in annual 
administrative costs and $4.52 million in one-time administrative cost 
savings.

         Summary of Proposed Changes to Oil & Gas Royalties Paid
                                [Annual]
------------------------------------------------------------------------
                                                           Net change in
                     Rule provision                       royalties paid
                                                            by lessees
------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length         $5,620,000
 Gas Sales..............................................
Index-Based Valuation Method Extended to Arm's-Length         21,141,000
 NGL Sales..............................................
High to Midpoint Index Price for Non-Arm's-Length Gas        (4,488,000)
 Sales..................................................
Transportation Deduction Non-Arm's-Length Index-Based        (7,121,000)
 Valuation Method.......................................
Extraordinary Processing Allowances.....................    (11,131,000)
Allowance for Certain OCS Gathering Costs...............    (32,900,000)
                                                         ---------------
    Total...............................................    (28,879,000)
------------------------------------------------------------------------


          Summary of Annual Administrative Impacts to Industry
------------------------------------------------------------------------
                                                            Cost (Cost
                     Rule provision                          savings)
------------------------------------------------------------------------
Administrative Cost Savings for Index-Based Valuation       ($1,354,000)
 Method for Arm's-Length Gas & NGL Sales................
Administrative Cost for Allowances for Certain OCS             3,931,000
 Gathering..............................................
                                                         ---------------
    Total...............................................       2,577,000
------------------------------------------------------------------------


               One-Time Administrative Impacts to Industry
------------------------------------------------------------------------
                     Rule provision                       (Cost savings)
------------------------------------------------------------------------
Administrative Cost-savings in lieu of Unbundling           ($4,520,000)
 related to Index-Based Valuation Method for ARMS Gas &
 NGLs...................................................
------------------------------------------------------------------------


         Net Present Value of Administrative Impacts to Industry
------------------------------------------------------------------------
                                            3% Discount     7% Discount
              Time horizon                     rate            rate
------------------------------------------------------------------------
Administrative Costs over 10 years......     $18,100,000     $14,800,000
Administrative Costs over 20 years......      35,000,000      24,700,000
------------------------------------------------------------------------

    To estimate the present value of potential future administrative 
cost to industry, ONRR looked at two different potential time periods 
to represent various production lives of oil and gas leases. ONRR 
applied three percent and seven percent discount rates as described in 
OMB Circular A-4, using a base year of 2021 and reported in 2020 
dollars. As described above, ONRR estimates a cost savings to industry 
in the first year this regulation is in effect and administrative costs 
each year thereafter.
    E.O. 13563 reaffirms the principles of E.O. 12866, while calling 
for improvements in the nation's regulatory system to promote 
predictability, to reduce uncertainty, and to use the best, most 
innovative, and least burdensome tools for achieving regulatory ends. 
E.O. 13563 directs agencies to consider regulatory approaches that 
reduce burdens and maintain flexibility and

[[Page 4651]]

freedom of choice for the public where these approaches are relevant, 
feasible, and consistent with regulatory objectives. E.O. 13563 
emphasizes further that regulations must be based on the best available 
science and that the rulemaking process must allow for public 
participation and an open exchange of ideas. ONRR developed this rule 
in a manner consistent with these requirements.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires Federal agencies to prepare a regulatory flexibility analysis 
for rules that are subject to the notice-and-comment rulemaking 
requirements under the Administrative Procedure Act (5 U.S.C. 553), if 
the rule would have a significant economic impact on a substantial 
number of small entities. See 5 U.S.C. 601-612.
    For the changes to 30 CFR part 1206, this rule would affect lessees 
of Federal oil and gas leases. For the changes to 30 CFR part 1241, 
this rule could affect violators of obligations under Federal and 
Indian mineral leases. Federal and Indian mineral lessees are, 
generally, companies classified under the North American Industry 
Classification System (``NAICS''), as follows:
     Code 211111, which includes companies that extract crude 
petroleum and natural gas;
     Code 212111, which includes companies that extract surface 
coal; and
     Code 212112, which includes companies that extract 
underground coal.
    Under NAICS code classifications, a small company is one with fewer 
than 500 employees. ONNR updated its count since the 2020 Proposed Rule 
to estimate that approximately 1,208 different companies submit royalty 
reports from Federal oil and gas leases and other Federal mineral 
leases to ONRR each month. Of these, approximately 106 companies are 
not considered small businesses because they exceed the employee count 
threshold established for small businesses. ONRR estimated that the 
remaining 1,102 companies affected by this rule are small businesses. 
Accordingly, ONRR has not changed its initial determination from the 
2020 Proposed Rule that this rule will have an impact on a substantial 
number of small entities, but the economic impact on those small 
entities will not be significant.
    As stated in the Summary of Royalty Impacts and Costs Table, shown 
above, this rule would benefit industry through a reduction in 
royalties of approximately $28.9 million per year. Small businesses 
account for about 8 percent of the royalties. Applying that percentage 
to industry costs, ONRR estimated that the changes in the final rule 
would result in a private cost savings to small business lessees of 
approximately $2.3 million per year, or $2,087 per small business, on 
average. The extent of an economic impact, if any, would vary between 
companies due to, for example, differences in the volume of production 
that the small business produces and sells each year. Furthermore, this 
rule does not require any business to incur new costs. Instead, this 
rule provides businesses with more flexibility as each entity, 
including small businesses, are able to determine whether it is 
economically advantageous to incur increases in administrative costs to 
reduce the royalties paid, based on an entity's individual 
circumstances. ONRR believes that the economic impact to small 
businesses, if any, will be minimal. Accordingly, this rule will not 
result in a significant economic impact on those small businesses.
    In accordance with 5 U.S.C. 605, ONRR hereby certifies that this 
rule will not have a significant economic impact on a substantial 
number of small entities under the Regulatory Flexibility Act. Thus, 
ONRR did not prepare a Regulatory Flexibility Act Analysis nor is a 
Small Entity Compliance Guide required.

C. Small Business Regulatory Enforcement Fairness Act

    This final rule is not a major rule under 5 U.S.C. 804(2), the 
Small Business Regulatory Enforcement Fairness Act. This rule:
    (a) Does not have an annual effect on the economy of $100 million 
or more. ONRR estimates that the cumulative effect on all of industry 
will be a reduction in private cost of nearly $26.32 million per year, 
which is the sum of $28.9 million in decreased royalty payments and 
$2.58 million in additional costs due to increased administrative 
burdens. The net change in royalty payments is a transfer rather than a 
cost or cost savings. The Summary of Royalty Impacts and Costs Table, 
as shown above, demonstrates that the cumulative economic impact on 
industry, State and local governments, and the Federal Government will 
be well below the $100 million threshold that the Federal Government 
uses to define a rule as having a significant impact on the economy.
    (b) Will not cause a major increase in costs or prices for 
consumers, individual industries, Federal, State, or local government 
agencies, or geographic regions. Please see the data tables in the 
Regulatory Planning and Review (E.O.s 12866 and 13563) section above.
    (c) Does 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. This rule is, in part, meant to incentivize domestic 
energy production. ONRR has estimated no significant adverse impacts to 
small business.

D. Unfunded Mandates Reform Act

    The final rule does not impose an unfunded mandate on State, local, 
or Tribal governments, or the private sector of more than $100 million 
per year. This rule does not have a significant or unique effect on 
State, local, or Tribal governments, or the private sector. Therefore, 
ONRR is not required to provide a statement containing the information 
that the Unfunded Mandates Reform Act (2 U.S.C. 1501 et seq.) requires 
because this rule is not an unfunded mandate.

E. Takings (E.O. 12630)

    Under the criteria in section 2 of E.O. 12630, the final rule does 
not have any significant takings implications. This rule does not 
impose conditions or limitations on the use of any private property. 
This rule applies to the valuation of Federal oil and gas and Federal 
and Indian coal only. The final rule only makes minor technical changes 
to ONRR's civil penalty regulations that have no expected economic 
impact. The final rule does not require a takings implication 
assessment.

F. Federalism (E.O. 13132)

    Under the criteria in section 1 of E.O. 13132, the final rule does 
not have sufficient Federalism implications to warrant the preparation 
of a Federalism summary impact statement. The management of Federal oil 
and gas is the responsibility of the Secretary, and ONRR distributes 
all of the royalties that it collects under Federal oil and gas leases 
as directed by the relevant disbursement statutes. This rule does not 
impose administrative costs on States or local governments. This rule 
also does not substantially and directly affect the relationship 
between the Federal and State governments. Because this rule does not 
alter that relationship, it does not require a Federalism summary 
impact statement.

[[Page 4652]]

G. Civil Justice Reform (E.O. 12988)

    The final rule complies with the requirements of E.O. 12988. 
Specifically, this rule:
    (a) Meets the criteria of Section 3(a), which requires that ONRR 
review all regulations to eliminate errors and ambiguity and write them 
to minimize litigation.
    (b) Meets the criteria of Section 3(b)(2), which requires that all 
regulations be written in clear language using clear legal standards.

H. Consultation With Indian Tribal Governments (E.O. 13175)

    The Department strives to strengthen its government-to-government 
relationship with Indian tribes through a commitment to consultation 
with Indian tribes and recognition of their right to self-governance 
and tribal sovereignty. ONRR evaluated this final rule under the 
Department's consultation policy and under the criteria in E.O. 13175 
and have determined that it has no substantial direct effects on 
Federally-recognized Indian tribes. Thus, consultation under the 
Department's tribal consultation policy is not required.
    ONRR reached this conclusion, in part, based on the consultations 
it conducted before the adoption of the 2016 Valuation Rule. At that 
time, ONRR held six tribal consultations with the three tribes (Navajo 
Nation, Crow Nation, and Hopi Tribe) for which ONRR collected and 
disbursed Indian coal royalties. Upon the conclusion of each 
consultation, ONRR and the tribal partners determined that the 2016 
Valuation Rule would have no substantial impact on any of the 
potentially impacted tribes. With the exception of the Kayenta Mine 
located in Navajo Nation, which ceased production in 2019, the 
circumstances relevant to the Indian coal leases have not changed since 
the prior consultations occurred. As with the 2016 Valuation Rule, 
ONRR's review of the royalty impact to tribes from this rulemaking 
concludes that there is no substantial impact to the three tribes. 
Further, this rule estimates no impact to the royalty value of Indian 
coal.

I. Paperwork Reduction Act (44 U.S.C. 3501 et seq.)

    Certain collections of information require OMB's approval under the 
Paperwork Reduction Act. This final rule does not require any new 
information collections subject to OMB's approval. Thus, ONRR has not 
submitted any new information collection requests to OMB related to 
this rule.
    The final rule leaves intact the information collection 
requirements that OMB has already approved under OMB Control Numbers 
1012-0004, 1012-0005, and 1012-0010.

J. National Environmental Policy Act

    This final rule does not constitute a major Federal action 
significantly affecting the quality of the human environment. ONRR is 
not required to provide a detailed statement under the National 
Environmental Policy Act of 1969 (``NEPA'') because this rule qualifies 
for a categorical exclusion under 43 CFR 46.210(c) and (i) and the 
Department's Departmental Manual, part 516, section 15.4.D: ``(c) 
Routine financial transactions including such things as . . . audits, 
fees, bonds, and royalties . . . [and] (i) [p]olicies, directives, 
regulations, and guidelines . . . [t]hat are of an administrative, 
financial, legal, technical, or procedural nature.'' ONRR also 
determined that this rule does not involved in any of the extraordinary 
circumstances listed in 43 CFR 46.215 that require further analysis 
under NEPA.

K. Effects on the Energy Supply (E.O. 13211)

    This final rule is not a significant energy action under the 
definition in E.O. 13211. It is not likely to have a significant 
adverse effect on the supply, distribution, or use of energy. Moreover, 
the Administrator of OIRA has not otherwise designated this action as a 
significant energy action. A Statement of Energy Effects pursuant to 
E.O. 13211, therefore, is not required.

L. Clarity of This Regulation

    E.O.s 12866 (section 1(b)(12)), 12988 (section 3(b)(1)(B)), and 
13563 (section 1(a)), and the Presidential Memorandum of June 1, 1998, 
require ONRR to write all rules in plain language. This means that the 
rules ONRR publishes must use:
    (a) Logical organization.
    (b) Active voice to address readers directly.
    (c) Clear language rather than jargon.
    (d) Short sections and sentences.
    (e) Lists and tables wherever possible.
    If you believe that ONRR has not met these requirements, send your 
comments to [email protected]. To better help ONRR understand your 
comments, please make your comments as specific as possible. For 
example, you should tell ONRR the numbers of the sections or paragraphs 
that you think were written unclearly, the sections or sentences that 
you think are too long, and the sections for which you believe lists or 
tables would be useful.

M. Congressional Review Act

    Pursuant to the Congressional Review Act, 5 U.S.C. 801 et seq., 
OIRA has determined that this rulemaking is not a major rulemaking, as 
defined by 5 U.S.C. 804(2), because this rulemaking has not resulted 
in, and is unlikely to result in: (1) An annual effect on the economy 
of $100,000,000 or more; (2) a major increase in costs or prices for 
consumers, individual industries, Federal, State, or local government, 
or geographic regions; or (3) significant adverse effects on 
competition, employment, investment, productivity, innovation, or on 
the ability of United States-based enterprises to compete with foreign-
based enterprises in domestic and export markets.

List of Subjects

30 CFR Part 1206

    Coal, Continental shelf, Geothermal energy, Government contracts, 
Indians-lands, Mineral royalties, Oil and gas exploration, Public 
lands-mineral resources, Reporting and recordkeeping requirements.

30 CFR Part 1241

    Administrative practice and procedure, Coal, Geothermal energy, 
Indians-lands, Mineral royalties, Natural gas, Oil and gas exploration, 
Penalties, Public lands-mineral resources.

Kimbra G. Davis,
Director for Office of Natural Resources Revenue.

Authority and Issuance

    For the reasons discussed in the preamble, the Office of Natural 
Resources Revenue is amending 30 CFR parts 1206 and 1241 as set forth 
below:

PART 1206--PRODUCT VALUATION

0
1. The authority citation for part 1206 continues to read as follows:

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

Subpart A--General Provisions and Definitions

0
2. Amend Sec.  1206.20 by:
0
a. Removing the definition of ``coal cooperative'';
0
b. Revising the definition of ``gathering''; and
0
c. Removing the definition of ``misconduct''.
    The revision reads as follows:

[[Page 4653]]

Sec.  1206.20  What definitions apply to this part?

* * * * *
    Gathering means the movement of lease production to a central 
accumulation or treatment point on the lease, unit, or communitized 
area, or to a central accumulation or treatment point off of the lease, 
unit, or communitized area that BLM or BSEE approves for onshore and 
offshore leases, respectively. Excluded from this definition is the 
movement of bulk production from a wellhead to an offshore platform 
which may, for valuation purposes, be considered a function for which a 
Transportation Allowance is properly taken pursuant to Sec. Sec.  
1206.110(a)(1) and 1206.152(a)(1).
* * * * *

Subpart C--Federal Oil

0
3. Amend Sec.  1206.101 by:
0
a. Revising paragraphs (a) introductory text, (c)(1) introductory text, 
and (c)(1)(i); and
0
b. Adding paragraph (d).
    The revisions and addition read as follows:


Sec.  1206.101  How do I calculate royalty value for oil I or my 
affiliate sell(s) under an arm's-length contract?

    (a) The value of oil under this section for royalty purposes is the 
gross proceeds accruing to you or your affiliate under the arm's-length 
contract less applicable allowances determined under Sec.  1206.111 or 
1206.112. This value does not apply if you exercise an option to use a 
different value provided in paragraph (c)(1) or (c)(2)(i) of this 
section, or if one of the exceptions in paragraph (d) of this section 
applies. You must use this paragraph (a) to value oil when:
* * * * *
    (c)(1) If you enter into an arm's-length exchange agreement, or 
multiple sequential arm's-length exchange agreements, and following the 
exchange(s) that you or your affiliate sell(s) the oil received in the 
exchange(s) under an arm's-length contract, then you may use either 
paragraph (a) of this section or Sec.  1206.102 to value your 
production for royalty purposes. If you fail to make the election 
required under this paragraph, you may not make a retroactive election.
    (i) If you use paragraph (a) of this section, your gross proceeds 
are the gross proceeds under your or your affiliate's arm's-length 
sales contract after the exchange(s) occur(s). You must adjust your 
gross proceeds for any location or quality differential, or other 
adjustments, that you received or paid under the arm's-length exchange 
agreement(s). If ONRR determines that any arm's-length exchange 
agreement does not reflect reasonable location or quality 
differentials, ONRR may require you to value the oil under Sec.  
1206.102. You may not otherwise use the price or differential specified 
in an arm's-length exchange agreement to value your production.
* * * * *
    (d) This paragraph contains exceptions to the valuation rule in 
paragraph (a) of this section. Apply these exceptions on an individual 
contract basis.
    (1) In conducting reviews and audits, if ONRR determines that any 
arm's-length sales contract does not reflect the total consideration 
actually transferred either directly or indirectly from the buyer to 
the seller, ONRR may require that you value the oil sold under that 
contract either under Sec.  1206.102 or at the total consideration 
received.
    (2) You must value the oil under Sec.  1206.102 if ONRR determines 
that the value under paragraph (a) of this section does not reflect the 
reasonable value of the production due to either:
    (i) Misconduct by or between the parties to the arm's-length 
contract; or
    (ii) Breach of your duty to market the oil for the mutual benefit 
of yourself and the lessor.

0
4. Amend Sec.  1206.102 by revising the introductory text and 
paragraphs (d) and (e) to read as follows:


Sec.  1206.102  How do I value oil not sold under an arm's-length 
contract?

    This section explains how to value oil that you may not value under 
Sec.  1206.101 or that you elect under Sec.  1206.101(c)(1) to value 
under this section. First, determine if paragraph (a), (b), or (c) of 
this section applies to production from your lease, or if you may apply 
paragraph (d) or (e) with ONRR's approval.
* * * * *
    (d) Unreasonable value. If ONRR determines that the NYMEX price or 
ANS spot price does not represent a reasonable royalty value in any 
particular case, ONRR may establish a reasonable royalty value based on 
other relevant matters.
    (e) Production delivered to your refinery and the NYMEX price or 
ANS spot price is an unreasonable value. (1) Instead of valuing your 
production under paragraph (a), (b), or (c) of this section, you may 
apply to ONRR to establish a value representing the market at the 
refinery if:
    (i) You transport your oil directly to your or your affiliate's 
refinery, or exchange your oil for oil delivered to your or your 
affiliate's refinery; and
    (ii) You must value your oil under this section at the NYMEX price 
or ANS spot price; and
    (iii) You believe that use of the NYMEX price or ANS spot price 
results in an unreasonable royalty value.
    (2) You must provide adequate documentation and evidence 
demonstrating the market value at the refinery. That evidence may 
include, but is not limited to:
    (i) Costs of acquiring other crude oil at or for the refinery;
    (ii) How adjustments for quality, location, and transportation were 
factored into the price paid for other oil;
    (iii) Volumes acquired for and refined at the refinery; and
    (iv) Any other appropriate evidence or documentation that ONRR 
requires.
    (3) If ONRR establishes a value representing market value at the 
refinery, you may not take an allowance against that value under Sec.  
1206.113(b) unless it is included in ONRR's approval.

0
5. Amend Sec.  1206.104 by revising paragraphs (a)(1), (b), (c) 
introductory text, (c)(2), (g)(1), and (2) to read as follows:


Sec.  1206.104  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report, and, if ONRR determines that your reported value is 
inconsistent with the requirements of this subpart, ONRR may establish 
a reasonable royalty value based on other relevant matters.
* * * * *
    (b) ONRR may examine whether your or your affiliate's contract 
reflects the total consideration transferred for Federal oil, either 
directly or indirectly, from the buyer to you or your affiliate. If 
ONRR determines that additional consideration beyond that reflected in 
the contract was transferred, or that any portion of the consideration 
was not included in gross proceeds reported, ONRR may establish a 
reasonable royalty value based on other relevant matters.
    (c) ONRR may establish a reasonable royalty value based on other 
relevant matters if ONRR determines that the gross proceeds accruing to 
you or your affiliate under a contract do not reflect reasonable 
consideration because:
* * * * *
    (2) You have breached your duty to market the oil for the mutual 
benefit of yourself and the lessor; or
* * * * *

[[Page 4654]]

    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may establish a reasonable royalty value 
based on other relevant matters.
* * * * *


Sec.  1206.105  [Removed and Reserved]

0
6. Remove and reserve Sec.  1206.105.

0
7. Amend Sec.  1206.108 by:
0
a. Revising paragraphs (a) introductory text and (a)(5); and
0
b. Removing the words ``Assistant Secretary'' in paragraphs (c)(2), 
(c)(3), (d)(1), (e), (f), and (g) and adding in their place the words 
``Assistant Secretary for Policy, Management and Budget''.
    The revisions read as follows:


Sec.  1206.108  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any oil produced. Your request must comply with all of the following:
* * * * *
    (5) Provide your analysis of the issue(s);
* * * * *

0
8. Amend Sec.  1206.110 by revising paragraphs (a), (f) introductory 
text and (f)(2) to read as follows:


Sec.  1206.110  What general transportation allowance requirements 
apply to me?

    (a)(1) ONRR will allow a deduction for the reasonable, actual costs 
to transport oil from the lease to the point off of the lease under 
Sec.  1206.110, 1206.111, or 1206.112, as applicable. You may not 
deduct transportation costs that you incur to move a particular volume 
of production to reduce royalties that you owe on production for which 
you did not incur those costs. This paragraph applies when:
    (i) You value oil under Sec.  1206.101 based on a sale at a point 
off of the lease, unit, or communitized area from which the oil is 
produced; or
    (ii) You do not value your oil under Sec.  1206.102(a)(3) or 
(b)(3).
    (2) You may not include any gathering costs in your transportation 
allowance under Sec.  1206.110, 1206.111, or 1206.112, as applicable, 
except those reasonable, actual gathering costs you incur for oil 
produced from a lease or unit on the OCS, any part of which lies in 
waters deeper than 200 meters, that meet all of the following criteria:
    (i) The gathering costs are for oil for which you are entitled to 
take a transportation allowance under paragraph (a)(1) of this section;
    (ii) The gathering costs are for movement of oil beyond a central 
accumulation point. For purposes of paragraph (a)(2) of this section, a 
central accumulation point may be a single well, a subsea manifold, the 
last well in a group of wells connected in a series, or a platform 
extending above the surface of the water;
    (iii) The gathering costs are for movement of oil to a facility 
that is not located on a lease or unit adjacent to the lease or unit on 
which the production originates. For purposes of paragraph (a)(2) of 
this section, an adjacent lease or unit is any lease or unit with at 
least one point of contact with the producing lease or unit. Typically, 
for a single OCS lease, there are 8 adjacent leases; and
    (iv) The gathering costs are only those allocable to the royalty-
bearing oil. Gathering costs properly allocable to non-royalty bearing 
substances, or any royalty-bearing substance other than oil, may not be 
included in your transportation allowance under this section.
* * * * *
    (f) ONRR may direct you to modify your transportation allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the oil for the mutual benefit of yourself and the 
lessor by transporting your oil at a cost that is unreasonably high; or
* * * * *

0
9. Amend Sec.  1206.111 by:
0
a. Removing paragraph (d)(1)
0
b. Redesignating paragraph (d) introductory text as (d)(1);
0
c. Revising newly redesignated paragraph (d)(1); and
0
d. Removing the word ``may'' in paragraph (d)(2) and adding in its 
place the word ``must''.
    The revision reads as follows:


Sec.  1206.111  How do I determine a transportation allowance if I have 
an arm's length transportation contract?

* * * * *
    (d)(1) If you have no written contract for the arm's-length 
transportation of oil, you must propose to ONRR a method to determine 
the allowance using the procedures in Sec.  1206.108(a).
* * * * *

0
10. Amend Sec.  1206.117 by revising paragraph (a) to read as follows:


Sec.  1206.117  What interest and penalties apply if I improperly 
report a transportation allowance?

    (a) If you deduct a transportation allowance on form ONRR-2014 that 
exceeds 50 percent of the value of the oil transported without 
obtaining ONRR's prior approval under Sec.  1206.110(d)(2), you must 
pay additional royalties due, plus late payment interest calculated 
under Sec. Sec.  1218.54 and 1218.102 of this chapter, on the excess 
allowance amount taken from the date when that amount is taken to the 
date when you file an exception request that ONRR approves. If you do 
not file an exception request, or if ONRR does not approve your 
request, you must pay late payment interest on the excess allowance 
amount taken from the date that amount is taken until the date you pay 
the additional royalties owed.
* * * * *

Subpart D--Federal Gas

0
11. Amend Sec.  1206.141 by:
0
a. Revising paragraphs (a)(2), (b) introductory text, (b)(2), (b)(3), 
(c) introductory text, (c)(1)(i), (c)(1)(ii), (c)(1)(iv), (c)(1)(vi), 
and (e)(2) introductory text;
0
b. Removing the word ``may'' in paragraph (e)(2)(ii) and adding in its 
place the word ``must''; and
0
c. Adding paragraphs (f) and (g).
    The revisions and additions read as follows:


Sec.  1206.141  How do I calculate royalty value for unprocessed gas 
that I or my affiliate sell(s) under an arm's-length or non-arm's 
length contract?

    (a) * * *
    (2) Any gas that you are not required to value under Sec.  
1206.142; or
* * * * *
    (b) The value of gas under this section for royalty purposes is the 
gross proceeds accruing to you or your affiliate under the first arm's-
length contract less a transportation allowance determined under Sec.  
1206.152. This value does not apply if you exercise the option in 
paragraph (c) of this section. Unless you elect to value your gas under 
paragraph (c) of this section, you must use this paragraph (b) to value 
gas when:
* * * * *
    (2) You sell or transfer unprocessed gas to your affiliate or 
another person under a non-arm's-length contract and that affiliate or 
person, or an affiliate of either of them, then sells the gas under an 
arm's-length contract;
    (3) You, your affiliate, or another person sell(s) unprocessed gas 
produced from a lease under multiple arm's length

[[Page 4655]]

contracts, and that gas is valued under this paragraph. The value of 
the gas is the volume-weighted average of the values, established under 
this paragraph, for each contract for the sale of gas produced from 
that lease; or
* * * * *
    (c) Alternatively, you may elect to value your unprocessed gas 
under this paragraph (c), which allows you to use an index-based 
valuation method to calculate royalty value. You may not change your 
election more often than once every two years.
    (1)(i) If you can only transport gas to one index pricing point 
published in an ONRR-approved publication, available at www.onrr.gov, 
your value, for royalty purposes, is the published average bidweek 
price to which your gas may flow for that respective production month.
    (ii) If you can transport gas to more than one index pricing point 
published in an ONRR-approved publication available at www.onrr.gov, 
your value, for royalty purposes, is the highest of the published 
average bidweek prices to which your gas may flow for that respective 
production month, whether or not there are constraints for that 
production month.
* * * * *
    (iv) You may adjust the number calculated under paragraphs 
(c)(1)(i) and (ii) of this section by reducing the value by 10 percent, 
but not less than 10 cents per MMBtu nor more than 40 cents per MMBtu 
for sales from the OCS Gulf of Mexico and by 15 percent, but not less 
than 10 cents per MMBtu nor more than 50 cents per MMBtu, for sales 
from all other areas.
* * * * *
    (vi) ONRR may exclude an individual index pricing point found in an 
ONRR-approved publication if ONRR determines that the index pricing 
point does not accurately reflect the values of production. ONRR will 
publish criteria for index pricing points available at www.onrr.gov.
* * * * *
    (e) * * *
    (2) There is not an index pricing point for the gas, then:
* * * * *
    (f) Under no circumstances may your gas be valued for royalty 
purposes at less than zero.
    (g) If you elect to value your gas under paragraph (c) of this 
section, ONRR reserves the right to collect actual transaction data in 
the future to assess the validity of the index-based valuation option.

0
12. Amend Sec.  1206.142 by:
0
a. Revising paragraphs (c) introductory text, (c)(2), (c)(3), 
(d)(1)(i), (d)(1)(ii), (d)(1)(iv), and (d)(1)(vi);
0
b. Removing the word ``methodology'' from paragraph (d)(2)(ii) and 
adding in its place the word ``method'';
0
c. Removing the word ``may'' in paragraph (d)(2)(iii) and adding in its 
place the word ``must'';
0
d. Revising paragraph (f)(2) introductory text;
0
e. Removing the word ``may'' in paragraph (f)(2)(ii) and adding in its 
place the word ``must''; and
0
f. Adding paragraphs (g) and (h).
    The revisions and additions read as follows:


Sec.  1206.142  How do I calculate royalty value for processed gas that 
I or my affiliate sell(s) under an arm's-length or non-arm's length 
contract?

* * * * *
    (c) The value of residue gas or any gas plant product under this 
section for royalty purposes is the gross proceeds accruing to you or 
your affiliate under the first arm's-length contract. This value does 
not apply if you exercise the option provided in paragraph (d) of this 
section. Unless you exercise the option provided in paragraph (d) of 
this section, you must use this paragraph (c) to value residue gas or 
any gas plant product when:
* * * * *
    (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 residue gas or any gas 
plant product under an arm's-length contract;
    (3) You, your affiliate, or another person sell(s), under multiple 
arm's-length contracts, residue gas or any gas plant products recovered 
from gas produced from a lease that you value under this paragraph. In 
that case, because you sold non-arm's-length to your affiliate or 
another person, the value of the residue gas or any gas plant product 
is the volume-weighted average of the gross proceeds established under 
this paragraph for each arm's-length contract for the sale of residue 
gas or any gas plant products recovered from gas produced from that 
lease; or
* * * * *
    (d) Alternatively, you may elect to value your residue gas and NGLs 
under this paragraph (d). You may not change your election more often 
than once every two years.
    (1)(i) If you can only transport residue gas to one index pricing 
point published in an ONRR-approved publication available at 
www.onrr.gov, your value, for royalty purposes, is the published 
average bidweek price to which your gas may flow for that respective 
production month.
    (ii) If you can transport residue gas to more than one index 
pricing point published in an ONRR-approved publication available at 
www.onrr.gov, your value, for royalty purposes, is the highest of the 
published average bidweek prices to which your gas may flow for that 
respective production month, whether or not there are constraints for 
that production month.
* * * * *
    (iv) You may adjust the number calculated under paragraphs 
(d)(1)(i) and (ii) of this section by reducing the value by 10 percent, 
but not less than 10 cents per MMBtu nor more than 40 cents per MMBtu 
for sales from the OCS Gulf of Mexico and by 15 percent, but not less 
than 10 cents per MMBtu nor more than 50 cents per MMBtu for sales from 
all other areas.
* * * * *
    (vi) ONRR may exclude an individual index pricing point found in an 
ONRR-approved publication if ONRR determines that the index pricing 
point does not accurately reflect the values of production. ONRR will 
publish criteria for index pricing points on www.onrr.gov.
* * * * *
    (f) * * *
    (2) There is not an index pricing point or commercial price 
bulletin for the gas, then:
* * * * *
    (g) Under no circumstances may your gas be valued for royalty 
purposes at less than zero.
    (h) If you elect to value your gas under paragraph (d) of this 
section, ONRR reserves the right to collect actual transaction data in 
the future to assess the validity of the index-based valuation option.

0
13. Amend Sec.  1206.143 by revising paragraphs (a)(1), (b), (c) 
introductory text, (c)(2), (g)(1), and (g)(2) to read as follows:


Sec.  1206.143  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report. If ONRR determines that your reported value is inconsistent 
with the requirements of this subpart, ONRR will direct you to use a 
different measure of royalty value.
* * * * *
    (b) ONRR may examine whether your or your affiliate's contract 
reflects the total consideration transferred for Federal gas, either 
directly or indirectly, from the buyer to you or your affiliate.

[[Page 4656]]

If ONRR determines that additional consideration beyond that reflected 
in the contract was transferred, or that any portion of the 
consideration was not included in gross proceeds reported, ONRR may 
establish a reasonable royalty value based on other relevant matters.
    (c) ONRR may direct you to use a different measure of royalty value 
if ONRR determines that the gross proceeds accruing to you or your 
affiliate under a contract do not reflect reasonable consideration 
because:
* * * * *
    (2) You have breached your duty to market the gas, residue gas, or 
gas plant products for the mutual benefit of yourself and the lessor; 
or
* * * * *
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may direct you to use a different measure 
of royalty value.
* * * * *


Sec.  1206.144  [Removed and Reserved]

0
14. Remove and reserve Sec.  1206.144.

0
15. Amend Sec.  1206.148 by:
0
a. Revising paragraphs (a) introductory text and (a)(5); and
0
b. Removing the words ``Assistant Secretary'' in paragraphs (c)(2), 
(c)(3), (d)(1), (e), and (f) and adding in their place the words 
``Assistant Secretary for Policy, Management and Budget''.
    The revisions read as follows:


Sec.  1206.148  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any gas produced. Your request must comply with all of the following:
* * * * *
    (5) Provide your analysis of the issue(s);
* * * * *

0
16. Amend Sec.  1206.152 by revising paragraph (a), (g) introductory 
text, and (g)(2) to read as follows:


Sec.  1206.152  What general transportation allowance requirements 
apply to me?

    (a)(1) ONRR will allow a deduction for the reasonable, actual costs 
to transport residue gas, gas plant products, or unprocessed gas from 
the lease to the point off of the lease under Sec.  1206.152, 1206.153, 
or 1206.154, as applicable. You may not deduct transportation costs 
that you incur when moving a particular volume of production to reduce 
royalties that you owe on production for which you did not incur those 
costs. This paragraph applies when you value unprocessed gas under 
Sec.  1206.141(b) or residue gas and gas plant products under Sec.  
1206.142(b) based on a sale at a point off of the lease, unit, or 
communitized area from which the residue gas, gas plant products, or 
unprocessed gas is produced.
    (2) You may not include any gathering costs in your transportation 
allowance under Sec.  1206.152, 1206.153, or 1206.154, as applicable, 
except those reasonable, actual gathering costs you incur for residue 
gas, gas plant products, or unprocessed gas produced from a lease or 
unit on the OCS, any part of which lies in waters deeper than 200 
meters, that meet all of the following criteria:
    (i) The gathering costs are for residue gas, gas plant products, or 
unprocessed gas for which you are entitled to take a transportation 
allowance under paragraph (a)(1) of this section;
    (ii) The gathering costs are for movement of residue gas, gas plant 
products, or unprocessed gas beyond a central accumulation point. For 
purposes of paragraph (a)(2) of this section, a central accumulation 
point may be a single well, a subsea manifold, the last well in a group 
of wells connected in a series, or a platform extending above the 
surface of the water;
    (iii) The gathering costs are for movement of residue gas, gas 
plant products, or unprocessed gas to a facility that is not located on 
a lease or unit adjacent to the lease or unit on which the production 
originates. For purposes of paragraph (a)(2) of this section, an 
adjacent lease or unit is any lease or unit with at least one point of 
contact with the producing lease or unit. Typically, for a single OCS 
lease, there are 8 adjacent leases; and
    (iv) The gathering costs are only those allocable to the royalty-
bearing residue gas, gas plant products, or unprocessed gas. Gathering 
costs properly allocable to non-royalty bearing substances, or any 
royalty-bearing substance other than residue gas, gas plant products, 
or unprocessed gas, may not be included in a transportation allowance 
under this section.
* * * * *
    (g) ONRR may direct you to modify your transportation allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the gas, residue gas, or gas plant products for the 
mutual benefit of yourself and the lessor; or
* * * * *

0
17. Amend Sec.  1206.153 by revising paragraph (d) to read as follows:


Sec.  1206.153  How do I determine a transportation allowance if I have 
an arm's-length transportation contract?

* * * * *
    (d) If you have no written contract for the arm's-length 
transportation of gas, and neither you nor your affiliate perform your 
own transportation, you must propose to ONRR a method to determine the 
transportation allowance using the procedures in Sec.  1206.148(a).
    (1) You must use that method to determine your allowance until ONRR 
issues its determination.
    (2) [Reserved]

0
18. Amend Sec.  1206.157 by revising paragraph (b) to read as follows:


Sec.  1206.157  What interest and penalties apply if I improperly 
report a transportation allowance?

* * * * *
    (b) If you deduct a transportation allowance on form ONRR-2014 that 
exceeds 50 percent of the value of the gas, residue gas, or gas plant 
products transported without obtaining ONRR's prior approval under 
Sec.  1206.152(e)(2), you must pay additional royalties due, plus late 
payment interest calculated under Sec. Sec.  1218.54 and 1218.102 of 
this chapter, on the excess allowance amount taken from the date when 
that amount is taken to the date when you file an exception request 
that ONRR approves. If you do not file an exception request, or if ONRR 
does not approve your request, you must pay late payment interest on 
the excess allowance amount taken from the date that amount is taken 
until the date you pay the additional royalties owed.
* * * * *

0
19. Amend Sec.  1206.159 by:
0
a. Revising paragraph (c)(1);
0
b. Adding paragraph (c)(5);
0
c. Redesignating paragraphs (d)(2)(A) and (B) as (d)(2)(i) and (ii); 
and
0
d. Revising paragraphs (e) introductory text and (e)(2).
    The revisions and additions read as follows:


Sec.  1206.159  What general processing allowances requirements apply 
to me?

* * * * *
    (c)(1) You may not apply the processing allowance against the value 
of the residue gas, except as provided in paragraph (c)(5) of this 
section.
* * * * *

[[Page 4657]]

    (5) If you incur extraordinary costs for processing gas, you may 
apply to ONRR for an allowance for those costs which must be in 
addition to any other processing allowance to which the lessee is 
entitled pursuant to this section. You must demonstrate that the costs 
are, by reference to standard industry conditions and practice, 
extraordinary, unusual, or unconventional. You are not required to 
receive ONRR approval to continue an extraordinary processing 
allowance. However, you must report the deduction to ONRR in a form and 
manner prescribed by ONRR in order to retain the ability to deduct the 
allowance.
* * * * *
    (e) ONRR may direct you to modify your processing allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length processing contract does not 
reflect the reasonable cost of the processing because you breached your 
duty to market the gas, residue gas, or gas plant products for the 
mutual benefit of yourself and the lessor; or
* * * * *

0
20. Amend Sec.  1206.160 by:
0
Revising paragraphs (a)(1) and (c), to read as follows:


Sec.  1206.160  How do I determine a processing allowance if I have an 
arm's length processing contract?

    (a)(1) If you or your affiliate incur processing costs under an 
arm's-length processing contract, you may claim a processing allowance 
for the reasonable, actual costs incurred, as more fully explained in 
paragraph (b) of this section, except as provided in Sec.  1206.159(e) 
and subject to the limitation in Sec.  1206.159(c)(2).
* * * * *
    (c) If you have no written contract for the arm's-length processing 
of gas, and neither you nor your affiliate perform your own processing, 
you must propose to ONRR a method to determine the processing allowance 
using the procedures in Sec.  1206.148(a).
    (1) You must use that method to determine your allowance until ONRR 
issues a determination.
    (2) [Reserved]

0
21. Amend Sec.  1206.164 by revising paragraph (b) to read as follows:


Sec.  1206.164  What interest and penalties apply if I improperly 
report a processing allowance?

* * * * *
    (b) If you deduct a processing allowance on form ONRR-2014 that 
exceeds 66\2/3\ percent of the value of a gas plant product without 
obtaining ONRR's prior approval under Sec.  1206.159(c)(3), you must 
pay additional royalties due, plus late payment interest calculated 
under Sec. Sec.  1218.54 and 1218.102 of this chapter, on the excess 
allowance amount taken from the date when that amount is taken to the 
date when you file an exception request that ONRR approves. If you do 
not file an exception request, or if ONRR does not approve your 
request, you must pay late payment interest on the excess allowance 
amount taken from the date that amount is taken until the date you pay 
the additional royalties owed.
* * * * *

Subpart F--Federal Coal

0
22. Amend Sec.  1206.252 by revising paragraph (a) introductory text, 
(b) and removing and reserving paragraph (c) to read as follows:


Sec.  1206.252  How do I calculate royalty value for coal?

    (a) The value of coal under this section for royalty purposes is 
the gross proceeds accruing to you or your affiliate under the first 
arm's-length contract, or another person, less an applicable 
transportation allowance determined under Sec. Sec.  1206.260 through 
1206.262 and washing allowance under Sec. Sec.  1206.267 through 
1206.269. You must use this paragraph (a) to value coal when:
* * * * *
    (b) If you have no contract for the sale of coal subject to this 
section because you or your affiliate used the coal in a power plant 
that you or your affiliate own(s) for the generation and sale of 
electricity:
    (1) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.258(a).
    (2) You must use that method to determine value, for royalty 
purposes, until ONRR issues a determination.
    (3) After ONRR issues a determination, you must make the 
adjustments under Sec.  1206.253(a)(2).
* * * * *

0
23. Amend Sec.  1206.253 by revising paragraphs (a)(1), (b), (c) 
introductory text, (c)(2), (g)(1) and (2) to read as follows:


Sec.  1206.253  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report, and, if ONRR determines that your reported value is 
inconsistent with the requirements of this subpart, ONRR may establish 
a reasonable royalty value based on other relevant matters.
* * * * *
    (b) ONRR may examine whether your or your affiliate's contract 
reflects the total consideration transferred for Federal coal, either 
directly or indirectly, from the buyer to you or your affiliate. If 
ONRR determines that additional consideration beyond that reflected in 
the contract was transferred, or that any portion of the consideration 
was not included in gross proceeds reported, ONRR may establish a 
reasonable royalty value based on other relevant matters.
    (c) ONRR may establish a reasonable royalty value based on other 
relevant matters if ONRR determines that the gross proceeds accruing to 
you or your affiliate under a contract do not reflect reasonable 
consideration because:
* * * * *
    (2) You breached your duty to market the coal for the mutual 
benefit of yourself and the lessor; or
* * * * *
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may establish a reasonable royalty value 
based on other relevant matters.
* * * * *


Sec.  1206.254  [Removed and Reserved]

0
24. Remove and reserve Sec.  1206.254.

0
25. Amend Sec.  1206.258 by:
0
a. Revising paragraphs (a) introductory text and (a)(5);
0
b. Removing the words ``Assistant Secretary'' in paragraphs (c)(2), 
(c)(3), (e), and (f) and adding in their place the words ``Assistant 
Secretary for Policy, Management and Budget'';
0
c. Revising paragraph (g); and
0
d. Adding paragraph (h).
    The revisions and additions read as follows:


Sec.  1206.258  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any coal produced. Your request must comply with all of the following:
* * * * *
    (5) Provide your analysis of the issue(s);
* * * * *
    (g) ONRR or the Assistant Secretary for Policy, Management and 
Budget generally will not retroactively modify or rescinds a valuation 
determination issued under paragraph (d) of this section, unless:

[[Page 4658]]

    (1) There was a misstatement or omission of material facts; or
    (2) The facts subsequently developed are materially different from 
the facts on which the guidance was based.
    (h) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.259.

0
26. Amend Sec.  1206.260 by revising paragraphs (g) introductory text 
and (g)(2) to read as follows:


Sec.  1206.260  What general transportation allowance requirements 
apply to me?

* * * * *
    (g) ONRR may determine your transportation allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the coal for the mutual benefit of yourself and the 
lessor by transporting your coal at a cost that is unreasonably high; 
or
* * * * *

0
27. Amend Sec.  1206.261 by revising paragraph (c) to read as follows:


Sec.  1206.261  How do I determine a transportation allowance if I have 
an arm's-length transportation contract?

* * * * *
    (c) If you have no written contract for the arm's-length 
transportation of coal, and neither you nor your affiliate perform your 
own transportation, you must propose to ONRR a method to determine the 
transportation allowance using the procedures in Sec.  1206.258(a).
    (1) You must use that method to determine your allowance until ONRR 
issues a determination.
    (2) [Reserved]

0
28. Amend Sec.  1206.267 by revising paragraphs (d) introductory text 
and (d)(2) to read as follows:


Sec.  1206.267  What general washing allowance requirements apply to 
me?

* * * * *
    (d) ONRR may direct you to modify your washing allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length washing contract does not reflect 
the reasonable cost of the washing because you breached your duty to 
market the coal for the mutual benefit of yourself and the lessor by 
washing your coal at a cost that is unreasonably high; or
* * * * *

0
29. Amend Sec.  1206.268 by revising paragraphs (b) and (c) to read as 
follows:


Sec.  1206.268  How do I determine washing allowances if I have an 
arm's-length washing contract or no written arm's-length contract?

* * * * *
    (b) You must be able to demonstrate that your or your affiliate's 
washing contract is arm's-length.
    (c) If you have no written contract for the arm's-length washing of 
coal, and neither you nor your affiliate perform your own washing, you 
must propose to ONRR a method to determine the washing allowance using 
the procedures in Sec.  1206.258(a).
    (1) You must use that method to determine your allowance until ONRR 
issues a determination.
    (2) [Reserved]

Subpart J--Indian Coal

0
30. Amend Sec.  1206.452 by revising the section heading, paragraphs 
(a) introductory text and (b) and removing and reserving paragraph (c) 
to read as follows:


Sec.  1206.452  How do I calculate royalty value for coal?

    (a) The value of coal under this section for royalty purposes is 
the gross proceeds accruing to you or your affiliate under the first 
arm's-length contract, or another person, less an applicable 
transportation allowance determined under Sec. Sec.  1206.460 through 
1206.462 and washing allowance under Sec. Sec.  1206.467 through 
1206.469. You must use this paragraph (a) to value coal when:
* * * * *
    (b) If you have no contract for the sale of coal subject to this 
section because you or your affiliate used the coal in a power plant 
that you or your affiliate own(s) for the generation and sale of 
electricity:
    (1) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.458(a).
    (2) You must use that method to determine value, for royalty 
purposes, until ONRR issues a determination.
    (3) After ONRR issues a determination, you must make the 
adjustments under Sec.  1206.453(a)(2).
* * * * *

0
31. Amend Sec.  1206.453 by revising paragraphs (a)(1), (b), (c) 
introductory text, (c)(2), (g)(1), and (2) to read as follows:


Sec.  1206.453  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report, and, if ONRR determines that your reported value is 
inconsistent with the requirements of this subpart, ONRR may establish 
a reasonable royalty value based on other relevant matters.
* * * * *
    (b) ONRR may examine whether your or your affiliate's contract 
reflects the total consideration transferred for Indian coal, either 
directly or indirectly, from the buyer to you or your affiliate. If 
ONRR determines that additional consideration beyond that reflected in 
the contract was transferred, or that any portion of the consideration 
was not included in gross proceeds reported, ONRR may establish a 
reasonable royalty value based on other relevant matters.
    (c) ONRR may establish a reasonable royalty value based on other 
relevant matters if ONRR determines that the gross proceeds accruing to 
you or your affiliate under a contract do not reflect reasonable 
consideration because:
* * * * *
    (2) You breached your duty to market the coal for the mutual 
benefit of yourself and the lessor; or
* * * * *
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may establish a reasonable royalty value 
based on other relevant matters.
* * * * *


Sec.  1206.454  [Removed and Reserved]

0
32. Remove and reserve Sec.  1206.454.

0
33. Amend Sec.  1206.458 by:
0
a. Revising paragraphs (a) introductory text and (a)(5);
0
b. Removing the words ``Assistant Secretary'' in paragraphs (c)(2), 
(c)(3), (d)(1), (e), and (f) and adding in their place the words 
``Assistant Secretary for Policy, Management and Budget'';
0
c. Revising paragraph (g); and
0
d. Adding paragraph (h).
    The revisions and additions read as follows:


Sec.  1206.458  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any coal produced. Your request must comply with all of the following:
* * * * *
    (5) Provide your analysis of the issue(s);
* * * * *
    (g) ONRR or the Assistant Secretary for Policy, Management and 
Budget generally will not retroactively modify

[[Page 4659]]

or rescinds a valuation determination issued under paragraph (d) of 
this section, unless:
    (1) There was a misstatement or omission of material facts; or
    (2) The facts subsequently developed are materially different from 
the facts on which the guidance was based.
    (h) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.459.

0
34. Amend Sec.  1206.460 by:
0
a. Revising paragraph (a)(2);
0
b. Removing paragraph (a)(3);
0
c. Removing the words ``a Federal'' in paragraphs (b)(2) and (b)(3) and 
adding in their place the words ``an Indian'';
0
d. Removing the word ``Federal'' in paragraphs (e)(1) and (e)(2) and 
adding in its place the word ``Indian''; and
0
e. Revising paragraphs (g) introductory text and (g)(2).
    The revisions read as follows:


Sec.  1206.460  What general transportation allowance requirements 
apply to me?

    (a)(1) * * *
    (2) You do not need ONRR's approval before reporting a 
transportation allowance for costs incurred.
* * * * *
    (g) ONRR may determine your transportation allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the coal for the mutual benefit of yourself and the 
lessor by transporting your coal at a cost that is unreasonably high; 
or
* * * * *

0
35. Amend Sec.  1206.461 by revising paragraph (c) to read as follows:


Sec.  1206.461  How do I determine a transportation allowance if I have 
an arm's-length transportation contract?

* * * * *
    (c) If you have no written contract for the arm's-length 
transportation of coal, then you must propose to ONRR a method to 
determine the allowance using the procedures in Sec.  1206.458(a). You 
may use that method to determine your allowance until ONRR issues a 
determination.
    (1) You must use that method to determine your allowance until ONRR 
issues a determination.
    (2) [Reserved]

0
36. Amend Sec.  1206.467 by:
0
a. Revising paragraph (a)(2);
0
b. Removing the word ``Federal'' in paragraph (b)(2) and adding in its 
place the word ``Indian''; and
0
c. Revising paragraphs (d) introductory text and (d)(2).
    The revisions read as follows:


Sec.  1206.467  What general washing allowance requirements app ly to 
me?

    (a)(1) * * *
    (2) You do not need ONRR's approval before reporting a washing 
allowance.
* * * * *
    (d) ONRR may direct you to modify your washing allowance if:
* * * * *
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length washing contract does not reflect 
the reasonable cost of the washing because you breached your duty to 
market the coal for the mutual benefit of yourself and the lessor by 
washing your coal at a cost that is unreasonably high; or
* * * * *

0
37. Amend Sec.  1206.468 by revising paragraph (c) to read as follows:


Sec.  1206.468  How do I determine washing allowances if I have an 
arm's-length washing contract or no written arm's-length contract?

* * * * *
    (c) If you have no written contract for the arm's-length washing of 
coal, and neither you nor your affiliate perform your own washing, you 
must propose to ONRR a method to determine the washing allowance using 
the procedures in Sec.  1206.458(a).
    (1) You must use that method to determine your allowance until ONRR 
issues a determination.
    (2) [Reserved]
* * * * *

PART 1241--PENALTIES

0
38. The authority citation for part 1241 continues to read as follows:

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

Subpart A--General Provisions

0
39. Amend Sec.  1241.11 by removing paragraph (b)(5).

Subpart C--Penalty Amount, Interest, and Collections

0
40. Amend Sec.  1241.70 by:
0
a. Revising paragraph (b); and
0
b. Adding paragraph (d).
    The revision and addition read as follows:


Sec.  1241.70  How does ONRR decide the amount of the penalty to 
assess?

* * * * *
    (b) For payment violations only, we will consider the unpaid, 
underpaid, or late payment amount in our analysis of the severity of 
the violation.
* * * * *
    (d) After we provisionally determine the civil penalty amount using 
the criteria and matrices described in paragraphs (a), (b), and (c) of 
this section, we may adjust the penalty amount in the FCCP or ILCP 
upward or downward if we find aggravating or mitigating circumstances 
to exist.
    (1) Aggravating circumstances may include, but are not limited to:
    (i) Committing a violation because you determined that the cost of 
a potential penalty is less than the cost of compliance;
    (ii) Committing a violation where you have no recent history of 
noncompliance of the same type, but you have a history of noncompliance 
of other violation types;
    (iii) Committing a violation that is also a criminal act.
    (2) Mitigating circumstances may include, but are not limited to:
    (i) Operational impacts resulting from the unexpected illness or 
death of an employee, natural disasters, pandemics, acts of terrorism, 
civil unrest, or armed conflict;
    (ii) Delays caused by government action or inaction, including as a 
result of a government shutdown and an extended ONRR-system downtime;
    (iii) Good-faith efforts to comply with formal or informal agency 
guidance.

[FR Doc. 2021-00217 Filed 1-14-21; 8:45 am]
BILLING CODE 4335-30-P