[Federal Register Volume 86, Number 111 (Friday, June 11, 2021)]
[Proposed Rules]
[Pages 31196-31218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-12318]


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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: Notification 
of Proposed Withdrawal

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

ACTION: Proposed rule; request for comments.

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SUMMARY: ONRR is proposing to withdraw the final rule entitled ``ONRR 
2020 Valuation Reform and Civil Penalty Rule'' (``2020 Rule''). This 
action opens a 60-day comment period to allow interested parties to 
comment on ONRR's proposed withdrawal of the 2020 Rule.

DATES: The final rule published on January 15, 2021, at 86 FR 4612, 
which was delayed at 86 FR 9286 on February 12, 2021, and 86 FR 20032 
on April 16, 2021, is proposed to be withdrawn. To be assured 
consideration, comments must be received at one of the addresses 
provided below by 11:59 p.m. EST on August 10, 2021.

ADDRESSES: You may submit comments to ONRR using one of the following 
two methods. Please reference the Regulation Identifier Number 
(``RIN'') for this action, ``RIN 1012-AA27,'' in your comment:
     Electronically via the Federal eRulemaking Portal: Please 
visit https://www.regulations.gov. In the Search Box, enter Docket ID 
``ONRR-2020-0001'' and click ``search'' to view the publications 
associated with the docket folder. Locate the document with an open 
comment period and then click ``Comment.'' Follow the instructions to 
submit your public comments prior to the close of the comment period.
     Email Submissions: Please submit your comments via email 
at [email protected] with ``RIN 1012-AA27'' listed in 
the subject line of your message. Email submissions must be postmarked 
on or before the close of the comment period.
    Instructions: All comments must include the agency name and docket 
number or RIN for this rulemaking. All comments, including any personal 
identifying information or confidential business information contained 
in a comment, will be posted without change to https://www.regulations.gov.
    Docket: For access to the docket to read background documents or 
comments received, go to https://www.regulations.gov and locate the 
docket folder by searching the Docket ID (ONRR-2020-0001) or RIN number 
(RIN 1012-AA27).

FOR FURTHER INFORMATION CONTACT: For questions, contact Luis Aguilar, 
Regulatory Specialist, at (303) 231-3418 or by email at 
[email protected].

SUPPLEMENTARY INFORMATION:

 Table of Abbreviations and Commonly Used Acronyms in This Proposed 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 Repeal Rule.............  ONRR's Repeal of the 2016 Valuation Rule,
                                82 FR 36934 (August 7, 2017).
ALJ..........................  Administrative Law Judge.
APA..........................  Administrative Procedure Act of 1946, as
                                amended.
API..........................  American Petroleum Institute.
BLM..........................  Bureau of Land Management.
BLS..........................  Bureau of Labor Statistics.
BOEM.........................  Bureau of Ocean Energy Management.
BSEE.........................  Bureau of Safety and Environmental
                                Enforcement.
Deepwater Policy.............  MMS's May 20, 1999, memorandum entitled
                                ``Guidance for Determining
                                Transportation Allowances for Production
                                from Leases in Water Depths Greater Than
                                200 Meters''.

[[Page 31197]]

 
DOI..........................  U.S. Department of the Interior.
E.O..........................  Executive Order.
FERC.........................  Federal Energy Regulatory Commission.
2020 Rule....................  ONRR 2020 Valuation Reform and Civil
                                Penalty Rule, 86 FR 4612 (January 15,
                                2021).
First Delay Rule.............  ONRR 2020 Valuation Reform and Civil
                                Penalty Rule: Delay of Effective Date
                                and Request for Public Comment, 86 FR
                                9286 (February 12, 2021).
FOGRMA.......................  Federal Oil and Gas Royalty Management
                                Act of 1982, 30 U.S.C. 1701, et seq..
GOM..........................  Gulf of Mexico.
MLA..........................  Mineral Leasing Act of 1920, 30 U.S.C.
                                181, et seq..
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, 43 U.S.C. 1331, et seq.
ONRR.........................  Office of Natural Resources Revenue.
Proposed 2020 Rule...........  ONRR 2020 Valuation Reform and Civil
                                Penalty Rule, Proposed Rule, 85 FR 62054
                                (October 1, 2020).
Second Delay Rule............  ONRR 2020 Valuation Reform and Civil
                                Penalty Rule: Delay of Effective Date,
                                86 FR 20032 (April 16, 2021).
Secretary....................  Secretary of the U.S. Department of the
                                Interior.
S.O..........................  Secretarial Order.
------------------------------------------------------------------------

I. Introduction

A. Statutory Authority

    Through the enactment of various mineral leasing laws, Congress 
authorized the Secretary to issue and administer leases to allow for 
the exploration, development, and production of mineral resources from 
Federal and Indian lands and the OCS. These laws include, for onshore 
lands, the MLA, for offshore lands, the OCSLA, and for Indian and 
allotted lands, 25 U.S.C. 396, et seq. The Secretary has delegated the 
statutory authority to lease, permit, and inspect mineral extraction 
activities on those lands to several bureaus and offices.
    The Secretary is also responsible for collecting, accounting for, 
and disbursing royalties and other financial obligations related to the 
leasing, production, and sale of minerals from Federal and Indian 
lands. Mineral leasing laws, regulations, and lease terms establish 
royalty rates and other obligations that a lessee must pay to the 
United States or Indian lessor. Relevant to this rulemaking, see, e.g., 
25 U.S.C. 396a-g, 400a; 30 U.S.C. 207(a), 226(b)(1) (MLA); 43 U.S.C. 
1337(a)(1) (OCSLA); 25 CFR 211.43; 43 CFR 3103.3-1, 43 CFR 3473.3-2.
    Congress enacted FOGRMA to further clarify and establish the 
Secretary's responsibilities with respect to royalty management. 
Through FOGRMA, Congress directed the Secretary ``to improve methods of 
accounting for such royalties and payments'' and required ``the 
development of enforcement practices that ensure the prompt and proper 
collection and disbursement of oil and gas revenues owed to the United 
States and Indian lessors and those inuring to the benefit of States.'' 
30 U.S.C. 1701(a)(3) and (b)(3).
    Over the years, royalty management responsibilities have been 
transferred within DOI and in 2010, following the reorganization of 
MMS, ONRR was created. The Secretary delegated authority to ONRR to 
carry out its responsibilities specific to ``royalty and revenue 
collection, distribution, auditing and compliance, investigation and 
enforcement, and asset management for both onshore and offshore 
activities.'' S.O. 3299, Sec. 5 (August 29, 2011); see also S.O. 3306 
(September 30, 2010). Pursuant to FOGRMA, the mineral leasing acts, and 
the authority delegated by the Secretary, ONRR has adopted regulations 
specifying the methods to be used to determine the value of Federal and 
Indian mineral production for royalty purposes.
    ONRR's responsibilities are distinct from other DOI offices and 
bureaus and pertain specifically to the collection, verification, and 
disbursement of royalty revenue realized from production of natural 
resources on Federal and Indian lands and the OCS. See 30 CFR 1201.100.
    FOGRMA and the mineral leasing laws grant the Secretary broad 
rulemaking authority to carry out and accomplish the purposes set forth 
in the governing statutes. See 30 U.S.C. 189 (MLA); 30 U.S.C. 1751 
(FOGRMA); and 43 U.S.C. 1334 (OCSLA). In turn, the Secretary delegated 
rulemaking authority specific to ONRR's portfolio of responsibilities 
to ONRR. See S.O. 3299, sec. 5 and S.O. 3306, sec. 3-4.

B. Rulemaking History

1. The 2020 Proposed Rule
    On October 1, 2020, ONRR published the Proposed 2020 Rule. The 
Proposed 2020 Rule proposed to amend certain regulations that inform 
the manner in which ONRR 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, lease terms, and orders 
associated with mineral leases. The Proposed 2020 Rule stated its 
purposes were to: Align the 2016 Valuation Rule with certain E.O.s 
issued after the 2016 Valuation Rule's publication date; address some 
of the amendments in the 2016 Valuation Rule asserted to be 
controversial and problematic; simplify processes and provide early 
clarity regarding royalties owed; better explain ONRR's civil penalty 
practices; and return certain provisions to the framework that had 
existed for decades prior to the 2016 Valuation Rule and 2016 Civil 
Penalties Rule.
    The 60-day comment period for the Proposed 2020 Rule closed on 
November 30, 2020. 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 36 unique comment submissions totaling to 40,456 pages of 
comment materials, of which 38,150 pages were a one-page form comment.

[[Page 31198]]

2. The 2020 Rule
    On January 15, 2021, 46 days after the close of the comment period, 
ONRR published the 2020 Rule. The 2020 Rule adopted amendments on 15 
topics, generally summarized as:
    1. Deepwater gathering--allowing certain gathering costs to be 
deducted as part of a lessee's transportation allowance for Federal oil 
and gas produced on the OCS at water depths greater than 200 meters.
    2. Extraordinary processing allowances--allowing a lessee to apply 
for approval to claim an extraordinary processing allowance for Federal 
gas in situations where the gas stream, plant design, and/or unit costs 
are extraordinary, unusual, or unconventional relative to standard 
industry conditions and practice.
    3. Default provision--removed the default provision and references 
thereto from the Federal oil and gas and Federal and Indian coal 
regulations. The default provision established criteria limiting how 
ONRR will exercise the Secretary's authority to establish royalty value 
when typical valuation methods are unavailable, unreliable, or 
unworkable.
    4. Misconduct--removed the misconduct definition from 30 CFR 
1206.20.
    5. Signed contracts--removed the requirement that a lessee have 
contracts signed by all parties.
    6. Citation to legal precedent--eliminated the requirement for a 
lessee to cite legal precedent when seeking a valuation determination.
    7. Arm's-length valuation option--adopted an index-based valuation 
option for arm's-length Federal gas sales.
    8. Change in indices to be used in index-based valuation options--
changed from the high index price to the average index price.
    9. Standard deduction for transportation allowance--amended the 
standard deduction included in the index-based valuation method to 
reflect more recent average transportation cost data.
    10. Valuation of coal based on electricity sales--removed the 
requirement to value certain Federal and Indian coal based on the sales 
price of electricity.
    11. Coal cooperative--removed the definition of ``coal 
cooperative'' and the method to value sales between members of a ``coal 
cooperative'' for Federal and Indian coal.
    12. Facts considered in penalizing payment violations--modified 
ONRR's civil penalty regulations to specify that ONRR considers unpaid, 
underpaid, or late payment amounts in the severity analysis for payment 
violations only.
    13. Consideration of aggravating and mitigating circumstances--
modified ONRR's civil penalty regulations to specify that ONRR may 
consider aggravating and mitigating circumstances when calculating the 
amount of a civil penalty.
    14. Conforming civil penalty regulations to court decision--removed 
a provision permitting an ALJ to vacate a previously-granted stay of an 
accrual of penalties if the ALJ later determines that a violator's 
defense to a notice of noncompliance was frivolous.
    15. Non-substantive corrections--amended various regulations by 
making non-substantive corrections.
    The 2020 Rule did not adopt amendments on three topics discussed in 
the Proposed 2020 Rule:
    1. Regulatory caps on transportation allowances for Federal oil and 
gas. See 86 FR 4613.
    2. Regulatory caps on processing allowances for Federal gas. See 86 
FR 4614.
    3. Shallow water gathering. See 86 FR 4614.
    The effective date of the 2020 Rule was originally February 16, 
2021. For amendments to 30 CFR part 1206 only, the 2020 Rule 
established a compliance date of May 1, 2021.
3. The First Delay Rule
    On January 20, 2021, the Assistant to the President and Chief of 
Staff issued a memorandum entitled ``Regulatory Freeze Pending Review'' 
which, along with the Office of Management and Budget (``OMB'') January 
20, 2021, Memorandum M-21-14, directed agencies to consider a delay of 
the effective date of rules published in the Federal Register that had 
not yet become effective and to invite public comment on issues of 
fact, law, and policy raised by those rules (86 FR 7424, January 28, 
2021).
    On February 12, 2021, ONRR published the First Delay Rule which 
initially delayed by 60 days the effective date of the 2020 Rule, 
opened a 30-day comment period on the facts, law, and policy 
underpinning the 2020 Rule, as well as on the impact of a delay in the 
effective date of the 2020 Rule. In response, ONRR received 13 comment 
submissions totaling to 1,339 pages of comment materials, many of which 
were submitted by the same organizations that had commented on the 
Proposed 2020 Rule.
4. The Second Delay Rule
    After the close of the First Delay Rule's comment period, ONRR 
determined that an additional delay of the 2020 Rule's effective date 
was needed. Thus, on April 16, 2021, ONRR published a second final rule 
which further delayed the effective date until November 1, 2021 (the 
``Second Delay Rule'').
    The Second Delay Rule listed 15 potential defects or shortcomings 
identified by ONRR in its initial reexamination of the 2020 Rule and in 
comments received in response to the First Delay Rule. 86 FR 20032. It 
also addressed public comments received on the impacts of delay of the 
effective date of the 2020 Rule.

II. Basis for Proposed Action

    ONRR is proposing to withdraw the 2020 Rule because the process 
used for its adoption arguably was without observance of procedure 
required by law, as well as in excess of ONRR's statutory authority. 
See 5 U.S.C. 706(2)(C), (D). While a complete withdrawal of the 2020 
Rule may be warranted, ONRR requests public comment on potential 
alternatives in Section IV of this rule. For example, alternative 
outcomes following this proposed rule's notice could include: Allowing 
the 2020 Rule to go into effect, a withdrawal limited to some or all of 
the 2020 Rule's amendments to 30 CFR part 1206, a withdrawal limited to 
some or all of the 2020 Rule's revenue-impacting amendments, a 
withdrawal limited to some or all of the 2020 Rule's amendments to part 
1241, or some combination thereof. ONRR acknowledges the importance of 
public participation as part of the rulemaking process. As such, this 
rule explains potential deficiencies in the 2020 Rule and invites 
public comment on the proposed withdrawal and new findings considered 
as part of this reevaluation. Following the close of this rule's 
comment period, ONRR will consider all relevant information submitted 
through public comment and determine the appropriate course of action.

A. APA Defects That Go to the Entirety of the 2020 Rule

    The 2020 Rule may be deficient under the APA for the following 
reasons.
1. Adequacy of the Comment Period
    Though the 2016 Valuation Rule included a public comment period of 
120 days, the 2020 Rule included a public comment period of just 60 
days. In litigation construing ONRR's reversal of major policies 
adopted in the 2016 Valuation Rule, the District Court found that ONRR 
failed to provide meaningful opportunity for comment when it enacted 
the reversal without a comment

[[Page 31199]]

period of commensurate length. Specifically, the District Court found 
that the 30-day comment period used for the 2017 repeal of the 2016 
Valuation Rule was too brief when ONRR had a much longer comment period 
for the 2016 Valuation Rule--approximately 120 days.\1\ Here, though 
ONRR did allow for more than 30 days of comment on the 2020 Rule, as 
with the repeal of the 2016 Valuation Rule, ONRR may still have 
deprived the public of an adequate period within which to comment.
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    \1\ California v. U.S. Dep't of the Interior, 381 F. Supp. 3d 
1153, 1177-78 (N.D. Cal. 2019) (``ONRR's failure to provide a 
meaningful opportunity to comment is underscored by the brevity of 
the comment period. While there is no bright-line test for the 
minimum amount of time allotted for the comment period, at least one 
circuit has recognized that 90 days is the `usual' amount of time 
allotted for a comment period. In cases involving the repeal of 
regulations, courts have considered the length of the comment period 
utilized in the prior rulemaking process as [ ] well as the number 
of comments received during that time-period. In the instant case, a 
comparison between the ONRR's rulemaking process leading to the 
Valuation Rule and the process used to repeal it exemplifies the 
ONRR's failure to provide for a meaningful rulemaking process. . . . 
In contrast to the years of consideration leading to the 
promulgation of the Valuation Rule, the ONRR's actions to repeal it 
took place in a matter of months. Whereas the ONRR provided a 120-
day comment period for the draft Valuation Rule, the ONRR allowed 
only a 30-day comment period to consider its repeal. . . . Based on 
the record presented, the Court finds that the ONRR failed to 
provide meaningful opportunity for comment.'' (citations omitted)).
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2. Consideration of Alternatives
    The Proposed 2020 Rule does not demonstrate that ONRR considered 
alternatives to the repeal of select regulations adopted in the 2016 
Valuation Rule and, to a lesser extent, its 2016 Civil Penalty Rule. 
For example, the 2020 Rule did not discuss alternatives to the repeal 
of the definition of misconduct or the requirement of signed contracts, 
among other less controversial changes. This again resembles ONRR's 
2017 attempt to repeal the 2016 Valuation Rule, where the District 
Court found that ONRR did not discuss alternatives to a full repeal of 
the 2016 Valuation Rule and explained that an agency must discuss 
alternatives even if the agency is repealing less than an entire 
rulemaking.\2\
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    \2\ Id. at 1168-69 (``When considering revoking a rule, an 
agency must consider alternatives in lieu of a complete repeal, such 
as by addressing the deficiencies individually. In response to the 
Proposed Repeal, the ONRR received comments suggesting that in lieu 
of complete repeal of the Valuation Rule, the ONRR should address 
specific problems `separately and not entirely abandon the rule in 
its entirety.' The ONRR responded that `[t]he cost of implementing 
the rule and subsequently trying to fix the defects in one or more 
separate rulemakings would far exceed the cost of repealing and 
replacing the rule.' That conclusory statement--unsupported by 
facts, reasoning or analysis--is legally insufficient.'').
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3. Lack of ``Reasoned Explanation'' for Proposed Rule Denies the Public 
an Opportunity To Comment
    In the Proposed 2020 Rule, ONRR may not have fully explained why it 
was proposing certain substantive amendments.\3\ The District Court 
noted a similar flaw in ONRR's 2017 proposal to repeal the 2016 
Valuation Rule, finding that ONRR did not identify the reasons 
supporting its proposed repeal.\4\
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    \3\ Even if ONRR's failure to fully explain its proposed action 
only affected the validity of certain amendments, a court may vacate 
an entire rule if it is not feasible to keep only the valid 
sections. See High Country Conservation Advocates v. U.S. Forest 
Serv., 951 F.3d 1217, 1228-29 (10th Cir. 2020) (holding that a court 
may only partially set aside a regulation if the invalid portion is 
severable, that is if the severed parts operate entirely 
independently of one another, and the circumstances indicate the 
agency would have adopted the regulations even without the faulty 
provision); see also Wyoming v. U.S. Dep't of the Interior, 493 F. 
Supp. 3d 1046 (D. Wyo. 2020) (holding that the remainder of the 
BLM's rule provisions could not function independently and vacating 
the entire rule.).
    \4\ California, 381 F. Supp. 3d at 1173-74 (``The Court 
concludes that, by failing to provide the requisite information to 
adequately apprise the public regarding the reasons the ONRR was 
seeking to repeal the Valuation Rule in favor of the former 
regulations it had just replaced, the ONRR effectively precluded 
interested parties from meaningfully commenting on the proposed 
repeal. The Court therefore concludes that Federal Defendants 
violated the APA by failing to comply with the notice and comment 
requirement.'' (citations omitted)).
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    Specifically, ONRR's Proposed 2020 Rule may not have fully 
described the reasons why it was proposing to return to some of the 
``historical practices'' or adopting other changes, including: (1) When 
production is completed offshore in waters 200 meters and deeper, 
allowing a lessee to report and claim certain gathering costs in its 
transportation allowances; (2) extension of index-based valuation to 
arm's-length sales of Federal gas; and (3) lowering of the index, from 
the highest bidweek price to an average bidweek price, for valuation of 
non-arm's-length sales of Federal gas. While the Proposed 2020 Rule 
identified the proposed changes, discussed the anticipated economic 
impact of the changes, and set forth the language of the proposed 
amendments, ONRR could have more fully discussed why the changes were 
being proposed. Moreover, for the changes that were reverting to 
``historical practices'' (i.e., those existing before the 2016 
Valuation Rule was adopted), ONRR did not fully explain why it was 
reverting to practices it had rejected in its last substantive 
rulemaking. Thus, the Proposed 2020 Rule may not have provided 
sufficient notice of the reasons for the substantive proposed changes 
to be adopted through the 2020 Rule such that the public was not 
provided with a meaningful opportunity to comment.
4. Failure to Adequately Justify Change in Recently Adopted Policy
    At the time the Proposed 2020 Rule was published, the 2016 
Valuation Rule had been in force for only seventeen months (from March 
29, 2019 when the repeal of the 2016 Valuation Rule was overturned to 
October 1, 2020) and full compliance with that rule had been delayed by 
the series of Dear Reporter letters to October 1, 2020. Given that the 
Proposed 2020 Rule was, in many instances, an attempt to return to the 
valuation rules that existed prior to the 2016 Valuation Rule, ONRR 
should have included justifications for the proposed changes in the 
Proposed 2020 Rule. In addition, ONRR should have explained the 
inconsistencies between the 2016 Valuation Rule and the amendments 
described in the Proposed 2020 Rule and, in addition, adequately 
explained its potential rejection of the position under which the 
agency and the regulated public had been operating for only a brief 
period of time.\5\
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    \5\ See footnote 4.
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    In considering ONRR's 2017 attempt to repeal its 2016 Valuation 
Rule, the District Court similarly concluded that ONRR did not provide 
``a reasoned explanation . . . for disregarding facts and circumstances 
that underlay or were engendered by the prior policy.'' \6\ Here too, 
the APA may have been violated by ONRR's failure to offer a reasoned 
explanation for the proposed amendments and its failure to describe why 
it was disregarding the findings in the 2016 Valuation Rule in favor of

[[Page 31200]]

reverting to prior policy after only a brief period of time operating 
under the 2016 Valuation Rule.
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    \6\ California, 381 F. Supp 3d at 1168 (citing Encino Motorcars, 
LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016)). The District Court 
further found that, in its 2017 repeal, ONRR completely 
contradict[ed] its prior findings. Despite its previous, detailed 
conclusions in support of the Valuation Rule's approach to valuing 
non-arm's-length coal transactions--and dismissing the industry's 
criticisms thereof--the ONRR now finds the approach prescribed in 
the Valuation Rule to be ``unnecessarily complicated and burdensome 
to implement and enforce.'' Likewise, in contrast to its prior 
criticisms of the benchmarks, the ONRR now lauds the benchmark 
system as ``proven and time-tested,'' as well as ``reasonable, 
reliable, and consistent.'' Although the ONRR is entitled to change 
its position, it must provide ``a reasoned explanation . . . for 
disregarding facts and circumstances that underlay or were 
engendered by the prior policy'' . . . . The Court finds that the 
ONRR's conclusory explanation in the Final Repeal fails to satisfy 
its obligation to explain the inconsistencies between its prior 
findings in enacting the Valuation Rule and its decision to repeal 
such Rule. The ONRR's repeal of the Valuation Rule is therefore 
arbitrary and capricious.
    Id. at 1167-68 (citations omitted).
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    Moreover, the justification offered in the 2020 Rule, in some 
instances, could be interpreted as relying on matters outside of ONRR's 
primary area of expertise--matters that were not signaled in the 
proposed rule. Since the explanation for its action was offered only in 
the 2020 Rule, and not in the Proposed 2020 Rule, members of the public 
may have been deprived of an opportunity to comment, as they were 
unlikely to anticipate that ONRR would cite external justification for 
the 2020 Rule.

B. APA and Other Defects That Go to Portions of the 2020 Rule

    Part A above explains four potential defects in the 2020 Rule. In 
addition to these defects, ONRR also believes it may have promulgated 
certain amendments in excess of the authority delegated to it, as 
explained below.\7\ The sum of these defects may warrant withdrawal of 
the entire 2020 Rule.
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    \7\ Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988) 
(``It is axiomatic that an administrative agency's power to 
promulgate legislative regulations is limited to the authority 
delegated by Congress.''); Food & Drug Admin. v. Brown & Williamson 
Tobacco Corp., 529 U.S. 120, 125 (2000) (``Regardless of how serious 
the problem an administrative agency seeks to address, . . . it may 
not exercise its authority 'in a manner that is inconsistent with 
the administrative structure that Congress enacted into law.' '').
---------------------------------------------------------------------------

    Because ONRR is considering alternatives to complete withdrawal of 
the 2020 Rule, this section provides information regarding additional, 
amendment-specific problems which may warrant the withdrawal of some 
but not all of the 2020 Rule. The amendments covered in this Part B 
are: (1) Deepwater gathering allowances; (2) extraordinary processing 
allowances; (3) index-based valuation for arm's-length sales; (4) 
modification of the index price used in index-based valuation; and (5) 
increasing the reduction to the index price used in index-based 
valuation to account for transportation expenses. Collectively, these 
five are referred to as the revenue-impacting provisions of the 2020 
Rule.
1. ONRR's Role in Incentivizing Production
    Since the 2020 Rule adopted each of these five revenue-impacting 
amendments to, in part, incentivize production by reducing royalties an 
oil and gas lessee would otherwise owe the United States, this section 
begins by discussing incentivization of production before turning to 
matters specific to individual revenue-impacting amendments.
a. Secretarial Authorities Delegated to ONRR Do Not Include 
Incentivizing Production
    In response to the Proposed 2020 Rule, some commenters noted that 
ONRR based the proposed rule on incentivizing or increasing Federal 
production despite the fact that ONRR has no explicit mandate to 
increase production. In the 2020 Rule, ONRR disagreed with the 
commenter and responded by stating that it shared in DOI's goal of 
managing Federal resources on the OCS. See 86 FR 4623. It is true that 
Congress has established official policy that ``the Outer Continental 
Shelf 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.'' 43 U.S.C. 1332(3). This broad 
directive, framed primarily by the overarching requirement that DOI 
conduct leasing activities ``to assure receipt of fair market value for 
the lands leased and the rights conveyed by the Federal Government,'' 
43 U.S.C. 1344(a)(4), provides the Secretary with broad discretion to 
emphasize varying components of OCLSA's objectives. Similarly, with 
respect to the royalty management program specifically, the Secretary 
has the authority to ``prescribe such rules and regulations as he deems 
reasonably necessary to carry out this chapter'' under FOGRMA, 30 
U.S.C. 1751(a).
    Notably, however, ONRR has reconsidered its responsibilities and 
determined that they are much narrower than the 2020 Rule suggested. 
ONRR was established, together with BOEM and BSEE, to purposefully 
separate and reassign the responsibilities of the former MMS in order 
to improve management, oversight, and accountability of activities on 
the OCS, ensure a fair return to the public from royalty and revenue 
collection and disbursement activities, and provide independent safety 
and environmental oversight and enforcement of offshore activities. See 
S.O. 3299 (May 19, 2010) and S.O. 3306 (Sept. 30, 2010). Under these 
S.O.s, ONRR is specifically responsible for managing royalty and 
revenue collection, distribution, auditing and compliance, 
investigation and enforcement, and asset management for both onshore 
and offshore activities. Id. Consistent with the S.O.s, ONRR is 
primarily responsible for carrying out the Secretary's duty to 
``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'' under 30 U.S.C. 1711(a). Unlike most 
agencies within DOI, ONRR has no organic statute and the role of ONRR 
under S.O. 3299 and S.O. 3306 is narrowly focused on the accounting and 
auditing activities that form the bedrock of ONRR's responsibilities. 
Thus, questions exist regarding the scope of ONRR's authority and the 
range of activities that have been assigned or delegated to it.
    The need to separate the auditing and accounting responsibilities 
from the planning and leasing activities was one of the primary stated 
purposes for the dissolution of the former MMS and the creation of 
BOEM, BSEE, and ONRR. MMS was divided into the three separate bureaus 
and offices to separate conflicting missions. See https://www.doi.gov/news/pressreleases/Salazar-Divides-MMSs-Three-Conflicting-Missions. 
Among other things, the establishment of ONRR in the Office of the 
Assistant Secretary for Policy Management and Budget, ``centralize[d] 
the collection and management of revenues from energy development on 
our public lands and oceans, which strengthens the ability of employees 
to independently and rigorously carry out their revenue management 
responsibilities, and ensures better protection of American taxpayer 
interests.'' See July 15, 2011 Statement of the Director of the Office 
of Natural Resources Revenue, to the Committee on Natural Resources, 
House of Representatives, doi.gov/ocl/hearings/112/OffshoreEnergyAgenciesGould_071511. Tasking ONRR with incentivizing 
energy production would seem to be inconsistent with the current 
delegation of responsibilities between BOEM, BSEE, and ONRR.
    Finally, it should be remembered that ONRR's primary functions 
include ensuring fair return (i.e., fair value) for the public from 
royalty and revenue collection and disbursement activities. As a 
result, any decision by ONRR to incentivize or disincentivize 
production that compromises the attainment of a fair return for the 
United States would be outside ONRR's primary function.

[[Page 31201]]

b. The 2020 Rule Failed To Show How It Incentivized Production
    In response to the First Delay Rule, one commenter wrote that ONRR 
revealed for the first time in the 2020 Rule that it evaluated the 
issue of production impacts using its economic models. The commenter 
referred to the following language: 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.'' 86 FR 
4616. The commenter described this language as convoluted.
    The commenter interpreted this statement to mean that, using the 
estimating models available to it, ONRR ultimately determined that the 
rule would have a ``negligible or marginal impact on production'' 
within the margin of error of its models. According to the commenter, 
ONRR's statement means the premise for adopting the 2020 Rule--that it 
would increase production--was false. The commenter also stated that 
ONRR failed to provide this finding to the public in the Proposed 2020 
Rule to allow the public the opportunity to comment on this new 
information. The commenter asserted that ONRR instead proceeded to 
adopt the 2020 Rule despite knowing the premise for its rulemaking had 
been withheld and, moreover, was materially false. The commenter 
claimed that on this basis alone, the 2020 Rule should be withdrawn.
    ONRR rejects the commenter's assertions that information was 
withheld in the Proposed 2020 Rule to undermine the public's 
opportunity to comment. Agencies routinely add, expand, and revise 
explanations between proposed and final rules based on public comments 
and their own continued analysis and search for information. However, 
ONRR agrees with the commenter that the 2020 Rule ultimately failed to 
explain or substantiate how it accomplished its stated purpose to 
incentivize production--regardless of whether, as discussed above, it 
is within ONRR's authority to adopt rules for that purpose.
c. The 2020 Rule Failed To Consider Existing Methods DOI Uses To 
Incentivize Production
    ONRR's sister bureaus have regulations in place to incentivize 
production through royalty relief in certain situations. This section 
briefly describes some of these bureaus' royalty-relief programs, which 
ONRR failed to consider when adopting the 2020 Rule. Immediately below 
we discuss BSEE's offshore royalty relief programs, and then BLM's 
onshore royalty relief programs.
    DOI's statutory authority allows it to reduce or eliminate a 
lessee's OCS royalty obligation in order to promote development, 
increase production, or encourage production of marginal resources. See 
43 U.S.C. 1337(a)(3). BSEE's royalty relief regulations, including 
those found at 30 CFR part 203, may provide a more appropriate 
incentive than the 2020 Rule's revenue-impacting amendments, including 
the deepwater gathering allowance, which is limited to the OCS.
    The Secretary implements 43 U.S.C. 1337(a)(3)(A)-(C) by offering 
royalty relief under two general categories, ``automatic'' and 
``discretionary.'' ``Automatic'' refers to deepwater and deep gas 
royalty relief that is specified in an OCS lease issued by BOEM. See 30 
CFR 560.220. ``Discretionary'' refers to royalty relief that a lessee 
may apply for under certain scenarios and includes end-of-life and 
special case royalty relief. See 30 CFR 203.50 through 203.56 and 
203.80, respectively. For more information, see https://www.boem.gov/oil-gas-energy/energy-economics/royalty-relief.
    In order to receive discretionary royalty relief, a lessee must 
demonstrate and BSEE must verify that a project would be uneconomic 
without royalty relief and would become economic with royalty relief. 
See 30 CFR 203.2. The lessee must submit an application to BSEE 
outlining the estimated economics of the project, which BSEE then 
reviews. See id. (stating that for different types of royalty relief, 
the applicant must propose and demonstrate that their project or 
further development is uneconomic without relief); see also https://www.boem.gov/oil-gas-energy/energy-economics/deepwater-royalty-relief-economic-model. BSEE employs this process to balance the promotion of 
production with other considerations, including protection of royalty 
revenue. In contrast, some of the 2020 Rule's revenue-impacting 
amendments, including the deepwater gathering allowance and amendments 
related to the index-based valuation option, may be claimed by all 
lessees producing from deepwater and are in no manner targeted to 
incentivize operations that otherwise would be uneconomic. Instead, 
these revenue-impacting amendments are an across-the-board benefit for 
any lessee that meets the criteria set out in the amendment--regardless 
of economic need.
    Specific to the deepwater gathering allowance, experience gained in 
numerous audits and other compliance activities has shown that many 
lessees commissioned deepwater projects without knowledge of the 
Deepwater Policy. Rather than having made investment decisions based on 
the Deepwater Policy, these lessees began to calculate allowances under 
that policy long after learning of the Deepwater Policy and, typically, 
long after a project began producing. Some companies, prior to the 2016 
Valuation Rule's rescission of the Deepwater Policy, applied the 
Deepwater Policy retroactively after selling the assets. Moreover, for 
production between 1999 and 2016, ONRR found that many lessees 
misapplied the Deepwater Policy (for example, claiming disallowed costs 
or claiming gathering in situations that did not meet the Deepwater 
Policy's criteria). While the Deepwater Policy (between 1999 and 2016) 
reduced royalty value, ONRR has seen no evidence that the Deepwater 
Policy impacted a lessee's decision-making to invest or not in a 
deepwater project.
    BSEE's royalty relief practices include safeguards for the public, 
including the application and approval process, volume thresholds, 
pricing thresholds, time limits, capital expenditure thresholds, and 
periodic reviews of approved royalty relief. 30 CFR 203.4 
(discretionary end-of-life and deep-water relief programs) and 30 CFR 
203.47 (deep gas relief program); see also https://www.bsee.gov/sites/bsee.gov/files/special-case-royalty-relief-overview-1.pdf (describing 
the special case relief program's application process). Each 
application for discretionary royalty relief is reviewed by BSEE, 
allowing BSEE to grant relief only where needed and appropriate while 
still protecting public interests. 30 CFR 203.1 and 203.2 (providing 
that BSEE may grant a ``royalty suspension for a minimum production 
volume plus any additional volume needed to make your project 
economic'').
    In contrast, four of the five revenue-impacting amendments adopted 
in the 2020 Rule do not include an economic needs test or an 
application and approval process. There was and is no safeguard to 
prevent a lessee with a highly lucrative operation from taking 
advantage of these revenue-impacting amendments.
    Because the 2020 Rule did not consider existing BSEE regulations 
and practices which provide more targeted, structured methods to 
incentivize new or continuing OCS operations, it appears ONRR's 2020 
rulemaking process was inadequate to support

[[Page 31202]]

adoption of its revenue-impacting amendments, including, on the basis 
of incentivizing production.
    See also the ``Memorandum of Understanding between BOEM, BSEE, and 
ONRR for the Collaboration on Processes, Policies and Systems Relating 
to the Management of [OCS] Energy and Marine Mineral Development,'' 
signed in March of 2014 (``2014 MOU''), which outlines BOEM, BSEE, and 
ONRR's respective duties for and involvement in various aspects of OCS 
production. ONRR's role, with respect to these programs, is limited to 
the maintenance of royalty information in ONRR's royalty management 
system. See 2014 MOU, Attachment A, Information Sharing and Bureau 
Responsibilities; Offshore Federal Oil, Gas, Sulphur and Marine 
Minerals at page A-21 to A-22 (noting BSEE and BOEM duties to track 
production and assess price forecasting, among other tasks, with ONRR's 
responsibility with respect to royalty relief limited to ensuring 
volume and royalty data remain up-to-date, and ensuring the collection 
of any royalty payments). 2014 MOU located at https://www.boem.gov/sites/default/files/documents//MOU%20BOEM-BSEE-ONRR%20Collaboration%202014-04-16.pdf.
    Onshore, BLM may reduce the royalty on a lease ``to encourage the 
greatest ultimate recovery of the resource and in the interest of 
conservation of natural resources.'' See 43 CFR 3103.4-1(a). Prior to 
reducing a royalty rate, BLM must conduct an analysis to determine that 
the royalty reduction ``is necessary to promote development of the 
lease or the BLM determines that the lease cannot be successfully 
operated under [the royalty rate agreed to in] the terms of the 
lease.'' 43 CFR 3133.3(a)(2). The regulations also specify the process 
by which companies must apply for a royalty reduction and the required 
contents of an application. See 43 CFR 3103.4-1(b)(1)-(3).
    ONRR invites public comment on whether the targeted royalty-relief 
authorities delegated to and administered by BSEE and BLM serve as more 
appropriate mechanisms to evaluate a lessee's economic or production 
hardship and to appropriately respond thereto than do the 2020 Rule's 
revenue-impacting provisions.
2. Deepwater Gathering Allowances (Sec. Sec.  1206.110(a) and 
1206.152(a))
a. The Regulation Text Adopted in the 2020 Rule Was Not in the Proposed 
2020 Rule
    Following the Proposed 2020 Rule's publication, ONRR discovered 
that some of the regulatory text intended for Sec. Sec.  1206.110(a) 
and 1206.152(a) was missing. In the 2020 Rule, at 86 FR 4622, ONRR 
explained that the proposed regulatory text failed to include certain 
requirements that a lessee must meet to be eligible for a deepwater 
gathering allowance, as several commenters had noted. ONRR corrected 
for its prior error and revised the regulatory text in the 2020 Rule. 
It made the oil and gas sections consistent, and added language in both 
Sec. Sec.  1206.110 and 1206.152 to incorporate the two previously 
missing components from the Deepwater Policy--the adjacency limitation 
and requirement for a lessee to identify a central accumulation point 
at or near the subsea wellhead. See also 86 FR 4654, 4656 (amendatory 
instructions for Sec. Sec.  1206.110 and 1206.152 in the 2020 Rule). 
While the preamble included in the Proposed 2020 Rule had explained 
ONRR's intention to adopt a deepwater gathering allowance consistent 
with the former Deepwater Policy, the revisions to regulation text made 
with publication of the 2020 Rule, which incorporated key aspects of 
the former Deepwater Policy into Sec. Sec.  1206.110 and 1206.152, can 
be seen as substantive changes that should have triggered a reopening 
of the comment period.
    With respect to Sec. Sec.  1206.110 and 1206.152, the public was 
not adequately apprised of and afforded an opportunity to read and 
comment on the proposed amendments to regulation text as those changes 
first appeared in the final rule. Accordingly, commenters focused on 
the Proposed 2020 Rule's regulation text would have been misled as to 
the availability of and criteria for a deepwater gathering allowance. 
ONRR believes that its failure to provide an opportunity for meaningful 
public comment on the regulation text of Sec. Sec.  1206.110 and 
1206.152 may constitute a procedural defect under 5 U.S.C. 553(b) and 
justify withdrawal of the deepwater gathering allowance provisions.
b. Deepwater Gathering Allowances Lack Statutory and Policy Support
    A Federal oil and gas lessee must pay a royalty of not less than 
12.5 percent in amount or value of the production removed or sold from 
the lease. See 43 U.S.C. 1337(a). Notwithstanding this statutory 
requirement, the 2020 Rule adopted the deepwater gathering allowance 
because doing so ``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 a resource.'' 86 
FR 4622. As its basis for incentivizing offshore production, the 2020 
Rule stated that ``Recent Executive and Secretarial Orders call on 
Federal agencies to appropriately promote and unburden domestic energy 
production, especially OCS resources.'' Id. (citing 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).
    The 2020 Rule's stated goal of promoting offshore oil and gas 
production through deepwater gathering allowances appears to be in 
conflict with the statutory requirement that royalties be paid based on 
the ``amount or value'' of the oil and gas produced. Value for royalty 
purposes is the value of the oil and gas in marketable condition. See 
California Co. v. Udall, 296 F.2d 384, 388 (D.C. Cir. 1961). Gathering 
costs, which include costs to measure and condition oil and gas for 
market, have long been considered a cost incurred by the lessee to 
place gas in marketable condition. Thus, gathering costs are the sole 
responsibility of the lessee. 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 (Aug. 26, 2019).
    Also, the deepwater gathering allowance appears to lack policy 
support. E.O. 13783 and E.O. 13795 (prior to withdrawal) provided that 
the E.O.s ``shall be implemented consistent with applicable law.'' 
Applicable law requires that royalties be paid based on the ``amount or 
value'' of the production. See 43 U.S.C. 1337(a)(1)(A). Thus, it is not 
clear that these E.O.s authorized DOI to incentivize offshore oil and 
gas production through reduction of the lessee's royalty burden. 
Further, even if these E.O.s could be construed to provide such policy 
support, the E.O.s were revoked within days of the publication of the 
2020 Rule and prior to the 2020 Rule's effective date.
c. The 2020 Rule Added Extensive Justification on Which the Public Was 
Unable To Comment
    While the Proposed 2020 Rule provided a lengthy background of the 
history of the Deepwater Policy, it

[[Page 31203]]

provided little justification for its codification, citing only that 
ONRR was ``reevaluating its rules in light of E.O. 13783 and E.O. 
13795, which call on Federal agencies to promote and unburden domestic 
energy production, and the Secretarial Orders encouraging robust and 
responsible exploration and development of [OCS] resources.'' 85 FR 
62060. In the 2020 Rule, however, ONRR explained its reasoning in far 
greater detail. See 86 FR 4622-4625. Thus, the Proposed 2020 Rule's 
lack of a fully-reasoned explanation for codifying a deepwater 
gathering allowance may have limited the public's opportunity to 
meaningfully comment on ONRR's intended regulatory change. See Section 
II.A.3. above and further discussion below.
    The 2020 Rule listed several new factors that warranted a deepwater 
gathering allowance in the GOM. First, it explained that the GOM is now 
a mature hydrocarbon province--most of the large fields have been 
discovered and developed and the remaining fields are smaller and more 
likely to be developed with subsea tiebacks, the costs of which would 
likely be allowed as a transportation allowance under the deepwater 
gathering allowance. See 86 FR 4623. Second, the 2020 Rule noted the 
drop in commodity prices since the development and publication the 2016 
Rule, which seemingly makes deepwater investment less economic. See 86 
FR 4623-4624. Third, the 2020 Rule compared the decrease in 
applications for drilling permits in the GOM to an increase in onshore 
drilling permits. See 86 FR 4624. Fourth, it referenced BOEM's current 
National Assessment of Undiscovered Oil and Gas Resources of the U.S. 
OCS, which shows declines in the GOM's economically recoverable oil and 
gas resources. Id. Finally, it explained the increased risk, cost, and 
national importance of producing oil and gas from the deepwater OCS. 86 
FR 4622-4625. Since this information was not provided in the Proposed 
2020 Rule, the public did not have an opportunity to comment on these 
reasons for adopting a deepwater gathering allowance.
3. Reinstated Extraordinary Processing Allowances for Federal Oil and 
Gas (Sec.  1206.159(c)(4))
a. Extraordinary Processing Allowances Lack Statutory and Policy 
Support
    Please see the discussion above at Section II.B.2.b.
b. Final Rule Included Inconsistent Language on Incentivizing 
Production
    ONRR addressed extraordinary processing allowances and hard caps on 
transportation and processing allowances in the same section of the 
Proposed 2020 Rule. 85 FR 62058. ONRR asserted in the Proposed 2020 
Rule that reinstating a lessee's ability to request approval to claim 
an extraordinary processing allowance and removing hard caps on 
transportation and processing allowances would incentivize production 
or remove a disincentive to produce. See 86 FR 4615. Those assertions 
conflict with other statements in the 2020 Rule that indicate the 
incentives, if any exist, are negligible. See 86 FR 4616-4617. 
Moreover, the Proposed 2020 Rule and 2020 Rule did not show any 
measurable connection between extraordinary processing allowances and 
increased production despite relying on an assertion that reinstating 
the allowance would incentivize production. The 2020 Rule adopted the 
amendment on extraordinary processing allowances but, based on a new 
economic analysis, did not adopt the hard caps on transportation and 
processing allowances.
    The Proposed 2020 Rule stated that allowing a lessee to request 
approval for an extraordinary processing allowance and to request to 
exceed the transportation and allowance hard caps would incentivize 
production. 85 FR 62058. The 2020 Rule referenced various statutes, 
E.O.s, and S.O.s to ``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.'' 86 FR 
4615. However, in response to public comments, the 2020 Rule also 
provided that it was ``not premised on increasing the production of 
oil, gas, or coal by some measured amount'' and was, instead, ``meant 
to incentivize both the conservation of natural resources (by extending 
the life of current operations) and domestic energy production over 
foreign energy production.'' 86 FR 4616.
    Later, the 2020 Rule presents a conflicting position--that the 
monetary impact of the rule's amendments is insufficient to incentivize 
new production or to incentivize a lessee to continue producing from a 
Federal lease when the lessee otherwise would not. In response to 
comments that suggest the allowances provide a disincentive for a 
lessee to reduce their costs for transportation and processing, ONRR 
generally referred to the Federal Government's royalty share of 
production, which is typically 12 1/2 or 16 2/3 percent and a lessee's 
retention of the remaining 87 1/2 or 83 1/3 percent, respectively. The 
2020 Rule concluded that the lessee's interest provided a significant 
incentive in minimizing transportation and processing costs. See 86 FR 
4620-4621. Thus, the 2020 Rule assumed the Federal Government benefits 
from a lessee's motivation to be cost-conscious on its greater share. 
86 FR 4646. Accordingly, ONRR stated it did not expect the regulatory 
limits on transportation and processing allowances on the government's 
smaller share to affect a lessee's decision making with respect to 
transportation and processing expenses proportionately applied to the 
lessee's greater share. See 86 FR 4626.
    The 2020 Rule again contradicted earlier statements in that rule in 
its discussion on helium-bearing gas streams. See 86 FR 4628. Although 
ONRR acknowledges that helium production from Federal leases is managed 
by BLM, helium royalties are not affected by the extraordinary 
processing allowance provision. See Exxon Corp., 118 IBLA 221, 229 n.9 
(1991) (noting that MMS does not consider helium in valuing a gas 
stream for royalty purposes because ``it is not considered a leasable 
mineral.''); see also https://www.blm.gov/programs/energy-and-minerals/helium/division-of-helium-resources (noting that the BLM's Division of 
Helium Resources ``adjudicates, collects, and audits monies for helium 
extracted from Federal lands''). Further, only one of the prior 
extraordinary processing allowance approvals involved a helium-bearing 
gas stream. See 86 FR 4628. Yet, the 2020 Rule maintained that 
reinstating extraordinary processing allowances is necessary because 
``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.'' 86 FR 4628.
c. ONRR's Authority To Incentivize Production
    Please see discussion at Section II.B.1., above.
d. The 2020 Rule Included Extensive Justification not Made Available 
for Public Comment
    The reasons stated in the Proposed 2020 Rule for changes to the 
2016 Valuation Rule's amendments to allowance limits (removing the

[[Page 31204]]

regulatory hard caps on transportation and processing allowances and 
reinstituting extraordinary processing allowances) were premised on 
promoting domestic production by reducing administrative burdens and 
incentivizing production by increasing transportation and processing 
allowances and thereby decreasing the royalties due. See 85 FR 62058.
    While the 2020 Rule did not adopt the proposed amendments to remove 
regulatory hard caps on transportation and processing allowances, it 
did reinstitute extraordinary processing allowances. In doing so, the 
2020 Rule cited additional reasons from commenters that harken back to 
those submitted by commenters--and rejected by ONRR--during 
promulgation of the 2016 Valuation Rule. See https://www.onrr.gov/Laws_R_D/FRNotices/AA13.htm. Specifically, the 2020 Rule identified the 
following reasons in support of reinstituting a lessee's ability to 
request an extraordinary processing allowance:
    (1) The technology to process two Wyoming unique gas streams has 
not changed, ``despite technological advances in processing relevant to 
many other areas and types of gas streams.'' 86 FR 4628.
    (2) Extraordinary processing allowances are essential for two major 
gas processing facilities in Wyoming that treat challenging gas 
streams, and without an extraordinary processing allowance approval, 
these two plants are at a competitive disadvantage and may be 
prematurely retired. 86 FR 4627.
    (3) One of Wyoming's unique gas streams, which previously had been 
approved for an extraordinary processing allowance, contains 
recoverable quantities of helium, an element that is vital to the 
Nation's security and economic prosperity. 86 FR 4628.
    (4) In instances where a lessee might not otherwise choose to 
produce a gas stream containing helium, the opportunity to apply for an 
extraordinary processing allowance approval could incentivize the 
lessee to either continue producing or to initiate production. 86 FR 
4628.
    (5) The overall positive 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. 86 FR 4628.
    As discussed above, although the Proposed 2020 Rule's proposed 
amendment to reinstitute extraordinary processing allowances was 
premised on incentivizing production, ONRR concluded that in most 
cases, providing an extraordinary processing allowance is not 
sufficient to incentivize production. See 86 FR 4627-4629. Apart from 
an unpersuasive argument about incentivizing production, ONRR relied 
entirely on reasons submitted by commenters in response to the Proposed 
2020 Rule to support reinstating a lessee's ability to request an 
extraordinary processing allowance. See 86 FR 4627-4629. Therefore, the 
public did not have a meaningful opportunity to comment on most of the 
reasons that ONRR relied on in the 2020 Rule to reinstitute 
extraordinary processing allowances in the final rule.
4. Expansion of the Federal Gas Index Pricing Valuation Option to 
Federal Gas Sold Under Arm's-Length Contracts (Sec. Sec.  1206.141(c) 
and 1206.142(d))
    Prior to the 2016 Rule, ONRR regulations did not include an index-
based valuation option for Federal gas or natural gas liquids. The 2016 
Rule included such an option. It allowed Federal oil and gas lessees a 
choice of methods in calculating royalties due on gas and on natural 
gas liquids. One option, which a lessee could elect for a two-year 
period of time (or longer), was to calculate royalty value for gas 
using a formula based on the high of certain published index prices, 
reduced by either 5% for onshore production or 10% for offshore 
production (subject to certain limits), with the reduction designed to 
account for a conservative estimate of average transportation costs as 
adjusted by average, non-deductible costs of placing gas in marketable 
condition. This option was only available for gas a lessee disposed of 
in non-arm's-length transactions--transactions which are most 
frequently between affiliates, and therefore may not be at market 
value, but rather at prices influenced by the affiliate relationship. 
Since index prices are published prices derived from reported arm's-
length transactions, ONRR considered the index-based valuation formula 
included in the 2016 Rule a simpler, acceptable, and potentially 
preferrable method to value gas disposed of in non-arm's-length (or 
affiliate) transactions. 81 FR 43338, 43346-43348.
a. New Analysis Shows a Decrease in Royalties Collected
    Several commenters on the Proposed 2020 Rule expressed concern that 
ONRR's assumption that 50 percent of lessees would elect the index-
based valuation option was flawed and failed to represent logical 
business decision making processes. As commenters suggested, a lessee 
might apply an internal, business-driven threshold to decide if the 
index-based valuation method would be of economic benefit or harm. 
Within a single lessee's portfolio of properties, the lessee might 
choose to use the index-based valuation method for some properties but 
not others.
    As described in this Economic Analysis below, ONRR has performed a 
new analysis to identify a more accurate estimate of the potential 
annual impact to royalty collections associated with the expansion of 
the index-based valuation method to arm's-length sales of natural gas 
and NGLs. This new analysis--based on the assumption that a lessee will 
act in its own financial best interest when deciding whether to use the 
index-based valuation option for its arm's-length sales--resulted in a 
projected net decrease in royalty collections of over $7 million per 
year as compared to collections made without the use of an index-based 
valuation option for arm's-length sales (i.e., as would occur under 
ONRR's regulations prior to the 2020 Rule, which only allow index-based 
valuation for non-arm's-length dispositions). This estimate sharply 
contrasts with the estimated $28.9 million per year increase in 
royalties stated in the 2020 Rule.
b. Arm's-Length Transaction Data Is a Better Measure of Value
    Arm's-length contracts are those negotiated between independent 
parties with opposing economic interests. See 30 CFR 1206.20. ONRR has 
long concluded that the gross proceeds accruing under an arm's-length 
contract is, in most cases, the best indicator of fair market value. 
See, e.g., 53 FR 1186 (Jan. 15, 1988); 81 FR 43338 (July 1, 2016).
    The 2020 Rule amended the 2016 Valuation Rule to introduce an 
index-based valuation option for Federal gas sold in arm's-length 
sales. The Economic Analysis in the 2020 Rule explained that, due to 
those amendments, royalty payments were expected to increase. ONRR 
relied on that analysis to deviate from its long-held position of 
relying exclusively on gross proceeds valuation (or a proxy where gross 
proceeds could not be reliably determined) to value arm's-length sales 
of Federal gas for royalty purposes. ONRR found that it had protected 
the Federal lessor's interest based on the conclusion that royalties 
were expected to meet or exceed values based on gross proceeds. But as 
explained in the Economic Analysis of this rule, the analysis in the 
2020 Rule was flawed because it did not consider

[[Page 31205]]

that economic factors will influence a lessee's decision to elect to 
use the index-based valuation method. ONRR has now reviewed historical 
data and can now show that electing the index-based valuation option 
would likely result in collecting less royalties for arm's-length 
sales.
5. Change of Index-Based Value to the Published Average Bidweek Price
    The 2020 Rule amended regulations at Sec. Sec.  1206.141(c)(1)(i) 
and (ii) and 1206.142(d)(1)(i) and (ii) to change references to the 
``highest monthly bidweek price'' for the index pricing points to which 
a lessee's gas could flow, to the ``highest of the monthly bidweek 
average prices'' for the index pricing points to which a lessee's gas 
could flow. The use of average index prices was considered during the 
2016 valuation rulemaking process and rejected. However, the 2020 Rule 
sought to reverse ONRR's earlier decision on that point so as to 
incentivize production. But, as discussed above, ONRR's authority to 
amend its valuation regulations to incentivize production is 
questionable; its 2020 Rule did not prove that it would incentivize 
production; and the same rule was internally inconsistent on whether it 
would, in fact, incentivize production.
6. Further Reduction to Index in Index-Based Valuation To Account for 
Transportation
    The 2020 Rule amended regulations at Sec. Sec.  1206.141(c)(1)(iv) 
and 1206.142(d)(1)(iv) to increase the amount of a reduction to index 
to account for the average costs of deductible transportation, after 
adjustment for the non-deductible costs of placing gas into marketable 
condition. This amendment was justified, in part, on an economic 
analysis of more recent royalty data, which showed higher average 
transportation costs than ONRR had relied on in adopting the 2016 
Valuation Rule. However, the amendment also was justified on an intent 
to incentivize production. But, as discussed above, ONRR's authority to 
amend its valuation regulations to incentivize production is 
questionable; its 2020 Rule did not prove that it would incentivize 
production; and the same rule was internally inconsistent on whether it 
would, in fact, incentivize production.

C. Comments in Response to the First Delay Rule

    ONRR received numerous comments in response to the First Delay 
Rule. Most commenters stated that a complete withdrawal of the 2020 
Rule is warranted. Several commenters presented material and arguments 
that were distinguishable from earlier comments. The new materials 
provided by commenters, along with ONRR's most recent findings and 
updated economic analysis, led ONRR to change its position with respect 
to several considerations that were thought to support the 2020 Rule. 
ONRR addresses below many of the public comments that ONRR received in 
response to specific questions posed in the First Delay Rule.
1. Reliance on E.O.s and Scope of Secretarial Authorities Delegated to 
ONRR
    ONRR relied on E.O.s in effect during the time it promulgated the 
2020 Proposed Rule and the 2020 Rule. See 86 FR 4612 and 85 FR 62056-
62057 (citing E.O. 13783, E.O. 13795, and E.O. 13892).
    Public Comment: Multiple commenters opined that the change in 
policy requires ONRR to reconsider all or certain provisions of the 
2020 Rule. Other commenters suggested the opposite, asserting that the 
prior E.O.s were not the sole justification for the 2020 Rule, and that 
ONRR provided sufficient detail in the 2020 Proposed and Final Rules to 
justify the amendments independent of the E.O.s. The commenters stated 
that the 2020 Rule sought to improve certainty and accuracy in royalty 
reporting and accounting consistent with FOGRMA and other mineral 
leasing laws. Commenters contended that ONRR relied on appropriate 
legal mandates to promulgate the 2020 Rule and asserted that policy 
changes cannot outweigh ONRR's governing legal authority under FOGRMA 
and the mineral leasing laws when it conducts rulemaking. One commenter 
asserted that changing policy where there is a new Administration or 
shift in E.O.s would ultimately create regulatory instability with 
respect to valuation and reporting requirements, thereby directly 
contradicting 30 U.S.C. 1711(a), which requires ONRR ``to establish a 
comprehensive . . . production accounting and . . . auditing system to 
provide the capability to accurately determine . . . royalties . . . 
and other payments owed and to collect and account for such amounts in 
a timely manner.''
    ONRR Response: ONRR proposed the 2020 Rule ``because policy 
directives issued after [the 2016 Valuation Rule's publication] give 
different weight to the factual findings, and also dictate that a 
different policy-based outcome be pursued.'' 85 FR 62056. The Proposed 
2020 Rule also explained that an agency's reconsideration of 
regulations in light of a new Administration's policy objectives is 
acceptable and within the agency's discretion. Id. As such, ONRR's 
discussions for the regulatory changes largely focused on reducing 
regulatory burden or uncertainty and incentivizing production. See 85 
FR 62054, 62056-62057. The Proposed 2020 Rule generally sought to 
further the objectives of E.O. 13783, E.O. 13795, E.O. 13892, S.O. 
3350, and S.O. 3360 in two ways, providing mechanisms that promote new 
and continued domestic energy production and simplify reporting. See 85 
FR 62057. However, ONRR did not (a) articulate how the 2020 Rule's 
proposed amendments furthered ONRR's delegated revenue management 
responsibilities, (b) explain the source of the delegation to ONRR to 
incentivize production, or (c) describe how the amendments would 
incentivize production or simplify reporting. In part, ONRR proposes to 
withdraw the 2020 Rule due to the revocation of these E.O.s and the 
uncertainty as to whether ONRR's authority and responsibilities permit 
it to adopt valuation rules for the purpose of incentivizing production 
and whether the amendments adopted would, in fact, incentivize 
production. Additional discussion of ONRR's reliance on incentivizing 
production as a rulemaking consideration is addressed in Section 
II.B.1.
2. Deepwater Gathering Costs
    MMS issued the Deepwater Policy on May 20, 1999, authorizing a 
lessee to include certain deepwater gathering costs in its 
transportation allowance. Although the Deepwater Policy conflicted with 
30 CFR 1206.110(a) and 1206.152(a), neither MMS nor ONRR adopted 
regulations resolving this conflict. The 2016 Valuation Rule ended the 
practice that had existed under the Deepwater Policy since 1999. See 30 
CFR 1206.110(a) and 1206.152(a) (2019). The 2020 Rule sought to return 
to the practice permitted by the Deepwater Policy by codifying the 
policy in ONRR's regulations. See 86 FR 4612. The justification for the 
deepwater gathering amendments was based, in part, on declining oil and 
gas production in and revenues from the Gulf of Mexico. See 86 FR 4623-
4624.
    Public Comment: Some commenters stated that the deepwater gathering 
allowance is not consistent with the current law and policy of the 
United States. Some commenters emphasized that the deepwater gathering 
allowance evidenced that ONRR was prioritizing increased oil and gas 
production over

[[Page 31206]]

other considerations, including proper management of royalty revenues 
and protecting the public interest. One commenter emphasized that the 
deepwater gathering allowance reduces Federal royalties without 
adequate justification. This commenter also noted that, while DOI must 
make the OCS available for development, OCSLA does not require ONRR to 
incentivize production for a lessee's benefit. A commenter asserted 
that ONRR provided no support for the assertion that a deepwater 
gathering allowance would incentivize production.
    Some commenters supported the deepwater gathering allowance and 
emphasized that industry relied on the Deepwater Policy between 1999 
and 2016 when making financial investments and leasing and development 
decisions. These commenters suggest that retroactively eliminating such 
allowances would present legal vulnerabilities (stating that it was 
unlawful for ONRR to eliminate the deepwater gathering allowance 
considering that a lessee relied on it to make leasing and development 
decisions) and may disincentivize future investment and development on 
the OCS. Commenters described the deepwater production environment as 
very different from typical onshore or shallow water environments. 
Another commenter disagreed with the premise of the question posed in 
the First Delay Rule because, according to the commenter, subsea 
movement of oil and gas is not gathering. That commenter asserted that 
ONRR has not construed the subsea movement of oil and gas as gathering 
for many years. A commenter that supported the 2020 Rule's deepwater 
gathering allowance explained that the Deepwater Policy was originally 
created and implemented in 1999 and that the elimination of the 
Deepwater Policy in 2016 violated contract law and the APA.
    ONRR Response: Reliance on the Deepwater Policy as part of long-
term decision making is questionable since that guidance was, from the 
time of its issuance in 1999 up to its rescission in the 2016 Valuation 
Rule (see 81 FR 43340, 43343, and 43352), not in conformity with the 
express language of MMS' regulations that governed gathering and 
transportation allowances. See 30 CFR 1206.20 (defining gathering and 
transportation); 30 CFR 1206.110 (governing oil transportation 
allowance); 30 CFR 1206.152 (governing gas transportation allowance); 
see also Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 386 (1947) 
(holding that reliance on an agency's advice that Federal crop 
insurance would cover a loss was unwarranted where such advice 
conflicted with a Federal regulation, noting that ``not even the 
temptations of a hard case can elude the clear meaning of the 
regulation'').
    Additionally, ONRR acknowledges that the 2020 Rule may have 
contained inconsistent language on incentivizing production and may not 
have demonstrated how and to what extent the amendments would impact 
production. In Sections II.A. II.B.1., and II.B.2., this proposed rule 
discusses these possible deficiencies in the 2020 Rule's justifications 
and other possible procedural errors specific to deepwater gathering 
costs.
3. Extraordinary Processing Allowances
    Public Comment: Some commenters asserted that ONRR failed to 
provide a reasoned or detailed justification in the 2020 Rule for its 
decision to reinstate extraordinary processing allowances. Some 
commenters said reinstatement of the allowances would not incentivize 
production, opining that, instead, producers will produce when they are 
likely to receive enough proceeds to conduct economic operations. Other 
commenters generally characterized the allowances as a benefit extended 
to industry at cost borne by the public in the form of environmental 
harms and loss of royalty revenue.
    A few commenters were in favor of reinstating extraordinary 
processing allowances, emphasizing that the allowances incentivize 
ongoing investment, as well as mutually beneficial development and 
production in atypical areas. These commenters noted that, due to the 
application and approval process, these allowances exist in limited 
circumstances. Commenters stated that industry relied on the allowances 
when making investment decisions and argued that the allowance is one 
of the tools that can be used to extend the life of existing wells and 
maximize the value of the associated leases.
    ONRR Response: ONRR acknowledges that the 2020 Rule contained 
inconsistent language on incentivizing production. See discussion in 
Section II.B.1., infra.
4. Considering the Impacts of Climate Change
    Public Comment: Multiple commenters urged ONRR to consider science 
on the source and impacts of climate change in setting royalty and 
revenue management policy. One commenter stated that ONRR should 
incorporate climate damages when setting royalties from fossil fuel 
extraction on public lands and waters, and the best way to do that is 
to include a carbon adder in the royalty rate that reflects the social 
cost of carbon and social cost of methane.
    Other commenters disagreed. One commenter explained that this topic 
falls outside the scope of the 2020 Rule because ONRR's role within DOI 
is the collection and disbursement of Federal and Indian royalties owed 
on leases that have already been issued, which constitute binding 
contracts. This commenter further stated that the matters relating to 
the issuance of new leases and potential impacts on climate change 
arising from leasing activity fall outside of the authority delegated 
to ONRR and, accordingly, are irrelevant to an evaluation of the 2020 
Rule.
    Another commenter stated that, for purposes of determining the 
value for royalty purposes of coal production from Federal leases, 
consideration of climate change factors is unlawful as it contravenes 
DOI's statutory mandate under the MLA.
    One commenter stated that ONRR appropriately addressed climate 
change in the 2020 Rule. See 86 FR 4612, 4617. This commenter urged 
that further environmental review of leases in the context of ONRR's 
royalty valuation rulemaking is inappropriate.
    ONRR Response: Addressing climate change is a priority to the 
Federal Government. See, e.g., E.O. 13990, ``Protecting Public Health 
and the Environment and Restoring Science to Tackle the Climate 
Crisis'' and E.O. 14008, ``Tackling the Climate Crisis at Home and 
Abroad.'' However, as described in Section I.A., ONRR is to collect, 
verify, and then disburse the revenues associated with the production 
of natural resources on Federal and Indian lands and the OCS. 30 U.S.C. 
1711; 30 CFR 1201.100. Moreover, the evaluation of environmental 
impacts is typically addressed by bureaus and agencies performing 
leasing and permitting functions. 86 FR 4612, 4617.
5. Assumptions Regarding the Index-Based Valuation Option
    In the 2020 Rule, ONRR assumed that 50 percent of reported 
royalties would come from eligible lessees that elected to use the 
index-based valuation option, while the remaining 50 percent would not 
(86 FR 4643-4645) and, as a result, the lessees that elected the index-
based valuation option were estimated to pay an additional $28.9 
million per year in royalties while saving $1.35 million in 
administrative costs. 86 FR 4648-4650. ONRR posited these assumptions 
even though the result is that a lessee would pay additional royalties 
far in excess of

[[Page 31207]]

the administrative cost savings they would realize. In the First Delay 
Rule, ONRR requested public comment on whether the assumption was 
flawed, and whether the resulting conclusion is appropriate and 
supported by current law and policy. See 86 FR 9288.
    Public Comment: Multiple commenters disagreed with the assumption 
that 50 percent of lessees would elect to use the index-based valuation 
option. One commenter described the assumption as baseless and urged 
ONRR to refrain from making conclusions based on the assumption. One 
commenter concluded that a lessee will value gas by the option that 
minimizes the royalty burden, explaining, for example, if the royalty 
payment resulting from a first arm's-length sale is less than the 
royalty payment that would be due using an index-based valuation 
methodology, then the lessee will elect to use the first arm's-length 
sale.
    A few commenters agreed the estimate was appropriate, noting that 
industry values early certainty and may elect to use the index-based 
valuation option even if the price is slightly higher than gross 
proceeds to avoid audits and other compliance reviews that lead to the 
issuance of an order directing payment of additional royalties and late 
payment interest. One commenter suggested that ONRR designed the index-
based valuation option solely to collect a greater royalty payment than 
what a lessee historically paid. The commenter opined that ONRR 
correctly assumed that some companies would elect to use the index-
based valuation method for the certainty alone.
    ONRR Response: ONRR recently revised the method of its economic 
analysis (provided in the Section III) to more accurately value the 
potential annual impact to royalty collections resulting from the 
expansion of the index-based valuation method to arm's-length sales of 
Federal gas and NGLs. The new analysis estimates that this provision of 
the 2020 Rule would decrease royalty collections by $7 million per 
year, rather than the $28.9 million per year increase previously 
estimated. Please refer to Sections II.B.4. through II.B.6. for further 
discussion of the amendments to the index-based valuation method.
6. Transparency in Royalty Administration in Index-Based Valuation
    Public Comment: A commenter stated that the index-based option 
provides clarity and early certainty for the producer but not for the 
public, asserting there is insufficient transparency in royalty 
administration for the public.
    ONRR Response: ONRR appreciates the public's interest in bringing 
greater clarity, certainty, and transparency to royalty valuation in a 
manner that fits the needs of all stakeholders. The scope of this 
rulemaking is limited to the methods used to determine value for 
royalty purposes and does not consider topics related to how ONRR 
shares royalty information with the public. For additional information 
on production, collection, and disbursement activities, please visit 
https://revenuedata.doi.gov/
7. Substitution of Index-Based Value for Arm's-Length Sales
    Public Comment: A commenter stated that it was premature for ONRR 
to extend the index-based valuation option to arm's-length gas sales 
without evaluating the impact of the index-based option on non-arm's-
length gas dispositions.
    Another commenter reiterated that royalty payments are not expected 
to be reduced under the index-based option. The commenter added that 
ONRR retains the ability to access sales information from a lessee that 
elects an index-based valuation methodology and concluded that ONRR 
will be able to use the sales information to monitor the royalty 
implications of the index-based method and, if appropriate, revisit the 
index-based valuation options.
    Another commenter stated that, while they agree that arm's-length 
negotiated contracts are the best indicator of value, the index-based 
valuation option may better serve both ONRR and lessees because of the 
estimated $28.9 million per year increase in royalty payments while 
permitting a lessee to avoid the complex reporting required by a gross 
proceeds valuation method. The commenter added that the two-year 
election period will prevent a lessee from manipulating reporting based 
on what method might be more economically beneficial each month. One 
commenter explained that industry values early certainty and assurance 
it will not face a burdensome audit years after the initial royalty 
payment.
    ONRR Response: ONRR, and previously MMS, has long viewed the gross 
proceeds received under an arm's-length contract between independent 
persons who are not affiliates and who have opposing economic interests 
to be the best indicator of value in most circumstances. See 53 FR 1186 
(Jan. 15, 1988); 81 FR 43338 (July 1, 2016). A lessee that sells gas 
for a price higher than the index-based price will have a financial 
incentive to use the index-based price because valuation based on gross 
proceeds will result in the payment of more royalties. A lessee that 
sells the gas for a price lower than the index-based price has a 
financial incentive to use its gross proceeds for valuation. A lessee 
knows its gross proceeds and lessees have long used this amount to 
report and pay royalties for arm's-length sales. An index-based option 
for arm's-length sales may provide minimal value to industry since they 
have long used their gross proceeds to report and pay royalties. ONRR 
is proposing to withdraw the 2020 Rule in part because there are 
significant questions about whether the index-based option adds to 
early certainty and whether it will adequately ensure a fair return for 
the public.
    In Section III, this proposed rule provides a revised economic 
analysis that estimates royalties impacts when a lessee bases its 
decision regarding whether to use index-based valuation on its 
financial interest. That analysis shows that this provision of the 2020 
Rule would decrease royalty collections by over $7 million per year. 
Please refer to Sections II.B.4. through II.B.6. and III for further 
discussion of the amendments to the index-based valuation method and 
the solicitation of comments on ONRR's revised analysis and 
assumptions.
8. Procedural Adequacy of the 2020 Rulemaking Process
    Public Comment: Several commenters stated the 2020 Rule was 
procedurally inadequate, asserting that interested parties did not have 
a fair opportunity to comment. One commenter stated that the 2020 Rule 
failed to provide a ``reasoned explanation'' for rescinding key 
portions of ONRR's 2016 rulemaking. The commenter explained that when 
an agency rescinds a prior policy, it must provide ``a reasoned 
analysis for the change beyond that which may be required when an 
agency does not act in the first instance.'' Another commenter stated 
that ONRR failed to respond to several public comments or responded in 
an incomplete or inaccurate manner. This commenter explained that the 
proposed rule failed to provide the general public, outside of the oil 
and gas industry, with sufficient information regarding the impacts of 
the proposals to enable the public to effectively participate in the 
rulemaking process. Another commenter noted that during the 2020 
rulemaking, ONRR did not have public meetings and evidently accepted 
only the suggestions it received from industry.

[[Page 31208]]

    Other commenters disagreed. One commenter stated that the 2020 Rule 
is sound law based on policy deliberations that span almost a decade of 
thorough public process properly conducted under the APA. Another 
commenter concluded that the 2020 Rule appropriately complied with the 
APA. This commenter explained that a proposed rule was issued that 
described in detail each change that the agency was considering, 
interested persons were given an opportunity to comment, and the final 
rule responds to those comments.
    ONRR Response: ONRR agrees that procedural flaws exist in the 2020 
Rule. Those flaws are explained in Sections II.A. and II.B. Further, 
ONRR notes that the 2020 Rule was not part of a rulemaking process that 
spanned a decade, as implied by the commenter.

III. Economic Analysis

    ONRR's delay rules have afforded ONRR more time to reexamine the 
methods and analyses it used to estimate economic impacts of the 2020 
Rule. ONRR recognizes that estimated changes to royalty obligations and 
regulatory costs in the 2020 Rule impact many groups, including the 
Federal Government, State and local governments, and industry. These 
potential changes to royalty obligations can have broader impacts 
beyond the amount of royalties. Royalty collections are used by these 
governments in a variety of ways that include funding projects, 
developing infrastructure, and fueling economic growth.
    Further, changes to royalties are transfers that are 
distinguishable from regulatory costs or cost savings. The estimated 
changes in royalties would affect both the private cost to the lessee 
and the amount of revenue collected by the Federal Government and 
disbursed to State and local governments. Based on an updated analysis, 
the net impact of the withdrawal of the 2020 Rule is an estimated $64.6 
million annual increase in royalty collections.
    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.

  Estimated Changes to Royalty Collections Resulting From Withdrawal of
                         the 2020 Rule (Annual)
------------------------------------------------------------------------
                                                           Net change in
                     Rule provision                       royalties paid
                                                            by lessees
------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length         $6,800,000
 Gas Sales..............................................
Index-Based Valuation Method Extended to Arm's-Length            660,000
 NGL Sales..............................................
High to Midpoint Index Price for Non-Arm's-Length Gas          5,062,000
 Sales..................................................
Transportation Deduction Non-Arm's-Length Index-Based          8,033,000
 Valuation Method.......................................
Extraordinary Processing Allowances.....................      11,131,000
Allowances for Certain OCS Gathering Costs..............      32,900,000
                                                         ---------------
    Total...............................................      64,600,000
------------------------------------------------------------------------

    ONRR also estimated that the oil and gas industry would face 
increased annual administrative costs of $2.8 million under the 2020 
Rule. As discussed below, this is the net impact of various cost 
increasing and cost saving measures. Withdrawal of the 2020 Rule will 
result in an estimated net cost savings for industry.

 Summary of Annual Administrative Impacts to Industry From Withdrawal of
                              the 2020 Rule
------------------------------------------------------------------------
                                                            Cost  (cost
                     Rule provision                          savings)
------------------------------------------------------------------------
Administrative Cost for Index-Based Valuation Method for      $1,077,000
 Gas & NGLs.............................................
Administrative Cost Savings for Allowances for Certain       (3,931,000)
 OCS Gathering..........................................
                                                         ---------------
    Total...............................................     (2,850,000)
------------------------------------------------------------------------

    Following the publication of the delay rules and after 
consideration of comments received in response to the First Delay Rule, 
ONRR assessed which parts of the previous economic analysis warrant 
revision. To provide a more complete analysis, this rule presents the 
estimated royalty impacts of the withdrawal of the 2020 Rule using 
updated analyses. Changes are measured relative to a baseline that 
includes the royalty changes finalized in the 2020 Rule.
    As shown in the tables, an updated analysis of the impact to 
royalty under the 2020 Rule results in a total decrease in royalties of 
$64.6 million per year, which translates to an increase of $64.6 
million per year under this proposed withdrawal. This amount stands in 
contrast to the annual decrease of $28.9 million per year in royalties 
previously estimated in the 2020 Rule. The change in amounts is largely 
attributable to the new assumption and method used to estimate the 
impact from extending the index-based valuation method to arm's-length 
natural gas and NGL sales. A more detailed explanation of the new 
method is described below. All amounts other than those related to the 
index-based valuation option remain unchanged from those published in 
the 2020 Rule.
    The administrative costs and potential administrative cost savings 
attributable to the 2020 Rule should also be updated using the new 
assumptions for the extension of index-based valuation method to arm's-
length sales. The administrative cost to industry for deepwater 
gathering allowances would remain unchanged from the value published in 
the 2020 Rule.
    ONRR also recalculated the estimated one-time administrative cost 
associated with the optional use of the index-based valuation method. 
These costs are only calculated by a lessee once to distinguish allowed 
and disallowed costs in reported processing and transportation 
allowances. Unless there is a significant change in processing and 
transportation costs, the ratio of allowed

[[Page 31209]]

to disallowed costs should not substantially change from year to year.

One-Time Administrative Impacts to Industry From Withdrawal of 2020 Rule
------------------------------------------------------------------------
                     Rule provision                            Cost
------------------------------------------------------------------------
Administrative Cost of Unbundling Related to Index-Based      $4,520,000
 Valuation Method for Gas & NGLs........................
------------------------------------------------------------------------

    If the 2020 Rule is withdrawn, there will be an increase in 
administrative costs when compared to the current status quo.
    ONRR used the same base dataset for this proposed rule's economic 
analysis as it used in the 2020 Rule for consistency and comparability. 
The description of the data was provided in the Economic Analysis of 
the 2020 Rule and is repeated here. 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 five calendar years, 2014-2018. ONRR 
used five calendar years of royalty data to reduce volatility caused by 
fluctuations in commodity pricing and volume swings. 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. A lessee reports 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

    ONRR analyzed this provision similarly to the 2020 Rule, assuming 
that half of lessees would elect to use the index-based valuation 
method. ONRR received many comments stating that this assumption was 
flawed, because a lessee will typically act in a manner that maximizes, 
not harms, financial benefits to the lessee. ONRR stated in the 2020 
Rule that the assumption that half of lessees would elect to use the 
index-based valuation option was an attempt to simplify the royalty 
impact estimation. Due to the delay rules, ONRR was able to apply a 
more sophisticated set of assumptions to accurately identify the 
lessees that would likely benefit from the 2020 Rule's amendments to 
the index-based valuation option and those that would not. ONRR began 
the analysis with a similar rationale on the same data that it used in 
the 2020 Rule's calculation. ONRR reviewed the reported royalty data 
for all Federal gas sales except for non-arm's-length transactions 
(discussed below), future valuation agreements, and percentage of 
proceeds (``POP'') contracts. 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 assumed the remaining 
five percent of lessees producing Federal gas will not elect the index-
based method because areas outside of major producing basins may have 
infrastructure limitations or limited access to index pricing. The 10 
geographic areas are:

1. Offshore Gulf of Mexico
2. Big Horn Basin
3. Green River Basin
4. Permian Basin
5. Piceance Basin
6. Powder River Basin
7. San Juan Basin
8. Uinta Basin
9. Williston Basin
10. Wind River Basin

    To calculate the estimated royalty impact, ONRR:
    (1) Identified the monthly bidweek price index, published by Platts 
Inside FERC, for each applicable 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 applicability of a price index based 
on proximity to the producing area and the frequency with which ONRR's 
audit and compliance staff verify these index prices in sales 
contracts;
    (2) subtracted the appropriate transportation deduction as 
described in the 2020 Rule from the midpoint index price identified in 
step (1);
    (3) compared the reported monthly price for each property inclusive 
of any reported transportation allowances to the applicable index price 
for the property calculated in step (2) for all months in the first 
year of reported royalty data in the dataset;
    (4) identified all properties in step (3) where the reported price 
exceeded the price calculated in step (2) for seven or more months in 
the time period;
    (5) used the property list created in step (4) as the base universe 
of properties that would elect to use the index-based valuation method 
available;
    (6) compared the actual reported price for each month for each 
property in the universe identified in step (5), inclusive of 
transportation allowances reported, to the calculated price in step (2) 
to identify the difference between what was reported as actual 
royalties and what would have been reported as royalties under the 
terms of the index-based valuation method;
    (7) performed this calculation and comparison for the next two sets 
of two-year time periods in the remaining four years of royalty 
reporting in the dataset; and
    (8) Calculated the total difference in the four years between the 
original reported royalty prices and royalties of the identified 
property universe that elected the index-based valuation method, then 
divided that total by four to get an annual estimated royalty impact.
    This new method of identification of the property universe that 
would elect the index-based valuation method if given the opportunity 
is the basis for the differences between the estimated royalty impact 
published in the 2020 Rule and the estimated royalty impact included in 
this proposed rule. Also, this identification of the properties that 
stand to benefit is similar to how a lessee will make its decisions and 
is a better method to estimate the royalty impact.
    ONRR estimates the index-based valuation method in the 2020 Rule 
will decrease royalty payments on arm's-length natural gas by 
approximately $6.8 million per year when compared to ONRR regulations 
in effect prior to the

[[Page 31210]]

2020 Rule. ONRR requests comments on the assumptions in the method 
described above.

  Annual Change in Royalties Paid Using Index-Based Method for Arm's-Length Gas Sales if 2020 Rule Is Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                                  Gulf of Mexico  Onshore basins       Total
----------------------------------------------------------------------------------------------------------------
Annualized Reported Royalties from Identified Lease Universe....     $51,720,000    $168,850,000    $220,570,000
Royalties Estimated using Index-Based Valuation Method for Lease      53,940,000     159,790,000     213,730,000
 Universe.......................................................
                                                                 -----------------------------------------------
    Difference..................................................     (2,220,000)       9,060,000       6,840,000
----------------------------------------------------------------------------------------------------------------

Change in Royalties 2: Using the Index-Based Valuation Method To Value 
Arm's-Length Sales of Federal NGLs

    ONRR used similar changes to the assumptions when calculating the 
royalty impact from extending the index-based valuation option to 
arm's-length sales of NGLs. As in the previous section, ONRR's goal was 
to identify a universe of properties that would benefit financially 
from electing the index-based valuation method. In the 2020 Rule, ONRR 
assumed that half of the lessees would elect the method without regard 
to financial benefit or harm.
    ONRR used the same dataset for this analysis that was used in the 
2020 Rule. It included all NGL sales except for non-arm's-length 
transactions 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 NGLs from Federal properties, 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 prices (weighted average prices to 
group the individual NGL components), which 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 ONRR 
regulations without amendment by the 2020 Rule 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) compared the reported monthly price for each property inclusive 
of any reported transportation or processing allowances to the 
applicable index price for the property calculated in step (3) for all 
months in the first year of reported royalty data in the dataset;
    (5) identified all properties in step (4) where the reported price 
exceeded the price calculated in step (3) for seven or more months in 
the time period;
    (6) used the property list created in step (5) as the base universe 
of properties that would elect to use the index-based valuation method 
if available;
    (7) compared the actual reported price for each month for each 
property in the universe identified in step (6), inclusive of 
transportation and processing allowances reported, to the calculated 
price in step (3) to identify the difference between what was reported 
as actual royalties and what would have been reported as royalties 
under the terms of the index-based valuation method;
    (8) performed this calculation and comparison for the next two sets 
of two-

[[Page 31211]]

year time periods in the remaining four years of royalty reporting in 
the dataset; and
    (9) calculated the total difference in the four years between the 
original reported royalty prices and the royalties if the identified 
property universe elected the index-based valuation method, then 
divided that total by four to get an annual estimated royalty impact.
    This new method of identification of the property universe that 
would elect the index-based valuation method is the basis for the 
difference between the estimated royalty impact published in the 2020 
Rule and the estimated royalty impact included in this proposed rule.
    ONRR estimates the index-based valuation method in the 2020 Rule 
will decrease royalty payments on arm's-length NGLs by approximately 
$660,000 per year, and that withdrawing the rule will increase royalty 
payments by $660,000 annually. ONRR requests comments on the 
assumptions in the method described above.

  Annual Change in Royalties Paid Using Index-Based Valuation Method for Arm's-Length NGL Sales if 2020 Rule Is
                                                    Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                  Gulf of Mexico    New Mexico      Other Areas        Total
----------------------------------------------------------------------------------------------------------------
Annualized Reported Royalties from Identified         $4,990,000        $350,000      $9,100,000     $14,440,000
 Lease Universe.................................
Royalties Estimated Using Index-Based Valuation        3,470,000         290,000      10,020,000      13,780,000
 Method for Lease Universe......................
                                                 ---------------------------------------------------------------
    Annual Net Change in Royalties Paid Using          1,520,000          60,000       (920,000)         660,000
     Index-Based Valuation Method for NGLs......
----------------------------------------------------------------------------------------------------------------

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

    In the 2020 Rule, ONRR amended the index-based valuation method to 
use the average published bidweek price, rather than the highest 
published bidweek price, for the appropriate index-pricing point. ONRR 
accounted for the impacts to royalty collections attributable to arm's-
length natural gas transactions in the earlier section. This section 
will focus on the impact to royalty collections only attributable to 
non-arm's-length natural gas transactions.
    The method for calculation in this proposed rule is similar to the 
method used in the 2020 Rule with adjustments made related to the 
universe of properties that would elect the index-based valuation 
method. ONRR compared the monthly prices reported to it in the first 
year of the data period, inclusive of transportation allowances, to the 
index prices for the appropriate producing areas, inclusive of 
transportation deductions. ONRR then identified the properties with 
reported prices higher than the index price in seven or more months of 
the year. For non-arm's-length natural gas sales, this equates to 56.4 
percent of the entire list of properties, and represents a percentage 
that is higher than the 50 percent assumption made by ONRR in the 2020 
Rule's estimated impacts on royalty collections of this same provision. 
This new percentage incorporates a more logical identification of the 
properties taking into account a lessee's potential financial benefit.
    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); and
    (5) subtracted the difference between the totals calculated in step 
(4).
    Because ONRR identified that 56.4 percent of properties fall in the 
universe of properties that would elect the index-based valuation 
method, ONRR reduced the total estimate by 43.6 percent in the 
following table. ONRR estimated that the result of this change is that 
the 2020 Rule, if it went into effect, would result in a decrease in 
annual royalty payments of approximately $5 million, and a withdrawal 
of that rule would result in an increase in annual royalty payments by 
a like amount, as reflected in the table below.

 Estimated Impact to Royalty Collections Due to Withdrawal of 2020 Rule's 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              288,000       8,687,000       8,975,000
     Change.....................................................
56.4% of applicable properties..................................  ..............  ..............       5,062,000
----------------------------------------------------------------------------------------------------------------


[[Page 31212]]

Change in Royalties 4: Modifying the Index-Based Valuation Method To 
Account for Transportation in Valuing Non-Arm's-Length Federal 
Unprocessed Gas, Residue Gas, and Coalbed Methane

    The 2020 Rule increased the reductions to index price to account 
for transportation of production valued under the non-arm's-length 
index-based valuation method. ONRR used the new method described 
previously in this Economic Analysis to identify the likely lease 
universe of non-arm's-length natural gas sales. ONRR identified the 
same 56.4 percent of non-arm's-length natural gas properties as the 
universe that would elect the method.
    To estimate the royalty impact of the change in amount intended to 
account for transportation, 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-related adjustment as published 
in the current regulations and the adjustment outlined in the table 
below for each area identified in step (1);

 Transportation Deduction of Index-Based Valuation Method for Non-Arm's-
                               Length Gas
                                [$/MMBtu]
------------------------------------------------------------------------
                                               2016
                 Element                     Valuation       2020 Rule
                                               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); and
    (6) subtracted the difference between the totals calculated in step 
(5).
    Because ONRR identified the universe of 56.4 percent of lessees 
that will likely elect this method, ONRR reduced the total estimated 
impact to royalty collections by 43.6 percent. ONRR estimated the 
change will result in a decrease in royalty collections of 
approximately $8 million per year if the 2020 Rule goes into effect, 
and an increase in royalty collections of like amount if the 2020 Rule 
is withdrawn, as reflected in the table below.

 Annual Royalty Impact Due to Transportation Deduction Modification for Non-Arm's-Length Sales of Natural Gas if
                                             2020 Rule Is Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                                      Gulf of
                                                                      Mexico        Other areas        Total
----------------------------------------------------------------------------------------------------------------
Current Regulations Transport Deduction.........................    ($5,387,000)   ($16,375,000)   ($21,762,000)
Estimate using 2020 Rule Transport Deduction....................     (10,346,000    (25,659,000)    (36,005,000)
                                                                 -----------------------------------------------
    Change......................................................       4,959,000       9,284,000      14,243,000
56.4% universe of properties....................................  ..............  ..............       8,033,000
----------------------------------------------------------------------------------------------------------------

Change in Royalties 5: Extraordinary Gas Processing Cost Allowances for 
Federal Gas

    The 2020 Rule allows a lessee to request an extraordinary 
processing cost allowance. ONRR adopted the same calculation method for 
these royalty impacts as it did in the 2020 Rule. 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 carbon dioxide (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 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 
from those same leases for residue gas. Based on these calculations, 
ONRR estimates the royalty impact of withdrawing this provision of the 
2020 rule would be an increase in royalties of $11.1 million per year.
    ONRR recognizes that there could be an increase in the number of 
requests submitted to ONRR related to extraordinary cost processing 
allowances under this provision. There is little data available to 
identify the magnitude of these requests, and there is not enough 
information to determine how many of these potential requests would be 
approved or denied by ONRR. ONRR invites public comment on this issue 
and solicits any data that would allow the agency to better quantify 
these impacts.

[[Page 31213]]



Estimated Annual Change in Royalty Collections if 2020 Rule Is Withdrawn
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Annual Average Sulfur Allowances in Excess of 66\2/3\%..        $348,000
Annual Average Residue Gas Allowance....................      10,783,000
Estimated Annual Impact on Royalties....................      11,131,000
------------------------------------------------------------------------

Change in Royalties 6: Transportation Allowances for Certain OCS 
Gathering for Federal Oil and Gas

    In the 2020 Rule, ONRR proposed regulatory changes that would allow 
an OCS lessee to take certain gathering costs as transportation. ONRR 
adjusted its method for calculating this royalty impact in response to 
comments received on the Proposed 2020 Rule and published a corrected 
method in the 2020 Rule. ONRR will continue to use the adjusted method 
here to estimate the royalty impact if the 2020 Rule goes into effect.
    As previously discussed, the Deepwater Policy was in effect from 
1999 until January 1, 2017. Under the Deepwater Policy, ONRR allowed a 
lessee to treat certain costs for subsea gathering as transportation 
expenses and to deduct those costs in calculating its royalty 
obligations. The 2016 Valuation Rule rescinded the Deepwater Policy, 
but the 2020 Rule would codify a deepwater gathering allowance similar 
to the Deepwater Policy. To analyze the impact to industry of 2020 
Rule's deepwater gathering allowance, ONRR used data from BSEE's 
Technical Information Management System database to identify 113 subsea 
pipeline segments, and 169 potentially eligible leases, which might 
have qualified for an allowance thereunder. 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 active and supporting producing leases. 
To determine the range (shown in the tables at the end of this section 
as low, mid, and high estimates) of changes to royalties, ONRR 
estimated 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. Then, 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 the return on investment using the average BBB Bond 
rate for January 2018 (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). 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 
must be excluded from any calculation of a permissible deduction. ONRR 
chose these two percentages based on knowledge and information gathered 
during audits of leases located 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 leases in the GOM (See 43 
U.S.C. 1335(a)(9)). Based on these calculations, the average annual 
allowance per pipeline segment during the period that ONRR collected 
data from 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 represented the estimated amount per lease for gathering 
that ONRR would allow a lessee to take as a transportation allowance 
based on the 2020 Rule's deepwater gathering allowance. 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 potentially 
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, are 
estimated to qualify for a deduction under the 2020 Rule's deepwater 
gathering allowance. 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, which 
limits the value of a deepwater gathering allowance. ONRR chose to use 
an estimate of half of the leases for consistency, and it decreased the 
low, mid, and high annual cost-to-industry estimates by 20 percent. The 
table below shows the estimated royalty impact of withdrawing this 
provision of the 2020 Rule.

                    Annual Estimated Impact to Royalty Collections if 2020 Rule Is Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                                        Low             Mid            High
----------------------------------------------------------------------------------------------------------------
Royalty Impact..................................................     $28,000,000     $32,900,000     $37,900,000
----------------------------------------------------------------------------------------------------------------

Cost Savings 1: Transportation Allowances for Certain OCS Gathering 
Costs for Offshore Federal Oil and Gas

    The 2020 Rule, by authorizing transportation allowances for certain 
OCS gathering, would result in an administrative cost to industry 
because it requires qualified lessees to monitor their costs and 
perform additional calculations. ONRR identified no need to adjust or 
change the analysis performed in the 2020 Rule to estimate this cost to 
industry. The cost to perform these calculations is significant because 
industry often hires additional labor or outside consultants to 
calculate subsea pipeline movement costs. ONRR estimates that each 
lessee with leases eligible for transportation allowances for deepwater 
gathering systems will allocate one full-time employee annually (or 
incur the equivalent cost for an outside consultant) to perform the 
calculation. ONRR used data from the

[[Page 31214]]

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. Using 
this fully burdened labor cost per hour, ONRR estimated that the annual 
administrative cost savings to industry if the 2020 Rule is withdrawn 
would be approximately $3.9 million.

     Annual Administrative Cost Savings to Industry To Calculate Certain OCS Gathering Costs if 2020 Rule Is
                                                    Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                                                   Companies
                                               Annual  burden  Industry  labor     reporting     Estimated  cost
                                                 hours per        cost/ hour        eligible       savings  to
                                                  company                            leases          industry
----------------------------------------------------------------------------------------------------------------
Allowance for Certain OCS Gathering Costs...           2,080           $59.26               32       $3,931,000
----------------------------------------------------------------------------------------------------------------

Cost 1: Administrative Cost From Using Index-Based Valuation Method To 
Value Arm's-Length Federal Unprocessed Gas, Residue Gas, Fuel Gas, 
Coalbed Methane, and NGLs

    In the 2020 Rule, ONRR assumed that half of the lessees would elect 
to use the index-based valuation method to value their arm's-length 
natural gas and NGL transactions. As described earlier in this Economic 
Analysis, ONRR identified that 39.8 percent of properties with arm's-
length sales would elect this option. This is more accurate than the 
2020 Rule assumption, and ONRR will use it to estimate the potential 
administrative cost savings for industry.
    ONRR estimated the index-based valuation method 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 Savings 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 to industry will be approximately $1.1 million if the 2020 Rule is 
withdrawn.

                        Annual Administrative Costs to Industry if 2020 Rule Is Withdrawn
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                    Time burden        lines
                                                                     per line        reported     Annual  burden
                                                                     reported       using index        hours
                                                                                   option  (50%)
----------------------------------------------------------------------------------------------------------------
Electronic Reporting (99%)......................................         1.5 min         710,525          17,763
Manual Reporting (1%)...........................................         3.5 min           7,177             419
Industry Labor Cost/hour........................................  ..............  ..............          $59.26
                                                                 -----------------------------------------------
    Total Costs.................................................  ..............  ..............      $1,077,000
----------------------------------------------------------------------------------------------------------------

Cost 2: Administrative Cost of Using Index-Based Valuation Method To 
Value Residue Gas and NGLs Because of Simplified Processing and 
Transportation Cost Calculations

    In the 2020 Rule, ONRR calculated the potential one-time 
administrative cost savings for industry if lessees elect to use the 
index-based valuation method. ONRR believes this calculation and method 
are still adequate and will use the same information again in this 
rule. Use of the index-based valuation method eliminates the need to 
segregate deductible costs of transportation and processing from non-
deductible costs of placing production in marketable condition. This 
segregation or allocation of costs, is often referred to as 
``unbundling.'' Industry would unbundle transportation systems and 
processing plants one time in the absence of the 2020 Rule, and then 
use those unbundled cost allocations for subsequent royalty 
calculations. While industry is responsible for calculating these 
costs, ONRR has published and calculated several unbundling cost 
allocations. It takes approximately 100 hours of labor per gas plant. 
ONRR calculated the average number of gas plants reported per payor to 
be 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 the 2020 Rule 
would have resulted in a one-time cost savings to industry of $4.5 
million dollars. If the 2020 Rule is withdrawn, lessees will incur this 
one-time administrative cost.

State and Local Governments

    ONRR estimated that, as a result of the 2020 Rule, States and 
certain local governments would receive an overall decrease in royalty 
disbursements based on the category that properties fall under, 
including OCSLA section 8(g) leases (See 43 U.S.C. 1337(g)), GOMESA 
(See 43 U.S.C. 1331 et seq.), and onshore Federal lands. ONRR disburses 
royalties based on where the royalty-bearing oil and gas was produced.
    Except for production from Federal leases in Alaska (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%
------------------------------------------------------------------------


[[Page 31215]]

    Please visit https://revenuedata.doi.gov/explore/#federal-disbursements to find more information on ONRR's disbursements to any 
specific State or local government. More specific details about 
estimated royalty disbursement impacts can be found below.

Indian Lessors

    The provisions in the 2020 Rule and this proposed withdrawal are 
not expected to affect Indian lessors.

Federal Government

    The impact of the 2020 Rule to the Federal Government will be a 
decrease in royalty collections. ONRR estimates the impact to the 
Federal Government (detailed in the next table of this section) would 
be a reduction in royalties of $49.7 million per year. If the 2020 Rule 
is withdrawn, this estimated impact to royalty collections relative to 
the 2020 Rule would be an increase in royalties of $49.7 million per 
year.

Summary of Royalty Impacts and Costs to Industry, State and Local 
Governments, Indian Lessors, and the Federal Government

    The table below shows the updated net change in royalties expected 
under withdrawal of the 2020 Rule. The table breaks out the impacts to 
Federal and State disbursements based on the typical distributions 
noted in the table above and the appropriate product weightings and the 
location of the affected properties.

      Withdrawal of the 2020 Rule: Annual Impact to Royaly Collections, the Federal Government, and States
----------------------------------------------------------------------------------------------------------------
                                                                     Impact to
                         Rule provision                               royalty         Federal     State  portion
                                                                    collections       portion
----------------------------------------------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length Gas Sales.      $6,800,000      $4,180,000      $2,620,000
Index-Based Valuation Method Extended to Arm's-Length NGL Sales.         660,000         430,000         230,000
High to Midpoint Index Price for Non-Arm's-Length Gas Sales.....       5,060,000       3,110,000       1,950,000
Transportation Deduction Non-Arm's-Length Index-Based Valuation        8,030,000       4,930,000       3,100,000
 Method.........................................................
Extraordinary Processing Allowance..............................      11,130,000       5,680,000       5,450,000
Allowance for Certain OCS Gathering Costs.......................      32,900,000      31,320,000       1,580,000
                                                                 -----------------------------------------------
    Total.......................................................      64,600,000      49,700,000      14,900,000
----------------------------------------------------------------------------------------------------------------
Note: totals may not add due to rounding.

Federal Oil and Gas Amendments With No Estimated Change to Royalty or 
Regulatory Costs

Change 1: Eliminate Reference to Default Provision Requirements for 
Federal Oil and Gas

    The 2020 Rule removed 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 can 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. There is no impact to royalty collections on 
account of the default provision regardless of whether the Final 2020 
Rule goes into effect or is withdrawn in whole or part.

Federal and Indian Coal

    In the 2020 Rule, ONRR estimated there will be no change to royalty 
collections for the Federal Government, Tribes, individual Indian 
mineral owners, States, or industry for Federal and Indian coal. ONRR 
has not changed or adjusted this estimate in this proposed rule. There 
is no impact to royalty collections on account of the coal provisions 
in the 2020 Rule regardless of whether the 2020 Rule goes into effect 
or is withdrawn in whole or part.

IV. Request for Public Comments

    ONRR is proposing to withdraw the 2020 Rule. For ONRR's 
consideration, before reaching a final decision on this action, ONRR 
requests comments, without limitation, on this proposed action. ONRR is 
also requesting any comments pertaining to the substance or merits of 
the 2020 Rule, and the prior regulatory scheme it replaced. 
Additionally, ONRR seeks public comment on the following:
    1. Should ONRR withdraw only the deepwater gathering allowance, 
extraordinary processing allowance, and/or index-based valuation 
provisions of the 2020 Rule, all of which reduce royalties; withdraw 
all royalty valuation provisions of the 2020 Rule; or allow all royalty 
valuation provisions 2020 Rule to go into effect?
    2. Should ONRR allow some or all of the 2020 Rule's civil penalty 
amendments, at 30 CFR part 1241, to go into effect? Or should ONRR 
withdraw those amendments, and, if so, should it initiate a new civil 
penalty rulemaking on the same or different subjects?
    3. What impacts, if any, or other information should ONRR consider 
if it were to adopt a final rule to either withdraw the deepwater 
gathering allowance, extraordinary processing allowance, and index-
based valuation amendments of the 2020 Rule, or withdraw the 2020 Rule 
in its entirety, and make the withdrawal effective immediately upon 
publication under 5 U.S.C. 553(d)(1) or (3)?
    4. This proposed rule provides a revised economic analysis of the 
Final 2020 Rule's amendments to the index-based valuation method. The 
updated analysis shows the net impact of the amendments is an estimated 
decrease of $20.6M in royalty collection per year (from table above, 
$6,800,000 + $660,000 + $5,062,000 + $8,033,000). Because the new 
analysis is presented for the first time in this rule, the public has 
not been given an opportunity to comment on the new analysis. ONRR 
invites public comment on the new information, methods ONRR used to 
perform its estimates, and whether it justifies withdrawal of some or 
all of the Final 2020 Rule's amendments to index-based valuation.

V. 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 OMB will review all significant rulemakings. This 
proposed rule is a significant regulatory action under E.O. 12866. 
Because the primary effect is on royalty payments, ONRR expects that 
withdrawal of the 2020 Rule will largely result in transfers, which are 
described in the table below. ONRR also anticipates that withdrawal of 
the 2020 Rule would result in annual administrative cost savings of 
$2.85

[[Page 31216]]

million and a one-time administrative cost of $4.52 million.
    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.

 Summary of Estimated Changes to Royalty Collections From Withdrawal of
                                2020 Rule
                                [Annual]
------------------------------------------------------------------------
                                                           Net change in
                     Rule provision                       royalties paid
                                                            by lessees
------------------------------------------------------------------------
Index-Based Valuation Method Extended to Arm's-Length         $6,800,000
 Gas Sales..............................................
Index-Based Valuation Method Extended to Arm's-Length            660,000
 NGL Sales..............................................
High to Midpoint Index Price for Non-Arm's-Length Gas          5,062,000
 Sales..................................................
Transportation Deduction Non-Arm's-Length Index-Based          8,033,000
 Valuation Method.......................................
Extraordinary Processing Allowances.....................      11,131,000
Allowances for Certain OCS Gathering Costs..............      32,900,000
                                                         ---------------
    Total...............................................      64,600,000
------------------------------------------------------------------------

    To estimate the present value of potential administrative costs/
savings to industry from withdrawal of the 2020 Rule, ONRR looked at 
two 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 to 
industry in the first year the 2020 Rule is in effect and incursion of 
administrative cost savings each year thereafter.

 Summary of Annual Administrative Impacts to Industry From Withdrawal of
                                2020 Rule
------------------------------------------------------------------------
                                                            Cost (cost
                     Rule provision                          savings)
------------------------------------------------------------------------
Administrative Cost Savings for Index-Based Valuation         $1,077,000
 Method for Arm's-Length Gas & NGL Sales................
Administrative Cost for Allowances for Certain OCS           (3,931,000)
 Gathering..............................................
                                                         ---------------
    Total...............................................     (2,850,000)
------------------------------------------------------------------------


 Summary of One-Time Administrative Impacts to Industry From Withdrawal
                              of 2020 Rule
------------------------------------------------------------------------
                     Rule provision                            Cost
------------------------------------------------------------------------
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 From Withdrawal
                              of 2020 Rule
------------------------------------------------------------------------
                                            3% Discount     7% Discount
              Time horizon                     rate            rate
------------------------------------------------------------------------
Administrative Costs over 10 years......     $19,920,000     $15,790,000
Administrative Costs over 20 years......      38,010,000      25,970,000
------------------------------------------------------------------------

    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 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 freedom of choice for the public where 
these approaches are relevant, feasible, and consistent with regulatory 
objectives. E.O. 13563 further emphasizes 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 alleged and actual 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 2111, Oil and Gas Extraction; and
     Code 21211, Coal Mining.
    Under NAICS code classifications, a small company is one with fewer 
than 500 employees. ONRR estimates that

[[Page 31217]]

approximately 1,208 different companies submit royalty reports for 
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 for 
small businesses. ONRR estimated that the remaining 1,102 companies 
affected by this rule are small businesses. ONRR has not changed the 
determination it made in the 2020 Rule. See 86 FR 4651.
    As stated in the Summary of Royalty Impacts and Costs Table, shown 
above, withdrawal of the 2020 Rule would impact industry through an 
increase in royalties of approximately $64.6 million per year. Small 
businesses account for approximately eight percent of those royalties. 
Applying that percentage, ONRR estimates that withdrawal of the 2020 
Rule would increase royalty payments made by small-business lessees by 
approximately $5.2 million per year, or $4,690 per small business, on 
average. The extent of any royalty impact would vary between companies 
due to, for example, differences in the revenues generated by a small 
business that is subject to royalties.
    Also stated above, withdrawal of the 2020 Rule would impact 
industry through a decrease in administrative costs of approximately 
$2.9 million per year and a first-year increase of $4.5 million. 
Applying the eight percent small-business share, ONRR estimates that 
withdrawal of the 2020 Rule would decrease administrative costs to 
small business lessees by approximately $211 per year and separately 
increase costs by $327 in the first year.
    In 2020, ONRR collected $6.3 billion in royalties from Federal oil 
and gas leases. Applying the eight-percent share, ONRR estimates that 
small-business lessees paid $504 million in royalties in 2020. Most 
Federal oil and gas leases have a 12.5 percent royalty rate, which 
calculates to an estimated $4 billion in total small-business lessee 
revenue from the production and sale of Federal oil and gas ($504 
million divided by .125). Thus, on average, ONRR estimates that small-
business lessees earn $3.6 million in revenue per year from the 
production and sale of Federal oil and gas ($4 billion divided by 
1,102).
    The estimated increase in royalties ($4,690) and decrease in 
administrative burden ($211) net to an increase in overall cost to 
1,102 small businesses of $4,479 per year. As a percentage of average 
small-business revenue, this proposed rule would increase costs to 
those entities by 0.12 percent ($4,479 divided by $3.6 million).
    According to the U.S. Census Bureau's 2017 Economic Census data, 
oil and gas extractors with 20 employees or less collected $2.1 million 
per year per entity. Taking the $4,479 discussed above, divided by $2.1 
million equals an estimated maximum impact of 0.2 percent of total 
revenue per year. Further, ONRR anticipates that the smallest entities 
would realize less of an increase in royalties because, for example, 
the changes to deepwater gathering and extraordinary processing 
allowances are capital-intensive operations that small entities 
typically do not participate in.
    In accordance with 5 U.S.C. 605, the head of the agency certifies 
that this proposed rule would have an impact on a substantial number of 
small entities, but the economic impact on those small entities would 
not be significant 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

    The 2020 Rule was not a major rule under Subtitle E of the Small 
Business Regulatory Enforcement Fairness Act of 1996. See 5 U.S.C. 
804(2). ONRR therefore expects that the withdrawal of the 2020 rule 
would likewise not be a major rule under that provision. Like the 2020 
rule, ONRR anticipates that this rule, if finalized:
    (1) Would not have an annual effect on the economy of $100 million 
or more. ONRR estimates that the cumulative effect on all of industry 
if the 2020 Rule goes into effect would be a reduction in private cost 
of nearly $61.45 million per year, which is the sum of $64.6 million in 
decreased royalty payments and $2.85 million in additional costs due to 
increased administrative burdens. This net change in royalty payments 
would be a transfer rather than a cost or cost savings. The Summary of 
Royalty Impacts and Costs Table, as shown above, demonstrates that the 
2020 Rule's cumulative economic impact on industry, State and local 
governments, and the Federal Government would be well below the $100 
million threshold that the Federal Government uses to define a rule as 
having a significant impact on the economy;
    (2) would 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. 12866 and E.O. 13563) section 
above; and
    (3) would not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
United States-based enterprises to compete with foreign-based 
enterprises. ONRR estimates no significant adverse impacts to small 
business.

D. Unfunded Mandates Reform Act

    Neither the 2020 Rule nor its withdrawal would impose an unfunded 
mandate or have a significant effect on State, local, or Tribal 
governments, or on the private sector, of more than $100 million per 
year. 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 the 2020 Rule or its withdrawal is an unfunded 
mandate.

E. Takings (E.O. 12630)

    Under the criteria in section 2 of E.O. 12630, neither the 2020 
Rule nor its withdrawal have any significant takings implications. 
Neither rule imposes conditions or limitations on the use of any 
private property because they apply to the valuation of Federal oil and 
gas and Federal and Indian coal only. The 2020 Rule only makes minor 
technical changes to ONRR's civil penalty regulations that have no 
expected economic impact, and the withdrawal of the 2020 Rule would 
have no economic impact. Neither rule requires a takings implication 
assessment.

F. Federalism (E.O. 13132)

    Under the criteria in section 1 of E.O. 13132, the 2020 Rule or its 
withdrawal 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. The 2020 Rule or its withdrawal would not impose 
administrative costs on States or local governments or substantially 
and directly affect the relationship between the Federal and State 
governments. Thus, a federalism summary impact statement is not 
required.

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

    The proposed withdrawal of the 2020 Rule complies with the 
requirements of E.O. 12988. Specifically, the proposed withdrawal rule:
    (1) Meets the criteria of Section 3(a), which requires that ONRR 
review all regulations to eliminate errors and ambiguity to minimize 
litigation; and

[[Page 31218]]

    (2) 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)

    ONRR 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 the 2020 Rule and the proposed 
withdrawal under the Department's consultation policy and the criteria 
in E.O. 13175 and determined that neither have substantial direct 
effects on Federally-recognized Indian tribes. Thus, consultation under 
ONRR'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 not have a 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 the 2020 Rule and 
its proposed withdrawal concludes that neither would substantially 
impact the three tribes. Further, neither rule is estimated to impact 
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. The 2020 Rule and its proposed withdrawal do 
not require any new or modify any existing information collections 
subject to OMB's approval. Thus, ONRR did not submit any new 
information collection requests to OMB related to the 2020 Rule or its 
proposed withdrawal.
    Both the 2020 Rule and its proposed withdrawal leave 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 of 1969

    The 2020 Rule and its proposed withdrawal do 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 NEPA because both rules qualify for a categorical exclusion under 
43 CFR 46.210(c) and (i), as well as the Departmental Manual, part 516, 
section 15.4.D, which covers routine financial transactions including 
such things as audits, fees, bonds, and royalties and policies, 
directives, regulations, and guidelines that are of an administrative, 
financial, legal, technical, or procedural nature. ONRR also determined 
that both the 2020 Rule and its proposed withdrawal do not involve 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)

    Both the 2020 Rule and its proposed withdrawal are not significant 
energy actions under the definition in E.O. 13211. Neither 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 either 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. 12866 (section 1(b)(12)), 12988 (section 3(b)(1)(B)), E.O. 
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:
    (1) Logical organization.
    (2) Active voice to address readers directly.
    (3) Clear language rather than jargon.
    (4) Short sections and sentences.
    (5) 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.
    This action is taken pursuant to delegated authority.

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.

Rachael S. Taylor,
Principal Deputy Assistant Secretary--Policy, Management and Budget.
[FR Doc. 2021-12318 Filed 6-10-21; 8:45 am]
BILLING CODE 4335-30-P