[Federal Register Volume 78, Number 153 (Thursday, August 8, 2013)]
[Proposed Rules]
[Pages 48343-48366]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19165]



[[Page 48343]]

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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1202, 1205, and 1210

[Docket No. ONRR-2011-0013; DS63610300 DR2PS0000.CH7000 134D0102R2]
RIN 1012-AA02


Reporting and Paying Royalties on Federal Leases

AGENCY: Office of Natural Resources Revenue, Interior.

ACTION: Proposed rule.

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SUMMARY: The Office of Natural Resources Revenue (ONRR) is proposing 
new regulations to implement section 6(d) of the Federal Oil and Gas 
Royalty Simplification and Fairness Act of 1996. The new regulations 
would prescribe when a Federal lessee must report and pay royalties on 
the volume of oil and gas it takes from a lease or on the volume to 
which it is entitled based on its ownership interest in the lease.

DATES: Comments must be submitted on or before October 7, 2013.

ADDRESSES: You may submit comments to ONRR on the rulemaking by any of 
the following methods. Please use the Regulation Identifier Number 
(RIN) 1012-AA02 as an identifier in your message. See also Public 
Availability of Comments under Procedural Matters.
     Federal eRulemaking Portal: http://www.regulations.gov. In 
the entry titled ``Enter Keyword or ID,'' enter ONRR-2011-0013, then 
click search. Follow the instructions to submit public comments and 
view supporting and related materials available for this rulemaking. 
ONRR will post all comments.
     Mail comments to Armand Southall, Regulatory Specialist, 
ONRR, P.O. Box 25165, MS 61030A, Denver, Colorado 80225-0165.
     Hand-carry comments or use an overnight courier service. 
Our courier address is Building 85, Room A-614, Denver Federal Center, 
West 6th Ave. and Kipling St., Denver, Colorado 80225.
    Information Collection Request (ICR) Comments: Submit written 
comments by either fax (202) 395-5806 or email (OIRA_Docket@omb.eop.gov) directly to the Office of Information and 
Regulatory Affairs, Office of Management and Budget (OMB), Attention: 
Desk Officer for the Department of the Interior [OMB Control Number ICR 
1012-0NEW as it relates to this proposed rule, Reporting and Paying 
Royalties on Federal Leases]. Please also send a copy to ONRR by one of 
the methods above.

FOR FURTHER INFORMATION CONTACT: For comments or questions on 
procedural issues, contact Armand Southall, Regulatory Specialist, at 
(303) 231-3221. For questions on technical issues, contact one of the 
authors: Sarah Inderbitzin at (303) 231-3748, Roman Geissel at (303) 
231-3226, or Lydia Barder at (303) 231-3570.

SUPPLEMENTARY INFORMATION:

I. Purpose of the Regulatory Action

    a. The proposed rule, known as Takes vs. Entitlements, would make 
substantive changes to the regulations in order to implement section 
6(d) of the Royalty Simplification and Fairness Act (RSFA). Section 
6(d), titled ``Volume Allocation of Oil and Gas Production,'' amended 
section 111 of the Federal Oil and Gas Royalty Management Act of 1982 
(FOGRMA), 30 U.S.C. 1721, by adding new paragraphs (k)(1) through (5), 
110 Stat. 1713, 1714.
    b. This rulemaking would implement FOGRMA paragraphs 111(k)(1) 
through (4). The new regulations would prescribe when a Federal lessee 
must report and pay royalties on the volume of oil and gas it takes 
from a lease or on the volume to which it is entitled based on its 
ownership interest in the lease.

II. Summary of Major Provisions of the Regulatory Action in Question

    In this proposed rule, we would amend title 30 of the Code of 
Federal Regulations (CFR) part 1202, subparts C and D, relating to the 
volume of production on which lessees must pay royalties. We also would 
amend subparts D and J to clarify that lessees should report gas 
volumes produced from Federal and Indian leases consistent with Bureau 
of Land Management (BLM) or Bureau of Ocean Energy Management (BOEM) 
regulations and notices. Because RSFA, including the takes versus 
entitlements provisions in 30 U.S.C. 1721(k), applies only to Federal 
leases, the only portions of this rule that apply to Indian leases are 
those specifically noted in the preamble or the proposed regulations.
    This proposed rule also would add a new 30 CFR part 1205. Subpart A 
would explain the general provisions of the rule, define the leases to 
which the rule applies, and provide definitions of terms used in the 
rulemaking. Subpart B would explain the basic reporting and payment 
requirements for each of the three classes of leases FOGRMA paragraph 
111(k)(1) identifies: 100-percent Federal agreements, leases in mixed 
agreements, and leases not contained in agreements (stand-alone 
leases), as the following table shows.

------------------------------------------------------------------------
   If you are a lessee of a lease or       Then you must report and pay
    portion of a lease that is . . .         royalties based on . . .
------------------------------------------------------------------------
(1) Not contained in an agreement        The volume of production you
 (stand-alone).                           take from the lease or portion
                                          of a lease that is not in an
                                          agreement.
(2) In a 100-percent Federal agreement.  The volume of production you
                                          take from the lease or portion
                                          of the lease in a 100-percent
                                          Federal agreement.
(3) In a mixed agreement...............  Your entitled share of
                                          production allocated to the
                                          lease or portion of the lease
                                          in the mixed agreement.
------------------------------------------------------------------------

    Subpart C would explain how lessees can propose and receive 
approval to use alternatives to the reporting requirements for leases 
in 100-percent Federal agreements. Subpart D would explain (1) How 
lessees can use the marginal property reporting exception for mixed 
agreements that meet specific criteria, (2) identify the determining 
criteria, and (3) explain how to report on an eligible marginal 
property.

III. Costs and Benefits

    ONRR estimates the net cost of compliance to industry in the first 
year this rule is effective would be $643,378 and $7,544 in subsequent 
years. We base the requests for alternate reporting costs on an 
estimated 250 requests for alternate reporting based on entitlements 
rather than takes. ONRR estimates that these requests will take 10 
hours each to complete, not including an additional one-quarter hour 
for recordkeeping. Thus, the hour burden in the first year would be 
2,563 hours. We estimate the labor costs of these hours, coupled with 
the $2,400 fee per request for alternate reporting, would be $717,898. 
In subsequent years, ONRR expects requests for alternate reporting 
would drop to 23 per year, and requests to terminate alternate 
reporting would be 2 per year. Using the

[[Page 48344]]

same calculations, ONRR expects the cost for alternate reporting in 
subsequent years would be $66,976.
    We estimated marginal property qualification based on 3,600 
producing mixed agreements, allowing one-half hour to determine average 
daily well production and one-quarter hour for recordkeeping. The hour 
burden would be 2,700 hours, and the cost would be $124,200, based on 
the same cost factor used in determining the costs for alternate 
reporting.
    ONRR estimates the reduction in reporting burden would save 
industry 4,320 hours per year. Using the same cost factor that we used 
in the costs for alternate reporting and determining marginal property 
qualification, the benefit to industry would be $198,720 per year.
    Adding the costs and subtracting the benefit accrued provides the 
net cost to industry of $643,378 in the first year and $7,544 in 
subsequent years.
    ONRR believes the costs and benefits to state governments would be 
minimal and are not quantifiable at this time.
    ONRR believes the Federal Government would benefit by a reduced 
burden and clearer reporting instructions for verifying production 
reports. ONRR also believes the Federal Government may benefit because 
(1) the reduced burden of reporting may extend the life on marginal 
properties, and (2) the diminished out-of-pocket expenses may enhance 
lease investment.

IV. Introduction

    On August 13, 1996, the President signed into law the Federal Oil 
and Gas Royalty Simplification and Fairness Act of 1996 (RSFA), Public 
Law 104-185, 110 Stat. 1700, as corrected by Public Law 104-200. 
Section 6(d) of RSFA amended section 111 of the Federal Oil and Gas 
Royalty Management Act of 1982 (FOGRMA). This rulemaking would 
implement FOGRMA paragraphs 111(k)(1) through (4), which Congress 
enacted to clarify and resolve the long-standing issues regarding so-
called ``takes versus entitlements.'' The issues arose primarily where 
the amount of natural gas taken and sold from Federal leases in a unit 
or communitization agreement was not equal to the lessee's entitled 
share based on the lessee's ownership interest in its leases in the 
unit or communitization agreement. These imbalances led to numerous 
questions about who should report and pay on what volumes and for what 
leases.
    In an earlier effort to resolve these issues, ONRR's predecessor 
organization, Minerals Revenue Management (MRM), a program of Minerals 
Management Service (MMS), published an advance notice of proposed 
rulemaking on June 1, 1992 (57 FR 23068), seeking comments on valuation 
and reporting and paying royalties on production from Federal 
agreements. (Hereafter, in this rulemaking, we will refer only to ONRR, 
although actions may have occurred before ONRR was established.) We 
formed the Federal Gas Valuation Negotiated Rulemaking Committee, one 
purpose of which was to seek ways to resolve these issues. 
Subsequently, we published a proposed rule on November 6, 1995 (60 FR 
56007), which contained reporting and payment provisions similar to 
FOGRMA paragraphs 111(k)(1) through (4). However, the proposed rule was 
withdrawn on April 22, 1997 (62 FR 19536).
    Prior to initiating this rulemaking, in order to implement FOGRMA 
paragraphs 111(k)(1) through (4), we sought input from interested 
states, oil and gas trade associations, and our own ONRR analysts. We 
held outreach meetings on October 30, November 19, and December 6, 
1996, and obtained input on general definitions, the reporting 
requirements for 100-percent Federal agreements, the definition of a 
``marginal property,'' and the determination of a marginal property 
reporting exception.
    Subsequently, ONRR began drafting a proposed rule. However, during 
that process, several issues came up regarding how this proposed rule 
should apply to production that is commingled prior to the royalty 
measurement point. Thus, we held additional public meetings on December 
14, 2005, and May 10, 2006, to solicit input on this issue. We also 
published advance notices of proposed rulemaking on November 29, 2005 
(70 FR 71421), and April 7, 2006 (71 FR 17774), giving examples of this 
issue and requesting comments.

V. Explanation of Proposed Amendments

    Before reading the additional explanatory information below, please 
turn to the proposed rule language that immediately follows the List of 
Subjects in 30 CFR parts 1202, 1205, and 1210 and signature page in 
this proposed rule. This language will be codified in the CFR if this 
rule is finalized as written.
    After you have read the rule, please return to the preamble 
discussion below. The preamble contains additional information about 
the rule, such as why we defined a term in a certain manner, why we 
chose a certain reporting procedure over another, and how we interpret 
the law this rule would implement.

A. Section-By-Section Analysis of Proposed Changes to 30 CFR Part 
1202--Royalties, Subpart C--Federal and Indian Oil, Subpart D--Federal 
Gas, and Subpart J--Gas Production From Indian Leases

    ONRR proposes to amend subparts C, D, and J relating to the Federal 
and Indian production volumes on which you must pay royalties.
Sec.  1202.100 Royalty on Oil
    This rule proposes to eliminate the current requirement to trace 
the sale of oil production that you do not take from a Federal lease by 
removing the reference to Federal leases in paragraph (e) and expressly 
limiting its applicability to Indian leases only.

    This rule also proposes to revise paragraph (f) to read as 
follows:
    Federal oil. The regulations explaining when you must report and 
pay royalties on the volume of oil you take from your Federal lease, 
including Federal leases committed to a federally approved 
unitization or communitization agreement, or on the entitled share 
of production from or allocated to your Federal lease, are found in 
30 CFR part 1205.

Existing paragraph (f) provides that lessees may request that ONRR 
establish a valuation method other than that required in 30 CFR part 
1206, under certain conditions. We propose to revise this paragraph 
because the revised regulations for Federal and Indian oil in 30 CFR 
part 1206 now contain similar, but less proscriptive, provisions. See 
30 CFR 1206.59 (Indian oil) and 30 CFR 1206.107 (Federal oil). We also 
propose to revise existing paragraph (f) to direct lessees of Federal 
oil and gas production to the regulations pertaining to the reporting 
and payment of royalties on Federal oil proposed under this rulemaking 
in a new part 1205 in 30 CFR.
    Finally, because this subpart applies to both Federal and Indian 
oil, we propose to add headings to the paragraphs to make it clear to 
the reader which paragraphs apply only to Federal oil or Indian oil.
    Under existing regulations, if another person takes and disposes of 
a portion of Federal production to which you were entitled but did not 
take, the actual disposition of that production by the other person 
controls its valuation. By removing the reference to Federal leases in 
this section and limiting its applicability to Indian leases only, the 
portion of oil production to which you were entitled but did not take 
from a Federal lease would be valued under 30

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CFR part 1206, subpart C, as production not sold under an arm's-length 
contract.
Sec.  1202.150 Royalty on Gas
    This rule proposes to separate the requirements applicable to 
Indian leases from those for Federal leases. Thus, the proposed rule 
would retain the existing requirements for Indian leases but would 
eliminate the current requirement to trace the sale of gas production 
that you do not take from a Federal lease because RSFA takes versus 
entitlements provisions apply only to Federal leases. This proposed 
rule also would remove references to 30 CFR part 1206 regarding 
valuation and, instead, direct lessees to 30 CFR part 1205 because 
proposed Sec. Sec.  1205.104 and 1205.30 explain how to value volume 
differences under this rule. Accordingly, the proposed rule would 
revise paragraph Sec.  1202.150(e) to refer lessees of Federal leases 
to 30 CFR part 1205 as follows:

    The regulations explaining when you must report and pay 
royalties on the volume of gas you take from your Federal lease, 
including Federal leases committed to a federally approved 
unitization or communitization agreement, or on the entitled share 
of production from or allocated to your Federal lease, are found in 
30 CFR part 1205.
Sec.  1202.152 Standards for Reporting and Paying Royalties on Gas
    The current regulations provide in the first sentence of paragraph 
(a)(1)(i) that persons responsible for reporting royalties or 
production must ``[r]eport gas volumes and British thermal unit (Btu) 
heating values, if applicable, under the same degree of water 
saturation.'' The first sentence of paragraph (a)(2) provides that 
``[t]he frequency and method of Btu measurement as set forth in the 
lessee's contract shall be used to determine Btu heating values for 
reporting purposes.'' However, we believe it is more appropriate for 
such persons to report volumes consistent with the requirements of the 
agencies managing lease operations, inspections, and enforcement. Thus, 
this rule proposes to replace paragraphs (a)(1) and (a)(2) with a new 
paragraph (a) to refer lessees to BLM (for Federal and Indian leases) 
and BOEM (for offshore leases) regulations, orders, and notices for the 
requirements to report volumes. However, we are also making such 
reporting ``subject to ONRR verification based on third party data.'' 
This addition to the rule will ensure that ONRR can verify the Btus you 
report using data from third parties, including, but not limited to, 
purchaser or plant statements or receipts.
Sec.  1202.558 What standards do I use to report and pay royalties on 
gas?
    The current regulations provide in the first sentence of paragraph 
(a)(1) that persons responsible for reporting royalties or production 
must ``[r]eport gas volumes and British thermal unit (Btu) heating 
values, if applicable, under the same degree of water saturation. 
Report gas volumes and Btu heating value at a standard pressure base of 
14.73 psia [pounds per square inch absolute] and a standard temperature 
of 60 degrees Fahrenheit. Report gas volumes in units of 1,000 cubic 
feet (Mcf).'' The first sentence of paragraph (a)(2) provides that 
``You must use the frequency and method of Btu measurement stated in 
your contract to determine Btu heating values for reporting purposes.'' 
However, we believe it is more appropriate for such persons to report 
volumes consistent with the requirements of the agency managing lease 
operations, inspections, and enforcement. Thus, this rule proposes to 
replace paragraphs (a)(1) and (a)(2) with a new paragraph (a) to refer 
lessees to BLM regulations, orders, and notices for the requirements to 
report volumes. However, we are also making such reporting ``subject to 
ONRR verification based on third party data.'' This addition to the 
rule will ensure that ONRR can verify the Btus you report using data 
from third parties, including, but not limited to, purchaser or plant 
statements or receipts.

B. Section-by-Section Analysis of 30 CFR Part 1205--Reporting and 
Paying Royalties on Federal Leases

    We propose to add a new part 1205 to our regulations in 30 CFR. 
This part would implement the new reporting and payment requirements in 
FOGRMA paragraphs 111(k)(1) through (4) for Federal oil and gas leases.
Subpart A--General Provisions
Sec.  1205.1 What is the purpose of this part?
    This section would explain the purpose of part 1205 and emphasize 
that reporting and payment requirements under this new part would not 
alter a lessee's ultimate royalty liability and obligations for oil or 
gas produced from Federal leases.
Sec.  1205.2 What leases are subject to this part?
    This section would explain that this part applies only to Federal 
oil and gas leases onshore and on the Outer Continental Shelf (OCS). 
Because RSFA applies only to Federal oil and gas leases, this part 
would not apply to: (1) Federal leases for minerals other than oil and 
gas; (2) Indian mineral leases; or (3) Leases for which the Federal 
Government became the lessor when it acquired a mineral interest 
subject to a private mineral lease.
Sec.  1205.3 What definitions apply to this part?
    This section defines certain terms used in part 1205. Only 
definitions requiring supplementary explanations are discussed below. 
See the proposed rule language for a complete list of terms and 
definitions.
    100-percent Federal agreement would mean any agreement that 
contains only Federal leases having the same fixed royalty rate and 
funds distribution. A 100-percent Federal agreement would exclude any 
agreement that includes leases subject to the Gulf of Mexico Energy 
Security Act of 2006 (GOMESA).
    Paragraph 111(k)(1)(A) of FOGRMA defines 100-percent Federal 
agreements as agreements containing ``. . . only Federal leases with 
the same royalty rate and funds distribution . . . .'' In the proposed 
rule, we added the word ``fixed'' before ``royalty rate'' in the 
definition because royalty rates on variable rate leases in an 
agreement may be different for each reporting period, based on volumes 
produced and the number of wells. Because there is little chance that, 
in any month, the royalty rates for fixed and variable rate leases in 
an agreement would be identical, we would restrict 100-percent Federal 
agreements to only those leases having the same fixed royalty rate. We 
believe this reflects the statutory intent.
    We excluded leases subject to GOMESA because of the unique funds 
distribution requirements for those leases. The funds distribution 
formulas established by GOMESA result in a different fund distribution 
for every lease, regardless of a lease's inclusion in a unit or 
communitization area. Because the distribution formulas established by 
GOMESA result in a different funds distribution for every lease, 30 
U.S.C. 1721(k)(1)(A) does not apply to GOMESA leases. Furthermore, 
unlike Outer Continental Shelf Lands Act Section 8(g) leases, 43 U.S.C. 
1337(g), for which funds are disbursed to not more than two state 
entities by lease and production month, GOMESA funds are accumulated 
from all leases subject to its requirements and are then disbursed the 
following calendar year to the four Gulf producing states--and their 
political subdivisions. Thus, including GOMESA leases in the definition 
of 100-percent Federal agreement would prove too administratively 
burdensome, given their unique distribution requirements.

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    Barrels of oil equivalent (BOE) would mean the combined equivalent 
production of oil and gas stated in barrels of oil. This definition 
would explain that each barrel of oil production is equal to one BOE 
and each 6,000 cubic feet (6 Mcf) of gas production is equal to one 
BOE. This definition is the same as the one published in the marginal 
property rule (30 CFR 1204.2).
    Combined equivalent production would mean the total of all oil and 
gas production for the marginal property, stated in BOE. This 
definition is the same as the one published in the marginal property 
rule (30 CFR 1204.2).
    Commingling approval would be defined as the BLM or the Bureau of 
Safety and Environmental Enforcement (BSEE) approved surface mixing of 
production from two or more independent leases or agreements, before 
measurement for royalty purposes. The commingling approval identifies 
how the volume measured at the approved point of royalty measurement 
must be allocated to each lease or agreement subject to the commingling 
approval. Further, as discussed in Sec.  1205.104 below, a commingling 
approval affects both your take volume and your entitled volume, 
because the sum of all the lessees' take volumes--or, as the case may 
be, entitled volumes--from a lease must equal the total volume 
allocated to the lease under the commingling approval.
    Delegated State would mean a state with which ONRR has entered into 
a delegation agreement under 30 U.S.C. 1735.
    Lessee would be defined as any person to whom the United States 
issues an oil and gas lease, an assignee of all or a part of the record 
title interest, or any person to whom operating rights in a lease have 
been assigned. This definition essentially follows the definition 
contained in section 3 of FOGRMA, 30 U.S.C. 1702, as amended by RSFA 
section 2(1), Public Law 104-185, 110 Stat. 1700.
    Mixed agreement would mean any agreement other than a 100-percent 
Federal agreement. Mixed agreements contain any mixture of Federal, 
Indian, state, or private mineral estates; or contain all Federal 
leases with different royalty rates or funds distribution. A mixed 
agreement would include any agreement that contains leases subject to 
GOMESA. For example, a communitization agreement with two Federal 
leases--one with a fixed 12\1/2\-percent royalty rate and one with a 
variable royalty rate based on volume of production--would be a mixed 
agreement.
    Take would be defined as any oil or gas volumes removed or sold 
from a lease or agreement, as measured at or allocated from an approved 
point of royalty measurement. For stand-alone leases, the take volume 
is the volume measured at the approved point of royalty measurement for 
the lease. For leases in a 100-percent Federal agreement or subject to 
a commingling approval, the take volume for an individual lease is the 
volume allocated back to the lease after measurement at an approved 
point of royalty measurement for the agreement or commingling approval.
    Paragraphs 111(k)(1)(A) and (C) of FOGRMA, in describing situations 
in which lessees are to report and pay based on actual take volume, 
state that a lessee or its designee will report and pay royalties on 
stand-alone leases and leases in 100-percent Federal agreements based 
on the ``actual volume of production sold by or on behalf of that 
lessee.'' Congress did not define ``sold'' in RSFA. Therefore, we found 
it necessary to define ``sold'' in this rulemaking as ``take'' for the 
following reasons:
    (1) It is plain from the context of paragraphs 111(k)(1)(A) and (C) 
that Congress was referring to the actual royalty-bearing volume taken 
by the lessee, and not just to production whose title was transferred 
to another party in return for money.
    (2) There are other important and frequently used royalty-bearing 
dispositions of production other than exchanging production for money. 
Any production ``removed from the lease,'' and not used in lease 
operations, is royalty-bearing. Limiting this rule to apply only to 
``sold'' volumes, as that term is commonly used, would greatly 
complicate royalty computations on many leases because it would require 
more than one reporting and payment method depending upon the type of 
disposition. This would defeat Congress' intent in RSFA to simplify 
reporting and payment.
    (3) Long-standing lease terms and existing valuation regulations 
require royalty to be paid on any production measured at an approved 
point of royalty measurement, regardless of whether that production is 
subsequently ``sold'' in the technical sense. See 30 CFR 1206.103 for 
Federal oil and 30 CFR 1206.154 for Federal gas. Nothing in RSFA 
purports to change that requirement. For example, assume gas is removed 
from a lease at an approved point of royalty measurement and stored 
offsite in an underground gas storage reservoir without first being 
exchanged for money. Royalty would be due at the time the gas is 
measured and removed from the lease, not later when it is removed from 
storage and exchanged for money.
    Thus, to accurately capture the paying and reporting concept we 
believe Congress intended in RSFA, we defined the word ``take'' to 
include ``sold.'' Accordingly, for purposes of this rule, ``take'' 
production defines the total body of production from a lease or 
agreement on which royalty is due during a reporting period. We believe 
this definition of ``take'' is the proper interpretation of the word 
``sold'' in RSFA and reflects the statutory intent. We specifically 
request comments on this interpretation.
    The following examples for stand-alone Federal leases illustrate 
the concept of ``takes'':
     First, assume you have a proceeds-sharing agreement in 
which a fellow interest owner in your Federal lease sells your portion 
of the lease production and shares the proceeds received from that sale 
with you. The other interest owner is deemed to have taken your 
production on your behalf, and you must report and pay royalty on the 
volumes for which you received proceeds.
     Second, assume you have a contract in which you and a 
fellow interest owner in a Federal lease take all the production from a 
Federal lease in alternate months. In the months in which your fellow 
interest owner sells all of the production, including your entitled 
share, your fellow interest owner is deemed to have taken all of the 
production and must report and pay royalties on all of the production. 
You would not have to report and pay royalty on any volumes for those 
months.
    We specifically request comments on this definition of ``take'' and 
its relationship to total production that is ``sold'' from a lease or 
agreement.
Subpart B--Reporting and Paying Royalties on Federal Leases
    Subpart B would describe how you must report and pay royalties each 
month based on the type of lease you have.
Sec.  1205.101 How do I report and pay royalties?
    This section would explain the reporting and payment requirements 
for stand-alone leases, leases in a 100-percent Federal agreement, and 
leases in a mixed agreement. This section would use a chart to aid 
understanding.
    Paragraph (a)(1) would explain that if you take production from a 
stand-alone lease (this would include a portion of a

[[Page 48347]]

lease that is not part of an agreement), you must report and pay 
royalties based on the production you take. For example, assume you are 
a lessee for a stand-alone Federal lease under the following 
conditions:

----------------------------------------------------------------------------------------------------------------
                                                           Your ownership                       Volume on which
             Volume produced from the lease               interest in the    Volume you take     you report and
                                                               lease          from the lease      pay royalty
(A)                                                                   (B)                  (C)              (D)
                                                                                                        (D) = (C)
----------------------------------------------------------------------------------------------------------------
1,000 Mcf..............................................               40%            700 Mcf            700 Mcf
----------------------------------------------------------------------------------------------------------------

Thus, when you pay royalty on a stand-alone lease, your entitled volume 
based on your ownership interest in the lease (1,000 Mcf x 40% = 400 
Mcf) is not used in the computation to determine the volumes on which 
you report and pay. Rather, you would report and pay royalty on the 700 
Mcf you actually took.
    Paragraph (a)(2) would explain that if you are a lessee taking 
production from a 100-percent Federal agreement, you must report and 
pay based on the production you take. For example, assume you are a 
lessee for one lease in a 100-percent Federal agreement under the 
following conditions:

----------------------------------------------------------------------------------------------------------------
                                      Percent of volume    Your ownership
                                      allocated to your   interest in one    Volume you take    Volume on which
 Volume produced from the agreement     lease from the      lease in the         from the        you report and
                                          agreement          agreement          agreement         pay royalty
(A)                                                (B)                  (C)              (D)                (E)
                                                                                                      (E) = (D)
----------------------------------------------------------------------------------------------------------------
1,000 Mcf...........................               50%                10%            800 Mcf            800 Mcf
----------------------------------------------------------------------------------------------------------------

Thus, when you pay royalty on a 100-percent Federal agreement, your 
entitled volume (1,000 Mcf x 50% x 10% = 50 Mcf) is not used in the 
computation to determine the volumes on which you report and pay. 
Rather, you would report and pay royalty on the 800 Mcf you actually 
took.
    Paragraph (a)(3) would explain the reporting requirements for 
lessees in mixed agreements. The proposed rule would require lessees to 
report and pay royalties based on their entitled share of the volume 
allocated to their lease from the agreement, regardless of the volume 
they take. For example, assume you are a lessee for a Federal lease in 
a mixed agreement under the following conditions:

----------------------------------------------------------------------------------------------------------------
                                   Percent of volume    Your ownership
     Volume produced from the      allocated to your   interest in one    Volume you take    Volume on which you
            agreement                lease from the      lease in the         from the         report and  pay
                                       agreement          agreement          agreement             royalty
(A)                                             (B)                  (C)              (D)   (E)
                                                                                            (A) x (B) x (C)
----------------------------------------------------------------------------------------------------------------
1,000 Mcf........................               60%                30%            300 Mcf   1,000 Mcf x 60% x
                                                                                             30% = 180 Mcf
----------------------------------------------------------------------------------------------------------------

Thus, when you pay royalty on a lease in a mixed agreement, your take 
volume (Column D, 300 Mcf) is not used in the computation to determine 
the volumes on which you report and pay. Rather, you would report and 
pay royalty on the 180 Mcf to which you were entitled.
    Paragraph (b) would explain that if you are a lessee for more than 
one lease in a 100-percent Federal agreement, you must allocate and 
report for each lease based on its allocated share. See Sec. Sec.  
1202.100(e) and 1202.150(e). ONRR considered allowing lessees to report 
on only one of their leases in a 100-percent Federal agreement but 
decided the adverse impact to minimum royalty obligations for all other 
leases in the agreement outweighed the benefits of simplified reporting 
for one lease. Leases must meet the minimum royalty obligation at the 
end of each lease year. If we were to allow lessees to report on only 
one of their leases in an agreement, then the other leases in the 
agreement might not meet their minimum royalty obligation by the end of 
the lease year. In that case, lessees would have to pay minimum royalty 
on all of their other leases in the agreement in order for the other 
leases to meet their minimum royalty obligation.
Sec.  1205.102 How do I determine my take volume?
    This section would explain that your take volume is the volume you, 
or someone on your behalf, removed or sold from your lease or leases. 
In this proposed rulemaking, as discussed above, ONRR is using the term 
``sold'' in the definition of ``take.'' The underlying requirement is 
that the sum of all take volumes reported for the lease must equal the 
volume upon which royalty is due.
    ONRR is not a party to the decisions that determine which lessees 
take what volume. Those decisions are made solely between lessees, 
operators, purchasers, and transporters of the oil and gas. However, we 
routinely verify that the combined volumes reported and paid by all 
lessees or designees on their royalty reports are equal to the volumes 
removed or sold from the lease or agreement as reported on 
corresponding production reports submitted by operators of a lease or 
agreement. To minimize questions when volumes

[[Page 48348]]

reported on the royalty report do not match volumes reported on 
production reports, we strongly recommend that all parties to the 
``take'' decisions establish procedures to ensure that all removed or 
sold volumes are accounted for and paid in every reporting period. In 
addition, we recommend that all parties take the necessary steps to 
ensure that minimum royalty obligations are met for each lease in an 
agreement.
Sec.  1205.103 How do I determine my entitled volume in a mixed 
agreement?
    This section would explain that you would determine your entitled 
volume by multiplying your entitled share in the lease by the volume of 
production allocated to your lease under the agreement allocation 
schedule.
    The determination of entitled volumes is not based on your 
ownership interest in a specific well on a lease. Consider the example 
in which you own 100 percent of the operating rights in the only 
Federal lease in a mixed agreement, and you chose not to participate in 
the drilling of the only well drilled on the agreement (non-consent 
well). Depending on the terms of your operating agreement, you might 
not be entitled to any production until, for example, 200 percent of 
the development costs are paid in full. Despite the fact that you do 
not receive production for a period of time, you must report and pay 
royalties on the full volume allocated to your Federal lease under the 
agreement allocation schedule.
Sec.  1205.104 How do I determine value for my entitled volume in a 
mixed agreement?
    This section would explain how to value volumes you report for a 
mixed agreement.
    Paragraph (a) would explain that if you take less than your 
entitled volume of production from a mixed agreement during a month, 
then the royalty value you must use for the difference is the volume 
weighted-average unit value for the total volume you take from the 
property during that month, as determined under part 1206 of this 
title.
    Paragraph (b) would explain that, if you do not take any production 
to which you were entitled from a mixed agreement during a month, then 
the royalty value for your entitled share for that month is the value 
determined for non-arm's-length dispositions under 30 CFR 1206.103 for 
oil; 30 CFR 1206.152(c) for unprocessed gas; and 30 CFR 1206.153(c) for 
processed gas.
Sec.  1205.105 How does a commingling approval affect my take volume?
    When BSEE or BLM approves either surface or downhole commingling of 
production before royalty measurement, the commingling approval 
identifies where the production will be measured for royalty purposes 
and how that measured volume will be allocated to each lease or 
agreement subject to the commingling approval. This section would 
explain that, if your lease is a stand-alone lease subject to a BLM or 
BSEE commingling approval, or in an agreement that is subject to a BLM 
or BSEE commingling approval, the volume allocated to the lease or 
agreement under the commingling approval is the production taken from 
the lease or agreement and the total volume upon which royalties must 
be paid. In other words, the commingling approval dictates the total 
volume removed or sold from the lease or agreement, and hence your 
takes from the lease. For example, assume two stand-alone Federal 
leases, each with a single lessee, are subject to a commingling 
approval under the following conditions:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Volume measured
                                                                   Percent of        at approved    Volume allocated       Volumes
                                                                   production     point of royalty    to each lease     nominated and    Over or 
                             Lease                                allocated to       measurement          under           delivered       taken volumes
                                                                each lease under        under          commingling     (taken) by each   for each lease
                                                                   commingling       commingling        approval           lessee
                                                                    approval          approval
                                                                             (A)               (B)               (C)               (D)               (E)
                                                                                                           (A) x (B)                           (D) - (C)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................................................                25         5,000 Mcf         1,250 Mcf         1,000 Mcf         <250 Mcf>
2.............................................................                75  ................         3,750 Mcf         4,000 Mcf           250 Mcf
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Under proposed Sec.  1205.101(a)(1), a lessee of a stand-alone 
Federal lease--assuming it was not subject to a commingling approval--
would be required to report on the take volume, Column D. However, 
because of the commingling approval, this proposed Sec.  1205.104 would 
require a lessee to report and pay royalties on the total volume 
allocated to each lease under the commingling approval--that is, Column 
C--whether or not that volume equals the take volume. Thus, in this 
example, the lessee for Lease 1 would have to report and pay royalties 
on 1,250 Mcf, rather than the 1,000 Mcf it actually took; and the 
lessee for Lease 2 would have to report and pay royalties on 3,750 Mcf, 
rather than the 4,000 Mcf it actually took. This example does not 
address the more complicated situation in which stand-alone leases have 
multiple owners and the total takes of the lessees of one of the leases 
does not equal the volume upon which royalties are due under the 
commingling approval. In those situations, lessees must report and pay 
on the full volume allocated to each lease under the commingling 
approval.
    Note that the effect of a commingling approval would be slightly 
different for leases in 100-percent Federal agreements, because the 
commingling approval would dictate the total volume allocated to the 
agreement, not the individual leases. Once the volume allocated to the 
agreement is established by the commingling approval, you would then 
have to allocate that volume to your leases in the agreement and report 
and pay accordingly. See Sec.  1205.101(b), discussed above. We realize 
that there are other alternatives to handle the commingling situation. 
We solicit comments on the proposed method for handling commingling and 
welcome suggestions for alternatives.
Sec.  1205.106 Are there exceptions to the reporting and payment 
requirements in this subpart?
    This section would explain the two exceptions to the reporting and 
payments requirements in this subpart.
    Paragraph (a) would explain that you may qualify for an alternative 
to the royalty reporting and payment requirements for 100-percent 
Federal agreements under Sec.  1205.101(a)(2) if you meet certain 
requirements. Subpart C would explain the requirements for alternative 
reporting, which are discussed further below.
    Under proposed paragraph (b), you also could qualify to report on 
your take volume rather than entitled volume,

[[Page 48349]]

with appropriate adjustments after year-end, if your mixed agreement is 
a marginal property. Subpart D would explain the requirements for the 
marginal property reporting exception, which are discussed further 
below.
Subpart C--Reporting and Paying Royalties on Federal Leases Under an 
Alternative Method for a 100-Percent Federal Agreement
    Subpart C would explain the requirements for requesting approval 
for, and using an alternative method of, reporting and paying royalties 
for Federal leases that participate in a 100-percent Federal agreement. 
This subpart implements FOGRMA paragraph 111(k)(3), which provides 
that, under certain conditions, lessees in an agreement may request an 
alternative method of reporting and paying royalties other than that 
prescribed under paragraphs 111(k)(1) and (2).
Sec.  1205.201 How do I qualify for alternative reporting and payment 
for a 100-percent Federal Agreement?
    This section would explain that you may qualify for an alternative 
to the royalty reporting and payment requirements for agreements under 
subpart B if:
    (a) You are in a 100-percent Federal agreement;
    (b) You and all other lessees in the agreement concur in writing to 
the alternative method; and
    (c) The alternative does not reduce the total monthly royalty 
obligation reported and paid to ONRR.
    During the outreach meetings, participants discussed FOGRMA 
paragraph 111(k)(3) at length. Meeting participants provided input that 
RSFA was intended to give lessees in 100-percent Federal agreements the 
option to report on their entitled volume rather than on their take 
volume. We are proposing to restrict alternative methods to 100-percent 
Federal agreements, primarily because it is impracticable to fully 
effectuate as written since ONRR cannot require private and state 
lessees in a mixed agreement to use an alternative method or report in 
accordance with Federal regulations. Nor can we apply FOGRMA 
enforcement authorities to such entities even if they agree in writing 
to an alternative methodology because any right to enforce would derive 
from the contractual agreement, not FOGRMA.
    We are specifically requesting comments on whether or not we should 
allow alternative reporting for mixed agreements. In your comments, 
please provide any legal authority for your position and specific 
examples of how it would be applied to mixed agreements.
Sec.  1205.202 How do I request alternative reporting and payment for a 
100-percent Federal Agreement?
    This section would explain the information that ONRR would need to 
adequately review a proposed alternative method of reporting and 
payment.
    Paragraph (a) would explain that, to obtain approval to use an 
alternative method of royalty reporting and payment, you must submit 
one written request to ONRR on behalf of all lessees of leases in the 
agreement.
    Paragraph (b) would explain that, in your request, you must 
describe the proposed alternative, identify the agreement and all the 
leases in the agreement, identify all lessees and their ownership 
interest in each Federal lease in the agreement, and include a copy of 
the written consent to the alternative method from all lessees in the 
agreement. Paragraph (b) also would explain that you must demonstrate 
that the proposed alternative method will not reduce the total monthly 
royalties due for the agreement. In addition, paragraph (b) would 
explain that you must submit a nonrefundable processing fee of $2,400 
to ONRR, under 30 CFR 1218.51, for each agreement for which you request 
an alternative method of reporting and payment. If you did not submit 
the full fee, we would return the request unprocessed. If we returned 
the request unprocessed for failure to pay the fee, you could not 
appeal the return of the request. Finally, paragraph (b) would provide 
that ONRR may periodically adjust the $2,400 fee to account for 
increases in our actual costs due to inflation and increases in Federal 
employee salaries. If we adjusted the fees, we would publish a notice 
in the Federal Register.
    Our rationale for collecting the fee is as follows. We would 
recover its costs under the Independent Offices Appropriations Act of 
1952 (IOAA), 31 U.S.C. 9701 et seq., for Federal offshore leases, and 
the Federal Land Policy and Management Act of 1976 (FLPMA), 43 U.S.C. 
1701, for Federal onshore leases. As part of this proposed rule, we 
analyzed the proposed cost recovery fees for reasonableness according 
to the factors in FLPMA section 304(b). Although the IOAA does not 
contain the same ``reasonableness factors'' as FLPMA section 304(b), 
the factors we considered under FLPMA to determine reasonable fees led 
us to conclude that the fees for offshore leases should be the same as 
the fees for onshore leases.
    The reasonableness factors required by FLPMA are: (a) Actual costs 
(exclusive of management overhead); (b) the monetary value of the 
rights or privileges sought by the applicant; (c) the efficiency to the 
Federal Government processing involved; (d) that portion of the cost 
incurred for the benefit of the general public interest rather than for 
the exclusive benefit of the applicant; (e) the public service 
provided; and (f) other factors relevant to determining the 
reasonableness of the costs.
    The method used to evaluate the factors is twofold. First, ONRR 
estimated the actual costs and evaluated each of the remaining FLPMA 
reasonableness factors (b) through (f) individually to decide whether 
the factor might reasonably lead to an adjustment in actual costs. If 
so, we then weighed that factor against the remaining factors to 
determine whether another factor might reasonably increase, decrease, 
or eliminate the contemplated adjustment. On the basis of this twofold 
analysis, we determined what final fee is reasonable. We cannot recover 
an amount greater than its actual costs, so any final adjustment cannot 
result in a fee greater than actual costs.
Reasonableness Factors Required by FLPMA
(a) Actual Costs
    Actual costs means the financial measure of resources ONRR would 
expend to process a request that a lessee or its designee would be 
allowed to report under an alternative method. Actual costs include, 
but are not limited to, the costs of special studies, monitoring 
compliance with this part, termination of relief authorized under this 
part, or any other relevant action. Actual costs include both direct 
and indirect costs, exclusive of management overhead. Management 
overhead costs means costs associated with the ONRR directorate, except 
where a member of such staff is required to perform work on a specific 
case. Section 304(b) of FLPMA requires that management overhead be 
excluded from chargeable costs.
    Our direct costs include expenditures for labor, material, and 
equipment usage connected with processing the requests. We calculated 
direct costs by estimating the average time it would take ONRR 
personnel to complete similar existing tasks.
    Our indirect costs include items such as rent and overhead 
(excluding management overhead). We calculated our indirect cost rate 
by dividing the

[[Page 48350]]

indirect costs described above by the total direct program costs to 
arrive at an indirect cost percentage. Then we multiplied the direct 
costs to process a request for alternative reporting by the indirect 
cost percentage and added that figure to the direct costs to determine 
its total actual costs of $60.00 per hour = $40.10 per hour [2011 GS-
12, Step 5] x 1.5 [benefits cost factor]. This method of calculating 
costs is a generally accepted practice in both the private and public 
sectors.
    Our method of establishing actual costs involved estimating the 
average cost of processing an individual request. Processing requests 
consists of two phases. In the first phase, ONRR personnel would review 
and analyze the proposed alternative method and provide preliminary 
approval, modification, or denial. In the second phase, we would 
communicate the decision to the lessee.
    We estimated that it would take an average of 40 hours to review 
and respond to a request for an alternative method of reporting and 
paying. We concluded that, while it might be possible to track costs 
and reasonableness on a case-by-case basis, it would be so inefficient 
and expensive as to be considered unreasonable. Using an hourly cost of 
$60.00 per hour for both direct and indirect costs, we determined that 
our average cost to process each request to use alternative reporting 
would be approximately $2,400.
(b) Monetary Value of the Rights and Privileges Sought
    Monetary value of the rights and privileges sought means the 
objective worth of the alternative reporting method sought or taken, in 
financial terms, to the lessee or its designee. We rejected the idea of 
trying to calculate monetary value on a case-by-case basis as too time 
consuming, wasteful of resources, and subject to endless disputes. 
Instead, we have attempted to calculate an average or estimated figure 
to represent the monetary value of rights for possible alternatives 
under this rulemaking. In addition, we took into account equitable 
considerations involving the costs to process relative to the monetary 
value of the relief sought.
    We determined that approving a proposal that would allow lessees to 
report and pay on their entitled share of production, rather than 
reporting on the required takes method, would allow the company to use 
only one system for reporting and would simplify the overall process 
for them. Approving this alternative would benefit lessees and their 
designees by decreasing the total number of hours they would devote 
manually to complete royalty reports for a portion of their Federal 
leases. We estimated the maximum monetary benefit of these relief 
options could be as high as $552 annually = 1 hour per month savings x 
12 months x $46/hour. The hourly labor cost of $46 is based on the 
Bureau of Labor Statistics National Occupational Employment and Wage 
Estimates. However, we did not adjust our actual costs for this factor.
(c) Efficiency to the Federal Government Processing Involved
    Efficiency to the Federal Government processing involved means the 
ability of the United States to process a request for an alternative 
method of reporting and paying royalties under Sec.  1205.202 with a 
minimum of waste, expense, and effort. Implicit in this factor is the 
establishment of a cost recovery process that does not cost more to 
operate than ONRR would collect and does not unduly increase the costs 
to be recovered. As noted in the above section on actual costs, we 
determined that it would be inefficient to determine actual cost data 
on a case-by-case basis. Estimates based on our experience indicate 
that the cost of maintaining actual cost data on specific cases would 
be unreasonably high, and the amount potentially collectible could be 
relatively small. This is principally because our automated accounting 
system would have to be extensively reprogrammed to add a relatively 
few items of information. Thus, we would use cost estimates derived 
from previously collected data.
    Because RSFA specifies that any alternative method of reporting and 
paying royalties may not reduce the royalty obligation, ONRR must 
perform sufficient review of each request to assure that this 
requirement would be met. We believe the actual cost estimate from 
factor (a) above anticipates an efficient process that would provide 
for the necessary technical review. The procedures we would use in 
processing the data would be based on standardized steps for similar 
ONRR transactions in order to eliminate duplication and extraneous 
procedures. Therefore, we believe factor (c) would be the most 
efficient processing method. Accordingly, because factor (c) would be 
an efficient processing method, we have made no adjustment to actual 
costs as a result of this factor.
(d) Cost Incurred for the Benefit of the General Public Interest
    Cost incurred for the benefit of the general public interest 
(public benefit) means funds the United States would expend in 
connection with the processing of a request for alternative reporting 
under Sec.  1205.202, for studies or data collection determined to have 
value or utility to the United States or the general public, separate 
and apart from the document processing. It is important to note that 
this definition addresses funds that would be expended in connection 
with a request. There is another level of public benefit that includes 
studies that we are required, by statute or regulation, to perform 
regardless of whether a request is received. The costs of such studies 
are excluded from any cost recovery calculations from the outset. 
Therefore, no additional reduction from costs recovered is necessary in 
relation to these studies.
    Our analysts concluded that the processing of requests for 
alternative methods of reporting and paying royalties under this 
proposed rule did not, as a rule, produce studies or data collection 
that might benefit the public to any appreciable degree. Therefore, any 
possible benefits of such studies to the public are balanced by their 
possible benefits to the applicant. Accordingly, we made no adjustment 
to actual costs based on this factor.
(e) Public Service Provided
    Public service provided means tangible improvements or other direct 
benefits, such as reduced administrative costs, with significant public 
value, that are expected in connection with approval of an alternative 
method of reporting and paying royalties. The definition specifically 
notes that negative factors, such as an adverse impact on royalty or 
ONRR's audit ability, could preclude considering an improvement as a 
public service. The definition also notes that data collection we would 
need in order to monitor an alternative reporting and payment method 
does not constitute a public service. This definition distinguishes the 
factor of public service provided (a benefit resulting from activities 
associated with the underlying relief) from the factor of cost incurred 
for the benefit of the general public interest (which relates to 
benefits of the document processing itself).
    We determined that the alternative reporting and payment options 
under this rule would provide the benefit of reducing our costs by 
decreasing the total number of hours we would devote to processing 
documents and correcting errors. We anticipate approving simpler 
reporting and payment methods under this rule. Therefore, we determined 
that the Federal Government would benefit under this factor to some 
extent.

[[Page 48351]]

However, we made no adjustment to actual costs based on this factor 
because this benefit is encompassed by our actual cost estimate under 
factor (a) discussed above.
(f) Other Factors
    The final reasonableness factor is other factors relevant to 
determining the reasonableness of the costs. We examined some of the 
possible alternative reporting and payment methods that could be 
requested under this section to determine whether other factors 
warranted a reduction in the proposed fee from our actual costs.
    Personnel with expertise and program management responsibilities in 
the particular area of the transaction reviewed the possible 
alternative reporting and payment methods. Our personnel weighed the 
proposed processing fee against their knowledge of the value of similar 
transactions. Our analysts concluded that factor (b) monetary value of 
the rights was clearly so far above the expected processing cost that a 
fee set at actual costs would be reasonable.
    In our outreach sessions, industry representatives indicated that 
significant processing fees would likely result in industry not 
submitting requests for alternative reporting and payment methods. 
Representatives of independent oil and gas producers stated that 
processing fees likely would discriminate against the small producers. 
However, those outreach sessions were held more than 12 years ago. Our 
personnel concluded that currently, the value of the rights was clearly 
so far above the expected processing cost, that a fee set at actual 
costs would be appropriate. Accordingly, we did not adjust the actual 
costs based on other factors. As a result, we determined that a 
processing fee of $2,400 per request would meet the reasonableness 
factors of FLPMA for onshore leases, and we would apply the same rate 
to offshore leases. We invite comments specifically concerning the 
amount of the proposed processing fee.
    Paragraph (c) of Sec.  1205.202 would explain that RSFA section 
4(f), 30 U.S.C. 1724(f), requires that Federal oil and gas lessees 
maintain records for 7 years after the royalty obligation becomes due. 
Since the methodology requested and approved under an alternative 
method of reporting and payment request applies to all periods from the 
date of approval until such time that the alternative method is 
terminated, this proposed paragraph would require lessees to keep all 
records pertaining to the request for an alternative method until 7 
years after termination of the alternative method.
Sec.  1205.203 Who will approve, deny, or modify my request for 
alternative reporting and payment for a 100-percent Federal agreement?
    Paragraph 111(k)(3) under FOGRMA requires the Secretary or the 
delegated state to determine whether to approve a request for 
alternative reporting and payment. This section would explain that ONRR 
would decide whether to approve your request for alternative reporting 
and payment. However, if there is a delegated state, we would consult 
with the state before making a decision.
Sec.  1205.204 How will I know if I am approved for alternative 
reporting and payment for a 100-percent Federal agreement?
    This section would explain that, when ONRR receives your request 
for alternative reporting and payment under Sec.  1205.202, we would 
notify you in writing as follows:
    Paragraph (a) would provide that, if your request for alternative 
reporting and payment is complete, we may approve, deny, or modify your 
request.
    Paragraph (b) would provide that if your request for alternative 
reporting and payment is not complete, we would notify you that your 
request is incomplete and identify any missing information. Under 
paragraph (1), you would have to submit the missing information within 
60 days of your receipt of our notice that your request is incomplete. 
Under paragraph (2), after you submit the missing information, ONRR 
could approve, deny, or modify your request for alternative reporting 
and payment under Sec.  1205.203.
    Under paragraph (b)(3), if you do not submit the missing 
information within 60 days, we would return your request for 
alternative reporting and payment as incomplete. If we returned your 
request because it was incomplete, then we would not return any 
processing fee you submitted with your request. In addition, if we 
returned your request as incomplete, it would not be considered an 
appealable denial of your request. However, under paragraph (4), you 
could submit a new request for alternative reporting and payment under 
this subpart, including another processing fee, at any time following 
our return of your incomplete request.
Sec.  1205.205 When must I begin using the alternative method for a 
100-percent Federal agreement?
    This section would explain when you must begin using the 
alternative method.
    Paragraph (a) would apply to lessees who requested the alternative 
method. Thus, the proposed rule would provide that, if you are a lessee 
for a lease in an agreement when you submit a request under Sec.  
1205.202, you would begin using the alternative method of royalty 
reporting and payment for the production month after you receive 
written approval from ONRR.
    Paragraph (b) would apply to a lessee who becomes the lessee for a 
lease in an agreement for which there is already an approved 
alternative method of royalty reporting and payment. In such cases, the 
lessee would begin reporting under the alternative method for the 
production month in which it became the lessee.
Sec.  1205.206 What if I want to stop reporting and paying under the 
approved alternative method for a 100-percent Federal agreement?
    This section would explain that, if you want to stop using the 
approved alternative method of royalty reporting and payment under 
paragraph (a), then you would have to obtain written concurrence from 
all lessees in the agreement to stop using the alternative method. 
Under paragraph (b), you would have to provide a copy of the written 
concurrence to ONRR and the delegated state.
Sec.  1205.207 When must I stop using the approved alternative method 
for a 100-percent Federal agreement?
    This section would explain when the approval to use an alternative 
method ends.
    Under paragraph (a), if you request to stop using the approved 
alternative method under Sec.  1205.206, you would stop using the 
approved alternative method of royalty reporting and payment beginning 
with the production month after you receive written notice of approval 
from ONRR. You would then return to using the reporting and payment 
requirements of Sec.  1205.101(a)(2) or (3).
    Paragraph (b) would explain that you would stop using the approved 
alternative method of royalty reporting and payment beginning within 60 
days after you receive written notice from:
    (1) ONRR that your approval, under this subpart, is terminated; or
    (2) BLM or BSEE that either a non-Federal tract or a tract that you

[[Page 48352]]

determine has a different royalty rate or funds distribution has been 
added to your agreement.
    Paragraph (c) would explain that a change in a lessee's ownership 
interests after the initial approval for alternative reporting and 
payment would not terminate an approval.
    Paragraph (d) would explain that ONRR would terminate an approval 
in any instance where we believed it would be in the United States' 
best interest.
Subpart D--Reporting and Paying Royalties on Marginal Properties
    Subpart D would provide a reporting and payment exception for 
properties that qualify as marginal properties and would describe how 
the exception would work.
Sec.  1205.301 What is the marginal property reporting and payment 
exception?
    This reporting option would be a reporting and payment exception to 
the requirements under Sec.  1205.101(a)(3) for mixed agreements. Under 
FOGRMA paragraph 111(k)(4), lessees would be allowed to report 
royalties for their leases in mixed agreements that qualify as marginal 
properties based on takes rather than entitlements for a calendar year 
or portion thereof (if they sell or acquire an interest in the marginal 
property during the calendar year). We believe this provision of RSFA 
was intended to minimize the out-of-pocket royalty payments from 
smaller producers who do not take their full entitled share each month. 
The exception applies only to mixed agreements because 100-percent 
Federal agreements and stand-alone Federal leases must already pay 
based on takes under FOGRMA paragraphs 111(k)(1)(A) and (C), as 
implemented under proposed Sec.  1205.101(a)(1) and (2). Therefore, 
because RSFA is silent on this point, we concluded in Sec.  
1205.101(a)(3) that this exception can apply only to mixed agreements.
Sec.  1205.302 What is a marginal property under this subpart?
    We propose to define a ``marginal property'' based on the 
definition in FOGRMA paragraph 111(k)(4). Paragraph 111(k)(4) defines a 
``marginal property'' as:

. . . a lease that produces on average the combined equivalent of 
less than 15 barrels of oil per well per day or 90 thousand cubic 
feet of gas per well per day, or a combination thereof, determined 
by dividing the average daily production of crude oil and natural 
gas from producing wells on such lease by the number of such wells, 
unless the Secretary, together with the State concerned, determines 
that a different production is more appropriate. (Emphasis added.)

Thus, as discussed above, a marginal property would be defined as a 
mixed agreement that produces an average of less than 15 barrels of oil 
equivalent (BOE) per well producing day.
    However, we had to consider an additional issue that the definition 
of ``marginal property'' in paragraph 111(k)(4) presents. Participants 
at our outreach meetings discussed the administrative burdens that this 
definition would impose on lessees and ONRR, or a delegated state, if 
we did not interpret the term ``lease'' to mean an ``agreement.'' For 
example:
     By defining a marginal property as a lease within an 
agreement, lessees would incur substantial cost to identify the 
specific lease on which each agreement well is located and the specific 
volumes attributable to each well for each lease each month, in order 
to calculate the average daily well production by lease.
     The regulations require lessees to report production from 
wells in agreements to ONRR on production reports at the agreement 
level and not on a specific lease. If ONRR were to define a marginal 
property as only a lease, we would not have the data to determine which 
wells correspond to a specific lease in an agreement. Therefore, ONRR 
could not verify lessee calculations of average daily well production 
to ensure that only marginal properties are taking advantage of the 
exception.
    To address this issue, meeting participants provided input that a 
marginal property should be determined on the basis of the production 
level of the entire mixed agreement, not on an individual lease basis. 
We specifically request comments on the proposed definition of 
``marginal property.''
Sec.  1205.303 How do I determine if my property is a marginal 
property?
    Also discussed during the outreach meetings was the production 
threshold that would qualify a property for the marginal property 
reporting exception. Paragraph 111(k)(4) of FOGRMA provides a 
production threshold of less than 15 BOE per well producing day. 
However, it also allows the Secretary, together with the state 
concerned [the state that receives a portion (prescribed by statute) of 
the royalties from a Federal onshore or offshore lease (30 U.S.C. 
1702(31)], to determine a different production threshold. After much 
discussion, the participants agreed to adopt the production level 
identified in paragraph 111(k)(4). Although we considered publishing an 
annual list of qualified properties, we determined that it would not be 
possible for ONRR to publish accurately and timely a list of qualified 
marginal properties. Therefore, this proposed rule would require 
lessees to perform the calculations necessary to identify qualified 
marginal properties.
    To determine if your lease would meet the qualifications for a 
marginal property under the proposed rule for the next calendar year, 
you would:
    (1) Calculate the total volume of oil and gas produced from your 
property during the period between July of the previous year and June 
of the current year. We propose to use a base period of July through 
June to allow sufficient time to adjust the production data before the 
following calendar year reporting period begins.
    (2) Divide the total gas production (in Mcf) by 6 to convert the 
gas volume to BOE (see definition of BOE in Sec.  1205.3 above) and add 
that total to the oil volume (in barrels).
    (3) Calculate the total number of days each well actually produced 
during the same time period (include all producing wells in the mixed 
agreement, including those that are not located on a Federal tract).
    (4) Divide the total produced volume by the total well producing 
days. If your calculated average daily well production is less than 15 
BOE, your property would qualify for the marginal property exception.
Sec.  1205.304 When may I begin using the marginal property exception?
    This section would explain that you may begin reporting under the 
marginal property exception in the January production month of the 
calendar year following the base period. It also would explain that you 
do not need to notify ONRR of your intent to report and pay using the 
exception.
Sec.  1205.305 How long must I use the marginal property exception?
    Paragraph (a) of this section would explain that once lessees begin 
using the marginal property reporting exception, they must continue to 
use the exception through the end of the calendar year. This 
requirement would establish a uniform period during which royalty 
payments made on the takes basis can be compared to royalty payments 
due on an entitlement basis.
    Paragraph (b) of this section would explain what happens if you 
sell your interest in a lease during a calendar year in which you were 
using the marginal property exception. In that situation, the reporting 
period during which you must

[[Page 48353]]

use the marginal property exception is only the period of your 
ownership.
Sec.  1205.306 How do I report under the marginal property exception?
    This section would explain how you report the take volume under the 
marginal property exception for your Federal leases in a mixed 
agreement.
Sec.  1205.307 What if the take volume I reported does not equal my 
entitled volume for one or more of my Federal leases for the calendar 
year?
    This section would explain what to do if the total takes volume on 
which you report and pay during the calendar year under the marginal 
property exception does not equal your total entitled volume for each 
of your Federal leases in the agreement. In that situation, you would 
report the difference between your entitled share and your take volume 
and pay additional royalties or report a credit within 6 months of the 
end of that calendar year. You would report the difference (true up) on 
the Report of Sales and Royalty Remittance, Form MMS-2014, for each of 
your leases as either an underpayment or an overpayment for the entire 
calendar year. It would not matter whether you took more or less during 
each individual month, but rather, if you took more or less for the 
entire calendar year. Thus, if for any month your takes did not equal 
your entitlements but, for the calendar year they were equal, you would 
not have to report any adjustment.
    Paragraph (a) of this section would explain that you must calculate 
the difference between the take volume you reported under the marginal 
property exception and your entitled volume for the calendar year in 
which you used the exception.
    Paragraph (b) would explain that you report the difference 
calculated in paragraph (a) of this section:
    (1) On Form MMS-2014, Report of Sales and Royalty Remittance;
    (2) By June 30 of the calendar year immediately following the 
calendar year for which you used the marginal property exception;
    (3) As underpaid (a positive amount on Form MMS-2014 when your 
total takes are less than your entitlements) or overpaid (a negative 
amount on Form MMS-2014 when your total takes exceed your 
entitlements);
    (4) As a single-line entry for each lease and product from the 
lease;
    (5) Using the correct adjustment reason code for reporting under 
this section; and
    (6) Using the December sales month of the calendar year for which 
you used the marginal property exception.
    Paragraph (c) would explain that you do not adjust the monthly 
royalty lines you reported under Sec.  1205.306(c) if the take volume 
you reported was accurate.
    For example, assume you own an interest in a Federal lease in a 
mixed agreement that qualifies for the marginal property reporting 
exception. Assume that the lease royalty rate is 16\2/3\ percent.

----------------------------------------------------------------------------------------------------------------
                                                                    Percent of
                                               Your ownership       production      Calculation of your entitled
 Total annual production from the agreement   interest in the   allocated to your     share (volume) from the
                                                   lease          lease from the             agreement
                                                                    agreement
(A)                                                       (B)                  (C) (D)
                                                                                   (A) x (B) x (C)
----------------------------------------------------------------------------------------------------------------
12,000 bbl.................................               60%                40%   12,000 bbl x 60% x 40% =
                                                                                    2,880 bbl
----------------------------------------------------------------------------------------------------------------

The volume on which you report royalty would be calculated as your 
entitled share from the mixed agreement, or 2,880 barrels (bbl), 
multiplied by the lease royalty rate of 16.667 percent, which equals 
480 bbl.
    Further, assume that you would report based on your takes from the 
mixed agreement for the year under the marginal property exception. You 
reported a take volume of 3,500 bbl. The volume on which you report 
royalty would be your take volume from the mixed agreement (3,500 bbl x 
16.667% [lease royalty rate] = 583 bbl). You would calculate your 
annual adjustment to entitlements as follows:

------------------------------------------------------------------------
                                 Your take volume
 Your entitled volume from the    from the mixed   Calculation of annual
  mixed agreement for royalty     agreement for        adjustment to
           purposes              royalty purposes       entitlements
(A)                                          (B)   (C)
                                                   (A)-(B)
------------------------------------------------------------------------
480 bbl.......................           583 bbl   480 bbl - 583 bbl = -
                                                    103 bbl
------------------------------------------------------------------------

The volume for royalty purposes of a negative 103 barrels means you 
overpaid the royalties for this lease for the calendar year. Thus, you 
would report the royalties associated with the negative 103 barrels on 
your Form MMS-2014 following current reporting instructions.
    This section also would explain that you would not have to adjust 
each line you reported during the calendar year (unless you originally 
reported those lines incorrectly). For example, based on your lease 
ownership percentage and your lease participation in the mixed 
agreement, assume you were entitled to take 500 bbl of oil and 10,000 
Mcf of gas for the year. However, you actually took 600 bbl of oil and 
9,000 Mcf of gas. You would be required to report an adjustment line 
for each product for your lease for the year. Therefore, you would 
report one net line for oil showing a negative 100 bbl and one net line 
for gas showing a positive 1,000 Mcf.
    You would not be required to back out all previously reported lines 
when you report your annual adjustment from takes to entitlements. 
However, if you made an error when reporting your take volume during 
the calendar year, then you would be required to submit

[[Page 48354]]

amended royalty reports correcting the lines originally submitted.
    You would report a single line for adjustments to your 
transportation and processing allowances. A positive value on your 
adjustment would show that you overclaimed an allowance based on your 
take volume under the marginal property exception.
Sec.  1205.308 How do I determine the royalty value for the difference 
between my take volume and entitled volume?
    This section would explain how to value any volumes you report 
under Sec.  1205.307.
    Paragraph (a) would explain how to value production that you take 
from a qualifying marginal property during the calendar year when you 
report a difference between your take and entitled volume under Sec.  
1205.307. In that instance, the royalty value you use for the 
difference would be based on the volume weighted-average unit value as 
determined under part 1206 of this title for the total volume you take 
from the property during that calendar year.
    Paragraph (b) would explain what you must do if you do not take 
production from a marginal property during the calendar year but you 
report a difference under Sec.  1205.307. In that instance, the royalty 
value for the difference would be the value for non-arm's-length 
dispositions determined under part 1206 of this title.
Sec.  1205.309 What must I do if I underpay royalties under this 
subpart?
    This section would explain that you must pay any additional royalty 
due under paragraph (a) based on your entitled share plus accrued 
interest, if the difference you reported under Sec.  1205.307 is 
positive, indicating that you underpaid royalties. Paragraph (b) would 
explain that you would owe interest on your underpaid royalties. As 
prescribed under 30 CFR part 1218, you would owe interest from the 
beginning of the calendar year following the calendar year you used the 
marginal property exception until the date you pay the additional 
royalties. For example, if you paid the additional royalties on January 
1 of the following calendar year, you would owe no interest. If you 
paid the additional royalties on February 28, you would owe interest 
from January 1 until February 28.
Sec.  1205.310 What must I do if I overpay royalties under this 
subpart?
    Paragraph (a) would explain that if you reported a negative 
difference under Sec.  1205.307, then you are entitled to a credit for 
the amount of overpaid royalties.
    Paragraph (b) would explain that you are entitled to a credit for 
the overpaid amount from January 1 of the calendar year following the 
calendar year for which you used the marginal property exception until 
the earlier of:
    (1) The date you reported the negative difference under Sec.  
1205.307; or
    (2) June 30 of the calendar year immediately following the year you 
used the marginal property exception.
    Paragraph (c) would explain that ONRR will pay interest on the 
overpayment after you take the credit.
Sec.  1205.311 What must I do if I erroneously report using the 
marginal property exception?
    This section would explain that if you have reported royalties 
using the marginal property exception for a property that is not a 
qualified marginal property, you must amend your Form MMS-2014. You 
also would owe (or receive) interest as determined under part 1218 of 
this title and, depending on the circumstance, you could be subject to 
civil penalty procedures under part 1241 of this title.
Sec.  1205.312 What must I do if my property no longer qualifies as a 
marginal property under this subpart?
    This section would explain that if your property ceases to qualify 
for the marginal property exception, you must return to reporting under 
the requirements of Sec.  1205.101(a)(3) beginning the next calendar 
year.

C. Proposed Changes to 30 CFR Part 1210--Forms and Reports

    We would make a technical amendment to the table at 30 CFR 1210.10 
by adding the OMB control number for the new ICR.

VI. Procedural Matters

1. Summary Cost and Royalty Impact Data

    We summarized below the estimated costs and benefits of this 
proposed rule for the three affected groups--industry, state and local 
governments, and the Federal Government. We segregated the costs into 
two categories--those costs that would be incurred in the first year 
after this rule is effective; and those costs that would be incurred on 
a continuing basis each year thereafter.
    The cost and benefit information in Item 1 of the Procedural 
Matters is used as the basis for Departmental certifications in Items 2 
through 10.
A. Industry

------------------------------------------------------------------------
                                             /Benefit Amount
   Description (see corresponding    -----------------------------------
          narrative below)               First year     Subsequent years
------------------------------------------------------------------------
Cost--Requests for Alternative              $<717,898>         $<66,976>
 Reporting..........................
Cost--Determining Marginal Property          <124,200>         <124,200>
 Qualification......................
Benefit--Simplified Reporting for              198,720           198,720
 Marginal Properties................
                                     -----------------------------------
    Net Cost or Benefit to Industry.         <643,378>             7,544
------------------------------------------------------------------------

    Cost--Requests for Alternative Reporting. We estimate alternative 
reporting requests would cost industry $717,898 in the first year and 
$66,976 each year thereafter. We estimate that industry would submit 
250 requests in the first year for an alternative method of reporting 
and payment. There are about 200 offshore and 50 onshore 100-percent 
Federal agreements on which ONRR expects submission of requests to 
allow lessees to continue to report on an entitlements basis rather 
than change to a takes reporting basis as required by RSFA. We estimate 
that each request would take approximately 10 hours to complete, for a 
total of 2,500 hours. We estimate the recordkeeping associated with 
each request would be one-quarter hour. We estimate the total burden in 
the first year would be 2,563 hours = 2,500 reporting hours + 63 
recordkeeping hours. We used tables from the Bureau of Labor Statistics 
to estimate the hourly cost for industry accountants in a metropolitan 
area. We added a multiplier of 1.4 for industry benefits. The industry 
labor cost factor for accountants would be approximately $46 per hour = 
$32.83 [mean hourly wage] x 1.4 [benefits cost factor]. Using a labor 
cost factor of $46 per hour, we estimate the total first-year cost to

[[Page 48355]]

industry would be $117,898 = 2,563 reporting hours x $46/hour. Industry 
must also submit processing fees for each of the 250 requests amounting 
to $600,000 = 250 requests x $2,400 fee. Thus, the estimated total 
industry costs for alternative reporting requests in the first year 
would be $717,898 = $117,898 + $600,000.
    In subsequent years, we estimate the number of alternative 
reporting requests would decrease from 250 to 23 annually, thus 
lowering the cost to industry. We also estimate that industry would 
file two termination requests for their respective alternative method, 
which would result in an annual estimate of 256 hours (25 requests [23 
alternative reporting requests + 2 termination requests] x 10 reporting 
hours) + 6 hours (25 requests x 0.25 recordkeeping hours). Based on the 
labor cost factor of $46 per hour, we estimate the total annual cost 
would be $11,776 = 256 hours x $46 per hour. Industry also would submit 
the $2,400 processing fee for the 23 new alternative reporting 
requests, which would cost $55,200 = 23 requests x $2,400 processing 
fee. Thus the estimated total costs, in subsequent years, for 
alternative requests would be $66,976 = $11,776 + $55,200.
    Cost--Determining Marginal Property Qualification. We estimate 
approximately 3,600 producing mixed agreements would qualify for the 
marginal property reporting and payment exception, and 1,000 lessees 
reporting royalties for these mixed agreements would try to avail 
themselves of the marginal property reporting exception. Industry would 
be required to determine whether or not their mixed agreements qualify 
as a marginal property on a yearly basis by calculating the average 
daily well production for the agreement, resulting in an annual 
estimate of 2,700 hours = (3,600 mixed agreements x 0.5 hours) + (3,600 
mixed agreements x 0.25 recordkeeping hours). Based on the labor cost 
factor of $46 per hour, we estimate the total annual cost would be 
$124,200 = 2,700 hours x $46/hour.
    Benefit--Simplified Reporting for Marginal Properties. ONRR 
estimates that simplified reporting for marginal properties would save 
industry $198,720 per year. We estimate that approximately 3,600 
producing mixed agreements would qualify for the marginal property 
exception on an annual basis. For each marginal property, we estimate 
that there would be an average of two leases with two payors and one 
line each for oil and gas products reported on each payor and lease on 
Form MMS-2014 each month. We estimate eight lines would be reported 
monthly on Form MMS-2014 per marginal property. Therefore, for these 
qualifying marginal properties, a total of 28,800 lines would be 
reported on Form MMS-2014 monthly or 345,600 lines annually calculated 
as follows:

3,600 agreements x 2 payors per marginal property x 2 leases per 
marginal property x 2 reported lines per lease x 12 months.

    Due to the reporting relief provided by this proposed rulemaking, 
we estimate that the reporting burden for Form MMS-2014 would be 
reduced by 25 percent for qualifying marginal properties, from 345,600 
lines annually to 259,200 lines annually, a reduction of 86,400 lines. 
We estimate that the total annual burden reduction for this information 
collection would be 4,320 hours calculated as follows:

(86,400 lines x 20% manually submitted x 7/60 hours per manual line) 
+ (86,400 lines x 80% electronically submitted x 2/60 hours per 
electronic line).

The estimated annual savings to industry would be $198,720 = 4,320 
hours x $46 per hour.
B. State and Local Governments
    State revenues may be negatively impacted by the marginal property 
reporting exception because royalty payments may be deferred for up to 
18 months. We believe the impact would be minimal because small 
producers would be more likely to use the marginal property exception 
than large producers. We are specifically requesting comments from both 
states and industry on what impact states may incur due to the marginal 
property reporting exception.
    States may realize additional royalty revenues in future years if 
RSFA has the desired effect of extending the life of marginal 
properties. These benefits are not quantifiable at this time.
C. Federal Government
    Benefit--Reduced Operating Costs for Fewer Reported Lines. We 
estimate that the Federal Government may benefit from clearer takes 
versus entitlement reporting procedures. More accurate reporting based 
on clearer reporting instructions would reduce ONRR resources needed to 
identify, notify, and resolve which parties are responsible for the 
reporting and payment of royalties on Federal oil and gas leases. 
However, these savings are not quantifiable at this time.
    Further, the Federal Government may realize additional royalty 
revenues in future years if: (a) the savings to lessees and designees 
from the marginal property reporting exception has the desired outcome 
of extending the production life of marginal properties; and (b) 
reduced out-of-pocket expenses motivates lessees to invest in further 
lease development. However, these additional revenues are not 
quantifiable at this time.

2. Regulatory Planning and Review (E.O. 12866)

    This document is a significant rule, and the Office of Management 
and Budget (OMB) has reviewed this proposed rule under Executive Order 
12866. We have made the assessments required by E.O. 12866, and the 
results are given below.
    a. This proposed rule would not have an effect of $100 million or 
more per year on the economy. It would not adversely affect in a 
material way the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or tribal 
governments or communities. The Costs and Benefits table, in Item 1 
above, demonstrates that the economic impact on industry would be well 
below the $100 million threshold used to define a rulemaking as having 
a significant impact on the economy.
    b. This proposed rule would not create a serious inconsistency or 
otherwise interfere with an action taken or planned by another agency. 
ONRR is the only agency that promulgates rules for reporting royalties 
on Federal oil and gas leases. Because this proposed rule would address 
only reporting and payment issues, it would not affect inspections and 
other actions that BLM, BSEE, or states perform.
    c. This proposed rule would not alter the budgetary effects of 
entitlements, grants, user fees, or loan programs or the rights or 
obligations of their recipients.
    d. This proposed rule could raise novel legal or policy issues. 
This proposed rule would codify Interior Board of Land Appeals 
decisions and provide additional details about the reporting and 
payment methods mandated by RSFA.

3. Regulatory Flexibility Act

    The Department of the Interior certifies that this proposed rule 
would not have a significant economic effect on a substantial number of 
small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). Approximately 2,500 different companies submit royalty and 
production reports to ONRR each month. In addition, approximately 200 
of these 2,500 companies are large businesses under the U.S. Small 
Business Administration definition because they have over 500 
employees.

[[Page 48356]]

The remaining 2,300 companies are considered to be small businesses.
    As documented in Item 1A Industry (costs and benefits) in the 
Procedural Matters section, we believe industry would indeed have net 
savings after the first year as a result of the provisions in this 
proposed rule. The most significant costs in the first year after this 
rule became effective would be the initial programming costs necessary 
to incorporate rule provisions into each company's automated reporting 
system. As stated earlier, we believe most of these costs would be 
incurred by very large companies with complex automated reporting 
systems. Consequently, we believe this proposed rule would have an 
overall positive economic effect on small businesses. In addition to 
the monetary benefits discussed in Item 1A, this proposed rule would 
have other beneficial effects unique to small businesses.
    Small businesses would be better able to match royalty payments 
with the cash flow from the sale of production. This proposed rule 
would require lessees to pay royalties on stand-alone leases and 100-
percent Federal agreements on a takes basis; that is, only when the 
lessee sells or removes production. This procedure would be 
substantially different from current requirements that lessees pay on 
their entitled share regardless of who took production. This proposed 
rule also would allow lessees to pay on a takes basis for mixed 
agreements if the agreement qualifies as a marginal property. 
Typically, as properties near the end of their productive life, larger 
companies with higher overhead divest their marginal properties to 
smaller companies who can operate the properties more profitably. 
Consequently, we anticipate that most reporting relief granted under 
the marginal property reporting exception would be for small entities. 
Paying on a takes basis would reduce the number of out-of-pocket 
royalty payments that would otherwise occur under entitlement 
reporting.
    The marginal property exception would also benefit small businesses 
reporting on a takes basis because it would allow lessees to ``true 
up'' to their entitled share up to 6 months after the calendar year. 
The lessee's decision to defer the true-up adjustment and associated 
royalty payment would be strictly discretionary. For example, the 
lessee could choose to true up by January 1 of the next calendar year 
and avoid any interest charges. On the other hand, the lessee could 
make a conscious decision to defer out-of-pocket royalty payments and 
use the funds for other purposes for up to 6 months. For example, 
lessees could choose to invest the money if the return on investment is 
higher than the interest that will be due to the Government at the end 
of the time period, or use the funds temporarily to capitalize 
development of their oil and gas properties while awaiting a more 
permanent source of funds. An important benefit of this proposed rule 
would provide greater flexibility for small businesses to meet their 
unique cash management needs.

4. Small Business Regulatory Enforcement Fairness Act (SBREFA)

    This proposed rule is not a major rule under 5 U.S.C. 804(2), the 
Small Business Regulatory Enforcement Fairness Act. This proposed rule:
    a. Would not have an annual effect on the economy of $100 million 
or more. The effect would be limited to a maximum estimated at 
$3,534,730 = $3,842,098 x (2,300 small businesses/2,500 companies). See 
Item 1 above.
    b. Would not cause a major increase in costs or prices for 
consumers, individual industries, Federal, state, or local government 
agencies, or geographic regions. See Item 1 above.
    c. Would not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
U.S.-based enterprises to compete with foreign-based enterprises. This 
proposed rulemaking would benefit U.S.-based enterprises if finalized 
as written.

5. Unfunded Mandates Reform Act

    This proposed rule would not impose an unfunded mandate on state, 
local, or tribal governments or the private sector of more than $100 
million per year. This proposed rule would not have a significant or 
unique effect on state, local, or tribal governments or the private 
sector. Therefore, a statement containing the information required by 
the Unfunded Mandates Reform Act (2 U.S.C. 1531 et seq.) is not 
required.

6. Takings (E.O. 12630)

    Under the criteria in Executive Order 12630, this proposed rule 
would not have any significant takings implications. This proposed rule 
would not impose conditions or limitations on the use of any private 
property. Therefore, a takings implication assessment is not required.

7. Federalism (E.O. 13132)

    Under the criteria in Executive Order 13132, this proposed rule 
would not have sufficient federalism implications to warrant the 
preparation of a Federalism Assessment. This proposed rule would affect 
the timing of royalty reports to the Federal Government but not the 
amount paid and, ultimately, distributed to the states. Consequently, 
this proposed rule would not substantially and directly affect the 
relationship between Federal and state governments or impose costs on 
states or localities. Therefore, a Federalism Assessment is not 
required.

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

    This proposed rule would comply with the requirements of Executive 
Order 12988. Specifically, this proposed rule:
    a. Would meet the criteria of section 3(a) requiring that all 
regulations be reviewed to eliminate errors and ambiguity and be 
written to minimize litigation.
    b. Would meet the criteria of section 3(b)(2) requiring that all 
regulations be written in clear language and contain clear legal 
standards.

9. Consultation With Indian Tribes (E.O. 13175)

    Under the criteria in Executive Order 13175, we have evaluated this 
proposed rule and determined that it would have no potential effects on 
federally recognized Indian tribes. This proposed rule would have no 
tribal implications that impose substantial direct compliance costs on 
Indian tribal governments.

10. Paperwork Reduction Act of 1995

    This proposed rule would create a new part 1205 containing new 
information collection requirements. The title of the new information 
collection request (ICR) is ``30 CFR Part 1205, Takes vs. 
Entitlements.'' ONRR is submitting this ICR to OMB for review and 
approval, as required under the Paperwork Reduction Act of 1995 (PRA), 
44 U.S.C. 3501 et seq. This proposed rule also would amend paragraphs 
in part 1202 but would not change the information collection 
requirements already approved for that part under OMB Control Number 
1012-0004. In addition, the proposed rule would make a technical 
amendment to the table at Sec.  1210.10 by adding the OMB control 
number for the new ICR.
    As part of our continuing effort to reduce paperwork and respondent 
burden, we invite the public and other Federal agencies to comment on 
any aspect of the reporting burden through the information collection 
process. Please see ICR Comments under the ADDRESSES section to submit 
comments.
    The OMB has up to 60 days to approve or disapprove this collection 
of information but may respond after 30 days. Therefore, submit public

[[Page 48357]]

comments to OMB within 30 days in order to ensure their maximum 
consideration. However, we will consider all comments received during 
the comment period for this notice of proposed rulemaking.
    The intent of this rulemaking is to implement provisions of RSFA 
governing when a Federal lessee must report and pay on the oil and gas 
volumes it takes from a lease, or on the volume it is entitled to, 
based on its ownership interest in the lease. We collect this 
information to ensure that lessees accurately value and properly pay 
royalties. In the first year, we expect that ONRR would receive 
approximately 250 requests for an alternative method of royalty 
reporting and payment for agreements.
    If a lessee of a Federal agreement, with concurrence of all 
lessees, wants to begin or end an alternative method of royalty 
reporting and payment, the lessee must submit a written request to 
ONRR. The lessee must submit the company's name, address, phone number, 
and a contact name; the agreement number and a list of leases in the 
agreement for the property being considered for beginning or ending the 
alternative method of royalty reporting and payment; a list of all 
lessees and their ownership interest in the leases in the agreement; 
and documentation that will support the concurrence of all lessees to 
beginning or terminating such alternative method of reporting. If the 
request is to begin an alternative reporting method, the lessee also 
must submit a description of the alternative method and documentation 
that will prove that such an alternative method does not reduce the 
amount of royalty obligation.
    We estimate that ONRR would receive approximately 250 requests in 
the first year for an alternative method of royalty reporting and 
payment on 100-percent Federal agreements from the lessees. We expect 
200 offshore and 50 onshore submitted requests, allowing lessees to 
continue to report on an entitlements basis instead of changing to a 
takes-reporting basis as required by RSFA. Each request for alternative 
reporting would be subject to a non-refundable processing fee of 
$2,400. Lessees would take approximately 10 hours to complete 
submission of each request and an additional one-quarter hour for 
recordkeeping. We estimate the total annual burden would be 2,563 hours 
= (250 requests x 10 reporting hours) + (250 requests x 0.25 
recordkeeping hours). In subsequent years, we expect the number of 
requests to decrease, thus lowering the cost to industry. We also 
estimate that industry would file annually two termination requests of 
their respective alternative method, resulting in an annual estimate of 
21 hours = (2 termination requests x 10 reporting hours) + (2 
termination requests x 0.25 recordkeeping hour).
    We estimate a total of 2,584 burden hours for the new requirements. 
The following table shows the proposed requirements and burden hours 
for this rule and new ICR, by CFR citation.

                                                Burden Breakdown
----------------------------------------------------------------------------------------------------------------
                                                                             Average  number
         30 CFR            Reporting and recordkeeping      Hour burden         of  annual       Annual burden
                                   requirement                                  responses            hours
----------------------------------------------------------------------------------------------------------------
                           PART 1205--REPORTING AND PAYING ROYALTIES ON FEDERAL LEASES
----------------------------------------------------------------------------------------------------------------
                           Subpart B--Reporting and Paying Royalties on Federal Leases
----------------------------------------------------------------------------------------------------------------
1205.101 (a)(1), (a)(2),  (a) Unless you qualify for       Hour burden covered under OMB Control No. 1012-0004
 and (a)(3).               the exceptions in subparts C                   (formerly 1010-0139).
                           and D of this part, you must
                           report and pay royalties. *
                           * *
1205.105 (a)............  The volume allocated to a
                           lease or agreement under a
                           BLM or BSEE commingling
                           approval is the volume on
                           which you and all other
                           lessees must report and pay
                           under Sec.  1205.101(a)(1)
                           through (3).
----------------------------------------------------------------------------------------------------------------
1205.106 (a) and (b)....  There are two exceptions to                    AUDIT PROCESS. See note.
                           the reporting and payment
                           requirements in this
                           subpart: (a) You may qualify
                           for an alternative to the
                           royalty reporting and
                           payment requirements for 100-
                           percent Federal agreements
                           under Sec.   1205.101(a)(2)
                           if you meet certain
                           requirements. The
                           requirements for alternative
                           reporting are explained in
                           subpart C; or (b) You may
                           qualify to report on your
                           take volume rather than
                           entitled volume, with
                           appropriate adjustments
                           after year-end, if your
                           mixed agreement is a
                           marginal property.
                           Requirements for the
                           marginal property reporting
                           exception are explained in
                           subpart D.
----------------------------------------------------------------------------------------------------------------
    Subpart C--Reporting and Paying Royalties on Federal Leases Under an Alternative Method for a 100-percent
                                                Federal Agreement
----------------------------------------------------------------------------------------------------------------
1205.201 (a)............  You may qualify for an                         AUDIT PROCESS. See note.
                           alternative to the royalty
                           reporting and payment
                           requirements for agreements
                           under subpart B if: (a) You
                           are in a 100-percent Federal
                           agreement;
                                                        --------------------------------------------------------
1205.201 (b)............  (b) You and all other lessees         Hour burden covered under 30 CFR 1205.202.
                           in the agreement concur in
                           writing to the alternative
                           method; and
                                                        --------------------------------------------------------
1205.201 (c)............  (c) The alternative does not                   AUDIT PROCESS. See note.
                           reduce the total monthly
                           royalty obligation reported
                           and paid to ONRR.
                                                        --------------------------------------------------------
1205.202 (a), (b), and    (a) To obtain approval to use              10.25                250              2,563
 (c).                      an alternative method of
                           royalty reporting and
                           payment, you must submit one
                           written request to ONRR on
                           behalf of all lessees of
                           leases in the agreement.

[[Page 48358]]

 
                          (b) The request you submit
                           under paragraph (a) of this
                           section must contain the
                           following documents and
                           information:
                          (1) A description of the
                           proposed alternative
                           reporting and payment method.
                          (2) The agreement number and
                           a list of the leases in the
                           agreement.
                          (3) A list of all lessees and
                           their ownership interest in
                           the leases in the agreement.
                          (4) A copy of the lessees'
                           written concurrence to the
                           alternative method required
                           under Sec.   1205.201(b).
                          (5) Documentation showing
                           that the proposed
                           alternative method does not
                           reduce the total monthly
                           royalty obligation reported
                           and paid to ONRR for the
                           leases in the agreement.
                          (6) A non-refundable
                           processing fee of $2,400 for
                           each request you make for an
                           agreement under this
                           section:
                          (i) You must pay the
                           processing fee to ONRR
                           following the requirements
                           for making payments found in
                           30 CFR 1218.51. You are not
                           required to use Electronic
                           Funds Transfer (EFT) for
                           these payments.
                          (ii) If you do not remit the
                           full amount of the
                           processing fee with your
                           request, ONRR will return
                           your request unprocessed. If
                           ONRR returns your
                           unprocessed request for
                           failure to pay the fee, you
                           may not appeal the return of
                           your request.
                          (iii) ONRR may adjust the
                           processing fee by providing
                           notice in the Federal
                           Register.
                          (c) You must retain all
                           records pertaining to your
                           request for an alternative
                           method for 7 years after
                           termination of the
                           alternative method.
                                                        --------------------------------------------------------
1205.204 (a)............  When ONRR receives your                        AUDIT PROCESS. See note.
                           request for alternative
                           reporting and payment under
                           Sec.   1205.202, ONRR will
                           notify you in writing as
                           follows:
                          (a) If your request for
                           alternative reporting and
                           payment is complete, ONRR
                           may approve, deny, or modify
                           your request in writing. * *
                           *.
                                                        --------------------------------------------------------
1205.204 (b)(1) and (4).  (b) If your request for               Hour burden covered under 30 CFR 1205.202.
                           alternative reporting and
                           payment is not complete,
                           ONRR will notify you in
                           writing that your request is
                           incomplete and identify any
                           missing information.
                          (1) You must submit the
                           missing information within
                           60 days of your receipt of
                           ONRR's notice. * * *.
                          (4) You may submit a new
                           request. * * *.
                                                        --------------------------------------------------------
1205.205 (a) and (b)....  (a) If you are a lessee for a    Hour burden covered under OMB Control No. 1012-0004.
                           lease in an agreement when
                           you submit a request under
                           Sec.   1205.202, you must
                           begin using the alternative
                           method of royalty reporting
                           and payment for the
                           production month after you
                           receive written approval
                           from ONRR.
                          (b) If you become a lessee
                           for a lease in an agreement
                           for which there is an
                           approved alternative method
                           of royalty reporting and
                           payment, you must begin
                           reporting under the
                           alternative method for the
                           production month in which
                           you become a lessee.
                                                        --------------------------------------------------------
1205.206 (a) and (b)....  If you want to stop using the              10.25                  2                 21
                           approved alternative method
                           of royalty reporting and
                           payment, you must:
                          (a) Obtain written
                           concurrence from all lessees
                           in the agreement to stop
                           using the alternative
                           method; and
                          (b) Provide a copy of the
                           written concurrence to ONRR
                           and the delegated state, if
                           applicable.
1205.207 (a) and (b)....  (a) If you request to stop
                           using the approved
                           alternative method under
                           Sec.   1205.206, then you
                           must stop using the approved
                           alternative method of
                           royalty reporting and
                           payment beginning with the
                           production month after you
                           provide a copy of the
                           written concurrence to ONRR
                           and the delegated state, if
                           applicable.
                          (b) You must stop using the    .................  .................  .................
                           approved alternative method
                           of royalty reporting and
                           payment within 60 days after
                           you receive written notice
                           from BLM or BSEE notifying
                           you that a non-Federal tract
                           or a tract with a different
                           royalty rate or funds
                           distribution has been added
                           to your agreement.
----------------------------------------------------------------------------------------------------------------

[[Page 48359]]

 
                        Subpart D--Reporting and Paying Royalties on Marginal Properties
----------------------------------------------------------------------------------------------------------------
1205.301 (a), (b), and    (a) The marginal property        Hour burden covered under OMB Control No. 1012-0004.
 (c).                      exception allows you to
                           report and pay on your take
                           volume each month and adjust
                           to your entitled volume
                           after the end of the
                           calendar year rather than
                           reporting and paying based
                           on your entitled volume each
                           month as required under Sec.
                             1205.101(a)(3).
                          (b) You may use the marginal
                           property exception if:.
                          (1) Your lease is in a mixed
                           agreement; and.
                          (2) The mixed agreement
                           qualifies as a marginal
                           property under this subpart.
                          (c) You may report and pay
                           using the marginal property
                           exception regardless of
                           whether any other lessee or
                           designee who pays royalties
                           for that marginal property
                           uses the exception.
                                                        --------------------------------------------------------
1205.305 (a)............  (a) If you start using the       Hour burden covered under OMB Control No. 1012-0004.
                           marginal property exception
                           . . . then you must report
                           and pay. * * *
1205.306 (a) and (b)....  If you want to report and pay
                           under the marginal property
                           exception, you must:
                          (a) First, determine your
                           take volume from the
                           qualifying marginal property
                           under Sec.   1205.102.
                          (b) Second, report and pay
                           for each of your Federal
                           leases in the qualifying
                           marginal property by
                           allocating the take volume
                           determined in paragraph (a)
                           of this section to all of
                           your leases in the agreement
                           based on the approved
                           agreement allocation
                           schedule.
1205.307 (a), (b), and    If the take volume you
 (c).                      reported under Sec.
                           1205.306(b) does not equal
                           your entitled volume for the
                           calendar year, for each of
                           your Federal leases in the
                           qualifying marginal
                           property, you must:
                          (a) Calculate the difference
                           between the take volume you
                           reported under the marginal
                           property exception and your
                           entitled volume for the
                           calendar year in which you
                           used the exception; and.
                          (b) Report the difference
                           calculated in paragraph (a)
                           of this section:.
                          (1) On Form MMS-2014, Report
                           of Sales and Royalty
                           Remittance.
                          (2) By June 30 of the
                           calendar year immediately
                           following the calendar year
                           for which you used the
                           marginal property exception.
                          (3) As a positive amount on
                           Form MMS-2014 when your
                           total takes are less than
                           your entitlements, or a
                           negative amount on Form MMS-
                           2014 when your total takes
                           exceed your entitlements.
                          (4) As a single-line entry
                           for each lease and product
                           from the lease.
                          (5) Using the correct
                           adjustment reason code for
                           reporting under this section.
                          (6) Using the December sales
                           month of the calendar year
                           for which you used the
                           marginal property exception.
                          (c) Do not adjust the monthly
                           royalty lines you reported
                           under Sec.   1205.306(b) if
                           the take volumes you
                           reported were accurate.
                                                        --------------------------------------------------------
1205.309 (a) and (b)....  If the difference you report     Hour burden covered under OMB Control No. 1012-0004.
                           under Sec.   1205.307 is
                           positive and you underpaid
                           royalties for the qualifying
                           marginal property, then you:
                          (a) Must pay the additional
                           royalty owed when you report
                           the difference under Sec.
                           1205.307; and.
                          (b) Will owe interest on the
                           additional royalty you
                           reported and paid under
                           paragraph (a) of this
                           section at the rate
                           prescribed under part 1218
                           of this title. You will owe
                           interest beginning January 1
                           of the calendar year
                           following the calendar year
                           for which you used the
                           marginal property exception
                           until the date you paid the
                           additional royalties due.

[[Page 48360]]

 
1205.311 (a), (b), and    If you erroneously report
 (c).                      using the marginal property
                           exception on a property that
                           is not a qualified marginal
                           property, you:
                          (a) Must amend all
                           erroneously submitted Form
                           MMS-2014s to report your
                           entitled volume for each
                           calendar month;.
                          (b) Will owe any associated
                           interest calculated under
                           part 1218 of this title; and.
                          (c) May be subject to civil
                           penalties under part 1241 of
                           this title.
                                                        --------------------------------------------------------
1205.312 (a), (b), and    (a) Your property must                         AUDIT PROCESS. See note.
 (c).                      qualify for the marginal
                           property exception under
                           this subpart for each
                           calendar year based on
                           production during the base
                           period.
                          (b) If you find that your
                           property is no longer
                           eligible for the marginal
                           property exception because
                           production increased in the
                           most recent base period, you
                           must stop using the
                           exception as of December 31
                           of the year in which the
                           most recent base period ends.
                          (c) If you do not stop using
                           the marginal property
                           exception as required under
                           paragraph (b) of this
                           section, then you:.
                          (1) Will owe late payment
                           interest determined under
                           part 1218 of this title from
                           the date you were required
                           to stop using the exception
                           under paragraph (b).
                          (2) May be subject to civil
                           penalties under part 1241 of
                           this title.
                                                        --------------------------------------------------------
Burden Hour Total                                        .................                252              2,584
----------------------------------------------------------------------------------------------------------------
Note: AUDIT PROCESS--The Office of Regulatory Affairs determined that the audit process is exempt from the
  Paperwork Reduction Act of 1995 because ONRR staff asks non-standard questions to resolve exceptions. 5 CFR
  1320.4(a)(2).

    Public Comment Policy: The PRA (44 U.S.C. 3501 et seq.) provides 
that an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. Before submitting an ICR to OMB, 
PRA section 3506(c)(2)(A) requires each agency to `` . . . consult with 
members of the public and affected agencies concerning each proposed 
collection of information. . . .'' ONRR is specifically soliciting 
comments on the following aspects of this collection: (a) Evaluate 
whether the proposed collection of information is necessary for the 
agency to perform its duties, including whether the information is 
useful; (b) evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information; (c) enhance the 
quality, usefulness, and clarity of the information to be collected; 
and (d) minimize the burden on the respondents, including the use of 
automated collection techniques or other forms of information 
technology.
    The PRA also requires agencies to estimate the total annual 
reporting ``non-hour cost'' burden to respondents or recordkeepers 
resulting from the collection of information. Other than the $2,400 fee 
for each alternative reporting request (Sec.  1205.202(b)(6)), we have 
not identified any other costs. Therefore, if you have costs to 
generate, maintain, and disclose this information, you should comment 
and provide your total capital and startup cost components or annual 
operation, maintenance, and purchase of service components. You should 
describe the methods you use to estimate major cost factors, including 
system and technology acquisition, expected useful life of capital 
equipment, discount rate(s), and the period over which you incur costs. 
Capital and startup costs include, among other items, software you 
purchase to prepare for collecting information; monitoring, sampling, 
and testing equipment; and record storage facilities. Generally, your 
estimates should not include equipment or services purchased: (i) 
Before October 1, 1995; (ii) to comply with requirements not associated 
with the information collection; (iii) for reasons other than to 
provide information or keep records for the Federal Government; or (iv) 
as part of customary and usual business or private practices.
    ONRR will summarize written responses to this proposed information 
collection and address them in our final rule. We will provide a copy 
of the ICR to you, without charge upon request, and also post the ICR 
at http://www.onrr.gov/Laws_R_D/FRNotices/FRInfColl.htm. We will post 
all comments in response to this proposed information collection at 
http://www.regulations.gov.

11. National Environmental Policy Act

    This rule does not constitute a major Federal action significantly 
affecting the quality of the human environment. A detailed statement 
under the National Environmental Policy Act of 1969 (NEPA) is not 
required because this rule is categorically excluded under: ``(i) 
Policies, directives, regulations, and guidelines: that are of an 
administrative, financial, legal, technical, or procedural nature.'' 
See 43 CFR 46.210(i) and the DOI Departmental Manual, part 516, section 
15.4.D. We have also determined that this rule is not involved in any 
of the extraordinary circumstances listed in 43 CFR 46.215 that would 
require further analysis under NEPA. The procedural changes resulting 
from these amendments would have no consequences with respect to the 
physical environment. This rule would not alter in any material way 
natural resource exploration, production, or transportation.

12. Data Quality Act

    In developing this proposed rule, we did not conduct or use a 
study, experiment, or survey requiring peer review under the Data 
Quality Act (Pub. L. 106-554), also known as the Information Quality 
Act. The Department of the Interior has issued

[[Page 48361]]

guidance regarding the quality of information that it relies on for 
regulatory decisions. This guidance is available on DOI's Web site at 
http://www.doi.gov/ocio/iq.html.

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

    This proposed rule would not be a significant energy action under 
the definition in Executive Order 13211. A Statement of Energy Effects 
is not required.

14. Clarity of This Regulation

    We are required by Executive Orders 12866 and 12988 and by the 
Presidential Memorandum of June 1, 1998, to write all rules in plain 
language. This means that each rule we publish must: (a) Be logically 
organized; (b) use the active voice to address readers directly; (c) 
use clear language rather than jargon; (d) be divided into short 
sections and sentences; and (e) use lists and tables wherever possible.
    If you feel that we have not met these requirements, send us 
comments by one of the methods listed in the ``ADDRESSES'' section. To 
better help us revise the rule, your comments should be as specific as 
possible. For example, you should tell us the numbers of the sections 
or paragraphs that are unclearly written, which sections or sentences 
are too long, the sections where you feel lists or tables would be 
useful, etc.

15. Public Availability of Comments

    Before including your address, phone number, email address, or 
other personal identifying information in your comment, you should be 
aware that your entire comment--including your personal identifying 
information--may be made publicly available at any time. While you can 
ask us in your comment to withhold your personal identifying 
information from public view, we cannot guarantee that we will be able 
to do so.

List of Subjects in 30 CFR Parts 1202, 1205, and 1210

    Indian leases, Actual disposition, Royalty purposes, Outer 
Continental shelf, Indian lands, Mineral resources, Mineral royalties, 
Natural gas, Oil, Public lands--mineral resources, Reporting and 
recordkeeping requirements.

    Dated: August 1, 2013.
Rhea Suh,
Assistant Secretary, Policy, Management and Budget.

    For the reasons stated in the preamble, the Office of Natural 
Resources Revenue proposes to amend 30 CFR parts 1202 and 1210, and add 
30 CFR part 1205 as set forth below:

PART 1202--ROYALTIES

0
1. The authority for part 1202 continues to read as follows:

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

Subpart C--Federal and Indian Oil


Sec.  1202.100  Royalty on oil.

0
2. Amend Sec.  1202.100 by revising paragraphs (e)(1), (e)(2), (e)(3), 
and (f) to read as follows:
* * * * *
    (e)(1) Indian oil. This paragraph (e) applies only to Indian 
leases. In those instances where the lessees of any Indian lease 
committed to a federally approved unitization or communitization 
agreement do not actually take the proportionate share of the agreement 
production attributable to their lease under the terms of the 
agreement, the full share of production attributable to the lease under 
the terms of the agreement nonetheless is subject to the royalty 
payment and reporting requirements of this title. Except as provided in 
paragraph (e)(2) of this section, the value, for royalty purposes, of 
production attributable to unitized or communitized leases will be 
determined in accordance with 30 CFR part 1206. In applying the 
requirements of 30 CFR part 1206 to Indian leases, the circumstances 
involved in the actual disposition of the portion of the production to 
which the lessee was entitled but did not take, will be considered as 
controlling in arriving at the value, for royalty purposes, of that 
portion, as if the person actually selling or disposing of the 
production were the lessee of the Indian lease.
    (e)(2) If an Indian lessee takes less than its proportionate share 
of agreement production, upon request of the lessee, ONRR may authorize 
a royalty valuation method different from that required by paragraph 
(e)(1) of this section, but consistent with the purposes of these 
regulations, for any volumes not taken by the lessee but for which 
royalties are due.
    (e)(3) For purposes of this section, all persons actually taking 
volumes in excess of their proportionate share of production in any 
month under a unitization or communitization agreement shall be deemed 
to have taken ratably from all persons actually taking less than their 
proportionate share of the agreement production for that month.
* * * * *
    (f) Federal oil. The regulations explaining when you must report 
and pay royalties on the volume of oil you take from your Federal 
lease, including Federal leases committed to a federally approved 
unitization or communitization agreement, or on the entitled share of 
production from or allocated to your Federal lease, are found in 30 CFR 
part 1205.
* * * * *

Subpart D--Federal Gas


Sec.  1202.150  Royalty on gas.

0
3. Amend Sec.  1202.150 by revising paragraph (e) to read as follows:
* * * * *
    (e) The regulations explaining when you must report and pay 
royalties on the volume of gas you take from your Federal lease, 
including Federal leases committed to a federally approved unitization 
or communitization agreement, or on the entitled share of production 
from or allocated to your Federal lease, are found in 30 CFR part 1205.


Sec.  1202.152  Standards for reporting and paying royalties on gas.

0
4. Amend Sec.  1202.152 by revising paragraphs (a)(1) and (a)(2) to 
read as follows:
    (a) You must report gas volumes and British thermal unit (Btu) 
heating values using the frequencies and methods required under BLM and 
Bureau of Ocean Energy Management (BOEM) regulations, orders, and 
notices subject to ONRR verification based on third party data.
* * * * *

Subpart J--Gas Production From Indian Leases


Sec.  1202.558   What standards do I use to report and pay royalties on 
gas?

0
5. Amend Sec.  1202.558 by revising paragraphs (a)(1) and (a)(2) to 
read as follows:
    (a) You must report gas volumes and Btu heating values using the 
frequencies and methods required under BLM regulations, orders and 
notices, subject to ONRR verification based on third party data.
* * * * *
0
6. Add part 1205 to read as follows:

PART 1205--REPORTING AND PAYING ROYALTIES ON FEDERAL LEASES

Subpart A--General Provisions
1205.1 What is the purpose of this part?

[[Page 48362]]

1205.2 What leases are subject to this part?
1205.3 What definitions apply to this part?
Subpart B--Reporting and Paying Royalties on Federal Leases
1205.101 How do I report and pay royalties?
1205.102 How do I determine my take volume?
1205.103 How do I determine my entitled volume in a mixed agreement?
1205.104 How do I determine value for my entitled volume in a mixed 
agreement?
1205.105 How does a commingling approval affect my take volume?
1205.106 Are there exceptions to the reporting and payment 
requirements in this subpart?
Subpart C--Reporting and Paying Royalties on Federal Leases Under an 
Alternative Method for a 100-Percent Federal Agreement
1205.201 How do I qualify for alternative reporting and payment for 
a 100-percent Federal agreement?
1205.202 How do I request alternative reporting and payment for a 
100-percent Federal agreement?
1205.203 Who will approve, deny, or modify my request for 
alternative reporting and payment for a 100-percent Federal 
agreement?
1205.204 How will I know if I am approved for alternative reporting 
and payment for a 100-percent Federal agreement?
1205.205 When must I begin using the alternative method for a 100-
percent Federal agreement?
1205.206 What if I want to stop reporting and paying under the 
approved alternative method for a 100-percent Federal agreement?
1205.207 When must I stop using the approved alternative method for 
a 100-percent Federal agreement?
Subpart D--Reporting and Paying Royalties on Marginal Properties
1205.301 What is the marginal property reporting and payment 
exception?
1205.302 What is a marginal property under this subpart?
1205.303 How do I determine if my property is a marginal property?
1205.304 When may I begin using the marginal property exception?
1205.305 How long must I use the marginal property exception?
1205.306 How do I report under the marginal property exception?
1205.307 What if the take volume I reported does not equal my 
entitled volume for one or more of my Federal leases for the 
calendar year?
1205.308 How do I determine the royalty value for the difference 
between my take volume and entitled volume?
1205.309 What must I do if I underpay royalties under this subpart?
1205.310 What must I do if I overpay royalties under this subpart?
1205.311 What must I do if I erroneously report using the marginal 
property exception?
1205.312 What must I do if my property no longer qualifies as a 
marginal property under this subpart?

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

Subpart A--General Provisions


Sec.  1205.1  What is the purpose of this part?

    (a) This part explains when you must report and pay royalties on:
    (1) The volume of oil and gas you take from your Federal lease; or
    (2) The entitled share of production from or allocated to your 
Federal lease.
    (b) The requirements of this part do not alter a lessee's liability 
to pay royalty on the percentage of lease production equal to the 
lessee's working interest percentage, record title interest, or 
operating rights ownership in a lease.
    (c) The requirements of this part do not alter a lessee's 
responsibility to timely pay annual obligations specified in lease 
terms such as minimum royalty payments.


Sec.  1205.2  What leases are subject to this part?

    (a) This part applies to all Federal oil and gas leases onshore and 
on the Outer Continental Shelf (OCS).
    (b) This part does not apply to:
    (1) Federal leases for minerals other than oil and gas;
    (2) Indian mineral leases; or
    (3) Leases for which the Federal Government became the lessor when 
it acquired a mineral interest subject to a private mineral lease.


Sec.  1205.3  What definitions apply to this part?

    The following definitions apply to this part:
    100-percent Federal agreement means any agreement that contains 
only Federal leases having the same fixed royalty rate and funds 
distribution. A 100-percent Federal agreement excludes any agreement 
that includes leases subject to the Gulf of Mexico Energy Security Act 
of 2006 (GOMESA).
    Agreement means an agreement for exploration or development of 
mineral resources from identified tracts of properties described in 30 
CFR chapters II or V (offshore) or 43 CFR part 3000 (onshore) that is 
approved by the Bureau of Safety and Environmental Enforcement (BSEE) 
or the Bureau of Land Management (BLM), as applicable. The most common 
agreements are enhanced recovery units, unit participating areas, 
unitization agreements, and communitization agreements. For purposes of 
this part, agreements fall into two categories: 100-percent Federal 
agreements and mixed agreements.
    Approved point of royalty measurement means the point where BLM or 
BSEE determines the volume of oil or gas is removed from a lease or 
agreement. The BLM designates this point under 43 CFR 3162.7 for 
onshore leases, and BSEE designates this point under 30 CFR part 250, 
subpart L, for OCS leases. When production from different leases or 
agreements is commingled before the approved point of royalty 
measurement, the commingling approval defines how the total volume 
measured at the approved point of royalty measurement is allocated to 
each lease or agreement subject to the commingling approval.
    Barrels of oil equivalent (BOE) means the combined equivalent 
production of oil and gas stated in barrels of oil. Each barrel of oil 
production is equal to one BOE. Also, each 6,000 cubic feet (6 Mcf) of 
gas production is equal to one BOE.
    Base period means the 12-month period from July 1 through June 30 
immediately preceding the calendar year for which you elect to report 
and pay using the marginal property reporting exception in subpart D.
    Calendar year means the January through December production months.
    Combined equivalent production means the total of all oil and gas 
production for the marginal property, stated in BOE.
    Commingling approval means the BLM- or BSEE-approved surface mixing 
of production from two or more independent leases or agreements, before 
measurement for royalty purposes.
    Delegated state means a state with which ONRR has entered into a 
delegation agreement under 30 U.S.C. 1735.
    Designee means the person designated by a lessee under 30 CFR 
1218.52 to make all or part of the royalty or other payments due on a 
lease on the lessee's behalf.
    Entitled share means the percentage of the volume of production 
equal to your working interest percentage or operating rights ownership 
in a lease.
    Lessee means any person to whom the United States issues an oil and 
gas lease, or any person to whom all or a part of a lessee's record 
title interest or operating rights in a lease have been assigned.
    Mixed agreement means any agreement other than a 100-percent 
Federal agreement. Mixed agreements contain any mixture of Federal, 
Indian, state or private mineral estates, or contain all Federal leases 
with different royalty rates or funds distribution. A

[[Page 48363]]

mixed agreement includes any agreement that contains leases subject to 
GOMESA.
    Operator means any person, including the lessee, who has control 
of, or who manages operations affecting any Federal oil and gas lease. 
``Operator'' also means any entity engaged in the business of 
developing, drilling for, or producing oil or gas or that has the 
responsibility for reporting production from a lease or portion 
thereof.
    Producing wells means only those producing oil or gas wells that 
contribute to the sum of BOE used in the calculation under Sec. Sec.  
1205.302 and 1205.303. Producing wells do not include injection wells, 
disposal wells and water source wells. Wells with multiple zones 
commingled downhole are considered a single well.
    Take means any oil or gas volumes removed or sold from a lease or 
agreement, as measured at or allocated from an approved point of 
royalty measurement. For stand-alone leases, the take volume is the 
volume measured at the approved point of royalty measurement for the 
lease. For leases in a 100-percent Federal agreement or subject to a 
commingling approval, the take volume for an individual lease is the 
volume allocated back to the lease after measurement at an approved 
point of royalty measurement for the agreement or commingling approval.
    You and your means the lessee or its designee for a lease.

Subpart B--Reporting and Paying Royalties on Federal Leases


Sec.  1205.101  How do I report and pay royalties?

    (a) Unless you qualify for the exceptions in subparts C and D of 
this part, you must report and pay royalties as stated in the table 
below:

------------------------------------------------------------------------
   If you are a lessee of a lease or       Then you must report and pay
    portion of a lease that is . . .         royalties based on . . .
------------------------------------------------------------------------
(1) Not contained in an agreement        The volume of production you
 (stand-alone).                           take from the lease or portion
                                          of a lease that is not in an
                                          agreement.
(2) In a 100-percent Federal agreement.  The volume of production you
                                          take from the lease or portion
                                          of the lease in a 100-percent
                                          Federal agreement.
(3) In a mixed agreement...............  Your entitled share of
                                          production allocated to the
                                          lease or portion of the lease
                                          in the mixed agreement.
------------------------------------------------------------------------

    (b) If you report and pay royalties under paragraph (a)(2) of this 
section for more than one lease in a 100-percent Federal agreement, you 
must allocate the volume to each lease in the agreement according to 
the agreement allocation schedule.


Sec.  1205.102  How do I determine my take volume?

    The volume of production you take is the volume you, or someone on 
your behalf, sold from your lease or leases. See Sec.  1205.105 to 
determine how a commingling approval may affect your take volume.


Sec.  1205.103  How do I determine my entitled volume in a mixed 
agreement?

    Your entitled volume is your entitled share in a lease or portion 
of a lease multiplied by the volume of production allocated to your 
lease under the agreement allocation schedule. See Sec.  1205.105 to 
determine how a commingling approval may affect your entitled volume.


Sec.  1205.104  How do I determine value for my entitled volume in a 
mixed agreement?

    (a) If you take less than your entitled volume of production from a 
mixed agreement during a month, then the royalty value you must use for 
the difference is the volume weighted-average unit value for the total 
volume you take from the property during that month, as determined 
under part 1206 of this title.
    (b) If you do not take any production to which you were entitled 
from a mixed agreement during a month, then the royalty value for your 
entitled share for that month is the value determined for non-arm's-
length dispositions under 30 CFR 1206.103 for oil; 30 CFR 1206.152(c) 
for unprocessed gas; and 30 CFR 1206.153(c) for processed gas.


Sec.  1205.105  How does a commingling approval affect my take volume?

    (a) The volume allocated to a lease or agreement under a BLM or 
BSEE commingling approval is the volume on which you and all other 
lessees must report and pay under Sec.  1205.101(a)(1) through (3).
    (b) The sum of the volumes all lessees report under paragraph (a) 
of this section must equal the total volume allocated to the lease or 
agreement under the commingling approval.


Sec.  1205.106  Are there exceptions to the reporting and payment 
requirements in this subpart?

    There are two exceptions to the reporting and payment requirements 
in this subpart:
    (a) You may qualify for an alternative to the royalty reporting and 
payment requirements for 100-percent Federal agreements under Sec.  
1205.101(a)(2) if you meet certain requirements. The requirements for 
alternative reporting are explained in subpart C; or
    (b) You may qualify to report on your take volume rather than 
entitled volume, with appropriate adjustments after year-end, if your 
mixed agreement is a marginal property. Requirements for the marginal 
property reporting exception are explained in subpart D.

Subpart C--Reporting and Paying Royalties on Federal Leases Under 
an Alternative Method for a 100-Percent Federal Agreement


Sec.  1205.201  How do I qualify for alternative reporting and payment 
for a 100-percent Federal agreement?

    You may qualify for an alternative to the royalty reporting and 
payment requirements for agreements under subpart B if:
    (a) You are in a 100-percent Federal agreement;
    (b) You and all other lessees in the agreement concur in writing to 
the alternative method; and
    (c) The alternative does not reduce the total monthly royalty 
obligation reported and paid to ONRR.


Sec.  1205.202  How do I request alternative reporting and payment for 
a 100-percent Federal agreement?

    (a) To obtain approval to use an alternative method of royalty 
reporting and payment, you must submit one written request to ONRR on 
behalf of all lessees of leases in the agreement.
    (b) The request you submit under paragraph (a) of this section must 
contain the following documents and information:
    (1) A description of the proposed alternative reporting and payment 
method.
    (2) The agreement number and a list of the leases in the agreement.
    (3) A list of all lessees and their ownership interest in the 
leases in the agreement.

[[Page 48364]]

    (4) A copy of the lessees' written concurrence to the alternative 
method required under Sec.  1205.201(b).
    (5) Documentation showing that the proposed alternative method does 
not reduce the total monthly royalty obligation reported and paid to 
ONRR for the leases in the agreement.
    (6) A non-refundable processing fee of $2,400 for each request you 
make for an agreement under this section.
    (i) You must pay the processing fee to ONRR following the 
requirements for making payments found in 30 CFR 1218.51. You are not 
required to use Electronic Funds Transfer (EFT) for these payments.
    (ii) If you do not remit the full amount of the processing fee with 
your request, ONRR will return your request unprocessed. If ONRR 
returns your unprocessed request for failure to pay the fee, you may 
not appeal the return of your request.
    (iii) ONRR may adjust the processing fee by providing notice in the 
Federal Register.
    (c) You must retain all records pertaining to your request for an 
alternative method for 7 years after termination of the alternative 
method.


Sec.  1205.203  Who will approve, deny, or modify my request for 
alternative reporting and payment for a 100-percent Federal agreement?

    (a) If there is not a delegated state for your lease in a 100-
percent Federal agreement, only ONRR will decide whether to approve, 
deny, or modify your request for alternative reporting and payment.
    (b) If there is a delegated state for your lease in a 100-percent 
Federal agreement, ONRR will decide whether to approve, deny, or modify 
your request for alternative reporting and payment after consulting 
with the delegated state.


Sec.  1205.204  How will I know if I am approved for alternative 
reporting and payment for a 100-percent Federal agreement?

    When ONRR receives your request for alternative reporting and 
payment under Sec.  1205.202, we will notify you in writing as follows:
    (a) If your request for alternative reporting and payment is 
complete, ONRR may approve, deny, or modify your request in writing.
    (1) If ONRR approves your request for alternative reporting and 
payment, ONRR will notify you with specifics of the approval.
    (2) If ONRR denies your request for alternative reporting and 
payment, ONRR will notify you of the reasons for denial and your appeal 
rights under part 1290, subpart B, of this chapter.
    (3) If ONRR modifies your request for alternative reporting and 
payment, ONRR will notify you of the modifications.
    (i) You have 60 days from your receipt of the notice to either 
accept or reject any modification(s) in writing.
    (ii) If you reject the modification(s) or fail to respond to the 
notice, ONRR will deny your request. ONRR will notify you in writing of 
the reasons for denial and your appeal rights under part 1290, subpart 
B, of this chapter.
    (b) If your request for alternative reporting and payment is not 
complete, ONRR will notify you in writing that your request is 
incomplete and identify any missing information.
    (1) You must submit the missing information within 60 days of your 
receipt of ONRR's notice that your request is incomplete.
    (2) After you submit all required information, ONRR may approve, 
deny, or modify your request for alternative reporting and payment 
under paragraph (a) of this section.
    (3) If you do not submit all required information within 60 days of 
your receipt of ONRR's notice that your request is incomplete, we will 
return your request as incomplete. If ONRR returns your unprocessed 
request because it is incomplete:
    (i) ONRR will not return the processing fee you paid under Sec.  
1205.202; and
    (ii) You may not appeal the return of your request.
    (4) You may submit a new request including another processing fee 
for alternative reporting and payment under this subpart at any time 
after ONRR returns your incomplete request.


Sec.  1205.205  When must I begin using the alternative method for a 
100-percent Federal agreement?

    (a) If you are a lessee for a lease in an agreement when you submit 
a request under Sec.  1205.202, you must begin using the alternative 
method of royalty reporting and payment for the production month after 
you receive written approval from ONRR.
    (b) If you become a lessee for a lease in an agreement for which 
there is an approved alternative method of royalty reporting and 
payment, you must begin reporting under the alternative method for the 
production month in which you become a lessee.


Sec.  1205.206  What if I want to stop reporting and paying under the 
approved alternative method for a 100-percent Federal agreement?

    If you want to stop using the approved alternative method of 
royalty reporting and payment, you must:
    (a) Obtain written concurrence from all lessees in the agreement to 
stop using the alternative method.
    (b) Provide a copy of the written concurrence to ONRR and the 
delegated state, if applicable.


Sec.  1205.207  When must I stop using the approved alternative method 
for a 100-percent Federal agreement?

    (a) If you request to stop using the approved alternative method 
under Sec.  1205.206, then you must stop using the approved alternative 
method of royalty reporting and payment beginning with the production 
month after you provide a copy of the written concurrence to ONRR and 
the delegated state, if applicable.
    (b) You must stop using the approved alternative method of royalty 
reporting and payment within 60 days after you receive written notice 
from BLM or BSEE notifying you that a non-Federal tract or a tract with 
a different royalty rate or funds distribution has been added to your 
agreement.
    (c) A change in a lessee's ownership interests after the initial 
approval for alternative reporting and payment will not terminate the 
approval.
    (d) ONRR will terminate an approval in any instance when it 
believes it is in the best interest of the United States.

Subpart D--Reporting and Paying Royalties on Marginal Properties


Sec.  1205.301  What is the marginal property reporting and payment 
exception?

    (a) The marginal property exception allows you to report and pay on 
your take volume each month and adjust to your entitled volume after 
the end of the calendar year rather than reporting and paying based on 
your entitled volume each month as required under Sec.  1205.101(a)(3).
    (b) You may use the marginal property exception if:
    (1) Your lease is in a mixed agreement; and
    (2) The mixed agreement qualifies as a marginal property under this 
subpart.
    (c) You may report and pay using the marginal property exception 
regardless of whether any other lessee or designee who pays royalties 
for that marginal property uses the exception.


Sec.  1205.302  What is a marginal property under this subpart?

    A marginal property is an agreement that, during the base period, 
has a

[[Page 48365]]

combined equivalent production averaging less than 15 barrels of oil 
equivalent (BOE) per well producing day, as calculated under Sec.  
1205.303.


Sec.  1205.303  How do I determine if my property is a marginal 
property?

    To determine if your property meets the marginal property 
qualifications for the next calendar year, you must:
    (a) Calculate the total volume of oil and gas produced from your 
property during the base period (starting July of the previous year 
through June of the current year).
    (b) Divide the total gas production (in Mcf) by 6 and add that 
total to the oil volume (in barrels) to arrive at the total BOE.
    (c) Calculate the total number of days each well actually produced 
during the same time period (include all producing wells in the mixed 
agreement, including those that are not located on a Federal tract).
    (d) Divide the total produced volume by the total well producing 
days.
    If your calculated average daily well production is less than 15 
BOE, your property qualifies for the marginal property exception.


Sec.  1205.304  When may I begin using the marginal property exception?

    (a) After determining your property qualifies as a marginal 
property during the base period, you may begin using the marginal 
property reporting exception in the January production month of the 
calendar year following the base period.
    (b) If you become a lessee of a qualifying marginal property during 
the calendar year, you may begin using the marginal property exception 
in the production month in which you became a lessee.
    (c) You do not need to notify ONRR of your intent to use the 
marginal property reporting exception.


Sec.  1205.305  How long must I use the marginal property exception?

    (a) If you start using the marginal property exception during any 
part of the calendar year and you do not dispose of your interest in 
the property during that calendar year, then you must report and pay 
under the exception through the December production month of that 
calendar year.
    (b) If you dispose of your interest in a qualified marginal 
property during the calendar year, then you must use the exception 
through the last production month in which you had an ownership 
interest in the property. If the take volume you reported during your 
period of ownership does not equal your entitled volume, you must 
adjust your payments under Sec. Sec.  1205.307 through 1205.310, except 
that:
    (1) You must use as the sales month the last month you had an 
ownership interest rather than the December sales month required under 
Sec.  1205.307(b)(6).
    (2) Interest will be calculated from the first day of the month 
following the month you disposed of your ownership interest rather than 
January 1 of the calendar year following the calendar year for which 
you used the marginal property exception as prescribed under Sec.  
1205.309(b).


Sec.  1205.306  How do I report under the marginal property exception?

    If you want to report and pay under the marginal property exception 
you must:
    (a) First, determine your take volume from the qualifying marginal 
property under Sec.  1205.102.
    (b) Second, report and pay for each of your Federal leases in the 
qualifying marginal property by allocating the take volume determined 
in paragraph (a) of this section to all of your leases in the agreement 
based on the approved agreement allocation schedule.


Sec.  1205.307  What if the take volume I reported does not equal my 
entitled volume for one or more of my Federal leases for the calendar 
year?

    If the take volume you reported under Sec.  1205.306(b) does not 
equal your entitled volume for the calendar year, for each of your 
Federal leases in the qualifying marginal property, you must:
    (a) Calculate the difference between the take volume you reported 
under the marginal property exception and your entitled volume for the 
calendar year in which you used the exception.
    (b) Report the difference calculated in paragraph (a) of this 
section:
    (1) On Form MMS-2014, Report of Sales and Royalty Remittance.
    (2) By June 30 of the calendar year immediately following the 
calendar year for which you used the marginal property exception.
    (3) As a positive amount on Form MMS-2014 when your total takes are 
less than your entitlements, or as a negative amount on Form MMS-2014 
when your total takes exceed your entitlements.
    (4) As a single-line entry for each lease and product from the 
lease.
    (5) Using the correct adjustment reason code for reporting under 
this section.
    (6) Using the December sales month of the calendar year for which 
you used the marginal property exception.
    (c) Do not adjust the monthly royalty lines you reported under 
Sec.  1205.306(b) if the take volume you reported was accurate.


Sec.  1205.308  How do I determine the royalty value for the difference 
between my take volume and entitled volume?

    (a) If you take production from a qualifying marginal property 
during the calendar year and you report a difference between your take 
volume and entitled volume under Sec.  1205.307, the royalty value you 
must use for the difference is based on the volume weighted-average 
unit value for the total volume you take from the property during that 
calendar year, as determined under part 1206 of this title.
    (b) If you do not take production from a marginal property during 
the calendar year but you report a difference under Sec.  1205.307, the 
royalty value for the difference is the value determined for non-arm's-
length dispositions under 30 CFR 1206.103 for oil; 30 CFR 1206.152(c) 
for unprocessed gas; and 30 CFR 1206.153(c) for processed gas.


Sec.  1205.309  What must I do if I underpay royalties under this 
subpart?

    If the difference you report under Sec.  1205.307 is positive and 
you underpaid royalties for the qualifying marginal property, then you:
    (a) Must pay the additional royalty owed when you report the 
difference under Sec.  1205.307; and
    (b) Will owe interest on the additional royalty you reported and 
paid under paragraph (a) of this section at the rate prescribed under 
part 1218 of this title. You will owe interest beginning January 1 of 
the calendar year following the calendar year for which you used the 
marginal property exception until the date you paid the additional 
royalties due.


Sec.  1205.310  What must I do if I overpay royalties under this 
subpart?

    If the difference you report under Sec.  1205.307 is negative and 
you overpaid royalties for the qualifying marginal property, then:
    (a) You are entitled to a credit for the royalty you overpaid;
    (b) You are entitled to a credit for the overpaid amount only for 
the period beginning January 1 of the calendar year following the 
calendar year for which you used the marginal property exception until 
the earlier of:
    (1) The date you report the negative adjustment for the overpaid 
amount under Sec.  1205.307; or
    (2) June 30 of the calendar year immediately following the calendar 
year for which you used the marginal property exception; and
    (c) ONRR will pay interest on the overpayment after you take the 
credit.

[[Page 48366]]

Sec.  1205.311  What must I do if I erroneously report using the 
marginal property exception?

    If you erroneously report using the marginal property exception on 
a property that is not a qualified marginal property, you:
    (a) Must amend all erroneously submitted Form MMS-2014s to report 
your entitled volume for each calendar month;
    (b) Will owe any associated interest calculated under part 1218 of 
this title; and
    (c) May be subject to civil penalties under part 1241 of this 
title.


Sec.  1205.312  What must I do if my property no longer qualifies as a 
marginal property under this subpart?

    (a) Your property must qualify for the marginal property exception 
under this subpart for each calendar year based on production during 
the base period.
    (b) If you find that your property is no longer eligible for the 
marginal property exception in the most recent base period, you must 
stop using the exception as of December 31 of the year in which the 
most recent base period ends.
    (c) If you do not stop using the marginal property exception as 
required under paragraph (b) of this section, then you:
    (1) Will owe late payment interest determined under part 1218 of 
this title from the date you were required to stop using the exception 
under paragraph (b).
    (2) May be subject to civil penalties under part 1241 of this 
title.

PART 1210--FORMS AND REPORTS

0
7. The authority for part 1210 continues to read as follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396, 2107; 30 U.S.C. 
189, 190, 359, 1023, 1751(a); 31 U.S.C. 3716, 9701; 43 U.S.C. 1334, 
1801 et seq.; and 44 U.S.C. 3506(a).

Subpart A--General Provisions


Sec.  1210.10  What are the OMB-approved information collections?

0
8. Amend Sec.  1210.10 by adding a new OMB control number as the last 
entry to the table as follows:
* * * * *

------------------------------------------------------------------------
   OMB control number and short title     Form or information collected
------------------------------------------------------------------------
 
                              * * * * * * *
1012-XXXX, 30 CFR Part 1205, Takes vs.   No forms for the following
 Entitlements.                            collections:
                                          Request to use an
                                          alternative method of royalty
                                          reporting and payment.
                                             Request to stop
                                             using the approved
                                             alternative method of
                                             royalty reporting and
                                             payment.
------------------------------------------------------------------------

[FR Doc. 2013-19165 Filed 8-7-13; 8:45 am]
BILLING CODE 4310-T2-P