[Title 30 CFR ]
[Code of Federal Regulations (annual edition) - July 1, 1999 Edition]
[From the U.S. Government Printing Office]
30
Mineral Resources
[[Page i]]
PARTS 200 TO 699
Revised as of July 1, 1999
CONTAINING
A CODIFICATION OF DOCUMENTS
OF GENERAL APPLICABILITY
AND FUTURE EFFECT
AS OF JULY 1, 1999
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
as a Special Edition of
the Federal Register
[[Page ii]]
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1999
For sale by U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 30:
Chapter II--Minerals Management Service, Department
of the Interior 3
Chapter III--Board of Surface Mining and Reclamation
Appeals, Department of the Interior 541
Chapter IV--Geological Survey, Department of the
Interior 545
Chapter VI--Bureau of Mines, Department of the
Interior 557
Finding Aids:
Material Approved for Incorporation by Reference.......... 571
Table of CFR Titles and Chapters.......................... 581
Alphabetical List of Agencies Appearing in the CFR........ 599
Redesignation Table....................................... 609
List of CFR Sections Affected............................. 613
[[Page iv]]
----------------------------
Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 30 CFR 201.100
refers to title 30, part
201, section 100.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
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Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
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The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
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[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
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What is a proper incorporation by reference? The Director of the
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(a) The incorporation will substantially reduce the volume of
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(b) The matter incorporated is in fact available to the extent
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(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
Properly approved incorporations by reference in this volume are
listed in the Finding Aids at the end of this volume.
What if the material incorporated by reference cannot be found? If
you have any problem locating or obtaining a copy of material listed in
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the revision dates of the 50 CFR titles.
[[Page vii]]
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Director,
Office of the Federal Register.
July 1, 1999.
[[Page ix]]
THIS TITLE
Title 30--Mineral Resources is composed of three volumes. The parts
in these volumes are arranged in the following order: parts 1 to 199,
parts 200 to 699, and part 700 to End. The contents of these volumes
represent all current regulations codified under this title of the CFR
as of July 1, 1999.
Redesignation tables appear in the first and second volumes of title
30.
For this volume, Ruth Reedy Green was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Frances D. McDonald, assisted by Alomha S. Morris.
[[Page x]]
[[Page 1]]
TITLE 30--MINERAL RESOURCES
(This book contains parts 200 to 699)
--------------------------------------------------------------------
Editorial Note: Other regulations issued by the Department of the
Interior appear in title 25, chapters I and II; title 36, chapter I;
title 41, chapter 114; title 43; and title 50, chapters I and IV.
Part
chapter ii--Minerals Management Service, Department of the
Interior.................................................. 201
chapter iii--Board of Surface Mining and Reclamation
Appeals, Department of the Interior....................... 301
chapter iv--Geological Survey, Department of the Interior... 401
chapter vi--Bureau of Mines, Department of the Interior..... 515
Cross References: Bureau of Land Management, Department of the Interior,
regulations with respect to mineral lands: 43 CFR, chapter II,
subchapter C.
Foreign Trade Statistics, Bureau of the Census, Department of
Commerce: 15 CFR part 30.
Forest Service regulations relating to mineral developments and mining
in national forests: 36 CFR part 228.
General Services Administration regulations for stockpiling of
strategic and critical materials: 41 CFR chapter 101, subchapter C.
Interstate Commerce Commission: 49 CFR chapter X.
Bureau of Indian Affairs, Department of the Interior, energy and
minerals regulations: 25 CFR chapter I, subchapter I.
[[Page 3]]
CHAPTER II--MINERALS MANAGEMENT SERVICE,
DEPARTMENT OF THE INTERIOR
(Parts 200 to 699)
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SUBCHAPTER A--ROYALTY MANAGEMENT
Part Page
201 General..................................... 5
202 Royalties................................... 5
203 Relief or reduction in royalty rates........ 11
206 Product valuation........................... 29
207 Sales agreements or contracts governing the
disposal of lease products.............. 135
208 Sale of Federal royalty oil................. 137
210 Forms and reports........................... 145
212 Records and files maintenance............... 153
215
Accounting and auditing standards [Reserved]
216 Production accounting....................... 155
217 Audits and inspections...................... 162
218 Collection of royalties, rentals, bonuses
and other monies due the Federal
Government.............................. 164
219 Distribution and disbursement of royalties,
rentals, and bonuses.................... 177
220 Accounting procedures for determining net
profit share payment for outer
Continental Shelf oil and gas leases.... 179
227 Delegation to States........................ 192
228 Cooperative activities with States and
Indian tribes........................... 204
229 Delegation to States........................ 207
230 Recoupments and refunds..................... 215
232
Interest payments [Reserved]
233
Escrow and investments [Reserved]
234
Bonding--payment liability [Reserved]
241 Penalties................................... 221
242
Orders [Reserved]
[[Page 4]]
243 Suspensions pending appeal and bonding--
Royalty Management Program.............. 227
SUBCHAPTER B--OFFSHORE
250 Oil and gas and sulphur operations in the
Outer Continental Shelf................. 233
251 Geological and geophysical (G & G)
explorations of the Outer Continental
Shelf................................... 413
252 Outer Continental Shelf (OCS) oil and gas
information program..................... 426
253 Oil spill financial responsibility for
offshore facilities..................... 431
254 Oil-spill response requirements for
facilities located seaward of the coast
line.................................... 445
256 Leasing of sulphur or oil and gas in the
Outer Continental Shelf................. 457
259 Mineral leasing: Definitions................ 484
260 Outer Continental Shelf oil and gas leasing. 485
270 Nondiscrimination in the Outer Continental
Shelf................................... 492
280 Prospecting for minerals other than oil,
gas, and sulfur in the outer continental
shelf................................... 493
281 Leasing of minerals other than oil, gas, and
sulphur in the outer continental shelf.. 500
282 Operations in the outer continental shelf
for minerals other than oil, gas, and
sulphur................................. 512
SUBCHAPTER C--APPEALS
290 Appeals procedures.......................... 536
[[Page 5]]
SUBCHAPTER A--ROYALTY MANAGEMENT
PART 201--GENERAL--Table of Contents
Subpart A--General Provisions [Reserved]
Subpart B--Oil and Gas, General [Reserved]
Subpart C--Oil and Gas, Onshore
Sec.
201.100 Responsibilities of the Associate Director for Royalty
Management.
Subpart D--Oil, Gas and Sulphur, Offshore [Reserved]
Subpart E--Coal [Reserved]
Subpart F--Other Solid Minerals [Reserved]
Subpart G--Geothermal Resources [Reserved]
Subpart H--Indian Lands [Reserved]
Authority: The Act of February 25, 1920 (30 U.S.C. 181, et seq.), as
amended; the Act of May 21, 1930 (30 U.S.C. 301-306); the Mineral
Leasing Act for Acquired Lands (30 U.S.C. 351-359), as amended; the Act
of March 3, 1909 (25 U.S.C. 396), as amended; the National Environmental
Policy Act of 1969 (42 U.S.C. 4321, et seq.) as amended; the Act of May
11, 1938 (25 U.S.C. 396a-396q), as amended; the Act of February 28, 1891
(25 U.S.C. 397), as amended; the Act of May 29, 1924 (25 U.S.C. 398);
the Act of March 3, 1927 (25 U.S.C. 398a-398e); the Act of June 30, 1919
(25 U.S.C. 399), as amended; R.S. Sec. 441 (43 U.S.C. 1457), see also
Attorney General's Opinion of April 2, 1941 (40 Op. Atty. Gen. 41); the
Federal Property and Administrative Services Act of 1949 (40 U.S.C. 471,
et seq.), as amended; the National Environmental Policy Act of 1969 (42
U.S.C. 4321 et seq.), as amended; the Act of December 12, 1980 (Pub. L.
96-514, 94 Stat. 2964); the Combined Hydrocarbon Leasing Act of 1981
(Pub. L. 97-78, 95 Stat. 1070); the Outer Continental Shelf Lands Act
(43 U.S.C. 1331, et seq.), as amended; section 2 of Reorganization Plan
No. 3 of 1950 (64 stat. 1262); Secretarial Order No. 3071 of January 19,
1982, as amended; and Secretarial Order 3087, as amended.
Subpart A--General Provisions [Reserved]
Subpart B--Oil and Gas, General [Reserved]
Subpart C--Oil and Gas, Onshore
Sec. 201.100 Responsibilities of the Associate Director for Royalty Management.
The Associate Director is responsible for the collection of certain
rents, royalties, and other payments; for the receipt of sales and
production reports; for determining royalty liability; for maintaining
accounting records; for any audits of the royalty payments and
obligations; and for any and all other functions relating to royalty
management on Federal and Indian oil and gas leases.
[47 FR 47768, Oct. 27, 1982. Redesignated at 48 FR 35641, Aug. 5, 1983]
Subpart D--Oil, Gas and Sulphur, Offshore [Reserved]
Subpart E--Coal [Reserved]
Subpart F--Other Solid Minerals [Reserved]
Subpart G--Geothermal Resources [Reserved]
Subpart H--Indian Lands [Reserved]
PART 202--ROYALTIES--Table of Contents
Subpart A--General Provisions [Reserved]
Subpart B--Oil, Gas, and OCS Sulfur, General
Sec.
202.51 Scope and definitions.
202.52 Royalties.
[[Page 6]]
202.53 Minimum royalty.
Subpart C--Federal and Indian Oil
202.100 Royalty on oil.
202.101 Standards for reporting and paying royalties.
Subpart D--Federal and Indian Gas
202.150 Royalty on gas.
202.151 Royalty on processed gas.
202.152 Standards for reporting and paying royalties on gas.
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal
202.250 Overriding royalty interest.
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources
202.350 Scope and definitions.
202.351 Royalties on geothermal resources.
202.352 Minimum royalty.
202.353 Measurement standards for reporting and paying royalties.
Subpart I--OCS Sulfur [Reserved]
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., 1801
et seq.
Subpart A--General Provisions [Reserved]
Subpart B--Oil, Gas, and OCS Sulfur, General
Source: 53 FR 1217, Jan. 15, 1988, unless otherwise noted.
Sec. 202.51 Scope and definitions.
(a) This subpart is applicable to Federal and Indian (Tribal and
allotted) oil and gas leases (except leases on the Osage Indian
Reservation, Osage County, Oklahoma) and OCS sulfur leases.
(b) The definitions in subparts C, D, and I of part 206 of this
title are applicable to subparts B, C, D, and I of this part.
Sec. 202.52 Royalties.
(a) Royalties on oil, gas, and OCS sulfur shall be at the royalty
rate specified in the lease, unless the Secretary, pursuant to the
provisions of the applicable mineral leasing laws, reduces, or in the
case of OCS leases, reduces or eliminates, the royalty rate or net
profit share set forth in the lease.
(b) For purposes of this subpart, the use of the term royalty(ies)
includes the term net profit share(s).
Sec. 202.53 Minimum royalty.
For leases that provide for minimum royalty payments, the lessee
shall pay the minimum royalty as specified in the lease.
Subpart C--Federal and Indian Oil
Sec. 202.100 Royalty on oil.
(a) Royalties due on oil production from leases subject to the
requirements of this part, including condensate separated from gas
without processing, shall be at the royalty rate established by the
terms of the lease. Royalty shall be paid in value unless MMS requires
payment in-kind. When paid in value, the royalty due shall be the value,
for royalty purposes, determined pursuant to part 206 of this title
multiplied by the royalty rate in the lease.
(b)(1) All oil (except oil unavoidably lost or used on, or for the
benefit of, the lease, including that oil used off-lease for the benefit
of the lease when such off-lease use is permitted by the MMS or BLM, as
appropriate) produced from a Federal or Indian lease to which this part
applies is subject to royalty.
(2) When oil is used on, or for the benefit of, the lease at a
production facility handling production from more than one lease with
the approval of the MMS or BLM, as appropriate, or at a production
facility handling unitized or communitized production, only that
proportionate share of each lease's production (actual or allocated)
necessary to operate the production facility may be used royalty-free.
(3) Where the terms of any lease are inconsistent with this section,
the lease terms shall govern to the extent of that inconsistency.
[[Page 7]]
(c) If BLM determines that oil was avoidably lost or wasted from an
onshore lease, or that oil was drained from an onshore lease for which
compensatory royalty is due, or if MMS determines that oil was avoidably
lost or wasted from an offshore lease, then the value of that oil shall
be determined in accordance with 30 CFR part 206.
(d) If a lessee receives insurance compensation for unavoidably lost
oil, royalties are due on the amount of that compensation. This
paragraph shall not apply to compensation through self-insurance.
(e)(1) In those instances where the lessee of any lease committed to
a federally approved unitization or communitization agreement does not
actually take the proportionate share of the agreement production
attributable to its 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 206. In applying the requirements of 30 CFR
part 206, the circumstances involved in the actual disposition of the
portion of the production to which the lessee was entitled but did not
take shall be considered as controlling in arriving at the value, for
royalty purposes, of that portion as though the person actually selling
or disposing of the production were the lessee of the Federal or Indian
lease.
(2) If a Federal or Indian lessee takes less than its proportionate
share of agreement production, upon request of the lessee MMS 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.
(3) For purposes of this subchapter, 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.
(4) If a lessee takes less than its proportionate share of agreement
production for any month but royalties are paid on the full volume of
its proportionate share in accordance with the provisions of this
section, no additional royalty will be owed for that lease for prior
periods when the lessee subsequently takes more than its proportionate
share to balance its account or when the lessee is paid a sum of money
by the other agreement participants to balance its account.
(f) For production from Federal and Indian leases which are
committed to federally-approved unitization or communitization
agreements, upon request of a lessee MMS may establish the value of
production pursuant to a method other than the method required by the
regulations in this title if: (1) The proposed method for establishing
value is consistent with the requirements of the applicable statutes,
lease terms, and agreement terms; (2) persons with an interest in the
agreement, including, to the extent practical, royalty interests, are
given notice and an opportunity to comment on the proposed valuation
method before it is authorized; and (3) to the extent practical, persons
with an interest in a Federal or Indian lease committed to the
agreement, including royalty interests, must agree to use the proposed
method for valuing production from the agreement for royalty purposes.
[53 FR 1217, Jan. 15, 1988]
Sec. 202.101 Standards for reporting and paying royalties.
Oil volumes are to be reported in barrels of clean oil of 42
standard U.S. gallons (231 cubic inches each) at 60 deg.F. When
reporting oil volumes for royalty purposes, corrections must have been
made for Basic Sediment and Water (BS&W) and other impurities. Reported
American Petroleum Institute (API) oil gravities are to be those
determined in accordance with standard industry procedures after
correction to 60 deg.F.
[53 FR 1217, Jan. 15, 1988]
[[Page 8]]
Subpart D--Federal and Indian Gas
Source: 53 FR 1271, Jan. 15, 1988, unless otherwise noted.
Sec. 202.150 Royalty on gas.
(a) Royalties due on gas production from leases subject to the
requirements of this subpart, except helium produced from Federal
leases, shall be at the rate established by the terms of the lease.
Royalty shall be paid in value unless MMS requires payment in kind. When
paid in value, the royalty due shall be the value, for royalty purposes,
determined pursuant to 30 CFR part 206 of this title multiplied by the
royalty rate in the lease.
(b)(1) All gas (except gas unavoidably lost or used on, or for the
benefit of, the lease, including that gas used off-lease for the benefit
of the lease when such off-lease use is permitted by the MMS or BLM, as
appropriate) produced from a Federal or Indian lease to which this
subpart applies is subject to royalty.
(2) When gas is used on, or for the benefit of, the lease at a
production facility handling production from more than one lease with
the approval of MMS or BLM, as appropriate, or at a production facility
handling unitized or communitized production, only that proportionate
share of each lease's production (actual or allocated) necessary to
operate the production facility may be used royalty free.
(3) Where the terms of any lease are inconsistent with this subpart,
the lease terms shall govern to the extent of that inconsistency.
(c) If BLM determines that gas was avoidably lost or wasted from an
onshore lease, or that gas was drained from an onshore lease for which
compensatory royalty is due, or if MMS determines that gas was avoidably
lost or wasted from an OCS lease, then the value of that gas shall be
determined in accordance with 30 CFR part 206.
(d) If a lessee receives insurance compensation for unavoidably lost
gas, royalties are due on the amount of that compensation. This
paragraph shall not apply to compensation through self-insurance.
(e)(1) In those instances where the lessee of any lease committed to
a Federally approved unitization or communitization agreement does not
actually take the proportionate share of the production attributable to
its Federal or Indian 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 206. In applying the requirements of 30 CFR part 206, the
circumstances involved in the actual disposition of the portion of the
production to which the lessee was entitled but did not take shall 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 Federal or Indian lease.
(2) If a Federal or Indian lessee takes less than its proportionate
share of agreement production, upon request of the lessee MMS may
authorize a royalty valuation method different from that required by
paragraph (e)(1) of this section, but consistent with the purpose of
these regulations, for any volumes not taken by the lessee but for which
royalties are due.
(3) For purposes of this subchapter, 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.
(4) If a lessee takes less than its proportionate share of agreement
production for any month but royalties are paid on the full volume of
its proportionate share in accordance with the provisions of this
section, no additional royalty will be owed for that lease for prior
periods at the time the lessee subsequently takes more than its
proportionate share to balance its account or when the lessee is paid a
sum of
[[Page 9]]
money by the other agreement participants to balance its account.
(f) For production from Federal and Indian leases which are
committed to federally-approved unitization or communitization
agreements, upon request of a lessee MMS may establish the value of
production pursuant to a method other than the method required by the
regulations in this title if: (1) The proposed method for establishing
value is consistent with the requirements of the applicable statutes,
lease terms and agreement terms; (2) to the extent practical, persons
with an interest in the agreement, including royalty interests, are
given notice and an opportunity to comment on the proposed valuation
method before it is authorized; and (3) to the extent practical, persons
with an interest in a Federal or Indian lease committed to the
agreement, including royalty interests, must agree to use the proposed
method for valuing production from the agreement for royalty purposes.
Sec. 202.151 Royalty on processed gas.
(a)(1) A royalty, as provided in the lease, shall be paid on the
value of:
(i) Any condensate recovered downstream of the point of royalty
settlement without resorting to processing; and
(ii) Residue gas and all gas plant products resulting from
processing the gas produced from a lease subject to this subpart.
(2) MMS shall authorize a processing allowance for the reasonable,
actual costs of processing the gas produced from Federal and Indian
leases. Processing allowances shall be determined in accordance with 30
CFR part 206 subpart D for gas production from Federal leases and 30 CFR
part 206 subpart E for gas production from Indian leases.
(b) A reasonable amount of residue gas shall be allowed royalty free
for operation of the processing plant, but no allowance shall be made
for boosting residue gas or other expenses incidental to marketing,
except as provided in 30 CFR part 206. In those situations where a
processing plant processes gas from more than one lease, only that
proportionate share of each lease's residue gas necessary for the
operation of the processing plant shall be allowed royalty free.
(c) No royalty is due on residue gas, or any gas plant product
resulting from processing gas, which is reinjected into a reservoir
within the same lease, unit area, or communitized area, when the
reinjection is included in a plan of development or operations and the
plan has received BLM or MMS approval for onshore or offshore
operations, respectively, until such time as they are finally produced
from the reservoir for sale or other disposition off-lease.
[53 FR 1217, Jan. 15, 1988, as amended at 61 FR 5490, Feb. 12, 1996]
Sec. 202.152 Standards for reporting and paying royalties on gas.
(a)(1) If you are responsible for reporting production or royalties,
you must:
(i) Report gas volumes and British thermal unit (Btu) heating
values, if applicable, under the same degree of water saturation;
(ii) Report gas volumes in units of 1,000 cubic feet (mcf); and
(iii) Report gas volumes and Btu heating value at a standard
pressure base of 14.73 pounds per square inch absolute (psia) and a
standard temperature base of 60 deg.F.
(2) The 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, the lessee shall measure the Btu value at
least semiannually by recognized standard industry testing methods even
if the lessee's contract provides for less frequent measurement.
(b)(1) Residue gas and gas plant product volumes shall be reported
as specified in this paragraph.
(2) Carbon dioxide (CO2), nitrogen (N2),
helium (He), residue gas, and any other gas marketed as a separate
product shall be reported by using the same standards specified in
paragraph (a) of this section.
(3) Natural gas liquids (NGL) volumes shall be reported in standard
U.S. gallons (231 cubic inches) at 60 deg.F.
(4) Sulfur (S) volumes shall be reported in long tons (2,240
pounds).
[53 FR 1271, Jan. 15, 1988, as amended at 63 FR 26367, May 12, 1998]
[[Page 10]]
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal
Sec. 202.250 Overriding royalty interest.
The regulations governing overriding royalty interests, production
payments, or similar interests created under Federal coal leases are in
43 CFR group 3400.
[54 FR 1522, Jan. 13, 1989]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources
Source: 56 FR 57275, Nov. 8, 1991, unless otherwise noted.
Sec. 202.350 Scope and definitions.
(a) This subpart is applicable to all geothermal resources produced
from Federal geothermal leases issued pursuant to the Geothermal Steam
Act of 1970, as amended (30 U.S.C. 1001 et seq.).
(b) The definitions in 30 CFR 206.351 are applicable to this
subpart.
Sec. 202.351 Royalties on geothermal resources.
(a) Royalties on geothermal resources, including byproduct minerals
and commercially demineralized water, shall be at the royalty rate(s)
specified in the lease, unless the Secretary of the Interior temporarily
waives, suspends, or reduces that rate(s). Royalties shall be paid in
value. The royalty due shall be the value determined pursuant to subpart
H of 30 CFR part 206 multiplied by the royalty rate in the lease.
(b)(1) Royalties are due on all geothermal resources, except those
specified in paragraph (b)(2) of this section, that are produced from a
lease and are sold or utilized by the lessee or are reasonably
susceptible to sale or utilization by the lessee.
(2) Geothermal resources that are unavoidably lost, as determined by
the Bureau of Land Management (BLM), and geothermal resources that are
reinjected prior to use on or off the lease, as approved by BLM, are not
subject to royalty. The Minerals Management Service (MMS) will allow
free of royalty a reasonable amount of geothermal energy necessary to
generate electricity for internal powerplant operations or to generate
electricity returned to the lease for lease operations. If a powerplant
uses geothermal production from more than one lease, or uses unitized or
communitized production, only that proportionate share of each lease's
production (actual or allocated) necessary to operate the powerplant may
be used royalty free. The MMS will also allow free of royalty a
reasonable amount of commercially demineralized water necessary for
powerplant operations or otherwise used on or for the benefit of the
lease.
(3) Royalties on byproducts are due at the time the recovered
byproduct is used, sold, or otherwise finally disposed of. Byproducts
produced and added to stockpiles or inventory do not require payment of
royalty until the byproducts are sold, utilized, or otherwise finally
disposed of. The MMS may ask BLM to increase the lease bond to protect
the lessor's interest when BLM determines that stockpiles or inventories
become excessive.
(c) If BLM determines that geothermal resources (including
byproducts) were avoidably lost or wasted from the lease, or that
geothermal resources (including byproducts) were drained from the lease
for which compensatory royalty is due, the value of those geothermal
resources shall be determined in accordance with subpart H of 30 CFR
part 206.
(d) If a lessee receives insurance or other compensation for
unavoidably lost geothermal resources (including byproducts), royalties
at the rates specified in the lease are due on the amount of that
compensation. This paragraph shall not apply to compensation through
self-insurance.
Sec. 202.352 Minimum royalty.
In no event shall the lessee's annual royalty payments for any
producing lease be less than the minimum royalty established by the
lease.
[[Page 11]]
Sec. 202.353 Measurement standards for reporting and paying royalties.
(a) For geothermal resources used to generate electricity, the
quantity on which royalty is due shall be reported on Form MMS-2014
(Report of Sales and Royalty Remittance) as follows:
(1) For geothermal resources valued under arm's-length or non-arm's-
length contracts, quantities shall be reported in:
(i) Kilowatthours to the nearest whole kilowatthour if the contract
specifies payment in terms of generated electricity,
(ii) Thousands of pounds to the nearest whole thousand pounds if the
contract specifies payment in terms of weight, or
(iii) Millions of Btu's to the nearest whole million Btu if the
contract specifies payment in terms of heat or thermal energy.
(2) For geothermal resources valued by the netback procedure
pursuant to 30 CFR 206.352(c)(1)(ii) or (d)(1)(ii), the quantities shall
be reported in kilowatthours to the nearest whole kilowatthour.
(b) For geothermal resources used in direct utilization processes,
the quantity on which royalty is due shall be reported on Form MMS-2014
in:
(1) Millions of Btu's to the nearest whole million Btu if valuation
is in terms of thermal energy used or displaced,
(2) Hundreds of gallons to the nearest hundred gallons of geothermal
fluid produced if valuation is in terms of volume, or
(3) Other measurement unit approved by MMS for valuation and
reporting purposes.
(c) For byproduct minerals, the quantity on which royalty is due
shall be reported on Form MMS-2014 consistent with MMS-established
reporting standards.
(d) For commercially demineralized water, the quantity on which
royalty is due shall be reported on Form MMS-2014 in hundreds of gallons
to the nearest hundred gallons.
(e) Lessees are not required to report the quality of geothermal
resources, including byproducts, to MMS. The lessee must maintain
quality measurements for audit and valuation purposes. Quality
measurements include, but are not limited to, temperatures and chemical
analyses for fluid geothermal resources and chemical analyses, weight
percent, or other purity measurements for byproducts.
Subpart I--OCS Sulfur--[Reserved]
PART 203--RELIEF OR REDUCTION IN ROYALTY RATES--Table of Contents
Subpart A--General Provisions
Sec.
203.0 What definitions apply to this part?
203.1 What is MMS's authority to grant royalty relief?
203.2 When can I get royalty relief?
203.3 Why must I pay a fee to request royalty relief?
203.4 How do the provisions in this part apply to different types of
leases and projects?
Subpart B--OCS Oil, Gas, and Sulfur General
Royalty Relief for end-of-life Leases
203.50 Who may apply for end-of-life royalty relief?
203.51 How do I apply for end-of-life royalty relief?
203.52 What criteria must I meet to get relief?
203.53 What relief will MMS grant?
203.54 How does my relief arrangement for an oil and gas lease operate
if prices rise sharply?
203.55 Under what conditions can my end-of-life royalty relief
arrangement for an oil and gas lease be ended?
203.56 Does relief transfer when a lease is assigned?
Royalty Relief For Deep Water Expansion Projects And Pre-Act Deep Water
Leases
203.60 Who may apply for deep water royalty relief?
203.61 How do I assess my chances for getting relief?
203.62 How do I apply for relief?
203.63 Does my application have to include all leases in the field?
203.64 How many applications may I file on a field?
203.65 How long will MMS take to evaluate my application?
203.66 What happens if MMS does not act in the time allowed under
Sec. 203.65, including any extensions?
[[Page 12]]
203.67 What economic criteria must I meet to get royalty relief on an
authorized field or expansion project?
203.68 What pre-application costs will MMS consider in determining
economic viability?
203.69 If my application is approved, what royalty relief will I
receive?
203.70 What information must I provide after MMS approves relief?
203.71 How does MMS allocate a field's suspension volume between my
lease and other leases on my field?
203.72 Can my lease receive more than one suspension volume?
203.73 How do suspension volumes apply to natural gas?
203.74 When will MMS reconsider its determination?
203.75 What risk do I run if I request a redetermination?
203.76 When might MMS withdraw or reduce the approved size of my
relief?
203.77 May I voluntarily give up relief if conditions change?
203.78 Do I keep relief if prices rise significantly?
203.79 How do I appeal MMS's decisions related to Deep Water Royalty
Relief?
Required Reports
203.81 What supplemental reports do royalty-relief applications
require?
203.82 What is MMS's authority to collect this information?
203.83 What is in an administrative information report?
203.84 What is in a net revenue and relief justification report?
203.85 What is in an economic viability and relief justification
report?
203.86 What is in a G&G report?
203.87 What is in an engineering report?
203.88 What is in a production report?
203.89 What is in a deep water cost report?
203.90 What is in a fabricator's confirmation report?
203.91 What is in a post-production development report?
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal
203.250 Advance royalty.
203.251 Reduction in royalty rate or rental.
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources [Reserved]
Subpart I--OCS Sulfur [Reserved]
Authority: 25 U.S.C. 396 et seq.; 25 U.S.C. 396a et seq.; 25 U.S.C.
2101 et seq.; 30 U.S.C. 181 et seq.; 30 U.S.C. 351 et seq.; 30 U.S.C.
1001 et seq.; 30 U.S.C. 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et
seq.; 43 U.S.C. 1331 et seq.; and 43 U.S.C. 1801 et seq.
Subpart A--General Provisions
Source: 63 FR 2616, Jan. 16, 1998, unless otherwise noted.
Sec. 203.0 What definitions apply to this part?
Authorized field means a field in a water depth of at least 200
meters and in the Gulf of Mexico west of 87 degrees, 30 minutes West
longitude from which no current pre-Act lease produced, other than test
production, before November 28, 1995.
Complete application means an original and two copies of the six
reports consisting of the data specified in 30 CFR 203.81, 203.83 and
203.85 through 203.89, along with one set of digital information, which
MMS has reviewed and found complete.
Determination means the binding decision by MMS on whether your
field qualifies for relief or how large a royalty-suspension volume must
be to make the field economically viable.
Draft application means the preliminary set of information and
assumptions you submit to seek a nonbinding assessment on whether a
field could be expected to qualify for royalty relief.
Eligible lease means a lease that results from a lease sale held
after November 28, 1995; is located in the Gulf of Mexico (GOM) in water
depths 200 meters or deeper; lies wholly west of 87 degrees, 30 minutes
West longitude; and is offered subject to a royalty-suspension volume
authorized by statute.
Expansion project means a project you propose in a Development
Operations Coordination Document (DOCD) or a Supplement approved by the
Secretary of the Interior after November 28, 1995,
[[Page 13]]
that will increase the ultimate recovery of resources from a pre-Act
lease and that involves a substantial capital investment (e.g., fixed-
leg platform, subsea template and manifold, tension-leg platform,
multiple well project, etc.).
Fabrication (or start of construction) means evidence of
irreversible commitment to a concept and scale of development, including
copies of a binding contract between you (as applicant) and a
fabrication yard, a letter from a fabricator certifying that
construction has begun, and a receipt for the customary down payment.
Field means an area consisting of a single reservoir or multiple
reservoirs all grouped on, or related to, the same general geological
structural feature or stratigraphic trapping condition. Two or more
reservoirs may be in a field, separated vertically by intervening
impervious strata or laterally by local geologic barriers, or both.
Lease means a lease or unit.
New production means any production from a current pre-Act lease
from which no royalties are due on production, other than test
production, before November 28, 1995. Also, it means any production
resulting from lease-development activities involving a substantial
capital investment (e.g., fixed-leg platform, subsea template and
manifold, tension-leg platform, multiple well project, etc.) on a
current pre-Act lease under a Development Operations Coordination
Document--or its supplement--approved by the Secretary of the Interior
after November, 28, 1995.
Nonbinding assessment means an opinion by MMS of whether your field
could qualify for royalty relief. It is based on your draft application
and does not entitle the field to relief.
Performance conditions means minimum conditions you must meet, after
we have granted relief and before production begins, to remain qualified
for that relief. If you do not meet each one of these performance
conditions, we consider it a change in material fact significant enough
to invalidate our original evaluation and approval.
Pre-Act lease means a lease issued as a result of a lease sale held
before November 28, 1995; in a water depth of at least 200 meters; and
in the Gulf of Mexico west of 87 degrees, 30 minutes West longitude.
Production means all oil, gas, and other relevant products you save,
remove, or sell from a tract or those quantities allocated to your tract
under a unitization formula, as measured for the purposes of determining
the amount of royalty payable to the United States.
Project means any activity that requires at least a permit to drill.
Redetermination means your request for us to reconsider our
determination on royalty relief if we have rejected your application or
if we have granted relief but you want a larger suspension volume.
Renounce means action you take to give up relief after we have
granted it and before you start production.
Sunk costs means costs (as specified in 30 CFR 203.89(a)) of
exploration, development, and production that you incur after the date
of first discovery on the field and before the date we receive your
complete application for royalty relief. Sunk costs include the costs of
the discovery well qualified as producible under 30 CFR part 250,
subpart A but do not include any pre-discovery activity costs or lease
acquisition and holding costs such as cash bonus and rental payments.
Withdraw means action we take on a field that has qualified for
relief if you have not met one or more of the performance conditions.
Sec. 203.1 What is MMS's authority to grant royalty relief?
The Outer Continental Shelf (OCS) Lands Act, 43 U.S.C. 1337, as
amended by the OCS Deep Water Royalty Relief Act (DWRRA), Public Law
104-58, authorizes us to grant royalty relief in three situations.
(a) Under 43 U.S.C. 1337(a)(3)(A), we may reduce or eliminate any
royalty or a net profit share specified for an OCS lease to promote
increased production.
(b) Under 43 U.S.C. 1337(a)(3)(B), we may reduce, modify, or
eliminate any royalty or net profit share to promote development,
increase production, or encourage production of marginal resources on
certain leases or categories of leases. This authority is restricted to
leases in the Gulf of Mexico (GOM)
[[Page 14]]
that are west of 87 degrees, 30 minutes West longitude.
(c) Under 43 U.S.C. 1337(a)(3)(C), we may suspend royalties for
designated volumes of new production from any lease if:
(1) Your lease is in deep water (water at least 200 meters deep);
(2) Your lease is in designated areas of the GOM (west of 87
degrees, 30 minutes West longitude);
(3) Your lease was acquired in a lease sale held before the DWRRA
(before November 28, 1995);
(4) We find that your new production would not be economic without
royalty relief; and
(5) Your lease is on a field that did not produce before enactment
of the DWRRA, or if you propose a project to significantly expand
production under a Development Operations Coordination Document (DOCD)
or a supplementary DOCD, that MMS approved after November 28, 1995.
Sec. 203.2 When can I get royalty relief?
We can reduce or suspend royalties for OCS leases or projects that
meet the criteria in the following table.
------------------------------------------------------------------------
THEN YOU MAY BE
IF YOU HAVE A LEASE-- AND IF YOU-- GRANTED--
------------------------------------------------------------------------
That generates earnings Seek to increase A reduced royalty
which cannot sustain production by rate on current
production (End-of-Life operating the lease production flows
lease),. beyond the point at along with a higher
which it is royalty rate on
economic under the some additional
existing royalty production flows.
rate,.
In designated areas of the Are producing and A royalty suspension
deep water GOM, acquired in seek to increase for an increment to
a lease sale held before ultimate recovery production large
November 28, 1995, and you of resources from enough to make the
propose activity in a DOCD the field with a project economic.
or supplement to substantial
significantly expand investment (e.g.,
production,. platform, multiple
wells, subsea
template) (an
expansion project),.
In designated areas of the Are on a field from A royalty suspension
deep water GOM, acquired in which no current for a minimum
a lease sale held before pre-Act lease production volume
November 28, 1995 (pre-Act produced (other plus any additional
lease),. than test volume needed to
production) before make the field
November 28, 1995 economic.
(authorized field),.
------------------------------------------------------------------------
Sec. 203.3 Why must I pay a fee to request royalty relief?
(a) When you submit an application or ask for a preview assessment,
you must include a fee to reimburse us for our costs of processing your
application or assessment. Federal policy and law require us to recover
the cost of services that confer special benefits to identifiable non-
Federal recipients. The Independent Offices Appropriation Act (31 U.S.C.
9701), Office of Management and Budget Circular A-25, and the Omnibus
Appropriations Bill (Pub. L. 104-133, 110 Stat. 1321, April 26, 1996)
authorize us to collect these fees.
(b) We will specify the necessary fees for each of the types of
royalty-relief applications and possible MMS audits in a Notice to
Lessees. We will periodically update the fees to reflect changes in
costs as well as provide other information necessary to administer
royalty relief.
Sec. 203.4 How do the provisions in this part apply to different types of leases and projects?
The tables in this section summarize how similar provisions in this
part apply in different situations.
(a) Provisions relating to application content in Secs. 203.51,
203.62 and 203.81 through 203.89.
----------------------------------------------------------------------------------------------------------------
Deep water
Information elements End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
Administrative information report............................ x x x
Net revenue and relief justification report (prescribed x
format).....................................................
Economic viability and relief justification report (Royalty ............... x x
Suspension Viability Program (RSVP) model inputs justified
with Geological & Geophysical (G&G), Engineering,
Production, & Cost reports).................................
G&G report................................................... ............... x x
Engineering report........................................... ............... x x
Production report............................................ ............... x x
[[Page 15]]
Deep Water cost report....................................... ............... x x
----------------------------------------------------------------------------------------------------------------
(b) Provisions relating to verification in Secs. 203.70, 203.81 and
203.90 through 203.91.
----------------------------------------------------------------------------------------------------------------
Deep water
Confirmation elements End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
Fabricator's confirmation report............................. ............... x x
Post-production development report (approved by certified ............... x x
public accountant (CPA).....................................
----------------------------------------------------------------------------------------------------------------
(c) Provisions relating to approval criteria contained in
Secs. 203.50, 203.52, 203.60 and 203.67.
----------------------------------------------------------------------------------------------------------------
Deep water
Approval conditions End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
At least 12 of the last 15 months have the required level of x
production..................................................
Already producing............................................ x x
Well can produce............................................. ............... ............... x
Royalties for qualifying months exceed 75 percent of net x
revenue (NR)................................................
Substantial investment (e.g., platform, multiple wells, ............... x
subsea template)............................................
Determined to be economic only with relief................... ............... x x
----------------------------------------------------------------------------------------------------------------
(d) Provisions related to redetermination in Secs. 203.52 and 203.74
through 203.75.
----------------------------------------------------------------------------------------------------------------
Deep water
Redetermination conditions End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
After 12 months under current rate, criteria same as for x
approval....................................................
For material change in geologic data, prices, or costs....... ............... x x
----------------------------------------------------------------------------------------------------------------
(e) Provisions related to the format of relief in Secs. 203.53 and
203.69.
----------------------------------------------------------------------------------------------------------------
Deep water
Relief rate & volume End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
One-half pre-application effective lease rate on the x
qualifying amount, 1.5 times pre-application effective lease
rate on additional production up to twice the qualifying
amount, and the pre-application effective lease rate for any
larger volumes..............................................
Qualifying amount is the average monthly production for 12 x
qualifying months...........................................
Zero royalty rate on the suspension volume and the original x x
lease rate on additional production.........................
Field Suspension volume is at least 17.5, 52.5 or 87.5 x
million barrels of oil equivalent (MMBOE)...................
Amount needed to become economic............................. x x
----------------------------------------------------------------------------------------------------------------
[[Page 16]]
(f) Provisions related to discontinuing relief Secs. 203.54 and
203.78.
----------------------------------------------------------------------------------------------------------------
Deep water
Full royalty resumes when-- End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
Average NYMEX price for last 12 months is at least 25 percent x
above the average for the qualifying months.................
Average NYMEX price for last 12 months exceeds $28/bbl or x x
$3.50/mcf, escalated by the gross domestic product deflator
since 1994..................................................
----------------------------------------------------------------------------------------------------------------
(g) Provisions related to the end, loss or reduction of relief in
Secs. 203.55 and 203.76.
----------------------------------------------------------------------------------------------------------------
Deep water
Relief withdrawn or reduced End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
Recipient so requests........................................ x
Lease rate is at the effective rate for 12 consecutive months x
Conditions that we may specify in the approval letter in x
individual cases actually occur.............................
Not submitting post-production report that compares expected x x
to actual costs.............................................
Change of development system................................. x x
Excess delay in starting fabrication......................... x x
Spending less than 80 percent of proposed pre-production x x
costs but notifying us in post-production report............
Amount of relief volume is produced.......................... x x
----------------------------------------------------------------------------------------------------------------
Subpart B-OCS Oil, Gas, and Sulfur General
Source: 63 FR 2618, Jan. 16, 1998, unless otherwise noted.
Royalty Relief for End-of-life Leases
Sec. 203.50 Who may apply for end-of-life royalty relief?
You may apply for royalty relief in two situations.
(a) Your end-of-life lease (as defined in Sec. 203.2) is an oil and
gas lease and has average daily production of at least 100 barrels of
oil equivalent (BOE) per month (as calculated in Sec. 203.73) in at
least 12 of the past 15 months. The most recent of these 12 months are
considered the qualifying months. These 12 months should reflect the
basic operation you intend to use until your resources are depleted. If
you changed your operation significantly (e.g., begin re-injecting
rather than recovering gas) during the qualifying months, or if you do
so while we are processing your application, we may defer action on your
application until you revise it to show the new circumstances.
(b) Your end-of-life lease is other than an oil and gas lease (e.g.,
sulphur) and has production in at least 12 of the past 15 months. The
most recent of these 12 months are considered the qualifying months.
[63 FR 2618, Jan. 16, 1998, as amended at 63 FR 57249, Oct. 27, 1998]
Sec. 203.51 How do I apply for end-of-life royalty relief?
You must submit a complete application and the required fee to the
appropriate MMS Regional Director. Your MMS regional office will provide
specific guidance on the report formats. A complete application for
relief includes:
(a) An administrative information report (specified in Sec. 203.83)
and
(b) A net revenue and relief justification report (specified in
Sec. 203.84).
Sec. 203.52 What criteria must I meet to get relief?
(a) To qualify for relief, you must demonstrate that the sum of
royalty payments over the 12 qualifying
[[Page 17]]
months exceeds 75 percent of the sum of net revenues (before-royalty
revenues minus allowable costs, as defined in Sec. 203.84).
(b) To re-qualify for relief, e.g., either applying for additional
relief on top of relief already granted, or applying for relief sometime
after your earlier agreement terminated, you must demonstrate that:
(1) You have met the criterion listed in paragraph (a) of this
section, and
(2) The 12 required qualifying months of operation have occurred
under the current royalty arrangement.
Sec. 203.53 What relief will MMS grant?
(a) If we approve your application and you meet certain conditions,
we will reduce the pre-application effective royalty rate by one-half on
production up to the relief volume amount. If you produce more than the
relief volume amount:
(1) We will impose a royalty rate equal to 1.5 times the effective
royalty rate on your additional production up to twice the relief volume
amount; and
(2) We will impose a royalty rate equal to the effective rate on all
production greater than twice the relief volume amount.
(b) Regardless of the level of production or prices (see
Sec. 203.54), royalty payments due under end-of-life relief will not
exceed the royalty obligations that would have been due at the effective
royalty rate.
(1) The effective royalty rate is the average lease rate paid on
production during the 12 qualifying months.
(2) The relief volume amount is the average monthly BOE production
for the 12 qualifying months.
Sec. 203.54 How does my relief arrangement for an oil and gas lease operate if prices rise sharply?
In those months when your current reference price rises by at least
25 percent above your base reference price, you must pay the effective
royalty rate on all monthly production.
(a) Your current reference price is a weighted average of daily
closing prices on the NYMEX for light sweet crude oil and natural gas
over the most recent full 12 calendar months;
(b) Your base reference price is a weighted average of daily closing
prices on the NYMEX for light sweet crude oil and natural gas during the
qualifying months; and
(c) Your weighting factors are the proportions of your total
production volume (in BOE) provided by oil and gas during the qualifying
months.
Sec. 203.55 Under what conditions can my end-of-life royalty relief arrangement for an oil and gas lease be ended?
(a) If you have an end-of-life royalty relief arrangement, you may
renounce it at any time. The lease rate will return to the effective
rate during the qualifying period in the first full month following our
receipt of your renouncement of the relief arrangement.
(b) If you pay the effective lease rate for 12 consecutive months,
we will terminate your relief. The lease rate will return to the
effective rate in the first full month following this termination.
(c) We may stipulate in the letter of approval for individual cases
certain events that would cause us to terminate relief because they are
inconsistent with an end-of-life situation.
Sec. 203.56 Does relief transfer when a lease is assigned?
Yes. Royalty relief is based on the lease circumstances, not
ownership. It transfers upon lease assignment.
Royalty Relief For Deep Water Expansion Projects And Pre-Act Deep Water
Leases
Sec. 203.60 Who may apply for deep water royalty relief?
Under conditions in Secs. 203.61(b) and 203.62, you may apply for
royalty relief if:
(a) You are a lessee of a lease in water at least 200 meters deep in
the GOM and lying wholly west of 87 degrees, 30 minutes West longitude;
(b) We have assigned your lease to a field (as defined in
Sec. 203.0); and
(c) You hold a pre-Act lease on an authorized field (as defined in
Sec. 203.0) or you propose an expansion project (as defined in
Sec. 203.0).
[[Page 18]]
Sec. 203.61 How do I assess my chances for getting relief?
You may ask for a nonbinding assessment (a formal opinion on whether
a field would qualify for royalty relief) before turning in your first
complete application on an authorized field. This field must have a
qualifying well under 30 CFR part 250, subpart A, or be on a lease that
has allocated production under an approved unit agreement.
(a) To request a nonbinding assessment, you must:
(1) Submit a draft application in the format and detail specified in
guidance from the MMS regional office for the GOM;
(2) Propose to drill at least one more appraisal well if you get a
favorable assessment; and
(3) Pay a fee under Sec. 203.3.
(b) You must wait at least 90 days after receiving our assessment to
apply for relief under Sec. 203.62.
(c) This assessment is not binding because a complete application
may contain more accurate information that does not support our original
assessment. It will help you decide whether your proposed inputs for
evaluating economic viability and your supporting data and assumptions
are adequate.
Effective Date Note: At 63 FR 2619, Jan. 16, 1998, Sec. 203.61 was
revised. This section contains information collection and recordkeeping
requirements and will not become effective until approval has been given
by the Office of Management and Budget.
Sec. 203.62 How do I apply for relief?
You must send a complete application and the required fee to the MMS
GOM Regional Director.
(a) Your application for deep water royalty relief must include an
original and two copies (one set of digital information) of:
(1) Administrative information report;
(2) Deep water economic viability and relief justification report;
(3) G&G report;
(4) Engineering report;
(5) Production report; and
(6) Deep water cost report.
(b) Section 203.82 explains why we are authorized to require these
reports.
(c) Sections 203.81, 203.83, and 203.85 through 203.89 describe what
these reports must include. The MMS GOM Regional Office will guide you
on the format for the required reports.
Sec. 203.63 Does my application have to include all leases in the field?
For authorized fields, we will accept only one joint application for
all leases that are part of the designated field on the date of
application, except as provided in paragraph (c) of this section and
Sec. 203.64.
(a) The Regional Director maintains a Field Names Master List with
updates of all leases in each designated field.
(b) To avoid sharing proprietary data with other lessees on the
field, you may submit your proprietary G&G report separately from the
rest of your application. Your application is not complete until we
receive all the required information for each lease on the field. We
will not disclose proprietary data when explaining our assumptions and
reasons for our determinations under Sec. 203.67.
(c) We will not require a joint application if you show good cause
and honest effort to get all lessees in the field to participate. If you
must exclude a lease from your application because its lessee will not
participate, that lease is ineligible for the royalty relief for the
designated field.
Sec. 203.64 How many applications may I file on a field?
You may file one complete application for royalty relief during the
life of the field. However, you may send another application if:
(a) You are eligible to apply for a redetermination under
Sec. 203.74;
(b) You apply for royalty relief for an expansion project;
(c) You withdraw the application before we make a determination; or
(d) You apply for end-of-life royalty relief.
Sec. 203.65 How long will MMS take to evaluate my application?
(a) We will determine within 20 working days if your application for
royalty relief is complete. If your application is incomplete, we will
explain in writing what it needs. If you withdraw a
[[Page 19]]
complete application, you may reapply.
(b) We will evaluate your first application on a field within 180
days and a redetermination under Sec. 203.75 within 120 days after we
say it is complete.
(c) We may ask to extend the review period for your application
under the conditions in the following table.
------------------------------------------------------------------------
If-- Then we may--
------------------------------------------------------------------------
We need more records to audit sunk Ask to extend the 120-day or 180-
costs. day evaluation period. The
extension we request will equal
the number of days between when
you receive our request for
records and the day we receive the
records.
We cannot evaluate your application Add another 30 days. We may add
for a valid reason, such as more than 30 days, but only if you
missing vital information or agree.
inconsistent or inconclusive
supporting data.
We need more data, explanations, or Ask to extend the 120-day or 180-
revision. day evaluation period. The
extension we request will equal
the number of days between when
you receive our request and the
day we receive the information.
------------------------------------------------------------------------
(d) We may change your assumptions under Sec. 203.62 if our
technical evaluation reveals others that are more appropriate. We may
consult with you before a final decision and will explain any changes.
(e) We will notify all designated lease operators within a field
when royalty relief is granted.
Sec. 203.66 What happens if MMS does not act in the time allowed under Sec. 203.65, including any extensions?
If we do not act within the timeframes established in Sec. 203.65,
the conditions in the following table apply.
------------------------------------------------------------------------
And we do not decide
If you apply for royalty within the time As long as you--
relief for-- specified--
------------------------------------------------------------------------
An authorized field........... You get the minimum Abide by Secs.
suspension volumes 203.70 & 76
specified in Sec.
203.69.
An expansion project.......... You get a royalty Abide by Secs.
suspension for the 203.70 & 76
first year of
production.
------------------------------------------------------------------------
Sec. 203.67 What economic criteria must I meet to get royalty relief on an authorized field or expansion project?
Your field or project must require royalty relief to be economic and
must become economic with this relief. That is, we will not approve
applications if we determine that royalty relief cannot make the field
or project economically viable.
Sec. 203.68 What pre-application costs will MMS consider in determining economic viability?
(a) We will not consider ineligible costs as set forth in
Sec. 203.89(h) in determining economic viability for purposes of royalty
relief.
(b) We will consider sunk costs (allowable expenditures on and after
the discovery well as specified in Sec. 203.89(a)) in accordance with
the following table.
------------------------------------------------------------------------
We will-- When--
------------------------------------------------------------------------
Include sunk costs........... The field has not produced, other than
test production, before the application
submission date.
Not include sunk costs....... Determining whether an authorized field
can become economic with any relief (see
Sec. 203.67).
Not include sunk costs....... Determining how much suspension volume is
necessary to make development economic
(see Sec. 203.69(c)).
Not include sunk costs....... Evaluating an expansion project.
------------------------------------------------------------------------
Sec. 203.69 If my application is approved, what royalty relief will I receive?
This section applies only to leases on which you have applied for
and received a royalty-suspension volume under section 302 of the DWRRA.
We will not collect royalties on a specified
[[Page 20]]
suspension volume for your field. Suspension amounts include volumes
allocated to a lease under an approved unit agreement and exclude any
volumes that do not bear a royalty under the lease or the regulations of
this chapter.
(a) For authorized fields, the minimum royalty-suspension volumes
are:
(1) 17.5 million barrels of oil equivalent (MMBOE) for fields in 200
to 400 meters of water;
(2) 52.5 MMBOE for fields in 400 to 800 meters of water; and
(3) 87.5 MMBOE for fields in more than 800 meters of water.
(b) If the application for the field includes leases in different
categories of water depth, we apply the minimum royalty-suspension
volume for the deepest lease then associated with the field. We base the
water depth and makeup of a field on the water-depth delineations in the
``Royalty Suspension Areas Map'' and the Field Names Master List and
updates in effect at the time your application is approved. These
publications are available from the GOM Regional Office.
(c) You will get a royalty-suspension volume above the minimum if we
determine that you need more to make developing the field economic.
(d) For expansion projects, the minimum suspension volumes do not
apply. If we determine that your expansion project may be economic only
with relief, we will determine and grant you the royalty-suspension
volume necessary to make the project economic.
(e) A royalty-suspension volume will continue through the end of the
month in which cumulative production reaches that volume. The cumulative
production is from all the leases in the authorized field or expansion
project that are entitled to share the royalty suspension volume.
Sec. 203.70 What information must I provide after MMS approves relief?
You must submit reports to us as indicated in the following table.
Sections 203.81 and 203.90 through 203.91 describe what these reports
must include. MMS's GOM Regional Office will tell you the formats.
------------------------------------------------------------------------
Required report When due to MMS Due date extensions
------------------------------------------------------------------------
Fabricator's confirmation Within 1 year after MMS Director may
report. approval of relief. grant you an
extension under
Sec. 203.79(c) for
up to 1 year.
Post-production report...... Within 60 days after With acceptable
the start of justification from
production that is you, MMS's GOM
subject to the Regional Director
approved royalty- may extend due date
suspension volume. up to 60 days.
------------------------------------------------------------------------
Sec. 203.71 How does MMS allocate a field's suspension volume between my lease and other leases on my field?
The allocation depends on when production occurs, when the lease is
assigned to the field, and whether we award the volume suspension by an
approved application or establish it in the lease terms.
(a) If your authorized field has an approved royalty-suspension
volume under Secs. 203.67 and 203.69, we will suspend payment of
royalties on production from all applying leases in the field until
their cumulative production equals the approved volume. The following
conditions also apply as appropriate:
------------------------------------------------------------------------
If-- Then-- And--
------------------------------------------------------------------------
We assign an eligible lease We will not change The newly assigned
to your field after we your field's leases may share in
approve or establish relief. royalty-suspension any remaining
volume. royalty relief.
We assign a pre-Act lease to We will not change The newly assigned
your field after you submit your field's leases may share in
a complete application. royalty-suspension any remaining
volume. royalty relief by
filing the short
form application
specified in Sec.
203.83 and
authorized in Sec.
203.82.
We assigned a pre-Act lease We will not change The newly assigned
to your field before you your field's lease will not
submitted the royalty royalty-suspension share in the relief
relief application. volume. if it did not
participate in the
application.
[[Page 21]]
We reassign a well on a pre- The past production The past production
Act lease to another field. from that well from that well will
counts toward the not count toward
royalty suspension any royalty
volume of the field suspension volume
to which the well granted to the
is reassigned. field from which it
was reassigned.
------------------------------------------------------------------------
(b) If your authorized field has an automatic royalty-suspension
volume established under Sec. 260.110 of this chapter, we will suspend
payment of royalties on production from all eligible leases in the field
until their cumulative production equals the automatic volume. The
following conditions also apply as appropriate:
------------------------------------------------------------------------
If-- Then-- And--
------------------------------------------------------------------------
Another eligible lease is Your field's royalty- The newly assigned
assigned to your field. suspension volume lease may share in
does not change. relief only to the
extent that
cumulative
production from
your field is less
than the automatic
volume.
A pre-Act lease applies Your field's royalty- All leases in the
(along with the other suspension volume field share the
leases in the field) and may increase or one, higher royalty-
qualifies (subject to the stay the same. suspension volume
field's automatic if we approve the
suspension volume) for application;
royalty relief under Secs. or
203.67 and 203.69. The eligible leases
in the field keep
the automatic
volume if we reject
the application.
------------------------------------------------------------------------
(c) If you have an expansion project with more than one lease, the
royalty-suspension volume for each lease equals that lease's actual
incremental production from the project (or production allocated under
an approved unit agreement) until cumulative incremental production for
all leases in the project equals the project's approved royalty-
suspension volume.
(d) You may receive a royalty-suspension volume only if your entire
lease is west of 87 degrees, 30 minutes West longitude. If the field
lies on both sides of this meridian, only leases located entirely west
of the meridian will receive a royalty-suspension volume.
Sec. 203.72 Can my lease receive more than one suspension volume?
Yes. You may apply for royalty relief that involves more than one
suspension volume under Sec. 203.62 in two circumstances.
(a) Each field that includes your lease may receive a separate
royalty-suspension volume, if it meets the evaluation criteria of
Sec. 203.67.
(b) An expansion project on your lease may receive a separate
royalty-suspension volume, even if we have already granted a royalty-
suspension volume to the field that encompasses the project. But the
reserves associated with the project must not have been part of our
original determination, and the project must meet the evaluation
criteria of Sec. 203.67.
Sec. 203.73 How do suspension volumes apply to natural gas?
You must measure natural gas production under the royalty-suspension
volume as follows: 5.62 thousand cubic feet of natural gas, measured in
accordance with 30 CFR part 250, subpart L, equals one barrel of oil
equivalent.
Sec. 203.74 When will MMS reconsider its determination?
Under certain conditions, you may request a redetermination if we
deny your application, if you want your approved royalty-suspension
volume to change, after we withdraw approval, or after you renounce
royalty relief. To be eligible for a redetermination, at least one of
the following three conditions must occur.
(a) You have significant new G&G data and you previously have not
either requested a redetermination or reapplied for relief after we
withdrew approval or you relinquished royalty relief. ``Significant''
means that the new G&G data:
[[Page 22]]
(1) Results from drilling new wells or getting new three-dimensional
seismic data and information (but not reinterpreting old data);
(2) Did not exist at the time of the earlier application; and
(3) Changes your estimates of gross resource size, quality, or
projected flow rates enough to materially affect the results of our
earlier determination.
(b) Your current reference price decreases by more than 25 percent
from your base reference price. For royalty relief on deep water
expansion projects and pre-Act deep water leases:
(1) Your current reference price is a weighted average of daily
closing prices on the NYMEX for light sweet crude oil and natural gas
over the most recent full 12-calendar months;
(2) Your base reference price is a weighted average of daily closing
prices on the NYMEX for oil and gas for the most recent full 12-calendar
months preceding the date of your most recent, complete application for
this royalty relief; and
(3) The weighting factors are the proportions of the total
production volume (in BOE) for oil and gas associated with the most
likely scenario (identified in Secs. 203.85 and 203.88) from your most
recently approved application for this royalty relief.
(c) Before starting to build your development and production system,
you have revised your estimated development costs, and they are more
than 120 percent of the eligible development costs associated with the
most likely scenario from your most recent, complete application for
this royalty relief.
[63 FR 2618, Jan. 16, 1998; 63 FR 24747, May 5, 1998]
Sec. 203.75 What risk do I run if I request a redetermination?
If you request a redetermination after we have granted you a
suspension volume, you could lose some or all of the previously granted
relief. This can happen because you must file a new complete application
and pay the required fee, as discussed in Sec. 203.62. We will evaluate
your application under Sec. 203.67 using the conditions prevailing at
the time of your redetermination request. In our evaluation, we may find
that you should receive a larger, equivalent, smaller, or no suspension
volume. This means we could find that you do not qualify for the amount
of relief previously granted or for any relief at all.
Sec. 203.76 When might MMS withdraw or reduce the approved size of my relief?
We will withdraw approval of relief for any of the following
reasons.
(a) You change the type of development system proposed in your
application (e.g., change from a fixed platform to floating production
system, tension leg platform to a moored catenary system such as a SPAR
platform, an independent development and production system to one with
subsea wells tied back to a host production facility, etc.).
(b) You do not start building the proposed development and
production system within 1 year of the date we approved your
application--unless the MMS Director grants you an extension under
Sec. 203.79(c).
(c) You do not tell us in your post-production development report
(Sec. 203.70), and we find out your actual development costs are less
than 80 percent of the eligible development costs estimated in your
application's most likely scenario. Development costs are those incurred
between the application submission date and start of production. If you
tell us about this result in the post-production development report, you
may retain 50 percent of the original royalty-suspension volume.
(d) We granted you a royalty-suspension volume after you qualified
for a redetermination under Sec. 203.74(c), and we find out your actual
development costs are less than 90 percent of the eligible development
costs associated with your application's most likely scenario.
Development costs are those expenditures defined in Sec. 203.89(b)
incurred between your application submission date and start of
production.
(e) You do not send us the fabrication confirmation report or the
post-production development report, or you provide false or
intentionally inaccurate information that was material to our granting
royalty relief under this section. You must pay royalties and late-
payment interest determined under 30
[[Page 23]]
U.S.C. 1721 and Sec. 218.54 of this chapter on all volumes for which you
used the royalty suspension. You also may be subject to penalties under
other provisions of law.
Sec. 203.77 May I voluntarily give up relief if conditions change?
You may renounce approved royalty-suspension volumes as soon as you
anticipate violating one of the withdrawal conditions, or for any other
reason, before you start production.
Sec. 203.78 Do I keep relief if prices rise significantly?
No, you must pay full royalties if prices rise above the statutory
base price for light sweet crude oil or natural gas.
(a) Suppose the arithmetic average of the daily closing NYMEX light
sweet crude oil prices for the previous calendar year exceeds $28.00 per
barrel, as adjusted in paragraph (f) of this section. In this case, we
retract the royalty relief authorized in this section and you must:
(1) Pay royalties on all oil production for the previous year at the
lease stipulated royalty rate plus interest (under 30 U.S.C. 1721 and
Sec. 218.54 of this chapter) by April 30 of the current calendar year,
and
(2) Pay royalties on all your oil production in the current year.
(b) Suppose the arithmetic average of the daily closing NYMEX
natural gas prices for the previous calendar year exceeds $3.50 per
million British thermal units (Btu), as adjusted in paragraph (f) of
this section. In this case, we retract the royalty relief authorized in
this section and you must:
(1) Pay royalties on all natural gas production for the previous
year at the lease stipulated royalty rate plus interest (under 30 U.S.C.
1721 and Sec. 218.54 of this chapter) by April 30 of the current
calendar year, and
(2) Pay royalties on all your natural gas production in the current
year.
(c) Production under both paragraphs (a) and (b) of this section
counts as part of the royalty-suspension volume.
(d) You are entitled to a refund or credit, with interest, of
royalties paid on any production (that counts as part of the royalty-
suspension volume):
(1) Of oil if the arithmetic average of the closing oil prices for
the current calendar year is $28.00 per barrel or less, as adjusted in
paragraph (f) of this section, and
(2) Of gas if the arithmetic average of the closing natural gas
prices for the current calendar year is $3.50 per million Btu or less,
as adjusted in paragraph (f) of this section.
(e) You must follow our regulations in part 230 of this chapter for
receiving refunds or credits.
(f) We change the prices referred to in paragraphs (a), (b) and (d)
of this section during each calendar year after 1994. These prices
change by the percentage the implicit price deflator for the gross
domestic product changed during the preceding calendar year.
Sec. 203.79 How do I appeal MMS's decisions related to Deep Water Royalty Relief?
(a) Once we have designated your lease as part of a field and
notified you and other affected operators of the designation, you can
request reconsideration by sending the MMS Director a letter within 15
days that also states your reasons. The MMS Director's response is the
final agency action.
(b) Our decisions on your application for relief from paying royalty
under Sec. 203.67 and the royalty-suspension volumes under Sec. 203.69
are final agency actions.
(c) If you cannot start construction by the deadline in
Sec. 203.76(b) for reasons beyond your control (e.g., strike at the
fabrication yard), you may request an extension up to 1 year by writing
the MMS Director and stating your reasons. The MMS Director's response
is the final agency action.
(d) We will notify you of all final agency actions by certified
mail, return receipt requested. Final agency actions are not subject to
appeal to the Interior Board of Land Appeals under 30 CFR part 290 and
43 CFR part 4. They are judicially reviewable under section 10(a) of the
Administrative Procedure Act (5 U.S.C. 702) only if you file an action
within 30 days of the date you receive our decision.
[[Page 24]]
Required Reports
Sec. 203.81 What supplemental reports do royalty-relief applications require?
(a) You must send us the supplemental reports listed below that
apply to your field. Secs. 203.83 through 203.91 describe these reports
in detail.
----------------------------------------------------------------------------------------------------------------
Deep water
Required reports End-of-life expansion Pre-act deep
lease project water lease
----------------------------------------------------------------------------------------------------------------
Administrative information report............................ x x x
Net revenue & relief justification report.................... x ............... ...............
Economic viability & relief justification report (RSVP model ............... x x
inputs justified by other required reports).................
G&G report................................................... ............... x x
Engineering report........................................... ............... x x
Production report............................................ ............... x x
Deep water cost report....................................... ............... x x
Fabricator's confirmation report............................. ............... x x
Post-production development report........................... ............... x x
----------------------------------------------------------------------------------------------------------------
(b) You must certify that all information in your application,
fabricator's confirmation and post-production development reports is
accurate, complete, and conforms to the most recent content and
presentation guidelines available from the MMS GOM Regional Office.
(c) You must submit with your application and post-production
development report an additional report prepared by a CPA that:
(1) Assesses the accuracy of the historical financial information in
your report; and
(2) Certifies that the content and presentation of the financial
data and information conforms to our most recent guidelines on royalty
relief.
(d) You must identify the people in the CPA firm who prepared the
reports referred to in paragraph (c) of this section and make them
available to us to respond to questions about the historical financial
information. We may also further review your records to support this
information.
Sec. 203.82 What is MMS's authority to collect this information?
The Office of Management and Budget (OMB) approved the information
collection requirements in part 203 under 44 U.S.C. 3501 et seq. and
assigned OMB control number 1010-0071.
(a) We use the information to determine whether royalty relief will
result in production that wouldn't otherwise occur. We rely largely on
your information to make these determinations.
(1) Your application for royalty relief must contain enough
information on finances, economics, reservoirs, G&G characteristics,
production, and engineering estimates for us to determine whether:
(i) We should grant relief under the law, and
(ii) The requested relief will ultimately recover more resources and
return a reasonable profit on project investments.
(2) Your fabricator confirmation and post-production development
reports must contain enough information for us to verify that your
application reasonably represented your plans.
(b) Applicants (respondents) are Federal OCS oil and gas lessees.
Applications are required to obtain or retain a benefit. Therefore, if
you apply for royalty relief, you must provide this information. We will
protect information considered proprietary under applicable law and
under regulations at Sec. 203.63(b) and part 250 of this chapter.
(c) The Paperwork Reduction Act of 1995 requires us to inform you
that we may not conduct or sponsor, and you are not required to respond
to, a collection of information unless it displays a currently valid OMB
control number.
(d) You may send comments regarding any aspect of the collection of
information under this part, including suggestions for reducing the
burden, to the Information Collection Clearance
[[Page 25]]
Officer, Minerals Management Service, Mail Stop 4230, 1849 C Street,
NW., Washington, DC 20240; and to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer for the Department of the Interior (1010-0071), Washington, DC
20503.
Sec. 203.83 What is in an administrative information report?
This report identifies the field or lease for which royalty relief
is requested and must contain the following items:
(a) The field or lease name;
(b) The serial number of leases we have assigned to the field, names
of the lease title holders of record, the lease operators, and whether
any lease is part of a unit;
(c) Lessee's designation, the API number and location of each well
that has been drilled on the field or lease or project (not required for
non-oil and gas leases);
(d) The location of any new wells proposed under the terms of the
application (not required for non-oil and gas leases);
(e) A description of field or lease history;
(f) Full information as to whether you will pay royalties or a share
of production to anyone other than the United States, the amount you
will pay, and how much you will reduce this payment if we grant relief;
(g) The type of royalty relief you are requesting;
(h) Confirmation that we approved a DOCD or supplemental DOCD (Deep
Water expansion project applications only); and
(i) A narrative description of the development activities associated
with the proposed capital investments and an explanation of proposed
timing of the activities and the effect on production (Deep Water
applications only).
Sec. 203.84 What is in a net revenue and relief justification report?
This report presents cash flow data for 12 qualifying months, using
the format specified in the ``Guidelines for the Application, Review,
Approval, and Administration of Royalty Relief for End-of-Life Leases'',
U.S. Department of the Interior, MMS. Qualifying months for an oil and
gas lease are the most recent 12 months out of the last 15 months that
you produced at least 100 BOE per day on average. Qualifying months for
other than oil and gas leases are the most recent 12 of the last 15
months having some production.
(a) The cash flow table you submit must include historical data for:
(1) Lease production subject to royalty;
(2) Total revenues;
(3) Royalty payments out of production;
(4) Total allowable costs; and
(5) Transportation and processing costs.
(b) Do not include in your cash flow table the non-allowable costs
listed at 30 CFR 220.013 or:
(1) OCS rental payments on the lease(s) in the application;
(2) Damages and losses;
(3) Taxes;
(4) Any costs associated with exploratory activities;
(5) Civil or criminal fines or penalties;
(6) Fees for your royalty relief application; and
(7) Costs associated with existing obligations (e.g., royalty
overrides or other forms of payment for acquiring the lease,
depreciation on previously acquired equipment or facilities).
(c) We may, in reviewing and evaluating your application, disallow
costs when you have not shown they are necessary to operate the lease,
or if they are inconsistent with end-of-life operations.
[63 FR 2618, Jan. 16, 1998, as amended at 63 FR 57249, Oct. 27, 1998]
Sec. 203.85 What is in an economic viability and relief justification report?
This report should show that your project appears economic without
royalties and sunk costs using the RSVP model we provide. The format of
the report and the assumptions and parameters we specify are found in
the ``Guidelines for the Application, Review, Approval and
Administration of the Deep Water Royalty Relief Program,'' U.S.
Department of the Interior, MMS. Clearly justify each parameter you set
in every scenario you
[[Page 26]]
specify in the RSVP. You may provide supplemental information, including
your own model and results. The economic viability and relief
justification report must contain the following items for an oil and gas
lease.
(a) Economic assumptions we provide which include:
(1) Starting oil and gas prices;
(2) Real price growth;
(3) Real cost growth or decline rate, if any;
(4) Base year;
(5) Range of discount rates; and
(6) Tax rate (for use in determining after-tax sunk costs).
(b) Analysis of projected cash flow (from the date of the
application using annual totals and constant dollar values) which shows:
(1) Oil and gas production;
(2) Total revenues;
(3) Capital expenditures;
(4) Operating costs;
(5) Transportation costs; and
(6) Before-tax net cash flow without royalties, overrides, sunk
costs, and ineligible costs.
(c) Discounted values which include:
(1) Discount rate used (selected from within the range we specify).
(2) Before-tax net present value without royalties, overrides, sunk
costs, and ineligible costs.
(d) Demonstrations that:
(1) All costs, gross production, and scheduling are consistent with
the data in the G&G, engineering, production, and cost reports
(Secs. 203.86 through 203.89) and
(2) The development and production scenarios provided in the various
reports are consistent with each other and with the proposed development
system. You can use up to three scenarios (conservative, most likely,
and optimistic), but you must link each to a specific range on the
distribution of resources from the RSVP Resource Module.
Sec. 203.86 What is in a G&G report?
This report supports the reserve and resource estimates used in the
economic evaluation and must contain each of the following elements.
(a) Seismic data which includes:
(1) Non-interpreted 2D/3D survey lines reflecting any available
state-of-the-art processing technique in a format readable by MMS and
specified by the deep water royalty relief guidelines;
(2) Interpreted 2D/3D seismic survey lines reflecting any available
state-of-the-art processing technique identifying all known and
prospective pay horizons, wells, and fault cuts;
(3) Digital velocity surveys in the format of the GOM region's
letter to lessees of 10/1/90;
(4) Plat map of ``shot points;'' and
(5) ``Time slices'' of potential horizons.
(b) Well data which includes:
(1) Hard copies of all well logs in which--
(i) The 1-inch electric log shows pay zones and pay counts and
lithologic and paleo correlation markers at least every 500-feet,
(ii) The 1-inch type log shows missing sections from other logs
where faulting occurs,
(iii) The 5-inch electric log shows pay zones and pay counts and
labeled points used in establishing resistivity of the formation, 100
percent water saturated (Ro) and the resistivity of the
undisturbed formation (Rt), and
(iv) The 5-inch porosity logs show pay zones and pay counts and
labeled points used in establishing reservoir porosity or labeled points
showing values used in calculating reservoir porosity such as bulk
density or transit time;
(2) Digital copies of all well logs spudded before December 1, 1995;
(3) Core data, if available;
(4) Well correlation sections;
(5) Pressure data;
(6) Production test results; and
(7) Pressure-volume-temperature analysis, if available.
(c) Map interpretations which includes for each reservoir in the
field:
(1) Structure maps consisting of top and base of sand maps showing
well and seismic shot point locations;
(2) Isopach maps for net sand, net oil, net gas, all with well
locations;
(3) Maps indicating well surface and bottom hole locations, location
of development facilities, and shot points; and
(4) Identification of reservoirs not contemplated for development.
[[Page 27]]
(d) Reservoir-specific data which includes:
(1) Probability of reservoir occurrence with hydrocarbons;
(2) Probability the hydrocarbon in the reservoir is all oil and the
probability it is all gas;
(3) Distributions or point estimates (accompanied by explanations of
why distributions less appropriately reflect the uncertainty) for the
parameters used to estimate reservoir size, i.e., acres and net
thickness;
(4) Most likely values for porosity, salt water saturation, volume
factor for oil formation, and volume factor for gas formation;
(5) Distributions or point estimates (accompanied by explanations of
why distributions less appropriately reflect the uncertainty) for
recovery efficiency (in percent) and oil or gas recovery (in stock-tank-
barrels per acre-foot or in thousands of cubic feet per acre foot);
(6) A gas/oil ratio distribution or point estimate (accompanied by
explanations of why distributions less appropriately reflect the
uncertainty) for each reservoir; and
(7) A yield distribution or point estimate (accompanied by
explanations of why distributions less appropriately reflect the
uncertainty) for each gas reservoir.
(e) Aggregated reserve and resource data which includes:
(1) The aggregated distributions for reserves and resources (in BOE)
and oil fraction for your field computed by the resource module of our
RSVP model;
(2) A description of anticipated hydrocarbon quality (i.e., specific
gravity); and
(3) The ranges within the aggregated distribution for reserves and
resources that define the development and production scenarios presented
in the engineering and production reports. Typically there will be three
ranges specified by two positive reserve and resource points on the
aggregated distribution. The range at the low end of the distribution
will be associated with the conservative development and production
scenario; the middle range will be related to the most likely
development and production scenario; and, the high end range will be
consistent with the optimistic development and production scenario.
Sec. 203.87 What is in an engineering report?
This report defines the development plan and capital requirements
for the economic evaluation and must contain the following elements.
(a) A description of the development concept (e.g., tension leg
platform, fixed platform, floater type, subsea tieback, etc.) which
includes:
(1) Its size and
(2) The construction schedule.
(b) An identification of planned wells which includes:
(1) The number;
(2) The type (platform, subsea, vertical, deviated, horizontal);
(3) The well depth;
(4) The drilling schedule;
(5) The kind of completion (single, dual, horizontal, etc.); and
(6) The completion schedule.
(c) A description of the production system equipment which includes:
(1) The production capacity for oil and gas and a description of
limiting component(s);
(2) Any unusual problems (low gravity, paraffin, etc.);
(3) All subsea structures;
(4) All flowlines; and
(5) Schedule for installing the production system.
(d) A discussion of any plans for multi-phase development which
includes:
(1) The conceptual basis for developing in phases and goals or
milestones required for starting later phases; and
(2) An explanation for excluding the reservoirs you are not planning
to develop.
(e) A set of development scenarios consisting of activity timing and
scale associated with each of up to three production profiles
(conservative, most likely, optimistic) provided in the production
report for your field (Sec. 203.88). Each development scenario and
production profile must denote the likely events should the field size
turn out to be within a range represented by one of the three segments
of the field size distribution. If you send in fewer than three
scenarios, you must explain why
[[Page 28]]
fewer scenarios are more efficient across the whole field size
distribution.
Sec. 203.88 What is in a production report?
This report supports your development and production timing and
product quality expectations and must contain the following elements.
(a) Production profiles by well completion and field that specify
the actual and projected production by year for each of the following
products: oil, condensate, gas, and associated gas. The production from
each profile must be consistent with a specific level of reserves and
resources on the aggregated distribution of field size.
(b) Production drive mechanisms for each reservoir.
Sec. 203.89 What is in a deep water cost report?
This report lists all actual and projected costs for your field,
must explain and document the source of each cost estimate, and must
identify the following elements.
(a) Sunk cost, which are all your eligible post-discovery
exploration, development, and production expenses (no third party
costs), and also include the eligible costs of the discovery well on the
field. Report them in nominal dollars and only if you have
documentation. We count sunk costs in an evaluation (specified in
Sec. 203.68) as after-tax expenses, using nominal dollar amounts.
(b) Appraisal, delineation and development costs. Base them on
actual spending, current authorization for expenditure, engineering
estimates, or analogous projects. These costs cover:
(1) Platform well drilling and average depth;
(2) Platform well completion;
(3) Subsea well drilling and average depth;
(4) Subsea well completion;
(5) Production system (platform); and
(6) Flowline fabrication and installation.
(c) Production costs based on historical costs, engineering
estimates, or analogous projects. These costs cover:
(1) Operation;
(2) Equipment; and
(3) Existing royalty overrides (we will not use the royalty
overrides in evaluations).
(d) Transportation costs, based on historical costs, engineering
estimates, or analogous projects. These costs cover:
(1) Oil or gas tariffs from pipeline or tankerage;
(2) Trunkline and tieback lines; and
(3) Gas plant processing for natural gas liquids.
(e) Abandonment costs, based on historical costs, engineering
estimates, or analogous projects. You should provide the costs to plug
and abandon only wells and to remove only production systems for which
you have not incurred costs as of the time of application submission.
You should also include a point estimate or distribution of prospective
salvage value for all potentially reusable facilities and materials,
along with the source and an explanation of the figures provided.
(f) A set of cost estimates consistent with each one of up to three
field-development scenarios and production profiles (conservative, most
likely, optimistic). You should express costs in constant real dollar
terms for the base year. You may also express the uncertainty of each
cost estimate with a minimum and maximum percentage of the base value.
(g) A spending schedule. You should provide costs for each year (in
real dollars) for each category in paragraphs (a) through (f) of this
section.
(h) A summary of other costs which are ineligible for evaluating
your need for relief. These costs cover:
(1) Expenses before first discovery on the field;
(2) Cash bonuses;
(3) Fees for royalty relief applications;
(4) Lease rentals, royalties, and payments of net profit share and
net revenue share;
(5) Legal expenses;
(6) Damages and losses;
(7) Taxes;
(8) Interest or finance charges, including those embedded in
equipment leases;
(9) Fines or penalties; and
(10) Money spent on previously existing obligations (e.g., royalty
overrides
[[Page 29]]
or other forms of payment for acquiring a financial position in a lease,
expenditures for plugging wells and removing and abandoning facilities
that existed on the application submission date).
Sec. 203.90 What is in a fabricator's confirmation report?
This report shows you have committed in a timely way to the approved
system for production. This report must include the following (or its
equivalent for unconventionally acquired systems):
(a) A copy of the contract(s) under which the fabrication yard is
building the approved system for you;
(b) A letter from the contractor building the system to the MMS's
GOM Regional Supervisor--Production and Development, certifying when
construction started on your system; and
(c) Evidence of an appropriate down payment or equal action that
you've started acquiring the approved system.
Sec. 203.91 What is in a post-production development report?
For each cost category in the deep water cost report, you must
compare actual costs up to the date when production starts to your
planned pre-production costs. If your application included more than one
development scenario, you need to compare actual costs with those in
your scenario of most likely development. Keep supporting records for
these costs and make them available to us on request.
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal
Sec. 203.250 Advance royalty.
Provisions for the payment of advance royalty in lieu of continued
operation are contained at 43 CFR 3483.4.
[54 FR 1522, Jan. 13, 1989]
Sec. 203.251 Reduction in royalty rate or rental.
An application for reduction in coal royalty rate or rental shall be
filed and processed in accordance with 43 CFR group 3400.
[54 FR 1522, Jan. 13, 1989]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources [Reserved]
Subpart I--OCS Sulfur [Reserved]
PART 206--PRODUCT VALUATION--Table of Contents
Subpart A--General Provisions
Sec.
206.10 Information collection.
Subpart B--Indian Oil
206.50 Purpose and scope.
206.51 Definitions.
206.52 Valuation standards.
206.53 Point of royalty settlement.
206.54 Transportation allowances--general.
206.55 Determination of transportation allowances.
Subpart C--Federal Oil
206.100 Purpose and scope.
206.101 Definitions.
206.102 Valuation standards.
206.103 Point of royalty settlement.
206.104 Transportation allowances--general.
206.105 Determination of transportation allowances.
206.106 Operating allowances.
Subpart D--Federal Gas
206.150 Purpose and scope.
206.151 Definitions.
206.152 Valuation standards--unprocessed gas.
206.153 Valuation standards--processed gas.
206.154 Determination of quantities and qualities for computing
royalties.
206.155 Accounting for comparison.
206.156 Transportation allowances--general.
206.157 Determination of transportation allowances.
206.158 Processing allowances--general.
206.159 Determination of processing allowances.
206.106 Operating allowances.
[[Page 30]]
Subpart E--Indian Gas
206.170 Purpose and scope.
206.171 Definitions.
206.172 Valuation standards--unprocessed gas.
206.173 Valuation standards--processed gas.
206.174 Determination of quantities and qualities for computing
royalties.
206.175 Accounting for comparison.
206.176 Transportation allowances--general.
206.177 Determination of transportation allowances.
206.178 Processing allowances--general.
206.179 Determination of processing allowances.
Subpart F--Federal Coal
206.250 Purpose and scope.
206.251 Definitions.
206.252 Information collection.
206.253 Coal subject to royalties--general provisions.
206.254 Quality and quantity measurement standards for reporting and
paying royalties.
206.255 Point of royalty determination.
206.256 Valuation standards for cents-per-ton leases.
206.257 Valuation standards for ad valorem leases.
206.258 Washing allowances--general.
206.259 Determination of washing allowances.
206.260 Allocation of washed coal.
206.261 Transportation allowances--general.
206.262 Determination of transportation allowances.
206.263 Contract submission.
206.264 In-situ and surface gasification and liquefaction operations.
206.265 Value enhancement of marketable coal.
Subpart G--Other Solid Minerals
206.301 Value basis for royalty computation.
Subpart H--Geothermal Resources
206.350 Purpose and scope.
206.351 Definitions.
206.352 Valuation standards for electrical generation.
206.353 Determination of transmission deductions.
206.354 Determination of generating deductions.
206.355 Valuation standards for direct utilization.
206.356 Valuation standards for byproducts.
206.357 Byproduct transportation allowances--general.
206.358 Determination of byproduct transportation allowances.
Subpart I--OCS Sulfur [Reserved]
Subpart J--Indian Coal
206.450 Purpose and scope.
206.451 Definitions.
206.452 Coal subject to royalties--general provisions.
206.453 Quality and quantity measurement standards for reporting and
paying royalties.
206.454 Point of royalty determination.
206.455 Valuation standards for cents-per-ton leases.
206.456 Valuation standards for ad valorem leases.
206.457 Washing allowances--general.
206.458 Determination of washing allowances.
206.459 Allocation of washed coal.
206.460 Transportation allowances--general.
206.461 Determination of transportation allowances.
206.462 Contract submission.
206.463 In-situ and surface gasification and liquefaction operations.
206.464 Value enhancement of marketable coal.
Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et
seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et seq.,
1701 et seq.; 31 U.S.C. 9701.; 43 U.S.C. 1301 et seq., 1331 et seq., and
1801 et seq.
Subpart A--General Provisions
Sec. 206.10 Information collection.
The information collection requirements contained in this part have
been approved by the Office of Management and Budget (OMB) under 44
U.S.C. 3501 et seq. The forms, filing date, and approved OMB clearance
numbers are identified in 30 CFR 210.10.
[57 FR 41863, Sept. 14, 1992]
Subpart B--Indian Oil
Source: 61 FR 5455, Feb. 12, 1996, unless otherwise noted.
Sec. 206.50 Purpose and scope.
(a) This subpart is applicable to all oil production from Indian
(Tribal and allotted) oil and gas leases (except leases on the Osage
Indian Reservation, Osage County, Oklahoma). The purpose of this subpart
is to establish the value of production, for royalty purposes,
consistent with the mineral leasing
[[Page 31]]
laws, other applicable laws, and lease terms.
(b) If the specific provisions of any Federal statute, treaty,
settlement agreement between the Indian lessor and a lessee resulting
from administrative or judicial litigation, or oil and gas lease subject
to the requirements of this subpart are inconsistent with any regulation
in this subpart, then the statute, treaty, lease provision or settlement
agreement shall govern to the extent of that inconsistency.
(c) All royalty payments made to MMS or Indian Tribes are subject to
audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian oil and gas leases are discharged in accordance
with the requirements of the governing mineral leasing laws, treaties,
and lease terms.
Sec. 206.51 Definitions.
For the purposes of this subpart:
Allowance means an approved or an MMS-initially accepted deduction
in determining value for royalty purposes. Transportation allowance
means an allowance for the reasonable, actual costs incurred by the
lessee for moving oil to a point of sale or point of delivery off the
lease, unit area, or communitized area, excluding gathering, or an
approved or MMS-initially accepted deduction for costs of such
transportation, determined by this subpart.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field in which oil and/or gas lease products
have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the market place between independent, nonaffiliated
persons with opposing economic interests regarding that contract. For
purposes of this subpart, two persons are affiliated if one person
controls, is controlled by, or is under common control with another
person. For purposes of this subpart, based on the instruments of
ownership of the voting securities of an entity, or based on other forms
of ownership: ownership in excess of 50 percent constitutes control;
ownership of 10 through 50 percent creates a presumption of control; and
ownership of less than 10 percent creates a presumption of noncontrol
which MMS may rebut if it demonstrates actual or legal control,
including the existence of interlocking directorates. Notwithstanding
any other provisions of this subpart, contracts between relatives,
either by blood or by marriage, are not arm's-length contracts. MMS may
require the lessee to certify ownership control. To be considered arm's-
length for any production month, a contract must meet the requirements
of this definition for that production month, as well as when the
contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Field means a geographic region situated over one or more subsurface
oil and gas reservoirs encompassing at least the outermost boundaries of
all oil and gas accumulations known to be within those reservoirs
vertically projected to the land surface. Onshore fields are usually
given names and their official boundaries are often designated by oil
and gas regulatory agencies in the respective States in which the fields
are located.
[[Page 32]]
Gathering means the movement of lease production to a central
accumulation or treatment point on the lease, unit, or communitized
area, or to a central accumulation or treatment point off the lease,
unit, or communitized area as approved by BLM operations personnel for
onshore leases.
Gross proceeds (for royalty payment purposes) means the total monies
and other consideration accruing to an oil and gas lessee for the
disposition of the oil produced. Gross proceeds includes, but is not
limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the lessee
is obligated to perform them at no cost to the Indian lessor. Gross
proceeds, as applied to oil, also includes, but is not limited to,
reimbursements for harboring or terminating fees. Tax reimbursements are
part of the gross proceeds accruing to a lessee even though the Indian
royalty interest may be exempt from taxation. Monies and other
consideration, including the forms of consideration identified in this
paragraph, to which a lessee is contractually or legally entitled but
which it does not seek to collect through reasonable efforts are also
part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject to
Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under a
mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered by
that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Indian leases.
Lessee means any person to whom an Indian Tribe, or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease. This
includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Load oil means any oil which has been used with respect to the
operation of oil or gas wells for wellbore stimulation, workover,
chemical treatment, or production purposes. It does not include oil used
at the surface to place lease production in marketable condition.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser under a sales contract typical for the field or
area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that the
lessee must pay as specified in the lease or in applicable leasing
regulations.
MMS means the Minerals Management Service of the Department of the
Interior.
Net-back method (or workback method) means a method for calculating
market value of oil at the lease. Under this method, costs of
transportation, processing, or manufacturing are deducted from the
proceeds received for the oil and any extracted, processed, or
manufactured products, or from the value of the oil or any extracted,
processed, or manufactured products at the first point at which
reasonable values for any such products may be determined by a sale
under an arm's-length contract or comparison to other sales of such
products, to ascertain value at the lease.
Net profit share (for applicable Indian lessees) means the specified
share of
[[Page 33]]
the net profit from production of oil and gas as provided in the
agreement.
Oil means a mixture of hydrocarbons that existed in the liquid phase
in natural underground reservoirs and remains liquid at atmospheric
pressure after passing through surface separating facilities and is
marketed or used as such. Condensate recovered in lease separators or
field facilities is considered to be oil. For purposes of royalty
valuation, the term tar sands is defined separately from oil.
Oil shale means a kerogen-bearing rock (i.e., fossilized, insoluble,
organic material). Separation of kerogen from oil shale may take place
in situ or in surface retorts by various processes. The kerogen, upon
distillation, will yield liquid and gaseous hydrocarbons.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Posted price means the price specified in publicly available posted
price bulletins, onshore terminal postings, or other price notices net
of all adjustments for quality (e.g., API gravity, sulfur content, etc.)
and location for oil in marketable condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which normally
take place on or near the lease, such as natural pressure reduction,
mechanical separation, heating, cooling, dehydration, and compression
are not considered processing. The changing of pressures and/or
temperatures in a reservoir is not considered processing.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of oil are made. Selling arrangements
are described by illustration in MMS Royalty Management Program Oil and
Gas Payor Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of oil at a specified price over a
fixed period, usually of short duration, which does not normally require
a cancellation notice to terminate, and which does not contain an
obligation, nor imply an intent, to continue in subsequent periods.
Tar sands means any consolidated or unconsolidated rock (other than
coal, oil shale, or gilsonite) that either contains a hydrocarbonaceous
material with a gas-free viscosity greater than 10,000 centipoise at
original reservoir temperature, or contains quarrying.
Sec. 206.52 Valuation standards.
(a)(1) The value of production, for royalty purposes, of oil from
leases subject to this subpart shall be the value determined under this
section less applicable allowances determined under this subpart.
(2)(i) For any Indian leases which provide that the Secretary may
consider the highest price paid or offered for a major portion of
production (major portion) in determining value for royalty purposes, if
data are available to compute a major portion, MMS will, where
practicable, compare the value determined in accordance with this
section with the major portion. The value to be used in determining the
value of production, for royalty purposes, shall be the higher of those
two values.
(ii) For purposes of this paragraph, major portion means the highest
price paid or offered at the time of production for the major portion of
oil production from the same field. The major portion will be calculated
using like-quality oil sold under arm's-length contracts from the same
field (or, if necessary to obtain a reasonable sample, from the same
area) for each month. All such oil production will be arrayed from
highest price to lowest price (at the bottom).
The major portion is that price at which 50 percent (by volume) plus
1 barrel of the oil (starting from the bottom) is sold.
(b)(1)(i) The value of oil which is sold under an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of this section. The
lessee shall have the burden of demonstrating that its contract is
arm's-length. The value which the lessee reports, for royalty purposes,
is subject to monitoring, review, and audit. For purposes of this
section, oil
[[Page 34]]
which is sold or otherwise transferred to the lessee's marketing
affiliate and then sold by the marketing affiliate under an arm's-length
contract shall be valued in accordance with this paragraph based upon
the sale by the marketing affiliate.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the oil. If the
contract does not reflect the total consideration, then MMS may require
that the oil sold under that contract be valued in accordance with
paragraph (c) of this section. Value may not be less than the gross
proceeds accruing to the lessee, including the additional consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee under an arm's-length contract do not reflect the reasonable
value of the production because of misconduct by or between two
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the oil
production be valued under the first applicable of paragraph (c)(2),
(c)(3), (c)(4), or (c)(5) of this section. When MMS determines that the
value may be unreasonable, MMS will notify the lessee and give the
lessee an opportunity to provide written information justifying the
lessee's value. If the oil production is then valued under paragraph
(c)(4) or (c)(5) of this section, the notification requirements of
paragraph (e) of this section shall apply.
(2) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the oil.
(c) The value of oil production from leases subject to this section
which is not sold under an arm's-length contract shall be the reasonable
value determined in accordance with the first applicable of the
following paragraphs:
(1) The lessee's contemporaneous posted prices or oil sales contract
prices used in arm's-length transactions for purchases or sales of
significant quantities of like-quality oil in the same field (or, if
necessary to obtain a reasonable sample, from the same area); provided,
however, that those posted prices or oil sales contract prices are
comparable to other contemporaneous posted prices or oil sales contract
prices used in arm's-length transactions for purchases or sales of
significant quantities of like-quality oil in the same field (or, if
necessary to obtain a reasonable sample, from the same area). In
evaluating the comparability of posted prices or oil sales contract
prices, the following factors shall be considered: Price, duration,
market or markets served, terms, quality of oil, volume, and other
factors as may be appropriate to reflect the value of the oil. If the
lessee makes arm's-length purchases or sales at different postings or
prices, then the volume-weighted average price for the purchases or
sales for the production month will be used;
(2) The arithmetic average of contemporaneous posted prices used in
arm's-length transactions by persons other than the lessee for purchases
or sales of significant quantities of like-quality oil in the same field
(or, if necessary to obtain a reasonable sample, from the same area);
(3) The arithmetic average of other contemporaneous arm's-length
contract prices for purchases or sales of significant quantities of
like-quality oil in the same area or nearby areas;
(4) Prices received for arm's-length spot sales of significant
quantities of like-quality oil from the same field (or, if necessary to
obtain a reasonable sample, from the same area), and other relevant
matters, including information submitted by the lessee concerning
circumstances unique to a particular lease operation or the salability
of certain types of oil;
(5) A net-back method or any other reasonable method to determine
value;
(6) For purposes of this paragraph, the term lessee includes the
lessee's designated purchasing agent, and the term contemporaneous means
postings or contract prices in effect at the time the royalty obligation
is incurred.
(d) Any Indian lessee will make available, upon request to the
authorized MMS or Indian representatives, to the Office of the Inspector
General of
[[Page 35]]
the Department of the Interior, or other persons authorized to receive
such information, arm's-length sales and volume data for like-quality
production sold, purchased, or otherwise obtained by the lessee from the
field or area or from nearby fields or areas.
(e)(1) Where the value is determined under paragraph (c) of this
section, the lessee shall retain all data relevant to the determination
of royalty value. Such data shall be subject to review and audit, and
MMS will direct a lessee to use a different value if it determines that
the reported value is inconsistent with the requirements of these
regulations.
(2) A lessee shall notify MMS if it has determined value under
paragraph (c)(4) or (c)(5) of this section. The notification shall be by
letter to MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method authorized
by paragraph (c)(4) or (c)(5) of this section and each time there is a
change from one to the other of these two methods.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on the difference computed under 30 CFR 218.54. If the
lessee is entitled to a credit, MMS will provide instructions for the
taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that value for royalty payment purposes until MMS issues a value
determination. The lessee shall submit all available data relevant to
its proposal. MMS shall expeditiously determine the value based upon the
lessee's proposal and any additional information MMS deems necessary. In
making a value determination, MMS may use any of the valuation criteria
authorized by this subpart. That determination shall remain effective
for the period stated therein. After MMS issues its determination, the
lessee shall make the adjustments in accordance with paragraph (f) of
this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production, for royalty purposes, be
less than the gross proceeds accruing to the lessee for lease
production, less applicable allowances determined under this subpart.
(i) The lessee is required to place oil in marketable condition at
no cost to the Indian lessor unless otherwise provided in the lease
agreement or this section. Where the value established under this
section is determined by a lessee's gross proceeds, that value shall be
increased to the extent that the gross proceeds have been reduced
because the purchaser, or any other person, is providing certain
services the cost of which ordinarily is the responsibility of the
lessee to place the oil in marketable condition.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to an arm's-length contract. If the lessee makes timely
application for a price increase or benefit allowed under its contract
but the purchaser refuses, and the lessee takes reasonable measures,
which are documented, to force purchaser compliance, the lessee will owe
no additional royalties unless or until monies or consideration
resulting from the price increase or additional benefits are received.
This paragraph shall not be construed to permit a lessee to avoid its
royalty payment obligation in situations where a purchaser fails to pay,
in whole or in part or timely, for a quantity of oil.
(k) Notwithstanding any provision in these regulations to the
contrary, no
[[Page 36]]
review, reconciliation, monitoring, or other like process that results
in a redetermination by MMS of value under this section shall be
considered final or binding as against the Indian Tribes or allottees
until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt, will be maintained in a
confidential manner in accordance with applicable laws and regulations.
All requests for information about determinations made under this part
are to be submitted in accordance with the Freedom of Information Act
regulation of the Department of the Interior, 43 CFR part 2. Nothing in
this section is intended to limit or diminish in any manner whatsoever
the right of an Indian lessor to obtain any and all information to which
such lessor may be lawfully entitled from MMS or such lessor's lessee
directly under the terms of the lease, 30 U.S.C. 1733, or other
applicable law.
Sec. 206.53 Point of royalty settlement.
(a)(1) Royalties shall be computed on the quantity and quality of
oil as measured at the point of settlement approved by BLM for onshore
leases.
(2) If the value of oil determined under Sec. 206.52 of this subpart
is based upon a quantity and/or quality different from the quantity and/
or quality at the point of royalty settlement approved by the BLM for
onshore leases, the value shall be adjusted for those differences in
quantity and/or quality.
(b) No deductions may be made from the royalty volume or royalty
value for actual or theoretical losses. Any actual loss that may be
sustained prior to the royalty settlement metering or measurement point
will not be subject to royalty provided that such actual loss is
determined to have been unavoidable by BLM.
(c) Except as provided in paragraph (b) of this section, royalties
are due on 100 percent of the volume measured at the approved point of
royalty settlement. There can be no reduction in that measured volume
for actual losses beyond the approved point of royalty settlement or for
theoretical losses that are claimed to have taken place either prior to
or beyond the proved point of royalty settlement. Royalties are due on
100 percent of the value of the oil as provided in this subpart. There
can be no deduction from the value of the oil for royalty purposes to
compensate for actual losses beyond the approved point of royalty
settlement or for theoretical losses that are claimed to have taken
place either prior to or beyond the approved point of royalty
settlement.
Sec. 206.54 Transportation allowances--general.
(a) Where the value of oil has been determined under Section 206.52
of this subpart at a point (e.g., sales point or point of value
determination) off the lease, MMS shall allow a deduction for the
reasonable, actual costs incurred by the lessee to transport oil to a
point off the lease; provided, however, that no transportation allowance
will be granted for transporting oil taken as Royalty-In-Kind (RIK); or
(b)(1) Except as provided in paragraph (b)(2) of this section, the
transportation allowance deduction on the basis of a selling arrangement
shall not exceed 50 percent of the value of the oil at the point of sale
as determined under Sec. 206.52 of this subpart. Transportation costs
cannot be transferred between selling arrangements or to other products.
(2) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitation prescribed by paragraph
(b)(1) of this section. The lessee must demonstrate that the
transportation costs incurred in excess of the limitation prescribed in
paragraph (b)(1) of this section were reasonable, actual, and necessary.
An application for exception (using Form MMS-4393, Request to Exceed
Regulatory Allowance Limitation) shall contain all relevant and
supporting documentation necessary for MMS to make a determination.
Under no circumstances shall the value, for royalty purposes, under any
[[Page 37]]
selling arrangement, be reduced to zero.
(c) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.55. Transportation
allowances for oil shall be expressed as dollars per barrel.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest.
Sec. 206.55 Determination of transportation allowances.
(a) Arm's-length transportation contracts. (1)(i) For transportation
costs incurred by a lessee under an arm's-length contract, the
transportation allowance shall be the reasonable, actual costs incurred
by the lessee for transporting oil under that contract, except as
provided in paragraphs (a)(1)(ii) and (a)(1)(iii) of this section,
subject to monitoring, review, audit, and adjustment. The lessee shall
have the burden of demonstrating that its contract is arm's-length. Such
allowances shall be subject to the provisions of paragraph (f) of this
section. Before any deduction may be taken, the lessee must submit a
completed page one of Form MMS-4110 (and Schedule 1), Oil Transportation
Allowance Report, in accordance with paragraph (c)(1) of this section. A
transportation allowance may be claimed retroactively for a period of
not more than 3 months prior to the first day of the month that Form
MMS-4110 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for the
transportation. If the contract reflects more than the total
consideration, then MMS may require that the transportation allowance be
determined in accordance with paragraph (b) of this section.
(iii) If MMS determines that the consideration paid under an arm's-
length transportation contract does not reflect the reasonable value of
the transportation because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee and
the lessor, then MMS shall require that the transportation allowance be
determined in accordance with paragraph (b) of this section. When MMS
determines that the value of the transportation may be unreasonable, MMS
will notify the lessee and give the lessee an opportunity to provide
written information justifying the lessee's transportation costs.
(2)(i) If an arm's-length transportation contract includes more than
one liquid product, and the transportation costs attributable to each
product cannot be determined from the contract, then the total
transportation costs shall be allocated in a consistent and equitable
manner to each of the liquid products transported in the same proportion
as the ratio of the volume of each product (excluding waste products
which have no value) to the volume of all liquid products (excluding
waste products which have no value). Except as provided in this
paragraph, no allowance may be taken for the costs of transporting lease
production which is not royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(3) If an arm's-length transportation contract includes both gaseous
and liquid products, and the transportation costs attributable to each
product cannot be determined from the contract, the lessee shall propose
an allocation procedure to MMS. The lessee may use the oil
transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall submit all
available data to support its proposal. The initial proposal must be
[[Page 38]]
submitted by June 30, 1988 or within 3 months after the last day of the
month for which the lessee requests a transportation allowance,
whichever is later (unless MMS approves a longer period). MMS shall then
determine the oil transportation allowance based upon the lessee's
proposal and any additional information MMS deems necessary.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not on a dollar-per-unit basis, the lessee shall
convert whatever consideration is paid to a dollar value equivalent for
the purposes of this section.
(5) Where an arm's-length sales contract price, or a posted price,
includes a provision whereby the listed price is reduced by a
transportation factor, MMS will not consider the transportation factor
to be a transportation allowance. The transportation factor may be used
in determining the lessee's gross proceeds for the sale of the product.
The transportation factor may not exceed 50 percent of the base price of
the product without MMS approval.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length transportation contract or has no contract, including those
situations where the lessee performs transportation services for itself,
the transportation allowance will be based upon the lessee's reasonable,
actual costs as provided in this paragraph. All transportation
allowances deducted under a non-arms-length or no-contract situation are
subject to monitoring, review, audit, and adjustment. Before any
estimated or actual deduction may be taken, the lessee must submit a
completed Form MMS-4110 in its entirety in accordance with paragraph
(c)(2) of this section. A transportation allowance may be claimed
retroactively for a period of not more than 3 months prior to the first
day of the month that Form MMS-4110 is filed with MMS, unless MMS
approves a longer period upon a showing of good cause by the lessee. MMS
will monitor the allowance deductions to determine whether lessees are
taking deductions that are reasonable and allowable. When necessary or
appropriate, MMS may direct a lessee to modify its actual transportation
allowance deduction.
(2) The transportation allowance for non-arms-length or no-contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the initial capital
investment in the transportation system multiplied by a rate of return
in accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and installation of capital equipment)
which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. After a lessee has elected to use either method for
a transportation system, the lessee may not later elect to change to the
other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services or on
a unit-of-production method. After an election is made, the
[[Page 39]]
lessee may not change methods without MMS approval. A change in
ownership of a transportation system shall not alter the depreciation
schedule established by the original transporter/lessee for purposes of
the allowance calculation. With or without a change in ownership, a
transportation system shall be depreciated only once. Equipment shall
not be depreciated below a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the initial capital
investment in the transportation system multiplied by the rate of return
determined under paragraph (b)(2)(v) of this section. No allowance shall
be provided for depreciation. This alternative shall apply only to
transportation facilities first placed in service after March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent transportation
allowance reporting period (which is determined under paragraph (c) of
this section).
(3)(i) The deduction for transportation costs shall be determined on
the basis of the lessee's cost of transporting each product through each
individual transportation system. Where more than one liquid product is
transported, allocation of costs to each of the liquid products
transported shall be in the same proportion as the ratio of the volume
of each liquid product (excluding waste products which have no value) to
the volume of all liquid products (excluding waste products which have
no value) and such allocation shall be made in a consistent and
equitable manner. Except as provided in this paragraph, the lessee may
not take an allowance for transporting lease production which is not
royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the oil transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all available data to support
its proposal. The initial proposal must be submitted by June 30, 1988 or
within 3 months after the last day of the month for which the lessee
requests a transportation allowance, whichever is later (unless MMS
approves a longer period). MMS shall then determine the oil
transportation allowance on the basis of the lessee's proposal and any
additional information MMS deems necessary.
(5) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(4) of this section. MMS will grant the exception only if the
lessee has a tariff for the transportation system approved by the
Federal Energy Regulatory Commission (FERC) for Indian leases. MMS shall
deny the exception request if it determines that the tariff is excessive
as compared to arm's-length transportation charges by pipelines, owned
by the lessee or others, providing similar transportation services in
that area. If there are no arm's-length transportation charges, MMS
shall deny the exception request if:
(i) No FERC cost analysis exists and the FERC has declined to
investigate under MMS timely objections upon filing; and
(ii) the tariff significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements. (1) Arm's-length contracts. (i) With the
exception of those transportation allowances specified in paragraphs
(c)(1)(v) and (c)(1)(vi) of this section, the lessee shall submit page
one of the initial
[[Page 40]]
Form MMS-4110 (and Schedule 1), Oil Transportation Allowance Report,
prior to, or at the same time as, the transportation allowance
determined, under an arm's-length contract, is reported on Form MMS-
2014, Report of Sales and Royalty Remittance. A Form MMS-4110 received
by the end of the month that the Form MMS-2014 is due shall be
considered to be timely received.
(ii) The initial Form MMS-4110 shall be effective for a reporting
period beginning the month that the lessee is first authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until the applicable contract or rate terminates or is
modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4110 (and
Schedule 1) within 3 months after the end of the calendar year, or after
the applicable contract or rate terminates or is modified or amended,
whichever is earlier, unless MMS approves a longer period (during which
period the lessee shall continue to use the allowance from the previous
reporting period).
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(v) Transportation allowances which are based on arm's-length
contracts and which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For the purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract. (i) With the exception of those
transportation allowances specified in paragraphs (c)(2)(v), (c)(2)(vii)
and (c)(2)(viii) of this section, the lessee shall submit an initial
Form MMS-4110 prior to, or at the same time as, the transportation
allowance determined under a non-arm's-length contract or no-contract
situation is reported on Form MMS-2014. A Form MMS-4110 received by the
end of the month that the Form MMS-2014 is due shall be considered to be
timely received. The initial report may be based upon estimated costs.
(ii) The initial Form MMS-4110 shall be effective for a reporting
period beginning the month that the lessee first is authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until transportation under the non-arm's-length
contract or the no-contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4110
containing the actual costs for the previous reporting period. If oil
transportation is continuing, the lessee shall include on Form MMS-4110
its estimated costs for the next calendar year. The estimated oil
transportation allowance shall be based on the actual costs for the
previous reporting period plus or minus any adjustments which are based
on the lessee's knowledge of decreases or increases that will affect the
allowance. MMS must receive the Form MMS-4110 within 3 months after the
end of the previous reporting period, unless MMS approves a longer
period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new transportation facilities or arrangements, the lessee's
initial Form MMS-4110 shall include estimates of the allowable oil
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(v) Non-arm's-length contract or no-contract transportation
allowances which are in effect at the time these
[[Page 41]]
regulations become effective will be allowed to continue until such
allowances terminate. For the purposes of this section, only those
allowances that have been approved by MMS in writing shall qualify as
being in effect at the time these regulations become effective.
(vi) Upon request by MMS, the lessee shall submit all data used to
prepare its Form MMS-4110. The data shall be provided within a
reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) If the lessee is authorized to use its FERC-approved tariff
as its transportation cost in accordance with paragraph (b)(5) of this
section, it shall follow the reporting requirements of paragraph (c)(1)
of this section.
(3) MMS may establish reporting dates for individual lessees
different from those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and for
failure to report. (1) If a lessee deducts a transportation allowance on
its Form MMS-2014 without complying with the requirements of this
section, the lessee shall pay interest only on the amount of such
deduction until the requirements of this section are complied with. The
lessee also shall repay the amount of any allowance which is disallowed
by this section.
(2) If a lessee erroneously reports a transportation allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be required
to pay additional royalties due plus interest computed under 30 CFR
218.54, retroactive to the first day of the first month the lessee is
authorized to deduct a transportation allowance. If the actual
transportation allowance is greater than the amount the lessee has taken
on Form MMS-2014 for each month during the allowance form reporting
period, the lessee shall be entitled to a credit without interest.
(2) For lessees transporting production from Indian leases, the
lessee must submit a corrected Form MMS-2014 to reflect actual costs,
together with any payment, in accordance with instructions provided by
MMS.
(f) Actual or theoretical losses. Notwithstanding any other
provisions of this subpart, for other than arm's-length contracts, no
cost shall be allowed for oil transportation which results from payments
(either volumetric or for value) for actual or theoretical losses. This
section does not apply when the transportation allowance is based upon a
FERC or State regulatory agency approved tariff.
(g) Other transportation cost determinations. The provisions of this
section shall apply to determine transportation costs when establishing
value using a netback valuation procedure or any other procedure that
requires deduction of transportation costs.
Subpart C--Federal Oil
Source: 53 FR 1218-1222, Jan. 15, 1988, unless otherwise noted.
Sec. 206.100 Purpose and scope.
(a) This subpart is applicable to all oil production from Federal
oil and gas leases. The purpose of this subpart is to establish the
value of production, for royalty purposes, consistent with the mineral
leasing laws, other applicable laws, and lease terms.
(b) If the specific provisions of any Federal statute, settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation in
this subpart, then the statute, lease provision or settlement agreement
[[Page 42]]
shall govern to the extent of that inconsistency.
(c) All royalty payments made to MMS are subject to audit and
adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian oil and gas leases are discharged in accordance
with the requirements of the governing mineral leasing laws, treaties,
and lease terms.
[53 FR 1218-1222, Jan. 15, 1988, as amended at 61 FR 5462, Feb. 12,
1996]
Sec. 206.101 Definitions.
For the purposes of this subpart:
Allowance means a deduction in determining value for royalty
purposes. Transportation allowance means an allowance for the
reasonable, actual costs incurred by the lessee for moving oil to a
point of sale or point of delivery off the lease, unit area, or
communitized area, excluding gathering.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field in which oil and/or gas lease products
have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the market place between independent, nonaffiliated
persons with opposing economic interests regarding that contract. For
purposes of this subpart, two persons are affiliated if one person
controls, is controlled by, or is under common control with another
person. For purposes of this subpart, based on the instruments of
ownership of the voting securities of an entity, or based on other forms
of ownership:
(a) Ownership in excess of 50 percent constitutes control;
(b) Ownership of 10 through 50 percent creates a presumption of
control; and
(c) Ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. The MMS may require the lessee to certify ownership control.
To be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month, as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
BLM means the Bureau of Land Management of the Department of the
Interior.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Field means a geographic region situated over one or more subsurface
oil and gas reservoirs encompassing at least the outermost boundaries of
all oil and gas accumulations known to be within those reservoirs
vertically projected to the land surface. Onshore fields are usually
given names and their official boundaries are often designated by oil
and gas regulatory agencies in the respective States in which the fields
are located. Outer Continental Shelf (OCS) fields are named and their
boundaries are designated by MMS.
Gathering means the movement of lease production to a central
accumulation or treatment point on the lease, unit, or communitized
area, or to a central accumulation or treatment point off the lease,
unit, or communitized area as approved by BLM or MMS OCS operations
personnel for onshore and offshore leases, respectively.
[[Page 43]]
Gross proceeds (for royalty payment purposes) means the total moneys
and other consideration accruing to an oil and gas lessee for the
disposition of the oil produced. Gross proceeds includes, but is not
limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the lessee
is obligated to perform them at no cost to the Federal Government. Gross
proceeds, as applied to oil, also includes, but is not limited to,
reimbursements for harboring or terminaling fees. Tax reimbursements are
part of the gross proceeds accruing to a lessee even though the Federal
royalty interest may be exempt from taxation. Moneys and other
consideration, including the forms of consideration identified in this
paragraph, to which a lessee is contractually or legally entitled but
which it does not seek to collect through reasonable efforts are also
part of gross proceeds.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under a
mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered by
that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Outer Continental Shelf or onshore
Federal leases.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Load oil means any oil which has been used with respect to the
operation of oil or gas wells for wellbore stimulation, workover,
chemical treatment, or production purposes. It does not include oil used
at the surface to place lease production in marketable condition.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser under a sales contract typical for the field or
area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that the
lessee must pay as specified in the lease or in applicable leasing
regulations.
Net-back method (or workback method) means a method for calculating
market value of oil at the lease. Under this method, costs of
transportation, processing, or manufacturing are deducted from the
proceeds received for the oil and any extracted, processed, or
manufactured products, or from the value of the oil or any extracted,
processed, or manufactured products at the first point at which
reasonable values for any such products may be determined by a sale
pursuant to an arm's-length contract or comparison to other sales of
such products, to ascertain value at the lease.
Net profit share (for applicable Federal leases) means the specified
share of the net profit from production of oil and gas as provided in
the agreement.
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting the
deduction as a separate line item on the Form MMS-2014.
Oil means a mixture of hydrocarbons that existed in the liquid phase
in natural underground reservoirs and remains liquid at atmospheric
pressure after passing through surface separating facilities and is
marketed or used as such. Condensate recovered in lease separators or
field facilities is considered to be oil. For purposes of royalty
valuation, the term tar sands is defined separately from oil.
Oil shale means a kerogen-bearing rock (i.e., fossilized, insoluble,
organic material). Separation of kerogen from oil shale may take place
in situ or in surface retorts by various processes.
[[Page 44]]
The kerogen, upon distillation, will yield liquid and gaseous
hydrocarbons.
Outer Continental Shelf (OCS) means all submerged lands lying
seaward and outside of the area of lands beneath navigable waters as
defined in section 2 of the Submerged Lands Act (43 U.S.C. 1301) and of
which the subsoil and seabed appertain to the United States and are
subject to its jurisdiction and control.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Posted price means the price specified in publicly available posted
price bulletins, offshore or onshore terminal postings, or other price
notices net of all adjustments for quality (e.g., API gravity, sulfur
content, etc.) and location for oil in marketable condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which normally
take place on or near the lease, such as natural pressure reduction,
mechanical separation, heating, cooling, dehydration, and compression
are not considered processing. The changing of pressures and/or
temperatures in a reservoir is not considered processing.
Section 6 lease means an OCS lease subject to section 6 of the Outer
Continental Shelf Lands Act, as amended, 43 U.S.C. 1335.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of oil are made. Selling arrangements
are described by illustration in the MMS Royalty Management Program (Oil
and Gas or Solid Minerals) Payor Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of oil at a specified price over a
fixed period, usually of short duration, which does not normally require
a cancellation notice to terminate, and which does not contain an
obligation, nor imply an intent, to continue in subsequent periods.
Tar sands means any consolidated or unconsolidated rock (other than
coal, oil shale, or gilsonite) that either contains a hydrocarbonaceous
material with a gas-free viscosity greater than 10,000 centipoise at
original reservoir temperature, or contains a hydrocarbonaceous material
and is produced by mining or quarrying.
[53 FR 1218-1222, Jan. 15, 1988, as amended at 53 FR 45084, Nov. 8,
1988; 61 FR 5462, Feb. 12, 1996]
Sec. 206.102 Valuation standards.
(a) The value of production, for royalty purposes, of oil from
leases subject to this subpart shall be the value determined pursuant to
this section less applicable allowances determined pursuant to this
subpart.
(b)(1)(i) The value of oil which is sold pursuant to an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(1) (ii) and (iii) of this section. The lessee
shall have the burden of demonstrating that its contract is arm's-
length. The value which the lessee reports, for royalty purposes, is
subject to monitoring, review, and audit. For purposes of this section,
oil which is sold or otherwise transferred to the lessee's marketing
affiliate and then sold by the marketing affiliate pursuant to an arm's-
length contract shall be valued in accordance with this paragraph based
upon the sale by the marketing affiliate.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the oil. If the
contract does not reflect the total consideration, then the MMS may
require that the oil sold pursuant to that contract be valued in
accordance with paragraph (c) of this section. Value may not be less
than the gross proceeds accruing to the lessee, including the additional
consideration.
(iii) If the MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
two contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then
[[Page 45]]
MMS shall require that the oil production be valued pursuant to the
first applicable of paragraph (c) (2), (3), (4), or (5) of this section.
When MMS determines that the value may be unreasonable, MMS will notify
the lessee and give the lessee an opportunity to provide written
information justifying the lessee's value. If the oil production is then
valued pursuant to paragraph (c)(4) or (c)(5) of this section, the
notification requirements of paragraph (e) of this section shall apply.
(2) The MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the oil.
(c) The value of oil production from leases subject to this section
which is not sold pursuant to an arm's-length contract shall be the
reasonable value determined in accordance with the first applicable of
the following paragraphs:
(1) The lessee's contemporaneous posted prices or oil sales contract
prices used in arm's-length transactions for purchases or sales of
significant quantities of like-quality oil in the same field (or, if
necessary to obtain a reasonable sample, from the same area); provided,
however, that those posted prices or oil sales contract prices are
comparable to other contemporaneous posted prices or oil sales contract
prices used in arm's-length transactions for purchases or sales of
significant quantities of like-quality oil in the same field (or, if
necessary to obtain a reasonable sample, from the same area). In
evaluating the comparability of posted prices or oil sales contract
prices, the following factors shall be considered: Price, duration,
market or markets served, terms, quality of oil, volume, and other
factors as may be appropriate to reflect the value of the oil. If the
lessee makes arm's-length purchases or sales at different postings or
prices, then the volume-weighted average price for the purchases or
sales for the production month will be used;
(2) The arithmetic average of contemporaneous posted prices used in
arm's-length transactions by persons other than the lessee for purchases
or sales of significant quantities of like-quality oil in the same field
(or, if necessary to obtain a reasonable sample, from the same area);
(3) The arithmetic average of other contemporaneous arm's-length
contract prices for purchases or sales of significant quantities of
like-quality oil in the same area or nearby areas;
(4) Prices received for arm's-length spot sales of significant
quantities of like-quality oil from the same field (or, if necessary to
obtain a reasonable sample, from the same area), and other relevant
matters, including information submitted by the lessee concerning
circumstances unique to a particular lease operation or the saleability
of certain types of oil;
(5) A net-back method or any other reasonable method to determine
value;
(6) For purposes of this paragraph, the term lessee includes the
lessee's designated purchasing agent, and the term contemporaneous means
postings or contract prices in effect at the time the royalty obligation
is incurred.
(d) Any Federal lessee will make available, upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other persons authorized
to receive such information, arm's-length sales and volume data for
like-quality production sold, purchased, or otherwise obtained by the
lessee from the field or area or from nearby fields or areas.
(e)(1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review and
audit, and MMS will direct a lessee to use a different value if it
determines that the reported value is inconsistent with the requirements
of these regulations.
(2) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c)(4) or (c)(5) of this section. The notification shall be by
letter to the MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee
[[Page 46]]
first reports royalties on a Form MMS-2014 using a valuation method
authorized by paragraph (c)(4) or (c)(5) of this section and each time
there is a change from one to the other of these two methods.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on the difference computed pursuant to 30 CFR 218.54.
If the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that value for royalty payment purposes until MMS issues a value
determination. The lessee shall submit all available data relevant to
its proposal. MMS shall expeditiously determine the value based upon the
lessee's proposal and any additional information MMS deems necessary. In
making a value determination, MMS may use any of the valuation criteria
authorized by this subpart. That determination shall remain effective
for the period stated therein. After MMS issues its determination, the
lessee shall make the adjustments in accordance with paragraph (f) of
this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production, for royalty purposes, be
less than the gross proceeds accruing to the lessee for lease
production, less applicable allowances determined pursuant to this
subpart.
(i) The lessee is required to place oil in marketable condition at
no cost to the Federal Government unless otherwise provided in the lease
agreement or this section. Where the value established under this
section is determined by a lessee's gross proceeds, that value shall be
increased to the extent that the gross proceeds have been reduced
because the purchaser, or any other person, is providing certain
services the cost of which ordinarily is the responsibility of the
lessee to place the oil in marketable condition.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to an arm's-length contract. If the lessee makes timely
application for a price increase or benefit allowed under its contract
but the purchaser refuses, and the lessee takes reasonable measures,
which are documented, to force purchaser compliance, the lessee will owe
no additional royalties unless or until monies or consideration
resulting from the price increase or additional benefits are received.
This paragraph shall not be construed to permit a lessee to avoid its
royalty payment obligation in situations where a purchaser fails to pay,
in whole or in part or timely, for a quantity of oil.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt, will be maintained in a
confidential manner in accordance with applicable laws and regulations.
All requests for information about determinations made under this part
are to be submitted in accordance with the Freedom of Information Act
regulation of the Department of the Interior, 43 CFR part 2.
[53 FR 1213-1222, Jan. 15, 1988, as amended at 53 FR 45762, Nov. 14,
1988; 61 FR 5462, Feb. 12, 1996]
[[Page 47]]
Sec. 206.103 Point of royalty settlement.
(a)(1) Royalties shall be computed on the quantity and quality of
oil as measured at the point of settlement approved by BLM or MMS for
onshore and offshore leases, respectively.
(2) If the value of oil determined pursuant to Sec. 206.102 of this
subpart is based upon a quantity and/or quality different from the
quantity and/or quality at the point of royalty settlement approved by
the BLM for onshore leases or the MMS for offshore leases, the value
shall be adjusted for those differences in quantity and/or quality.
(b) No deductions may be made from the royalty volume or royalty
value for actual or theoretical losses. Any actual loss that may be
sustained prior to the royalty settlement metering or measurement point
will not be subject to royalty provided that such actual loss is
determined to have been unavoidable by BLM or MMS, as appropriate.
(c) Except as provided in paragraph (b) of this section, royalties
are due on 100 percent of the volume measured at the approved point of
royalty settlement. There can be no reduction in that measured volume
for actual losses beyond the approved point of royalty settlement or for
theoretical losses that are claimed to have taken place either prior to
or beyond the approved point of royalty settlement. Royalties are due on
100 percent of the value of the oil as provided in this part. There can
be no deduction from the value of the oil for royalty purposes to
compensate for actual losses beyond the approved point of royalty
settlement or for theoretical losses that are claimed to have taken
place either prior to or beyond the approved point of royalty
settlement.
Sec. 206.104 Transportation allowances--general.
(a) Where the value of oil has been determined pursuant to
Sec. 206.102 of this subpart at a point (e.g., sales point or point of
value determination) off the lease, MMS shall allow a deduction for the
reasonable, actual costs incurred by the lessee to:
(1) Transport oil from an onshore lease to the point off the lease;
Provided, however, That for onshore leases, no transportation allowance
will be granted for transporting oil taken as Royalty-In-Kind (RIK); or
(2) Transport oil from an offshore lease to the point off the lease;
provided, however, that for oil taken as RIK, a transportation allowance
shall be provided for the reasonable actual costs incurred to transport
that oil to the delivery point specified in the contract between the RIK
oil purchaser and the Federal Government.
(b)(1) Except as provided in paragraph (b)(2) of this section, the
transportation allowance deduction on the basis of a selling arrangement
shall not exceed 50 percent of the value of the oil at the point of sale
as determined pursuant to Sec. 206.102 of this subpart. Transportation
costs cannot be transferred between selling arrangements or to other
products.
(2) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitation prescribed by paragraph
(b)(1) of this section. The lessee must demonstrate that the
transportation costs incurred in excess of the limitation prescribed in
paragraph (b)(1) of this section were reasonable, actual, and necessary.
An application for exception (using Form MMS-4393, Request to Exceed
Regulatory Allowance Limitation) shall contain all relevant and
supporting documentation necessary for MMS to make a determination.
Under no circumstances shall the value, for royalty purposes, under any
selling arrangement, be reduced to zero.
(c) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.105. Transportation
allowances for oil shall be expressed as dollars per barrel.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest. If the lessee takes a deduction
for transportation on the Form MMS-2014 by improperly netting the
allowance against the sales value of the oil instead of reporting the
allowance as a separate line item, the
[[Page 48]]
lessee may be assessed an amount under Sec. 206.105(d).
[53 FR 1218-1222, Jan. 15, 1988; 53 FR 24688, June 30, 1988; 53 FR
45762, Nov. 14, 1988; 61 FR 5463, Feb. 12, 1996]
Sec. 206.105 Determination of transportation allowances.
(a) Arm's-length transportation contracts. (1)(i) For transportation
costs incurred by a lessee under an arm's-length contract, the
transportation allowance shall be the reasonable, actual costs incurred
by the lessee for transporting oil under that contract, except as
provided in paragraphs (a)(1)(ii) and (a)(1)(iii) of this section,
subject to monitoring, review, audit, and adjustment. The lessee shall
have the burden of demonstrating that its contract is arm's-length. MMS'
prior approval is not required before a lessee may deduct costs incurred
under an arm's-length contract. Such allowances shall be subject to the
provisions of paragraph (f) of this section. The lessee must claim a
transportation allowance by reporting it as a separate line entry on the
Form MMS-2014.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for the
transportation. If the contract reflects more than the total
consideration, then the MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(iii) If the MMS determines that the consideration paid pursuant to
an arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(2)(i) If an arm's-length transportation contract includes more than
one liquid product, and the transportation costs attributable to each
product cannot be determined from the contract, then the total
transportation costs shall be allocated in a consistent and equitable
manner to each of the liquid products transported in the same proportion
as the ratio of the volume of each product (excluding waste products
which have no value) to the volume of all liquid products (excluding
waste products which have no value). Except as provided in this
paragraph, no allowance may be taken for the costs of transporting lease
production which is not royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. The MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(3) If an arm's-length transportation contract includes both gaseous
and liquid products, and the transportation costs attributable to each
product cannot be determined from the contract, the lessee shall propose
an allocation procedure to MMS. The lessee may use the oil
transportation allowance determined in accordance with its proposed
allocation procedure until MMS issues its determination on the
acceptability of the cost allocation. The lessee shall submit all
available data to support its proposal. The initial proposal must be
submitted within 3 months after the last day of the month for which the
lessee requests a transportation allowance. MMS shall then determine the
oil transportation allowance based upon the lessee's proposal and any
additional information MMS deems necessary.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not on a dollar-per-unit basis, the lessee shall
convert whatever consideration is paid to a dollar value equivalent for
the purposes of this section.
(5) Where an arm's-length sales contract price, or a posted price,
includes
[[Page 49]]
a provision whereby the listed price is reduced by a transportation
factor, MMS will not consider the transportation factor to be a
transportation allowance. The transportation factor may be used in
determining the lessee's gross proceeds for the sale of the product. The
transportation factor may not exceed 50 percent of the base price of the
product without MMS approval.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length transportation contract or has no contract, including those
situations where the lessee performs transportation services for itself,
the transportation allowance will be based upon the lessee's reasonable,
actual costs as provided in this paragraph. All transportation
allowances deducted under a non-arms-length or no-contract situation are
subject to monitoring, review, audit, and adjustment to ensure that they
are reasonable and allowable. The lessee must claim a transportation
allowance by reporting it as a separate line entry on the Form MMS-2014.
When necessary or appropriate, MMS may direct a lessee to modify its
estimated or actual transportation allowance deduction.
(2) The transportation allowance for non-arms-length or no-contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the initial capital
investment in the transportation system multiplied by a rate of return
in accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and installation of capital equipment)
which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. After a lessee has elected to use either method for
a transportation system, the lessee may not later elect to change to the
other alternative without approval of the MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services or on
a unit-of-production method. After an election is made, the lessee may
not change methods without MMS approval. A change in ownership of a
transportation system shall not alter the depreciation schedule
established by the original transporter/lessee for purposes of the
allowance calculation. With or without a change in ownership, a
transportation system shall be depreciated only once. Equipment shall
not be depreciated below a reasonable salvage value.
(B) The MMS shall allow as a cost an amount equal to the initial
capital investment in the transportation system multiplied by the rate
of return determined pursuant to paragraph (b)(2)(v) of this section. No
allowance shall be provided for depreciation. This alternative shall
apply only to transportation facilities first placed in service after
March 1, 1988.
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
[[Page 50]]
(3)(i) The deduction for transportation costs shall be determined on
the basis of the lessee's cost of transporting each product through each
individual transportation system. Where more than one liquid product is
transported, allocation of costs to each of the liquid products
transported shall be in the same proportion as the ratio of the volume
of each liquid product (excluding waste products which have no value) to
the volume of all liquid products (excluding waste products which have
no value) and such allocation shall be made in a consistent and
equitable manner. Except as provided in this paragraph, the lessee may
not take an allowance for transporting lease production which is not
royalty-bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to the MMS a cost allocation method on the basis of the
values of the products transported. The MMS shall approve the method
unless it determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the oil transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all available data to support
its proposal. MMS shall then determine the oil transportation allowance
on the basis of the lessee's proposal and any additional information MMS
deems necessary. The lessee must submit the allocation proposal within 3
months of claiming the allocated deduction on the Form MMS-2014.
(5) A lessee may apply to the MMS for an exception from the
requirement that it compute actual costs in accordance with paragraphs
(b)(1) through (b)(4) of this section. The MMS will grant the exception
only if the lessee has a tariff for the transportation system approved
by the Federal Energy Regulatory Commission (FERC) (for both Federal and
Indian leases) or a State regulatory agency (for Federal leases). The
MMS shall deny the exception request if it determines that the tariff is
excessive as compared to arm's-length transportation charges by
pipelines, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if: (i) No
FERC or State regulatory agency cost analysis exists and the FERC or
State regulatory agency, as applicable, has declined to investigate
pursuant to MMS timely objections upon filing; and (ii) the tariff
significantly exceeds the lessee's actual costs for transportation as
determined under this section.
(c) Reporting requirements. (1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
(ii) The MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(2) Non-arm's-length or no contract. (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on the Form MMS-2014.
(ii) For new transportation facilities or arrangements, the lessee's
initial deduction shall include estimates of the allowable oil
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) If the lessee is authorized to use its FERC-approved or State
regulatory agency-approved tariff as its transportation cost in
accordance with paragraph (b)(5) of this section, it shall follow the
reporting requirements of paragraph (c)(1) of this section.
[[Page 51]]
(d) Interest and assessments. (1) If a lessee nets a transportation
allowance against the royalty value on the Form MMS-2014, the lessee
shall be assessed an amount of up to 10 percent of the allowance netted
not to exceed $250 per lease selling arrangement per sales period.
(2) If a lessee deducts a transportation allowance on its Form MMS-
2014 that exceeds 50 percent of the value of the oil transported without
obtaining prior approval of MMS under 206.104 of this subpart, the
lessee shall pay interest on the excess allowance amount taken from the
date such amount is taken to the date the lessee files an exception
request with MMS.
(3) If a lessee erroneously reports a transportation allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(4) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall pay additional
royalties due plus interest computed under 30 CFR 218.54 from the
allowance reporting period when the lessee took the deduction to the
date the lessee repays the difference to MMS. If the actual
transportation allowance is greater than the amount the lessee has taken
on Form MMS-2014 for each month during the allowance reporting period,
the lessee shall be entitled to a credit without interest.
(2) For lessees transporting production from onshore Federal leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Actual or theoretical losses. Notwithstanding any other
provisions of this subpart, for other than arm's-length contracts, no
cost shall be allowed for oil transportation which results from payments
(either volumetric or for value) for actual or theoretical losses. This
section does not apply when the transportation allowance is based upon a
FERC or State regulatory agency approved tariff.
(g) Other transportation cost determinations. The provisions of this
section shall apply to determine transportation costs when establishing
value using a netback valuation procedure or any other procedure that
requires deduction of transportation costs.
[53 FR 1218-1222, Jan. 15, 1988, as amended at 53 FR 45762, Nov. 14,
1988; 61 FR 5463, Feb. 12, 1996]
Sec. 206.106 Operating allowances.
Notwithstanding any other provisions in these regulations, an
operating allowance may be used for the purpose of computing payment
obligations when specified in the notice of sale and the lease. The
allowance amount or formula shall be specified in the notice of sale and
in the lease agreement.
[61 FR 3804, Feb. 2, 1996]
Subpart D--Federal Gas
Source: 53 FR 1272, Jan. 15, 1988, unless otherwise noted.
Sec. 206.150 Purpose and scope.
(a) This subpart is applicable to all gas production from Federal
oil and gas leases. The purpose of this subpart is to establish the
value of production for royalty purposes consistent with the mineral
leasing laws, other applicable laws and lease terms.
(b) If the specific provisions of any statute or settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation in
this subpart, then the lease, statute, or settlement agreement shall
govern to the extent of that inconsistency.
(c) All royalty payments made to MMS are subject to audit and
adjustment.
(d) The regulations in this subpart are intended to ensure that the
administration of oil and gas leases is discharged in accordance with
the requirements of the governing mineral leasing laws and lease terms.
[61 FR 5464, Feb. 12, 1996]
[[Page 52]]
Sec. 206.151 Definitions.
For purposes of this subpart:
Allowance means a deduction in determining value for royalty
purposes. Processing allowance means an allowance for the reasonable
costs for processing gas determined under this subpart. Transportation
allowance means an allowance for the cost of moving royalty bearing
substances (identifiable, measurable oil and gas, including gas that is
not in need of initial separation) from the point at which it is first
identifiable and measurable to the sales point or other point where
value is established under this subpart.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field, in which oil and/or gas lease
products have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated persons
with opposing economic interests regarding that contract. For purposes
of this subpart, two persons are affiliated if one person controls, is
controlled by, or is under common control with another person. For
purposes of this subpart, based on the instruments of ownership of the
voting securities of an entity, or based on other forms of ownership:
(a) Ownership in excess of 50 percent constitutes control;
(b) Ownership of 10 through 50 percent creates a presumption of
control; and
(c) Ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. The MMS may require the lessee to certify ownership control.
To be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
BLM means the Bureau of Land Management of the Department of the
Interior.
Compression means the process of raising the pressure of gas.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing. Condensate is the mixture of liquid hydrocarbons that
results from condensation of petroleum hydrocarbons existing initially
in a gaseous phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Field means a geographic region situated over one or more subsurface
oil and gas reservoirs encompassing at least the outermost boundaries of
all oil and gas accumulations known to be within those reservoirs
vertically projected to the land surface. Onshore fields are usually
given names and their official boundaries are often designated by oil
and gas regulatory agencies in the respective States in which the fields
are located. Outer Continental Shelf (OCS) fields are named and their
boundaries are designated by MMS.
Gas means any fluid, either combustible or noncombustible,
hydrocarbon or nonhydrocarbon, which is extracted from a reservoir and
which has neither independent shape nor volume, but tends to expand
indefinitely. It is a substance that exists in a gaseous or rarefied
state under standard temperature and pressure conditions.
Gas plant products means separate marketable elements, compounds, or
mixtures, whether in liquid, gaseous, or solid form, resulting from
processing gas, excluding residue gas.
Gathering means the movement of lease production to a central
accumulation and/or treatment point on the lease, unit or communitized
area, or to a central accumulation or treatment
[[Page 53]]
point off the lease, unit or communitized area as approved by BLM or MMS
OCS operations personnel for onshore and OCS leases, respectively.
Gross proceeds (for royalty payment purposes) means the total monies
and other consideration accruing to an oil and gas lessee for the
disposition of the oil produced. Gross proceeds includes, but is not
limited to, payments to the lessee for certain services such as
dehydration, measurement, and/or gathering to the extent that the lessee
is obligated to perform them at no cost to the Federal Government. Gross
proceeds, as applied to oil, also includes, but is not limited to,
reimbursements for harboring or terminaling fees. Tax reimbursements are
part of the gross proceeds accruing to a lessee even though the Federal
royalty interest may be exempt from taxation. Monies and other
consideration, including the forms of consideration identified in this
paragraph, to which a lessee is contractually or legally entitled but
which it does not seek to collect through reasonable efforts are also
part of gross proceeds.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States under a
mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered by
that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Outer Continental Shelf or onshore
Federal leases.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a purchaser under a sales contract typical for the field or
area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that the
lessee must pay as specified in the lease or in applicable leasing
regulations.
Net-back method (or work-back method) means a method for calculating
market value of gas at the lease. Under this method, costs of
transportation, processing, or manufacturing are deducted from the
proceeds received for the gas, residue gas or gas plant products, and
any extracted, processed, or manufactured products, or from the value of
the gas, residue gas or gas plant products, and any extracted,
processed, or manufactured products, at the first point at which
reasonable values for any such products may be determined by a sale
pursuant to an arm's-length contract or comparison to other sales of
such products, to ascertain value at the lease.
Net output means the quantity of residue gas and each gas plant
product that a processing plant produces.
Net profit share (for applicable Federal leases) means the specified
share of the net profit from production of oil and gas as provided in
the agreement.
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting the
deduction as a separate line item on the Form MMS-2014.
Outer Continental Shelf (OCS) means all submerged lands lying
seaward and outside of the area of land beneath navigable waters as
defined in section 2 of the Submerged Lands Act (43 U.S.C. 1301) and of
which the subsoil and seabed appertain to the United States and are
subject to its jurisdiction and control.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
[[Page 54]]
Posted price means the price, net of all adjustments for quality and
location, specified in publicly available price bulletins or other price
notices available as part of normal business operations for quantities
of unprocessed gas, residue gas, or gas plant products in marketable
condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which normally
take place on or near the lease, such as natural pressure reduction,
mechanical separation, heating, cooling, dehydration, and compression,
are not considered processing. The changing of pressures and/or
temperatures in a reservoir is not considered processing.
Residue gas means that hydrocarbon gas consisting principally of
methane resulting from processing gas.
Section 6 lease means an OCS lease subject to section 6 of the Outer
Continental Shelf Lands Act, as amended, 43 U.S.C. 1335.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of gas, residue gas and gas plant
products are made. Selling arrangements are described by illustration in
the MMS Royalty Management Program Oil and Gas Payor Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of unprocessed gas, residue gas, or
gas plant products at a specified price over a fixed period, usually of
short duration, which does not normally require a cancellation notice to
terminate, and which does not contain an obligation, nor imply an
intent, to continue in subsequent periods.
Warranty contract means a long-term contract entered into prior to
1970, including any amendments thereto, for the sale of gas wherein the
producer agrees to sell a specific amount of gas and the gas delivered
in satisfaction of this obligation may come from fields or sources
outside of the designated fields.
[53 FR 1272, Jan. 15, 1988, as amended at 53 FR 45084, Nov. 8, 1988; 61
FR 5464, Feb. 12, 1996]
Sec. 206.152 Valuation standards--unprocessed gas.
(a)(1) This section applies to the valuation of all gas that is not
processed and all gas that is processed but is sold or otherwise
disposed of by the lessee pursuant to an arm's-length contract prior to
processing (including all gas where the lessee's arm's-length contract
for the sale of that gas prior to processing provides for the value to
be determined on the basis of a percentage of the purchaser's proceeds
resulting from processing the gas). This section also applies to
processed gas that must be valued prior to processing in accordance with
Sec. 206.155 of this part. Where the lessee's contract includes a
reservation of the right to process the gas and the lessee exercises
that right, Sec. 206.153 of this part shall apply instead of this
section.
(2) The value of production, for royalty purposes, of gas subject to
this subpart shall be the value of gas determined under this section
less applicable allowances.
(b)(1)(i) The value of gas sold under an arm's-length contract is
the gross proceeds accruing to the lessee except as provided in
paragraphs (b)(1)(ii), (iii), and (iv) of this section. The lessee shall
have the burden of demonstrating that its contract is arm's-length. The
value which the lessee reports, for royalty purposes, is subject to
monitoring, review, and audit. For purposes of this section, gas which
is sold or otherwise transferred to the lessee's marketing affiliate and
then sold by the marketing affiliate pursuant to an arm's-length
contract shall be valued in accordance with this paragraph based upon
the sale by the marketing affiliate. Also, where the lessee's arm's-
length contract for the sale of gas prior to processing provides for the
value to be determined based upon a percentage of the purchaser's
proceeds resulting from processing the gas, the value of production, for
royalty purposes, shall never be less than a value equivalent to 100
percent of the value of the residue gas attributable to the processing
of the lessee's gas.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or
[[Page 55]]
indirectly from the buyer to the seller for the gas. If the contract
does not reflect the total consideration, then the MMS may require that
the gas sold pursuant to that contract be valued in accordance with
paragraph (c) of this section. Value may not be less than the gross
proceeds accruing to the lessee, including the additional consideration.
(iii) If the MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then MMS shall require that the gas
production be valued pursuant to paragraph (c)(2) or (c)(3) of this
section, and in accordance with the notification requirements of
paragraph (e) of this section. When MMS determines that the value may be
unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
value.
(iv) How to value over-delivered volumes under a cash-out program.
This paragraph applies to situations where a pipeline purchases gas from
a lessee according to a cash-out program under a transportation
contract. For all over-delivered volumes, the royalty value is the price
the pipeline is required to pay for volumes within the tolerances for
over-delivery specified in the transportation contract. Use the same
value for volumes that exceed the over-delivery tolerances even if those
volumes are subject to a lower price under the transportation contract.
However, if MMS determines that the price specified in the
transportation contract for over-delivered volumes is unreasonably low,
the lessee must value all over-delivered volumes under paragraph (c)(2)
or (c)(3) of this section.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of gas sold pursuant to a warranty contract shall be
determined by MMS, and due consideration will be given to all valuation
criteria specified in this section. The lessee must request a value
determination in accordance with paragraph (g) of this section for gas
sold pursuant to a warranty contract; provided, however, that any value
determination for a warranty contract in effect on the effective date of
these regulations shall remain in effect until modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the gas.
(c) The value of gas subject to this section which is not sold
pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract (or other disposition other than by
an arm's-length contract), provided that those gross proceeds are
equivalent to the gross proceeds derived from, or paid under, comparable
arm's-length contracts for purchases, sales, or other dispositions of
like-quality gas in the same field (or, if necessary to obtain a
reasonable sample, from the same area). In evaluating the comparability
of arm's-length contracts for the purposes of these regulations, the
following factors shall be considered: price, time of execution,
duration, market or markets served, terms, quality of gas, volume, and
such other factors as may be appropriate to reflect the value of the
gas;
(2) A value determined by consideration of other information
relevant in valuing like-quality gas, including gross proceeds under
arm's-length contracts for like-quality gas in the same field or nearby
fields or areas, posted prices for gas, prices received in arm's-length
spot sales of gas, other reliable public sources of price or market
information, and other information as to the particular lease operation
or the saleability of the gas; or
(3) A net-back method or any other reasonable method to determine
value.
(d)(1) Notwithstanding any other provisions of this section, except
paragraph (h) of this section, if the maximum price permitted by Federal
law at which gas may be sold is less than the value determined pursuant
to this section, then MMS shall accept such
[[Page 56]]
maximum price as the value. For purposes of this section, price
limitations set by any State or local government shall not be considered
as a maximum price permitted by Federal law.
(2) The limitation prescribed in paragraph (d)(1) of this section
shall not apply to gas sold pursuant to a warranty contract and valued
pursuant to paragraph (b)(2) of this section.
(e)(1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review and
audit, and MMS will direct a lessee to use a different value if it
determines that the reported value is inconsistent with the requirements
of these regulations.
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other person authorized to
receive such information, arm's-length sales and volume data for like-
quality production sold, purchased or otherwise obtained by the lessee
from the field or area or from nearby fields or areas.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c)(2) or (c)(3) of this section. The notification shall be by
letter to the MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method authorized
by paragraph (c)(2) or (c)(3) of this section, and each time there is a
change in a method under paragraph (c)(2) or (c)(3) of this section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR 218.54.
If the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. The MMS shall expeditiously determine the value based
upon the lessee's proposal and any additional information MMS deems
necessary. In making a value determination MMS may use any of the
valuation criteria authorized by this subpart. That determination shall
remain effective for the period stated therein. After MMS issues its
determination, the lessee shall make the adjustments in accordance with
paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production for royalty purposes be less
than the gross proceeds accruing to the lessee for lease production,
less applicable allowances.
(i) The lessee must place gas in marketable condition and market the
gas for the mutual benefit of the lessee and the lessor at no cost to
the Federal Government. Where the value established under this section
is determined by a lessee's gross proceeds, that value will be increased
to the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the gas
in marketable condition or to market the gas.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. If there
is no contract revision or amendment, and the lessee fails to take
proper or timely action to receive prices or benefits to which it is
entitled, it must pay royalty at a value based upon that obtainable
price or benefit. Contract revisions or amendments shall be in writing
and signed by all parties to an arm's-length contract. If the lessee
makes timely application for a price
[[Page 57]]
increase or benefit allowed under its contract but the purchaser
refuses, and the lessee takes reasonable measures, which are documented,
to force purchaser compliance, the lessee will owe no additional
royalties unless or until monies or consideration resulting from the
price increase or additional benefits are received. This paragraph shall
not be construed to permit a lessee to avoid its royalty payment
obligation in situations where a purchaser fails to pay, in whole or in
part or timely, for a quantity of gas.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation or extraordinary cost allowances, is
exempted from disclosure by the Freedom of Information Act, 5 U.S.C.
Sec. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt will be maintained in a
confidential manner in accordance with applicable law and regulations.
All requests for information about determinations made under this
subpart are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
part 2.
[53 FR 1272, Jan. 15, 1988, as amended at 56 FR 46530, Sept. 13, 1991;
61 FR 5464, Feb. 12, 1996; 62 FR 65761, 65762, Dec. 16, 1997]
Sec. 206.153 Valuation standards--processed gas.
(a)(1) This section applies to the valuation of all gas that is
processed by the lessee and any other gas production to which this
subpart applies and that is not subject to the valuation provisions of
Sec. 206.152 of this part. This section applies where the lessee's
contract includes a reservation of the right to process the gas and the
lessee exercises that right.
(2) The value of production, for royalty purposes, of gas subject to
this section shall be the combined value of the residue gas and all gas
plant products determined pursuant to this section, plus the value of
any condensate recovered downstream of the point of royalty settlement
without resorting to processing determined pursuant to Sec. 206.102 of
this part, less applicable transportation allowances and processing
allowances determined pursuant to this subpart.
(b)(1)(i) The value of residue gas or any gas plant product sold
under an arm's-length contract is the gross proceeds accruing to the
lessee, except as provided in paragraphs (b)(1)(ii), (iii), and (iv) of
this section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value that the lessee reports for royalty
purposes is subject to monitoring, review, and audit. For purposes of
this section, residue gas or any gas plant product which is sold or
otherwise transferred to the lessee's marketing affiliate and then sold
by the marketing affiliate pursuant to an arm's-length contract shall be
valued in accordance with this paragraph based upon the sale by the
marketing affiliate.
(ii) In conducting these reviews and audits, MMS will examine
whether or not the contract reflects the total consideration actually
transferred either directly or indirectly from the buyer to the seller
for the residue gas or gas plant product. If the contract does not
reflect the total consideration, then the MMS may require that the
residue gas or gas plant product sold pursuant to that contract be
valued in accordance with paragraph (c) of this section. Value may not
be less than the gross proceeds accruing to the lessee, including the
additional consideration.
(iii) If the MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the residue gas or gas plant product because of
misconduct by or between the contracting parties, or because the lessee
otherwise has breached its duty to the lessor to market the production
for the mutual benefit of the lessee and the lessor, then MMS shall
require that the residue gas or gas plant product be valued pursuant to
paragraph (c)(2) or (c)(3) of this section, and in accordance with the
notification requirements of
[[Page 58]]
paragraph (e) of this section. When MMS determines that the value may be
unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
value.
(iv) How to value over-delivered volumes under a cash-out program.
This paragraph applies to situations where a pipeline purchases gas from
a lessee according to a cash-out program under a transportation
contract. For all over-delivered volumes, the royalty value is the price
the pipeline is required to pay for volumes within the tolerances for
over-delivery specified in the transportation contract. Use the same
value for volumes that exceed the over-delivery tolerances even if those
volumes are subject to a lower price under the transportation contract.
However, if MMS determines that the price specified in the
transportation contract for over-delivered volumes is unreasonably low,
the lessee must value all over-delivered volumes under paragraph (c)(2)
or (c)(3) of this section.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of residue gas sold pursuant to a warranty contract
shall be determined by MMS, and due consideration will be given to all
valuation criteria specified in this section. The lessee must request a
value determination in accordance with paragraph (g) of this section for
gas sold pursuant to a warranty contract; provided, however, that any
value determination for a warranty contract in effect on the effective
date of these regulations shall remain in effect until modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the residue gas or gas plant
product.
(c) The value of residue gas or any gas plant product which is not
sold pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract (or other disposition other than by
an arm's-length contract), provided that those gross proceeds are
equivalent to the gross proceeds derived from, or paid under, comparable
arm's-length contracts for purchases, sales, or other dispositions of
like quality residue gas or gas plant products from the same processing
plant (or, if necessary to obtain a reasonable sample, from nearby
plants). In evaluating the comparability of arm's-length contracts for
the purposes of these regulations, the following factors shall be
considered: price, time of execution, duration, market or markets
served, terms, quality of residue gas or gas plant products, volume, and
such other factors as may be appropriate to reflect the value of the
residue gas or gas plant products;
(2) A value determined by consideration of other information
relevant in valuing like-quality residue gas or gas plant products,
including gross proceeds under arm's-length contracts for like-quality
residue gas or gas plant products from the same gas plant or other
nearby processing plants, posted prices for residue gas or gas plant
products, prices received in spot sales of residue gas or gas plant
products, other reliable public sources of price or market information,
and other information as to the particular lease operation or the
saleability of such residue gas or gas plant products; or
(3) A net-back method or any other reasonable method to determine
value.
(d)(1) Notwithstanding any other provisions of this section, except
paragraph (h) of this section, if the maximum price permitted by Federal
law at which any residue gas or gas plant products may be sold is less
than the value determined pursuant to this section, then MMS shall
accept such maximum price as the value. For the purposes of this
section, price limitations set by any State or local government shall
not be considered as a maximum price permitted by Federal law.
(2) The limitation prescribed by paragraph (d)(1) of this section
shall not apply to residue gas sold pursuant to a warranty contract and
valued pursuant to paragraph (b)(2) of this section.
(e)(1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject
[[Page 59]]
to review and audit, and MMS will direct a lessee to use a different
value if it determines upon review or audit that the reported value is
inconsistent with the requirements of these regulations.
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Office of the Inspector
General of the Department of the Interior, or other persons authorized
to receive such information, arm's-length sales and volume data for
like-quality residue gas and gas plant products sold, purchased or
otherwise obtained by the lessee from the same processing plant or from
nearby processing plants.
(3) A lessee shall notify MMS if it has determined any value
pursuant to paragraph (c)(2) or (c)(3) of this section. The notification
shall be by letter to the MMS Associate Director for Royalty Management
or his/her designee. The letter shall identify the valuation method to
be used and contain a brief description of the procedure to be followed.
The notification required by this paragraph is a one-time notification
due no later than the end of the month following the month the lessee
first reports royalties on a Form MMS-2014 using a valuation method
authorized by paragraph (c)(2) or (c)(3) of this section, and each time
there is a change in a method under paragraph (c)(2) or (c)(3) of this
section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest computed on that difference pursuant to 30 CFR 218.54.
If the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. The MMS shall expeditiously determine the value based
upon the lessee's proposal and any additional information MMS deems
necessary. In making a value determination, MMS may use any of the
valuation criteria authorized by this subpart. That determination shall
remain effective for the period stated therein. After MMS issues its
determination, the lessee shall make the adjustments in accordance with
paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production for royalty purposes be less
than the gross proceeds accruing to the lessee for residue gas and/or
any gas plant products, less applicable transportation allowances and
processing allowances determined pursuant to this subpart.
(i) The lessee must place residue gas and gas plant products in
marketable condition and market the residue gas and gas plant products
for the mutual benefit of the lessee and the lessor at no cost to the
Federal Government. Where the value established under this section is
determined by a lessee's gross proceeds, that value will be increased to
the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the
residue gas or gas plant products in marketable condition or to market
the residue gas and gas plant products.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to an arm's-length contract. If the lessee makes timely
application for a price increase or benefit allowed under its contract
but the purchaser refuses, and the lessee takes reasonable measures,
which are documented, to force purchaser compliance, the lessee will owe
no additional royalties unless
[[Page 60]]
or until monies or consideration resulting from the price increase or
additional benefits are received. This paragraph shall not be construed
to permit a lessee to avoid its royalty payment obligation in situations
where a purchaser fails to pay, in whole or in part, or timely, for a
quantity of residue gas or gas plant product.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding against the Federal Government or
its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances, processing allowances or
extraordinary cost allowances, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 552, or other Federal law. Any data
specified by law to be privileged, confidential, or otherwise exempt,
will be maintained in a confidential manner in accordance with
applicable law and regulations. All requests for information about
determinations made under this part are to be submitted in accordance
with the Freedom of Information Act regulation of the Department of the
Interior, 43 CFR part 2.
[53 FR 1272, Jan. 15, 1988, as amended at 56 FR 46530, Sept. 13, 1991;
61 FR 5465, Feb. 12, 1996; 62 FR 65762, Dec. 16, 1997]
Sec. 206.154 Determination of quantities and qualities for computing royalties.
(a)(1) Royalties shall be computed on the basis of the quantity and
quality of unprocessed gas at the point of royalty settlement approved
by BLM or MMS for onshore and OCS leases, respectively.
(2) If the value of gas determined pursuant to Sec. 206.152 of this
subpart is based upon a quantity and/or quality that is different from
the quantity and/or quality at the point of royalty settlement, as
approved by BLM or MMS, that value shall be adjusted for the differences
in quantity and/or quality.
(b)(1) For residue gas and gas plant products, the quantity basis
for computing royalties due is the monthly net output of the plant even
though residue gas and/or gas plant products may be in temporary
storage.
(2) If the value of residue gas and/or gas plant products determined
pursuant to Sec. 206.153 of this subpart is based upon a quantity and/or
quality of residue gas and/or gas plant products that is different from
that which is attributable to a lease, determined in accordance with
paragraph (c) of this section, that value shall be adjusted for the
differences in quantity and/or quality.
(c) The quantity of the residue gas and gas plant products
attributable to a lease shall be determined according to the following
procedure:
(1) When the net output of the processing plant is derived from gas
obtained from only one lease, the quantity of the residue gas and gas
plant products on which computations of royalty are based is the net
output of the plant.
(2) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of uniform content, the
quantity of the residue gas and gas plant products allocable to each
lease shall be in the same proportions as the ratios obtained by
dividing the amount of gas delivered to the plant from each lease by the
total amount of gas delivered from all leases.
(3) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of nonuniform content,
the quantity of the residue gas allocable to each lease will be
determined by multiplying the amount of gas delivered to the plant from
the lease by the residue gas content of the gas, and dividing the
arithmetical product thus obtained by the sum of the similar
arithmetical products separately obtained for all leases from which gas
is delivered to the plant, and then multiplying the net output of the
residue gas by the arithmetic quotient obtained. The net output of gas
plant products allocable to each lease will be determined by multiplying
the amount of gas delivered to the plant from the lease by the gas plant
product content of the gas, and dividing the arithmetical product thus
[[Page 61]]
obtained by the sum of the similar arithmetical products separately
obtained for all leases from which gas is delivered to the plant, and
then multiplying the net output of each gas plant product by the
arithmetic quotient obtained.
(4) A lessee may request MMS approval of other methods for
determining the quantity of residue gas and gas plant products allocable
to each lease. If approved, such method will be applicable to all gas
production from Federal leases that is processed in the same plant.
(d)(1) No deductions may be made from the royalty volume or royalty
value for actual or theoretical losses. Any actual loss of unprocessed
gas that may be sustained prior to the royalty settlement metering or
measurement point will not be subject to royalty provided that such loss
is determined to have been unavoidable by BLM or MMS, as appropriate.
(2) Except as provided in paragraph (d)(1) of this section and 30
CFR 202.151(c), royalties are due on 100 percent of the volume
determined in accordance with paragraphs (a) through (c) of this
section. There can be no reduction in that determined volume for actual
losses after the quantity basis has been determined or for theoretical
losses that are claimed to have taken place. Royalties are due on 100
percent of the value of the unprocessed gas, residue gas, and/or gas
plant products as provided in this subpart, less applicable allowances.
There can be no deduction from the value of the unprocessed gas, residue
gas, and/or gas plant products to compensate for actual losses after the
quantity basis has been determined, or for theoretical losses that are
claimed to have taken place.
[53 FR 1272, Jan. 15, 1988, as amended at 61 FR 5465, Feb. 12, 1996]
Sec. 206.155 Accounting for comparison.
(a) Except as provided in paragraph (b) of this section, where the
lessee (or a person to whom the lessee has transferred gas pursuant to a
non-arm's-length contract or without a contract) processes the lessee's
gas and after processing the gas the residue gas is not sold pursuant to
an arm's-length contract, the value, for royalty purposes, shall be the
greater of (1) the combined value, for royalty purposes, of the residue
gas and gas plant products resulting from processing the gas determined
pursuant to Sec. 206.153 of this subpart, plus the value, for royalty
purposes, of any condensate recovered downstream of the point of royalty
settlement without resorting to processing determined pursuant to
Sec. 206.102 of this subpart; or (2) the value, for royalty purposes, of
the gas prior to processing determined in accordance with Sec. 206.152
of this subpart.
(b) The requirement for accounting for comparison contained in the
terms of leases will govern as provided in Sec. 206.150(b) of this
subpart. When accounting for comparison is required by the lease terms,
such accounting for comparison shall be determined in accordance with
paragraph (a) of this section.
[53 FR 1272, Jan. 15, 1988, as amended at 61 FR 5465, Feb. 12, 1996]
Sec. 206.156 Transportation allowances--general.
(a) Where the value of gas has been determined pursuant to
Sec. 206.152 or Sec. 206.153 of this subpart at a point (e.g., sales
point or point of value determination) off the lease, MMS shall allow a
deduction for the reasonable actual costs incurred by the lessee to
transport unprocessed gas, residue gas, and gas plant products from a
lease to a point off the lease including, if appropriate, transportation
from the lease to a gas processing plant off the lease and from the
plant to a point away from the plant.
(b) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.157.
(c)(1) Except as provided in paragraph (c)(3) of this section, for
unprocessed gas valued in accordance with Sec. 206.152 of this subpart,
the transportation allowance deduction on the basis of a selling
arrangement shall not exceed 50 percent of the value of the unprocessed
gas determined in accordance with Sec. 206.152 of this subpart.
(2) Except as provided in paragraph (c)(3) of this section, for gas
production valued in accordance with Sec. 206.153 of this subpart the
transportation allowance deduction on the basis of a selling
[[Page 62]]
arrangement shall not exceed 50 percent of the value of the residue gas
or gas plant product determined in accordance with Sec. 206.153 of this
subpart. For purposes of this section, natural gas liquids shall be
considered one product.
(3) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitations prescribed by
paragraphs (c)(1) and (c)(2) of this section. The lessee must
demonstrate that the transportation costs incurred in excess of the
limitations prescribed in paragraphs (c)(1) and (c)(2) of this section
were reasonable, actual, and necessary. An application for exception
(using Form MMS-4393, Request to Exceed Regulatory Allowance Limitation)
shall contain all relevant and supporting documentation necessary for
MMS to make a determination. Under no circumstances shall the value for
royalty purposes under any selling arrangement be reduced to zero.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest. If the lessee takes a deduction
for transportation on the Form MMS-2014 by improperly netting the
allowance against the sales value of the oil instead of reporting the
allowance as a separate line item, he may be assessed an additional
amount under 206.157(d).
[53 FR 1272, Jan. 15, 1988, as amended at 61 FR 5465, Feb. 12, 1996]
Sec. 206.157 Determination of transportation allowances.
(a) Arm's-length transportation contracts. (1)(i) For transportation
costs incurred by a lessee under an arm's-length contract, the
transportation allowance shall be the reasonable, actual costs incurred
by the lessee for transporting the unprocessed gas, residue gas and/or
gas plant products under that contract, except as provided in paragraphs
(a)(1)(ii) and (a)(1)(iii) of this section, subject to monitoring,
review, audit, and adjustment. The lessee shall have the burden of
demonstrating that its contract is arm's-length. MMS' prior approval is
not required before a lessee may deduct costs incurred under an arm's-
length contract. Such allowances shall be subject to the provisions of
paragraph (f) of this section. The lessee must claim a transportation
allowance by reporting it as a separate line entry on the Form MMS-2014.
(ii) In conducting reviews and audits, MMS will examine whether or
not the contract reflects more than the consideration actually
transferred either directly or indirectly from the lessee to the
transporter for the transportation. If the contract reflects more than
the total consideration, then the MMS may require that the
transportation allowance be determined in accordance with paragraph (b)
of this section.
(iii) If the MMS determines that the consideration paid pursuant to
an arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(2)(i) If an arm's-length transportation contract includes more than
one product in a gaseous phase and the transportation costs attributable
to each product cannot be determined from the contract, the total
transportation costs shall be allocated in a consistent and equitable
manner to each of the products transported in the same proportion as the
ratio of the volume of each product (excluding waste products which have
no value) to the volume of all products in the gaseous phase (excluding
waste products which have no value). Except as provided in this
paragraph, no allowance may be taken for the costs of transporting lease
production which is not royalty bearing without MMS approval.
[[Page 63]]
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(3) If an arm's-length transportation contract includes both gaseous
and liquid products and the transportation costs attributable to each
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all relevant data to support
its proposal. MMS shall then determine the gas transportation allowance
based upon the lessee's proposal and any additional information MMS
deems necessary. The lessee must submit the allocation proposal within 3
months of claiming the allocated deduction on the Form MMS-2014.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar per unit, the lessee shall
convert whatever consideration is paid to a dollar value equivalent for
the purposes of this section.
(5) Where an arm's-length sales contract price or a posted price
includes a provision whereby the listed price is reduced by a
transportation factor, MMS will not consider the transportation factor
to be a transportation allowance. The transportation factor may be used
in determining the lessee's gross proceeds for the sale of the product.
The transportation factor may not exceed 50 percent of the base price of
the product without MMS approval.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length transportation contract or has no contract, including those
situations where the lessee performs transportation services for itself,
the transportation allowance will be based upon the lessee's reasonable
actual costs as provided in this paragraph. All transportation
allowances deducted under a non-arm's-length or no contract situation
are subject to monitoring, review, audit, and adjustment. The lessee
must claim a transportation allowance by reporting it as a separate line
entry on the Form MMS-2014. When necessary or appropriate, MMS may
direct a lessee to modify its estimated or actual transportation
allowance deduction.
(2) The transportation allowance for non-arm's-length or no-contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the initial
depreciable investment in the transportation system multiplied by a rate
of return in accordance with paragraph (b)(2)(iv)(B) of this section.
Allowable capital costs are generally those costs for depreciable fixed
assets (including costs of delivery and installation of capital
equipment) which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. After a lessee has elected to use either method for
a transportation system, the lessee may not later elect to change to the
other alternative without approval of the MMS.
[[Page 64]]
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services, or a
unit of production method. After an election is made, the lessee may not
change methods without MMS approval. A change in ownership of a
transportation system shall not alter the depreciation schedule
established by the original transporter/lessee for purposes of the
allowance calculation. With or without a change in ownership, a
transportation system shall be depreciated only once. Equipment shall
not be depreciated below a reasonable salvage value.
(B) The MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the transportation system multiplied by
the rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to transportation facilities first placed
in service after March 1, 1988.
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
(3)(i) The deduction for transportation costs shall be determined on
the basis of the lessee's cost of transporting each product through each
individual transportation system. Where more than one product in a
gaseous phase is transported, the allocation of costs to each of the
products transported shall be made in a consistent and equitable manner
in the same proportion as the ratio of the volume of each product
(excluding waste products which have no value) to the volume of all
products in the gaseous phase (excluding waste products which have no
value). Except as provided in this paragraph, the lessee may not take an
allowance for transporting a product which is not royalty bearing
without MMS approval.
(ii) Notwithstanding the requirements of paragraph (b)(3)(i), the
lessee may propose to the MMS a cost allocation method on the basis of
the values of the products transported. MMS shall approve the method
unless it determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all relevant data to support
its proposal. MMS shall then determine the transportation allowance
based upon the lessee's proposal and any additional information MMS
deems necessary. The lessee must submit the allocation proposal within 3
months of claiming the allocated deduction on the Form MMS-2014.
(5) A lessee may apply to the MMS for an exception from the
requirement that it compute actual costs in accordance with paragraphs
(b)(1) through (b)(4) of this section. The MMS will grant the exception
only if the lessee has a tariff for the transportation system approved
by the Federal Energy Regulatory Commission (FERC) (for both Federal and
Indian leases) or a State regulatory agency (for Federal leases). The
MMS shall deny the exception request if it determines that the tariff is
excessive as compared to arm's-length transportation charges by
pipelines, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if: (i) No
FERC or State regulatory agency cost analysis exists and the FERC or
State regulatory agency, as applicable, has declined to investigate
pursuant to MMS timely objections upon filing; and (ii) the tariff
significantly exceeds the lessee's actual costs for transportation as
determined under this section.
[[Page 65]]
(c) Reporting requirements. (1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
(ii) The MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(2) Non-arm's-length or no contract. (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on the Form MMS-2014.
(ii) For new transportation facilities or arrangements, the lessee's
initial deduction shall include estimates of the allowable gas
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) If the lessee is authorized to use its FERC-approved or State
regulatory agency-approved tariff as its transportation cost in
accordance with paragraph (b)(5) of this section, it shall follow the
reporting requirements of paragraph (c)(1) of this section.
(d) Interest and assessments. (1) If a lessee nets a transportation
allowance against the royalty value on the Form MMS-2014, the lessee
shall be assessed an amount of up to 10 percent of the allowance netted
not to exceed $250 per lease selling arrangement per sales period.
(2) If a lessee deducts a transportation allowance on its Form MMS-
2014 that exceeds 50 percent of the value of the gas transported without
obtaining prior approval of MMS under Sec. 206.156, the lessee shall pay
interest on the excess allowance amount taken from the date such amount
is taken to the date the lessee files an exception request with MMS.
(3) If a lessee erroneously reports a transportation allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(4) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall be required to
pay additional royalties due plus interest computed under 30 CFR 218.54
from the allowance reporting period when the lessee took the deduction
to the date the lessee repays the difference to MMS. If the actual
transportation allowance is greater than the amount the lessee has taken
on Form MMS-2014 for each month during the allowance reporting period,
the lessee shall be entitled to a credit without interest.
(2) For lessees transporting production from onshore Federal leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(3) For lessees transporting gas production from leases on the OCS,
if the lessee's estimated transportation allowance exceeds the allowance
based on actual costs, the lessee must submit a corrected Form MMS-2014
to reflect actual costs, together with its payment, in accordance with
instructions provided by MMS. If the lessee's estimated transportation
allowance is less than the allowance based on actual costs, the refund
procedure will be specified by MMS.
(f) Allowable costs in determining transportation allowances.
Lessees may include, but are not limited to, the following costs in
determining the arm's-length transportation allowance under paragraph
(a) of this section or the non-arm's-length transportation allowance
under paragraph (b) of this section:
(1) Firm demand charges paid to pipelines. You must limit the
allowable costs for the firm demand charges to
[[Page 66]]
the applicable rate per MMBtu multiplied by the actual volumes
transported. You may not include any losses incurred for previously
purchased but unused firm capacity. You also may not include any gains
associated with releasing firm capacity. If you receive a payment or
credit from the pipeline for penalty refunds, rate case refunds, or
other reasons, you must reduce the firm demand charge claimed on the
Form MMS-2014. You must modify the Form MMS-2014 by the amount received
or credited for the affected reporting period;
(2) Gas supply realignment (GSR) costs. The GSR costs result from a
pipeline reforming or terminating supply contracts with producers to
implement the restructuring requirements of FERC Orders in 18 CFR part
284;
(3) Commodity charges. The commodity charge allows the pipeline to
recover the costs of providing service;
(4) Wheeling costs. Hub operators charge a wheeling cost for
transporting gas from one pipeline to either the same or another
pipeline through a market center or hub. A hub is a connected manifold
of pipelines through which a series of incoming pipelines are
interconnected to a series of outgoing pipelines;
(5) Gas Research Institute (GRI) fees. The GRI conducts research,
development, and commercialization programs on natural gas related
topics for the benefit of the U.S. gas industry and gas customers. GRI
fees are allowable provided such fees are mandatory in FERC-approved
tariffs;
(6) Annual Charge Adjustment (ACA) fees. FERC charges these fees to
pipelines to pay for its operating expenses;
(7) Payments (either volumetric or in value) for actual or
theoretical losses. This paragraph does not apply to non-arm's-length
transportation arrangements unless the transportation allowance is based
on a FERC or State regulatory-approved tariff;
(8) Temporary storage services. This includes short duration storage
services offered by market centers or hubs (commonly referred to as
``parking'' or ``banking''), or other temporary storage services
provided by pipeline transporters, whether actual or provided as a
matter of accounting. Temporary storage is limited to 30 days or less;
and
(9) Supplemental costs for compression, dehydration, and treatment
of gas. MMS allows these costs only if such services are required for
transportation and exceed the services necessary to place production
into marketable condition required under Secs. 206.152(i) and 206.153(i)
of this part.
(g) Nonallowable costs in determining transportation allowances.
Lessees may not include the following costs in determining the arm's-
length transportation allowance under paragraph (a) of this section or
the non-arm's-length transportation allowance under paragraph (b) of
this section:
(1) Fees or costs incurred for storage. This includes storing
production in a storage facility, whether on or off the lease, for more
than 30 days;
(2) Aggregator/marketer fees. This includes fees you pay to another
person (including your affiliates) to market your gas, including
purchasing and reselling the gas, or finding or maintaining a market for
the gas production;
(3) Penalties you incur as shipper. These penalties include, but are
not limited to:
(i) Over-delivery cash-out penalties. This includes the difference
between the price the pipeline pays you for over-delivered volumes
outside the tolerances and the price you receive for over-delivered
volumes within the tolerances;
(ii) Scheduling penalties. This includes penalties you incur for
differences between daily volumes delivered into the pipeline and
volumes scheduled or nominated at a receipt or delivery point;
(iii) Imbalance penalties. This includes penalties you incur
(generally on a monthly basis) for differences between volumes delivered
into the pipeline and volumes scheduled or nominated at a receipt or
delivery point; and
(iv) Operational penalties. This includes fees you incur for
violation of the pipeline's curtailment or operational orders issued to
protect the operational integrity of the pipeline;
[[Page 67]]
(4) Intra-hub transfer fees. These are fees you pay to hub operators
for administrative services (e.g., title transfer tracking) necessary to
account for the sale of gas within a hub; and
(5) Other nonallowable costs. Any cost you incur for services you
are required to provide at no cost to the lessor.
(h) Other transportation cost determinations. Use this section when
calculating transportation costs to establish value using a netback
procedure or any other procedure that requires deduction of
transportation costs.
[53 FR 1272, Jan. 15, 1988, as amended at 53 FR 45762, Nov. 14, 1988; 61
FR 5465, Feb. 12, 1996; 62 FR 65762, Dec. 16, 1997]
Sec. 206.158 Processing allowances--general.
(a) Where the value of gas is determined pursuant to Sec. 206.153 of
this subpart, a deduction shall be allowed for the reasonable actual
costs of processing.
(b) Processing costs must be allocated among the gas plant products.
A separate processing allowance must be determined for each gas plant
product and processing plant relationship. Natural gas liquids (NGL's)
shall be considered as one product.
(c)(1) Except as provided in paragraph (d)(2) of this section, the
processing allowance shall not be applied against the value of the
residue gas. Where there is no residue gas MMS may designate an
appropriate gas plant product against which no allowance may be applied.
(2) Except as provided in paragraph (c)(3) of this section, the
processing allowance deduction on the basis of an individual product
shall not exceed 66\2/3\ percent of the value of each gas plant product
determined in accordance with Sec. 206.153 of this subpart (such value
to be reduced first for any transportation allowances related to
postprocessing transportation authorized by Sec. 206.156 of this
subpart).
(3) Upon request of a lessee, MMS may approve a processing allowance
in excess of the limitation prescribed by paragraph (c)(2) of this
section. The lessee must demonstrate that the processing costs incurred
in excess of the limitation prescribed in paragraph (c)(2) of this
section were reasonable, actual, and necessary. An application for
exception (using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation for
MMS to make a determination. Under no circumstances shall the value for
royalty purposes of any gas plant product be reduced to zero.
(d)(1) Except as provided in paragraph (d)(2) of this section, no
processing cost deduction shall be allowed for the costs of placing
lease products in marketable condition, including dehydration,
separation, compression, or storage, even if those functions are
performed off the lease or at a processing plant. Where gas is processed
for the removal of acid gases, commonly referred to as ``sweetening,''
no processing cost deduction shall be allowed for such costs unless the
acid gases removed are further processed into a gas plant product. In
such event, the lessee shall be eligible for a processing allowance as
determined in accordance with this subpart. However, MMS will not grant
any processing allowance for processing lease production which is not
royalty bearing.
(2)(i) If the lessee incurs extraordinary costs for processing gas
production from a gas production operation, it may apply to MMS for an
allowance for those costs which shall be in addition to any other
processing allowance to which the lessee is entitled pursuant to this
section. Such an allowance may be granted only if the lessee can
demonstrate that the costs are, by reference to standard industry
conditions and practice, extraordinary, unusual, or unconventional.
(ii) Prior MMS approval to continue an extraordinary processing cost
allowance is not required. However, to retain the authority to deduct
the allowance the lessee must report the deduction to MMS in a form and
manner prescribed by MMS.
(e) If MMS determines that a lessee has improperly determined a
processing allowance authorized by this subpart, then the lessee shall
pay any additional royalties, plus interest determined in accordance
with 30 CFR 218.54, or shall be entitled to a credit, without interest.
If the lessee takes a deduction for transportation on the
[[Page 68]]
Form MMS-2014 by improperly netting the allowance against the sales
value of the oil instead of reporting the allowance as a separate line
item, he may be assessed an additional amount under 206.159(d).
[53 FR 1272, Jan. 15, 1988, as amended at 61 FR 5466, Feb. 12, 1996]
Sec. 206.159 Determination of processing allowances.
(a) Arm's-length processing contracts. (1)(i) For processing costs
incurred by a lessee under an arm's-length contract, the processing
allowance shall be the reasonable actual costs incurred by the lessee
for processing the gas under that contract, except as provided in
paragraphs (a)(1)(ii) and (a)(1)(iii) of this section, subject to
monitoring, review, audit, and adjustment. The lessee shall have the
burden of demonstrating that its contract is arm's-length. MMS' prior
approval is not required before a lessee may deduct costs incurred under
an arm's-length contract. The lessee must claim a transportation
allowance by reporting it as a separate line entry on the Form MMS-2014.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the processor for the
processing. If the contract reflects more than the total consideration,
then the MMS may require that the processing allowance be determined in
accordance with paragraph (b) of this section.
(iii) If MMS determines that the consideration paid pursuant to an
arm's-length processing contract does not reflect the reasonable value
of the processing because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee and
lessor, then MMS shall require that the processing allowance be
determined in accordance with paragraph (b) of this section. When MMS
determines that the value of the processing may be unreasonable, MMS
will notify the lessee and give the lessee an opportunity to provide
written information justifying the lessee's processing costs.
(2) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
can be determined from the contract, then the processing costs for each
gas plant product shall be determined in accordance with the contract.
No allowance may be taken for the costs of processing lease production
which is not royalty-bearing.
(3) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use its proposed allocation
procedure until MMS issues its determination. The lessee shall submit
all relevant data to support its proposal. MMS shall then determine the
processing allowance based upon the lessee's proposal and any additional
information MMS deems necessary. No processing allowance will be granted
for the costs of processing lease production which is not royalty
bearing. The lessee must submit the allocation proposal within 3 months
of claiming the allocated deduction on Form MMS-2014.
(4) Where the lessee's payments for processing under an arm's-length
contract are not based on a dollar per unit basis, the lessee shall
convert whatever consideration is paid to a dollar value equivalent for
the purposes of this section.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length processing contract or has no contract, including those
situations where the lessee performs processing for itself, the
processing allowance will be based upon the lessee's reasonable actual
costs as provided in this paragraph. All processing allowances deducted
under a non-arm's-length or no-contract situation are subject to
monitoring, review, audit, and adjustment. The lessee must claim a
processing allowance by reflecting it as a separate line entry on the
Form MMS-2014. When necessary or appropriate, MMS may direct a lessee to
modify its estimated or actual processing allowance.
(2) The processing allowance for non-arm's-length or no-contract
situations
[[Page 69]]
shall be based upon the lessee's actual costs for processing during the
reporting period, including operating and maintenance expenses,
overhead, and either depreciation and a return on undepreciated capital
investment in accordance with paragraph (b)(2)(iv)(A) of this section,
or a cost equal to the initial depreciable investment in the processing
plant multiplied by a rate of return in accordance with paragraph
(b)(2)(iv)(B) of this section. Allowable capital costs are generally
those costs for depreciable fixed assets (including costs of delivery
and installation of capital equipment) which are an integral part of the
processing plant.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
processing plant; maintenance of equipment; maintenance labor; and other
directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the processing plant is an allowable expense. State
and Federal income taxes and severance taxes, including royalties, are
not allowable expenses.
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. When a lessee has elected to use either method for a
processing plant, the lessee may not later elect to change to the other
alternative without approval of the MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the processing plant services, or a unit-
of-production method. After an election is made, the lessee may not
change methods without MMS approval. A change in ownership of a
processing plant shall not alter the depreciation schedule established
by the original processor/lessee for purposes of the allowance
calculation. With or without a change in ownership, a processing plant
shall be depreciated only once. Equipment shall not be depreciated below
a reasonable salvage value.
(B) The MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the processing plant multiplied by the
rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to plants first placed in service after
March 1, 1988.
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
(3) The processing allowance for each gas plant product shall be
determined based on the lessee's reasonable and actual cost of
processing the gas. Allocation of costs to each gas plant product shall
be based upon generally accepted accounting principles. The lessee may
not take an allowance for the costs of processing lease production which
is not royalty bearing.
(4) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(3) of this section. The MMS may grant the exception only if:
(i) The lessee has arm's-length contracts for processing other gas
production at the same processing plant; and (ii) at least 50 percent of
the gas processed annually at the plant is processed pursuant to arm's-
length processing contracts; if the MMS grants the exception, the lessee
shall use as its processing allowance the volume weighted average prices
charged other persons pursuant to arm's-length contracts for processing
at the same plant.
(c) Reporting requirements--(1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
[[Page 70]]
(ii) The MMS may require that a lessee submit arm's-length
processing contracts and related documents. Documents shall be submitted
within a reasonable time, as determined by MMS.
(2) Non-arm's-length or no contract. (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on the Form MMS-2014.
(ii) For new processing plants, the lessee's initial deduction shall
include estimates of the allowable gas processing costs for the
applicable period. Cost estimates shall be based upon the most recently
available operations data for the plant or, if such data are not
available, the lessee shall use estimates based upon industry data for
similar gas processing plants.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) If the lessee is authorized to use the volume weighted average
prices charged other persons as its processing allowance in accordance
with paragraph (b)(4) of this section, it shall follow the reporting
requirements of paragraph (c)(1) of this section.
(d) Interest and assessments. (1) If a lessee nets a processing
allowance against the royalty value on the Form MMS-2014, the lessee
shall be assessed an amount of up to 10 percent of the allowance netted
not to exceed $250 per lease selling arrangement per sales period.
(2) If a lessee deducts a processing allowance on its Form MMS-2014
that exceeds 66\2/3\ percent of the value of the gas processed without
obtaining prior approval of MMS under Sec. 206.158, the lessee shall pay
interest on the excess allowance amount taken from the date such amount
is taken to the date the lessee files an exception request with MMS.
(3) If a lessee erroneously reports a processing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(4) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual processing allowance is less than
the amount the lessee has taken on Form MMS-2014 for each month during
the allowance reporting period, the lessee shall pay additional
royalties due plus interest computed under 30 CFR 218.54 from the
allowance reporting period when the lessee took the deduction to the
date the lessee repays the difference to MMS. If the actual processing
allowance is greater than the amount the lessee has taken on Form MMS-
2014 for each month during the allowance reporting period, the lessee
shall be entitled to a credit without interest.
(2) For lessees transporting production from onshore Federal leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(3) For lessees processing gas production from leases on the OCS, if
the lessee's estimated processing allowance exceeds the allowance based
on actual costs, the lessee must submit a corrected Form MMS-2014 to
reflect actual costs, together with its payment, in accordance with
instructions provided by MMS. If the lessee's estimated costs were less
than the actual costs, the refund procedure will be specified by MMS.
(f) Other processing cost determinations. The provisions of this
section shall apply to determine processing costs when establishing
value using a net back valuation procedure or any other procedure that
requires deduction of processing costs.
[53 FR 1272, Jan. 15, 1988, as amended at 53 FR 45762, Nov. 14, 1988; 61
FR 5466, Feb. 12, 1996]
Sec. 206.106 Operating allowances.
Notwithstanding any other provisions in these regulations, an
operating allowance may be used for the purpose of computing payment
obligations when specified in the notice of sale and the lease. The
allowance amount or formula shall be specified in the notice of sale and
in the lease agreement.
[61 FR 3804, Feb. 2, 1996]
[[Page 71]]
Subpart E--Indian Gas
Source: 61 FR 5467, Feb. 12, 1996, unless otherwise noted.
Sec. 206.170 Purpose and scope.
(a) This subpart is applicable to all gas production from Indian
(Tribal and allotted) oil and gas leases (except leases on the Osage
Indian Reservation, Osage County, Oklahoma). The purpose of this subpart
is to establish the value of production for royalty purposes consistent
with the mineral leasing laws, other applicable laws, and lease terms.
(b) If the specific provisions of any statute, treaty, or settlement
agreement between the Indian lessor and a lessee resulting from
administrative or judicial litigation, or oil and gas lease subject to
the requirements of this subpart are inconsistent with any regulation in
this subpart, then the lease, statute, treaty provision or settlement
agreement shall govern to the extent of that inconsistency.
(c) All royalty payments made to any Tribe or allottee are subject
to audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian oil and gas leases are discharged in accordance
with the requirements of the governing mineral leasing laws, treaties,
and lease terms.
Sec. 206.171 Definitions.
For purposes of this subpart:
Allowance means an approved or an (MMS)-initially accepted deduction
in determining value for royalty purposes. Processing allowance means an
allowance for the reasonable, actual costs incurred by the lessee for
processing gas, or an approved or MMS-initially accepted deduction for
costs of such processing, determined pursuant to this subpart.
Transportation allowance means an allowance for the reasonable, actual
costs incurred by the lessee for moving unprocessed gas, residue gas, or
gas plant products to a point of sale or point of delivery off the
lease, unit area, communitized area, or away from a processing plant,
excluding gathering, or an approved or MMS-initially accepted deduction
for costs of such transportation, determined pursuant to this subpart.
Area means a geographic region at least as large as the defined
limits of an oil and/or gas field, in which oil and/or gas lease
products have similar quality, economic, and legal characteristics.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated persons
with opposing economic interests regarding that contract. For purposes
of this subpart, two persons are affiliated if one person controls, is
controlled by, or is pursuant to common control with another person. For
purposes of this subpart, based on the instruments of ownership of the
voting securities of an entity, or based on other forms of ownership:
ownership in excess of 50 percent constitutes control; ownership of 10
through 50 percent creates a presumption of control; and ownership of
less than 10 percent creates a presumption of noncontrol which MMS may
rebut if it demonstrates actual or legal control, including the
existence of interlocking directorates. Notwithstanding any other
provisions of this subpart, contracts between relatives, either by blood
or by marriage, are not arm's-length contracts. MMS may require the
lessee to certify ownership control. To be considered arm's-length for
any production month, a contract must meet the requirements of this
definition for that production month, as well as when the contract was
executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Compression means the process of raising the pressure of gas.
Condensate means liquid hydrocarbons (normally exceeding 40 degrees
of API gravity) recovered at the surface without resorting to
processing.
[[Page 72]]
Condensate is the mixture of liquid hydrocarbons that results from
condensation of petroleum hydrocarbons existing initially in a gaseous
phase in an underground reservoir.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Field means a geographic region situated over one or more subsurface
oil and gas reservoirs encompassing at least the outermost boundaries of
all oil and gas accumulations known to be within those reservoirs
vertically projected to the land surface. Onshore fields are usually
given names and their official boundaries are often designated by oil
and gas regulatory agencies in the respective States in which the fields
are located.
Gas means any fluid, either combustible or noncombustible,
hydrocarbon or nonhydrocarbon, which is extracted from a reservoir and
which has neither independent shape nor volume, but tends to expand
indefinitely. It is a substance that exists in a gaseous or rarefied
state pursuant to standard temperature and pressure conditions.
Gas plant products means separate marketable elements, compounds, or
mixtures, whether in liquid, gaseous, or solid form, resulting from
processing gas, excluding residue gas.
Gathering means the movement of lease production to a central
accumulation and/or treatment point on the lease, unit or communitized
area, or to a central accumulation or treatment point off the lease,
unit or communitized area as approved by BLM operations personnel for
onshore leases.
Gross proceeds (for royalty payment purposes) means the total monies
and other consideration accruing to an oil and gas lessee for the
disposition of unprocessed gas, residue gas, or gas plant products
produced. Gross proceeds includes, but is not limited to, payments to
the lessee for certain services such as compression, dehydration,
measurement, and/or field gathering to the extent that the lessee is
obligated to perform them at no cost to the Indian lessor, and payments
for gas processing rights. Gross proceeds, as applied to gas, also
includes but is not limited to reimbursements for severance taxes and
other reimbursements. Tax reimbursements are part of the gross proceeds
accruing to a lessee even though the Indian royalty interest may be
exempt from taxation. Monies and other consideration, including the
forms of consideration identified in this paragraph, to which a lessee
is contractually or legally entitled but which it does not seek to
collect through reasonable efforts are also part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject to
Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States pursuant to a
mineral leasing law that authorizes exploration for, development or
extraction of, or removal of lease products--or the land area covered by
that authorization, whichever is required by the context.
Lease products means any leased minerals attributable to,
originating from, or allocated to Indian leases.
Lessee means any person to whom an Indian Tribe, or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease. This
includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality lease products means lease products which have similar
chemical, physical, and legal characteristics.
Marketable condition means lease products which are sufficiently
free from impurities and otherwise in a condition that they will be
accepted by a
[[Page 73]]
purchaser pursuant to a sales contract typical for the field or area.
Marketing affiliate means an affiliate of the lessee whose function
is to acquire only the lessee's production and to market that
production.
Minimum royalty means that minimum amount of annual royalty that the
lessee must pay as specified in the lease or in applicable leasing
regulations.
MMS means the Minerals Management Service of the Department of the
Interior.
Net-back method (or work-back method) means a method for calculating
market value of gas at the lease. Pursuant to this method, costs of
transportation, processing, or manufacturing are deducted from the
proceeds received for the gas, residue gas or gas plant products, and
any extracted, processed, or manufactured products, or from the value of
the gas, residue gas or gas plant products, and any extracted,
processed, or manufactured products, at the first point at which
reasonable values for any such products may be determined by a sale
pursuant to an arm's-length contract or comparison to other sales of
such products, to ascertain value at the lease.
Net output means the quantity of residue gas and each gas plant
product that a processing plant produces.
Net profit share (for applicable Indian leases) means the specified
share of the net profit from production of oil and gas as provided in
the agreement.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Posted price means the price, net of all adjustments for quality and
location, specified in publicly available price bulletins or other price
notices available as part of normal business operations for quantities
of unprocessed gas, residue gas, or gas plant products in marketable
condition.
Processing means any process designed to remove elements or
compounds (hydrocarbon and nonhydrocarbon) from gas, including
absorption, adsorption, or refrigeration. Field processes which normally
take place on or near the lease, such as natural pressure reduction,
mechanical separation, heating, cooling, dehydration, and compression,
are not considered processing. The changing of pressures and/or
temperatures in a reservoir is not considered processing.
Residue gas means that hydrocarbon gas consisting principally of
methane resulting from processing gas.
Selling arrangement means the individual contractual arrangements
pursuant to which sales or dispositions of gas, residue gas and gas
plant products are made. Selling arrangements are described by
illustration in the MMS Royalty Management Program Oil and Gas Payor
Handbook.
Spot sales agreement means a contract wherein a seller agrees to
sell to a buyer a specified amount of unprocessed gas, residue gas, or
gas plant products at a specified price over a fixed period, usually of
short duration, which does not normally require a cancellation notice to
terminate, and which does not contain an obligation, nor imply an
intent, to continue in subsequent periods.
Warranty contract means a long-term contract entered into prior to
1970, including any amendments thereto, for the sale of gas wherein the
producer agrees to sell a specific amount of gas and the gas delivered
in satisfaction of this obligation may come from fields or sources
outside of the designated fields.
Sec. 206.172 Valuation standards--unprocessed gas.
(a)(1) This section applies to the valuation of all gas that is not
processed and all gas that is processed but is sold or otherwise
disposed of by the lessee pursuant to an arm's-length contract prior to
processing (including all gas where the lessee's arm's-length contract
for the sale of that gas prior to processing provides for the value to
be determined on the basis of a percentage of the purchaser's proceeds
resulting from processing the gas). This section also applies to
processed gas that must be valued prior to processing in accordance with
Sec. 206.175 of this subpart. Where the lessee's contract includes a
reservation of the right to process the gas and the lessee exercises
that right, Sec. 206.173 of this subpart shall apply instead of this
section.
[[Page 74]]
(2) The value of production, for royalty purposes, of gas subject to
this subpart shall be the value of gas determined pursuant to this
section less applicable allowances determined pursuant to this subpart.
(3)(i) For any Indian leases which provide that the Secretary may
consider the highest price paid or offered for a major portion of
production (major portion) in determining value of production for
royalty purposes, if data are available to compute a major portion MMS
will, where practicable, compare the value determined in accordance with
this section with the major portion. The value to be used in determining
the value of production for royalty purposes shall be the higher of
those two values.
(ii) For purposes of this paragraph, major portion means the highest
price paid or offered at the time of production for the major portion of
gas production from the same field. The major portion will be calculated
using like-quality gas sold pursuant to arm's-length contracts from the
same field (or, if necessary to obtain a reasonable sample, from the
same area) for each month. All such sales will be arrayed from highest
price to lowest price (at the bottom). The major portion is that price
at which 50 percent (by volume) plus 1 mcf of the gas (starting from the
bottom) is sold.
(b)(1)(i) The value of gas sold under an arm's-length contract is
the gross proceeds accruing to the lessee, except as provided in
paragraphs (b)(1)(ii), (iii), and (iv) of this section. The lessee shall
have the burden of demonstrating that its contract is arm's-length. The
value which the lessee reports, for royalty purposes, is subject to
monitoring, review, and audit. For purposes of this section, gas which
is sold or otherwise transferred to the lessee's marketing affiliate and
then sold by the marketing affiliate pursuant to an arm's-length
contract shall be valued in accordance with this paragraph based upon
the sale by the marketing affiliate. Also, where the lessee's arm's-
length contract for the sale of gas prior to processing provides for the
value to be determined based upon a percentage of the purchaser's
proceeds resulting from processing the gas, the value of production, for
royalty purposes, shall never be less than a value equivalent to 100
percent of the value of the residue gas attributable to the processing
of the lessee's gas.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the gas. If the
contract does not reflect the total consideration, then MMS may require
that the gas sold pursuant to that contract be valued in accordance with
paragraph (c) of this section. Value may not be less than the gross
proceeds accruing to the lessee, including the additional consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then MMS shall require that the gas
production be valued pursuant to paragraphs (c)(2) or (c)(3) of this
section, and in accordance with the notification requirements of
paragraph (e) of this section. When MMS determines that the value may be
unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
value.
(iv) How to value over-delivered volumes under a cash-out program.
This paragraph applies to situations where a pipeline purchases gas from
a lessee according to a cash-out program under a transportation
contract. For all over-delivered volumes, the royalty value is the price
the pipeline is required to pay for volumes within the tolerances for
over-delivery specified in the transportation contract. Use the same
value for volumes that exceed the over-delivery tolerances even if those
volumes are subject to a lower price under the transportation contract.
However, if MMS determines that the price specified in the
transportation contract for over-delivered volumes is unreasonably low,
the lessee must value all over-delivered volumes under paragraph (c)(2)
or (c)(3) of this section.
[[Page 75]]
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of gas sold pursuant to a warranty contract shall be
determined by MMS, and due consideration will be given to all valuation
criteria specified in this section. The lessee must request a value
determination in accordance with paragraph (g) of this section for gas
sold pursuant to a warranty contract; provided, however, that any value
determination for a warranty contract in effect on the effective date of
these regulations shall remain in effect until modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the gas.
(c) The value of gas subject to this section which is not sold
pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
pursuant to its non-arm's-length contract (or other disposition other
than by an arm's-length contract), provided that those gross proceeds
are equivalent to the gross proceeds derived from, or paid pursuant to,
comparable arm's-length contracts for purchases, sales, or other
dispositions of like-quality gas in the same field (or, if necessary to
obtain a reasonable sample, from the same area). In evaluating the
comparability of arm's-length contracts for the purposes of these
regulations, the following factors shall be considered: price, time of
execution, duration, market or markets served, terms, quality of gas,
volume, and such other factors as may be appropriate to reflect the
value of the gas;
(2) A value determined by consideration of other information
relevant in valuing like-quality gas, including gross proceeds pursuant
to arm's-length contracts for like-quality gas in the same field or
nearby fields or areas, posted prices for gas, prices received in arm's-
length spot sales of gas, other reliable public sources of price or
market information, and other information as to the particular lease
operation or the salability of the gas; or
(3) A net-back method or any other reasonable method to determine
value.
(d)(1) Notwithstanding any other provisions of this section, except
paragraph (h) of this section, if the maximum price permitted by Federal
law at which gas may be sold is less than the value determined pursuant
to this section, then MMS shall accept such maximum price as the value.
For purposes of this section, price limitations set by any State or
local government shall not be considered as a maximum price permitted by
Federal law.
(2) The limitation prescribed in paragraph (d)(1) of this section
shall not apply to gas sold pursuant to a warranty contract and valued
pursuant to paragraph (b)(2) of this section.
(e)(1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review and
audit, and MMS will direct a lessee to use a different value if it
determines that the reported value is inconsistent with the requirements
of these regulations.
(2) Any Indian lessee will make available upon request to the
authorized MMS or Indian representatives, to the Office of the Inspector
General of the Department of the Interior, or other person authorized to
receive such information, arm's-length sales and volume data for like-
quality production sold, purchased or otherwise obtained by the lessee
from the field or area or from nearby fields or areas.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c)(2) or (c)(3) of this section. The notification shall be by
letter to MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method authorized
by paragraph (c)(2) or (c)(3) of this section, and each time there is a
change in a method pursuant to paragraph (c)(2) or (c)(3) of this
section.
[[Page 76]]
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR 218.54.
If the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. MMS shall expeditiously determine the value based upon
the lessee's proposal and any additional information MMS deems
necessary. In making a value determination MMS may use any of the
valuation criteria authorized by this subpart. That determination shall
remain effective for the period stated therein. After MMS issues its
determination, the lessee shall make the adjustments in accordance with
paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, pursuant to
no circumstances shall the value of production for royalty purposes be
less than the gross proceeds accruing to the lessee for lease
production, less applicable allowances determined pursuant to this
subpart.
(i) The lessee must place gas in marketable condition and market the
gas for the mutual benefit of the lessee and the lessor at no cost to
the Indian lessor. Where the value established under this section is
determined by a lessee's gross proceeds, that value will be increased to
the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the gas
in marketable condition or to market the gas.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims pursuant to its contract. If
there is no contract revision or amendment, and the lessee fails to take
proper or timely action to receive prices or benefits to which it is
entitled, it must pay royalty at a value based upon that obtainable
price or benefit. Contract revisions or amendments shall be in writing
and signed by all parties to an arm's-length contract. If the lessee
makes timely application for a price increase or benefit allowed
pursuant to its contract but the purchaser refuses, and the lessee takes
reasonable measures, which are documented, to force purchaser
compliance, the lessee will owe no additional royalties unless or until
monies or consideration resulting from the price increase or additional
benefits are received. This paragraph shall not be construed to permit a
lessee to avoid its royalty payment obligation in situations where a
purchaser fails to pay, in whole or in part or timely, for a quantity of
gas.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value pursuant to this
section shall be considered final or binding as against the Indian
Tribes or allottees until the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation, processing, or extraordinary cost
allowances, is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt will be maintained in a
confidential manner in accordance with applicable law and regulations.
All requests for information about determinations made pursuant to this
subpart are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
part 2. Nothing in this section is intended to limit or diminish in any
manner whatsoever the right of an Indian lessor to obtain any and all
information as such lessor may be lawfully entitled from MMS or such
lessor's lessee directly pursuant to the terms of the lease, 30 U.S.C.
1733, or other applicable law.
[61 FR 5467, Feb. 12, 1996, as amended at 62 FR 65763, Dec. 16, 1997]
[[Page 77]]
Sec. 206.173 Valuation standards--processed gas.
(a)(1) This section applies to the valuation of all gas that is
processed by the lessee and any other gas production to which this
subpart applies and that is not subject to the valuation provisions of
Sec. 206.172 of this part. This section applies where the lessee's
contract includes a reservation of the right to process the gas and the
lessee exercises that right.
(2) The value of production, for royalty purposes, of gas subject to
this section shall be the combined value of the residue gas and all gas
plant products determined pursuant to this section, plus the value of
any condensate recovered downstream of the point of royalty settlement
without resorting to processing determined pursuant to section of this
part, less applicable transportation allowances and processing
allowances determined pursuant to this subpart.
(3)(i) For any Indian leases which provide that the Secretary may
consider the highest price paid or offered for a major portion of
production (major portion) in determining value for royalty purposes, if
data are available to compute a major portion MMS will, where
practicable, compare the values determined in accordance with this
section for any lease product with the major portion determined for that
lease product. The value to be used in determining the value of
production for royalty purposes shall be the higher of those two values.
(ii) For purposes of this paragraph, major portion means the highest
price paid or offered at the time of production for the major portion of
gas production from the same field, or for residue gas or gas plant
products from the same processing plant, as applicable. The major
portion will be calculated using like-quality lease products sold
pursuant to arm's-length contracts from the same field or processing
plant (or, if necessary to obtain a reasonable sample, from the same
area or nearby processing plants) for each month. All such sales will be
arrayed from highest price to lowest price (at the bottom). The major
portion is that price at which 50 percent (by volume) plus 1 mcf of the
gas (starting from the bottom) is sold, or for gas plant products, 50
percent (by volume) plus 1 unit.
(b)(1)(i) The value of residue gas or any gas plant product sold
under an arm's-length contract is the gross proceeds accruing to the
lessee, except as provided in paragraphs (b)(1)(ii), (iii), and (iv) of
this section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value that the lessee reports for royalty
purposes is subject to monitoring, review, and audit. For purposes of
this section, residue gas or any gas plant product which is sold or
otherwise transferred to the lessee's marketing affiliate and then sold
by the marketing affiliate pursuant to an arm's-length contract shall be
valued in accordance with this paragraph based upon the sale by the
marketing affiliate.
(ii) In conducting these reviews and audits, MMS will examine
whether or not the contract reflects the total consideration actually
transferred either directly or indirectly from the buyer to the seller
for the residue gas or gas plant product. If the contract does not
reflect the total consideration, then MMS may require that the residue
gas or gas plant product sold pursuant to that contract be valued in
accordance with paragraph (c) of this section. Value may not be less
than the gross proceeds accruing to the lessee, including the additional
consideration.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the residue gas or gas plant product because of
misconduct by or between the contracting parties, or because the lessee
otherwise has breached its duty to the lessor to market the production
for the mutual benefit of the lessee and the lessor, then MMS shall
require that the residue gas or gas plant product be valued pursuant to
paragraphs (c)(2) or (c)(3) of this section, and in accordance with the
notification requirements of paragraph (e) of this section. When MMS
determines that the value may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written information
justifying the lessee's value.
(iv) How to value over-delivered volumes under a cash-out program.
This
[[Page 78]]
paragraph applies to situations where a pipeline purchases gas from a
lessee according to a cash-out program under a transportation contract.
For all over-delivered volumes, the royalty value is the price the
pipeline is required to pay for volumes within the tolerances for over-
delivery specified in the transportation contract. Use the same value
for volumes that exceed the over-delivery tolerances even if those
volumes are subject to a lower price under the transportation contract.
However, if MMS determines that the price specified in the
transportation contract for over-delivered volumes is unreasonably low,
the lessee must value all over-delivered volumes under paragraph (c)(2)
or (c)(3) of this section.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the value of residue gas sold pursuant to a warranty contract
shall be determined by MMS, and due consideration will be given to all
valuation criteria specified in this section. The lessee must request a
value determination in accordance with paragraph (g) of this section for
gas sold pursuant to a warranty contract; provided, however, that any
value determination for a warranty contract in effect on the effective
date of these regulations shall remain in effect until modified by MMS.
(3) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the residue gas or gas plant
product.
(c) The value of residue gas or any gas plant product which is not
sold pursuant to an arm's-length contract shall be the reasonable value
determined in accordance with the first applicable of the following
methods:
(1) The gross proceeds accruing to the lessee pursuant to a sale
pursuant to its non-arm's-length contract (or other disposition other
than by an arm's-length contract), provided that those gross proceeds
are equivalent to the gross proceeds derived from, or paid pursuant to,
comparable arm's-length contracts for purchases, sales, or other
dispositions of like quality residue gas or gas plant products from the
same processing plant (or, if necessary to obtain a reasonable sample,
from nearby plants). In evaluating the comparability of arm's-length
contracts for the purposes of these regulations, the following factors
shall be considered: price, time of execution, duration, market or
markets served, terms, quality of residue gas or gas plant products,
volume, and such other factors as may be appropriate to reflect the
value of the residue gas or gas plant products;
(2) A value determined by consideration of other information
relevant in valuing like-quality residue gas or gas plant products,
including gross proceeds pursuant to arm's-length contracts for like-
quality residue gas or gas plant products from the same gas plant or
other nearby processing plants, posted prices for residue gas or gas
plant products, prices received in spot sales of residue gas or gas
plant products, other reliable public sources of price or market
information, and other information as to the particular lease operation
or the salability of such residue gas or gas plant products; or
(3) A net-back method or any other reasonable method to determine
value.
(d)(1) Notwithstanding any other provisions of this section, except
paragraph (h) of this section, if the maximum price permitted by Federal
law at which any residue gas or gas plant products may be sold is less
than the value determined pursuant to this section, then MMS shall
accept such maximum price as the value. For the purposes of this
section, price limitations set by any State or local government shall
not be considered as a maximum price permitted by Federal law.
(2) The limitation prescribed by paragraph (d)(1) of this section
shall not apply to residue gas sold pursuant to a warranty contract and
valued pursuant to paragraph (b)(2) of this section.
(e)(1) Where the value is determined pursuant to paragraph (c) of
this section, the lessee shall retain all data relevant to the
determination of royalty value. Such data shall be subject to review and
audit, and MMS will direct a lessee to use a different value if it
determines upon review or audit that the reported value is inconsistent
with the requirements of these regulations.
(2) The Indian lessee will make available upon request to the
authorized
[[Page 79]]
MMS, or Indian representatives, to the Office of the Inspector General
of the Department of the Interior, or other persons authorized to
receive such information, arm's-length sales and volume data for like-
quality residue gas and gas plant products sold, purchased or otherwise
obtained by the lessee from the same processing plant or from nearby
processing plants.
(3) A lessee shall notify MMS if it has determined any value
pursuant to paragraph (c)(2) or (c)(3) of this section. The notification
shall be by letter to MMS Associate Director for Royalty Management or
his/her designee. The letter shall identify the valuation method to be
used and contain a brief description of the procedure to be followed.
The notification required by this paragraph is a one-time notification
due no later than the end of the month following the month the lessee
first reports royalties on a Form MMS-2014 using a valuation method
authorized by paragraph (c)(2) or (c)(3) of this section, and each time
there is a change in a method pursuant to paragraph (c)(2) or (c)(3) of
this section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest computed on that difference pursuant to 30 CFR 218.54.
If the lessee is entitled to a credit, MMS will provide instructions for
the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. MMS shall expeditiously determine the value based upon
the lessee's proposal and any additional information MMS deems
necessary. In making a value determination, MMS may use any of the
valuation criteria authorized by this subpart. That determination shall
remain effective for the period stated therein. After MMS issues its
determination, the lessee shall make the adjustments in accordance with
paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, pursuant to
no circumstances shall the value of production for royalty purposes be
less than the gross proceeds accruing to the lessee for residue gas and/
or any gas plant products, less applicable transportation allowances and
processing allowances determined pursuant to this subpart.
(i) The lessee must place residue gas and gas plant products in
marketable condition and market the residue gas and gas plant products
for the mutual benefit of the lessee and the lessor at no cost to the
Indian lessor. Where the value established under this section is
determined by a lessee's gross proceeds, that value will be increased to
the extent that the gross proceeds have been reduced because the
purchaser, or any other person, is providing certain services the cost
of which ordinarily is the responsibility of the lessee to place the
residue gas or gas plant products in marketable condition or to market
the residue gas and gas plant products.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims pursuant to its contract.
Absent contract revision or amendment, if the lessee fails to take
proper or timely action to receive prices or benefits to which it is
entitled it must pay royalty at a value based upon that obtainable price
or benefit. Contract revisions or amendments shall be in writing and
signed by all parties to an arm's-length contract. If the lessee makes
timely application for a price increase or benefit allowed pursuant to
its contract but the purchaser refuses, and the lessee takes reasonable
measures, which are documented, to force purchaser compliance, the
lessee will owe no additional royalties unless or until monies or
consideration resulting from the price increase or additional benefits
are received. This paragraph shall not be construed to permit a lessee
to avoid its royalty payment obligation in situations where a purchaser
fails to pay, in whole or in part, or timely, for a quantity of residue
gas or gas plant product.
(k) Notwithstanding any provision in these regulations to the
contrary, no
[[Page 80]]
review, reconciliation, monitoring, or other like process that results
in a redetermination by MMS of value pursuant to this section shall be
considered final or binding against the Indian Tribes or allottees until
the audit period is formally closed.
(l) Certain information submitted to MMS to support valuation
proposals, including transportation allowances, processing allowances or
extraordinary cost allowances, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 552, or other Federal law. Any data
specified by law to be privileged, confidential, or otherwise exempt,
will be maintained in a confidential manner in accordance with
applicable law and regulations. All requests for information about
determinations made pursuant to this part are to be submitted in
accordance with the Freedom of Information Act regulation of the
Department of the Interior, 43 CFR part 2. Nothing in this section is
intended to limit or diminish in any manner whatsoever the right of an
Indian lessor to obtain any and all information as such lessor may be
lawfully entitled from MMS or such lessor's lessee directly pursuant to
the terms of the lease, 30 U.S.C. 1733, or other applicable law.
[61 FR 5467, Feb. 12, 1996, as amended at 62 FR 65763, Dec. 16, 1997]
Sec. 206.174 Determination of quantities and qualities for computing royalties.
(a)(1) Royalties shall be computed on the basis of the quantity and
quality of unprocessed gas at the point of royalty settlement approved
by BLM for onshore leases.
(2) If the value of gas determined pursuant to Sec. 206.172 of this
subpart is based upon a quantity and/or quality that is different from
the quantity and/or quality at the point of royalty settlement, as
approved by BLM or MMS, that value shall be adjusted for the differences
in quantity and/or quality.
(b)(1) For residue gas and gas plant products, the quantity basis
for computing royalties due is the monthly net output of the plant even
though residue gas and/or gas plant products may be in temporary
storage.
(2) If the value of residue gas and/or gas plant products determined
pursuant to Sec. 206.173 of this subpart is based upon a quantity and/or
quality of residue gas and/or gas plant products that is different from
that which is attributable to a lease, determined in accordance with
paragraph (c) of this section, that value shall be adjusted for the
differences in quantity and/or quality.
(c) The quantity of the residue gas and gas plant products
attributable to a lease shall be determined according to the following
procedure:
(1) When the net output of the processing plant is derived from gas
obtained from only one lease, the quantity of the residue gas and gas
plant products on which computations of royalty are based is the net
output of the plant.
(2) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of uniform content, the
quantity of the residue gas and gas plant products allocable to each
lease shall be in the same proportions as the ratios obtained by
dividing the amount of gas delivered to the plant from each lease by the
total amount of gas delivered from all leases.
(3) When the net output of a processing plant is derived from gas
obtained from more than one lease producing gas of nonuniform content,
the quantity of the residue gas allocable to each lease will be
determined by multiplying the amount of gas delivered to the plant from
the lease by the residue gas content of the gas, and dividing the
arithmetical product thus obtained by the sum of the similar
arithmetical products separately obtained for all leases from which gas
is delivered to the plant, and then multiplying the net output of the
residue gas by the arithmetic quotient obtained. The net output of gas
plant products allocable to each lease will be determined by multiplying
the amount of gas delivered to the plant from the lease by the gas plant
product content of the gas, and dividing the arithmetical product thus
obtained by the sum of the similar arithmetical products separately
obtained for all leases from which gas is delivered to the plant, and
then multiplying the net output of each gas plant
[[Page 81]]
product by the arithmetic quotient obtained.
(4) A lessee may request MMS approval of other methods for
determining the quantity of residue gas and gas plant products allocable
to each lease. If approved, such method will be applicable to all gas
production from Indian leases that is processed in the same plant.
(d)(1) No deductions may be made from the royalty volume or royalty
value for actual or theoretical losses. Any actual loss of unprocessed
gas that may be sustained prior to the royalty settlement metering or
measurement point will not be subject to royalty provided that such loss
is determined to have been unavoidable by BLM .
(2) Except as provided in paragraph (d)(1) of this section and 30
CFR 202.171(c), royalties are due on 100 percent of the volume
determined in accordance with paragraphs (a) through (c) of this
section. There can be no reduction in that determined volume for actual
losses after the quantity basis has been determined or for theoretical
losses that are claimed to have taken place. Royalties are due on 100
percent of the value of the unprocessed gas, residue gas, and/or gas
plant products as provided in this subpart, less applicable allowances.
There can be no deduction from the value of the unprocessed gas, residue
gas, and/or gas plant products to compensate for actual losses after the
quantity basis has been determined, or for theoretical losses that are
claimed to have taken place.
Sec. 206.175 Accounting for comparison.
(a) Except as provided in paragraph (b) of this section, where the
lessee (or a person to whom the lessee has transferred gas pursuant to a
non-arm's-length contract or without a contract) processes the lessee's
gas and after processing the gas the residue gas is not sold pursuant to
an arm's-length contract, the value, for royalty purposes, shall be the
greater of (1) the combined value, for royalty purposes, of the residue
gas and gas plant products resulting from processing the gas determined
pursuant to Sec. 206.173 of this subpart, plus the value, for royalty
purposes, of any condensate recovered downstream of the point of royalty
settlement without resorting to processing determined pursuant to
Sec. 206.52 of this subpart; or (2) the value, for royalty purposes, of
the gas prior to processing determined in accordance with Sec. 206.172
of this subpart.
(b) The requirement for accounting for comparison contained in the
terms of leases, particularly Indian leases, will govern as provided in
Sec. 206.170(b) of this subpart. When accounting for comparison is
required by the lease terms, such accounting for comparison shall be
determined in accordance with paragraph (a) of this section.
Sec. 206.176 Transportation allowances--general.
(a) Where the value of gas has been determined pursuant to
Sec. 206.172 or Sec. 206.173 of this subpart at a point (e.g., sales
point or point of value determination) off the lease, MMS shall allow a
deduction for the reasonable actual costs incurred by the lessee to
transport unprocessed gas, residue gas, and gas plant products from a
lease to a point off the lease including, if appropriate, transportation
from the lease to a gas processing plant off the lease and from the
plant to a point away from the plant.
(b) Transportation costs must be allocated among all products
produced and transported as provided in Sec. 206.177.
(c)(1) Except as provided in paragraph (c)(3) of this section, for
unprocessed gas valued in accordance with Sec. 206.172 of this subpart,
the transportation allowance deduction on the basis of a selling
arrangement shall not exceed 50 percent of the value of the unprocessed
gas determined in accordance with Sec. 206.172 of this subpart.
(2) Except as provided in paragraph (c)(3) of this section, for gas
production valued in accordance with Sec. 206.173 of this subpart the
transportation allowance deduction on the basis of a selling arrangement
shall not exceed 50 percent of the value of the residue gas or gas plant
product determined in accordance with Sec. 206.173 of this subpart. For
purposes of this section, natural gas liquids shall be considered one
product.
[[Page 82]]
(3) Upon request of a lessee, MMS may approve a transportation
allowance deduction in excess of the limitations prescribed by
paragraphs (c)(1) and (c)(2) of this section. The lessee must
demonstrate that the transportation costs incurred in excess of the
limitations prescribed in paragraphs (c)(1) and (c)(2) of this section
were reasonable, actual, and necessary. An application for exception
(using Form MMS-4393, Request to Exceed Regulatory Allowance Limitation)
shall contain all relevant and supporting documentation necessary for
MMS to make a determination. Pursuant to no circumstances shall the
value for royalty purposes pursuant to any selling arrangement be
reduced to zero.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
subpart, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.54, or shall be
entitled to a credit, without interest.
Sec. 206.177 Determination of transportation allowances.
(a) Arm's-length transportation contracts. (1)(i) For transportation
costs incurred by a lessee pursuant to an arm's-length contract, the
transportation allowance shall be the reasonable, actual costs incurred
by the lessee for transporting the unprocessed gas, residue gas and/or
gas plant products pursuant to that contract, except as provided in
paragraphs (a)(1)(ii) and (a)(1)(iii) of this section, subject to
monitoring, review, audit, and adjustment. The lessee shall have the
burden of demonstrating that its contract is arm's-length. Such
allowances shall be subject to the provisions of paragraph (f) of this
section. Before any deduction may be taken, the lessee must submit a
completed page one of Form MMS-4295 (and Schedule 1), Gas Transportation
Allowance Report, in accordance with paragraph (c)(1) of this section. A
transportation allowance may be claimed retroactively for a period of
not more than 3 months prior to the first day of the month that Form
MMS-4295 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee.
(ii) In conducting reviews and audits, MMS will examine whether or
not the contract reflects more than the consideration actually
transferred either directly or indirectly from the lessee to the
transporter for the transportation. If the contract reflects more than
the total consideration, then MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(iii) If MMS determines that the consideration paid pursuant to an
arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(2)(i) If an arm's-length transportation contract includes more than
one product in a gaseous phase and the transportation costs attributable
to each product cannot be determined from the contract, the total
transportation costs shall be allocated in a consistent and equitable
manner to each of the products transported in the same proportion as the
ratio of the volume of each product (excluding waste products which have
no value) to the volume of all products in the gaseous phase (excluding
waste products which have no value). Except as provided in this
paragraph, no allowance may be taken for the costs of transporting lease
production which is not royalty bearing without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the
[[Page 83]]
purposes of the regulations in this subpart.
(3) If an arm's-length transportation contract includes both gaseous
and liquid products and the transportation costs attributable to each
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all relevant data to support
its proposal. The initial proposal must be submitted by June 30, 1988,
or within 3 months after the last day of the month for which the lessee
requests a transportation allowance, whichever is later (unless MMS
approves a longer period). MMS shall then determine the gas
transportation allowance based upon the lessee's proposal and any
additional information MMS deems necessary.
(4) Where the lessee's payments for transportation pursuant to an
arm's-length contract are not based on a dollar per unit, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(5) Where an arm's-length sales contract price or a posted price
includes a provision whereby the listed price is reduced by a
transportation factor, MMS will not consider the transportation factor
to be a transportation allowance. The transportation factor may be used
in determining the lessee's gross proceeds for the sale of the product.
The transportation factor may not exceed 50 percent of the base price of
the product without MMS approval.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length transportation contract or has no contract, including those
situations where the lessee performs transportation services for itself,
the transportation allowance will be based upon the lessee's reasonable
actual costs as provided in this paragraph. All transportation
allowances deducted pursuant to a non-arm's-length or no contract
situation are subject to monitoring, review, audit, and adjustment.
Before any estimated or actual deduction may be taken, the lessee must
submit a completed Form MMS-4295 in accordance with paragraph (c)(2) of
this section. A transportation allowance may be claimed retroactively
for a period of not more than 3 months prior to the first day of the
month that Form MMS-4295 is filed with MMS, unless MMS approves a longer
period upon a showing of good cause by the lessee. MMS will monitor the
allowance deductions to ensure that deductions are reasonable and
allowable. When necessary or appropriate, MMS may direct a lessee to
modify its actual transportation allowance deduction.
(2) The transportation allowance for non-arm's-length or no-contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the initial
depreciable investment in the transportation system multiplied by a rate
of return in accordance with paragraph (b)(2)(iv)(B) of this section.
Allowable capital costs are generally those costs for depreciable fixed
assets (including costs of delivery and installation of capital
equipment) which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transportation system is an allowable expense.
State and Federal income taxes and severance taxes and other fees,
including royalties, are not allowable expenses.
[[Page 84]]
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. After a lessee has elected to use either method for
a transportation system, the lessee may not later elect to change to the
other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services, or a
unit of production method. After an election is made, the lessee may not
change methods without MMS approval. A change in ownership of a
transportation system shall not alter the depreciation schedule
established by the original transporter/lessee for purposes of the
allowance calculation. With or without a change in ownership, a
transportation system shall be depreciated only once. Equipment shall
not be depreciated below a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the transportation system multiplied by
the rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to transportation facilities first placed
in service after March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent transportation
allowance reporting period (which is determined pursuant to paragraph
(c) of this section).
(3)(i) The deduction for transportation costs shall be determined on
the basis of the lessee's cost of transporting each product through each
individual transportation system. Where more than one product in a
gaseous phase is transported, the allocation of costs to each of the
products transported shall be made in a consistent and equitable manner
in the same proportion as the ratio of the volume of each product
(excluding waste products which have no value) to the volume of all
products in the gaseous phase (excluding waste products which have no
value). Except as provided in this paragraph, the lessee may not take an
allowance for transporting a product which is not royalty bearing
without MMS approval.
(ii) Notwithstanding the requirements of paragraph (i), the lessee
may propose to MMS a cost allocation method on the basis of the values
of the products transported. MMS shall approve the method unless it
determines that it is not consistent with the purposes of the
regulations in this part.
(4) Where both gaseous and liquid products are transported through
the same transportation system, the lessee shall propose a cost
allocation procedure to MMS. The lessee may use the transportation
allowance determined in accordance with its proposed allocation
procedure until MMS issues its determination on the acceptability of the
cost allocation. The lessee shall submit all relevant data to support
its proposal. The initial proposal must be submitted by June 30, 1988 or
within 3 months after the last day of the month for which the lessee
begins the transportation, whichever is later, unless MMS approves a
longer period. MMS shall then determine the transportation allowance
based upon the lessee's proposal and any additional information MMS
deems necessary.
(5) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(4) of this section. MMS will grant the exception only if the
lessee has a tariff for the transportation system approved by the
Federal Energy Regulatory Commission (FERC) for Indian leases. MMS shall
deny the exception request if it determines that the tariff is excessive
as compared to arm's-length transportation charges by pipelines, owned
by the lessee or others, providing similar transportation services in
that area. If there are no arm's-length transportation charges, MMS
shall deny the exception request if: (i) No FERC cost
[[Page 85]]
analysis exists and the FERC has declined to investigate pursuant to MMS
timely objections upon filing; and (ii) the tariff significantly exceeds
the lessee's actual costs for transportation as determined pursuant to
this section.
(c) Reporting requirements. (1) Arm's-length contracts. (i) With the
exception of those transportation allowances specified in paragraphs
(c)(1)(v) and (c)(1)(vi) of this section, the lessee shall submit page
one of the initial Form MMS-4295 (and Schedule 1) prior to, or at the
same time as, the transportation allowance determined pursuant to an
arm's-length contract is reported on Form MMS-2014, Report of Sales and
Royalty Remittance. A Form MMS-4295 received by the end of the month
that the Form MMS-2014 is due shall be considered to be timely received.
(ii) The initial Form MMS-4295 shall be effective for a reporting
period beginning the month that the lessee is first authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until the applicable contract or rate terminates or is
modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4295 (and
Schedule 1) within 3 months after the end of the calendar year, or after
the applicable contract or rate terminates or is modified or amended,
whichever is earlier, unless MMS approves a longer period (during which
period the lessee shall continue to use the allowance from the previous
reporting period).
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(v) Transportation allowances which are based on arm's-length
contracts and which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For the purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract. (i) With the exception of those
transportation allowances specified in paragraphs (c)(2)(v),
(c)(2)(vii), and (c)(2)(viii) of this section, the lessee shall submit
an initial Form MMS-4295 prior to, or at the same time as, the
transportation allowance determined pursuant to a non-arm's-length
contract or no contract situation is reported on Form MMS-2014, Report
of Sales and Royalty Remittance. A Form MMS-4295 received by the end of
the month that the Form MMS-2014 is due shall be considered to be timely
received. The initial report may be based upon estimated costs.
(ii) The initial Form MMS-4295 shall be effective for a reporting
period beginning the month that the lessee first is authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until the transportation pursuant to the non-arm's-
length contract or the no contract situation terminates, whichever is
earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4295
containing the actual costs for the previous reporting period. If the
transportation is continuing, the lessee shall include on Form MMS-4295
its estimated costs for the next calendar year. The estimated
transportation allowance shall be based on the actual costs for the
previous reporting period plus or minus any adjustments which are based
on the lessee's knowledge of decreases or increases which will affect
the allowance. Form MMS-4295 must be received by MMS within 3 months
after the end of the previous reporting period, unless MMS approves a
longer period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new transportation facilities or arrangements, the lessee's
initial Form MMS-4295 shall include estimates of the allowable
transportation
[[Page 86]]
costs for the applicable period. Cost estimates shall be based upon the
most recently available operations data for the transportation system,
or if such data are not available, the lessee shall use estimates based
upon industry data for similar transportation systems.
(v) Non-arm's-length contract or no contract based transportation
allowances which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For the purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) Upon request by MMS, the lessee shall submit all data used to
prepare its Form MMS-4295. The data shall be provided within a
reasonable period of time, as determined by MMS.
(vii) MMS may establish in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) If the lessee is authorized to use its FERC-approved tariff
as its transportation cost in accordance with paragraph (b)(5) of this
section, it shall follow the reporting requirements of paragraph (c)(1)
of this section.
(3) MMS may establish reporting dates for individual lessees
different than those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and failure
to report. (1) If a lessee deducts a processing allowance on its Form
MMS-2014 without complying with the requirements of this section, the
lessee shall pay interest only on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a transportation allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be required
to pay additional royalties due plus interest computed pursuant to 30
CFR 218.54, retroactive to the first day of the first month the lessee
is authorized to deduct a transportation allowance. If the actual
transportation allowance is greater than the amount the lessee has taken
on Form MMS-2014 for each month during the allowance form reporting
period, the lessee shall be entitled to a credit, without interest.
(2) For lessees transporting production from onshore Indian leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Allowable costs in determining transportation allowances.
Lessees may include, but are not limited to, the following costs in
determining the arm's-length transportation allowance under paragraph
(a) of this section or the non-arm's-length transportation allowance
under paragraph (b) of this section:
(1) Firm demand charges paid to pipelines. You must limit the
allowable costs for the firm demand charges to the applicable rate per
MMBtu multiplied by the actual volumes transported. You may not include
any losses incurred for previously purchased but unused firm capacity.
You also may not include any gains associated with releasing firm
capacity. If you receive a payment or credit from the pipeline for
penalty refunds, rate case refunds, or other reasons, you must reduce
the firm demand charge claimed on the Form MMS-2014. You must modify the
Form MMS-2014 by the amount received or credited for the affected
reporting period;
(2) Gas supply realignment (GSR) costs. The GSR costs result from a
pipeline reforming or terminating supply contracts with producers to
implement the
[[Page 87]]
restructuring requirements of FERC Orders in 18 CFR part 284;
(3) Commodity charges. The commodity charge allows the pipeline to
recover the costs of providing service;
(4) Wheeling costs. Hub operators charge a wheeling cost for
transporting gas from one pipeline to either the same or another
pipeline through a market center or hub. A hub is a connected manifold
of pipelines through which a series of incoming pipelines are
interconnected to a series of outgoing pipelines;
(5) Gas Research Institute (GRI) fees. The GRI conducts research,
development, and commercialization programs on natural gas related
topics for the benefit of the U.S. gas industry and gas customers. GRI
fees are allowable provided such fees are mandatory in FERC-approved
tariffs;
(6) Annual Charge Adjustment (ACA) fees. FERC charges these fees to
pipelines to pay for its operating expenses;
(7) Payments (either volumetric or in value) for actual or
theoretical losses. This paragraph does not apply to non-arm's-length
transportation arrangements unless the transportation allowance is based
on a FERC or State regulatory-approved tariff;
(8) Temporary storage services. This includes short duration storage
services offered by market centers or hubs (commonly referred to as
``parking'' or ``banking''), or other temporary storage services
provided by pipeline transporters, whether actual or provided as a
matter of accounting. Temporary storage is limited to 30 days or less;
and
(9) Supplemental costs for compression, dehydration, and treatment
of gas. MMS allows these costs only if such services are required for
transportation and exceed the services necessary to place production
into marketable condition required under Secs. 206.172(i) and 206.173(i)
of this part.
(g) Nonallowable costs in determining transportation allowances.
Lessees may not include the following costs in determining the arm's-
length transportation allowance under paragraph (a) of this section or
the non-arm's-length transportation allowance under paragraph (b) of
this section:
(1) Fees or costs incurred for storage. This includes storing
production in a storage facility, whether on or off the lease, for more
than 30 days;
(2) Aggregator/marketer fees. This includes fees you pay to another
person (including your affiliates) to market your gas, including
purchasing and reselling the gas, or finding or maintaining a market for
the gas production;
(3) Penalties you incur as shipper. These penalties include, but are
not limited to:
(i) Over-delivery cash-out penalties. This includes the difference
between the price the pipeline pays you for over-delivered volumes
outside the tolerances and the price you receive for over-delivered
volumes within the tolerances;
(ii) Scheduling penalties. This includes penalties you incur for
differences between daily volumes delivered into the pipeline and
volumes scheduled or nominated at a receipt or delivery point;
(iii) Imbalance penalties. This includes penalties you incur
(generally on a monthly basis) for differences between volumes delivered
into the pipeline and volumes scheduled or nominated at a receipt or
delivery point; and
(iv) Operational penalties. This includes fees you incur for
violation of the pipeline's curtailment or operational orders issued to
protect the operational integrity of the pipeline;
(4) Intra-hub transfer fees. These are fees you pay to hub operators
for administrative services (e.g., title transfer tracking) necessary to
account for the sale of gas within a hub; and
(5) Other nonallowable costs. Any cost you incur for services you
are required to provide at no cost to the lessor.
(h) Other transportation cost determinations. Use this section when
calculating transportation costs to establish value using a netback
procedure or any other procedure that requires deduction of
transportation costs.
[61 FR 5467, Feb. 12, 1996, as amended at 62 FR 65763, Dec. 16, 1997]
Sec. 206.178 Processing allowances--general.
(a) Where the value of gas is determined pursuant to Sec. 206.173 of
this subpart, a deduction shall be allowed for
[[Page 88]]
the reasonable actual costs of processing.
(b) Processing costs must be allocated among the gas plant products.
A separate processing allowance must be determined for each gas plant
product and processing plant relationship. Natural gas liquids (NGL's)
shall be considered as one product.
(c)(1) Except as provided in paragraph (d)(2) of this section, the
processing allowance shall not be applied against the value of the
residue gas. Where there is no residue gas MMS may designate an
appropriate gas plant product against which no allowance may be applied.
(2) Except as provided in paragraph (c)(3) of this section, the
processing allowance deduction on the basis of an individual product
shall not exceed 66\2/3\ percent of the value of each gas plant product
determined in accordance with Sec. 206.173 of this subpart (such value
to be reduced first for any transportation allowances related to
postprocessing transportation authorized by Sec. 206.176 of this
subpart).
(3) Upon request of a lessee, MMS may approve a processing allowance
in excess of the limitation prescribed by paragraph (c)(2) of this
section. The lessee must demonstrate that the processing costs incurred
in excess of the limitation prescribed in paragraph (c)(2) of this
section were reasonable, actual, and necessary. An application for
exception (using Form MMS-4393, Request to Exceed Regulatory Allowance
Limitation) shall contain all relevant and supporting documentation for
MMS to make a determination. Under no circumstances shall the value for
royalty purposes of any gas plant product be reduced to zero.
(d)(1) Except as provided in paragraph (d)(2) of this section, no
processing cost deduction shall be allowed for the costs of placing
lease products in marketable condition, including dehydration,
separation, compression, or storage, even if those functions are
performed off the lease or at a processing plant. Where gas is processed
for the removal of acid gases, commonly referred to as ``sweetening,''
no processing cost deduction shall be allowed for such costs unless the
acid gases removed are further processed into a gas plant product. In
such event, the lessee shall be eligible for a processing allowance as
determined in accordance with this subpart. However, MMS will not grant
any processing allowance for processing lease production which is not
royalty bearing.
(2)(i) If the lessee incurs extraordinary costs for processing gas
production from a gas production operation, it may apply to MMS for an
allowance for those costs which shall be in addition to any other
processing allowance to which the lessee is entitled pursuant to this
section. Such an allowance may be granted only if the lessee can
demonstrate that the costs are, by reference to standard industry
conditions and practice, extraordinary, unusual, or unconventional.
(ii) Prior MMS approval to continue an extraordinary processing cost
allowance is not required. However, to retain the authority to deduct
the allowance the lessee must report the deduction to MMS in a form and
manner prescribed by MMS.
(e) If MMS determines that a lessee has improperly determined a
processing allowance authorized by this subpart, then the lessee shall
pay any additional royalties, plus interest determined in accordance
with 30 CFR 218.54, or shall be entitled to a credit, without interest.
Sec. 206.179 Determination of processing allowances.
(a) Arm's-length processing contracts. (1)(i) For processing costs
incurred by a lessee pursuant to an arm's-length contract, the
processing allowance shall be the reasonable actual costs incurred by
the lessee for processing the gas pursuant to that contract, except as
provided in paragraphs (a)(1)(ii) and (a)(1)(iii) of this section,
subject to monitoring, review, audit, and adjustment. The lessee shall
have the burden of demonstrating that its contract is arm's-length.
Before any deduction may be taken, the lessee must submit a completed
page one of Form MMS-4109, Gas Processing Allowance Summary Report, in
accordance with paragraph (c)(1) of this section. A processing allowance
may be claimed retroactively for a period of not more than 3 months
prior to the first day of the
[[Page 89]]
month that Form MMS-4109 is filed with MMS, unless MMS approves a longer
period upon a showing of good cause by the lessee.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the processor for the
processing. If the contract reflects more than the total consideration,
then MMS may require that the processing allowance be determined in
accordance with paragraph (b) of this section.
(iii) If MMS determines that the consideration paid pursuant to an
arm's-length processing contract does not reflect the reasonable value
of the processing because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee and
lessor, then MMS shall require that the processing allowance be
determined in accordance with paragraph (b) of this section. When MMS
determines that the value of the processing may be unreasonable, MMS
will notify the lessee and give the lessee an opportunity to provide
written information justifying the lessee's processing costs.
(2) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
can be determined from the contract, then the processing costs for each
gas plant product shall be determined in accordance with the contract.
No allowance may be taken for the costs of processing lease production
which is not royalty-bearing.
(3) If an arm's-length processing contract includes more than one
gas plant product and the processing costs attributable to each product
cannot be determined from the contract, the lessee shall propose an
allocation procedure to MMS. The lessee may use its proposed allocation
procedure until MMS issues its determination. The lessee shall submit
all relevant data to support its proposal. The initial proposal must be
submitted by June 30, 1988 or within 3 months after the last day of the
month for which the lessee requests a processing allowance, whichever is
later (unless MMS approves a longer period). MMS shall then determine
the processing allowance based upon the lessee's proposal and any
additional information MMS deems necessary. No processing allowance will
be granted for the costs of processing lease production which is not
royalty bearing.
(4) Where the lessee's payments for processing pursuant to an arm's-
length contract are not based on a dollar per unit basis, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length processing contract or has no contract, including those
situations where the lessee performs processing for itself, the
processing allowance will be based upon the lessee's reasonable actual
costs as provided in this paragraph. All processing allowances deducted
pursuant to a non-arm's-length or no contract situation are subject to
monitoring, review, audit, and adjustment. Before any estimated or
actual deduction may be taken, the lessee must submit a completed Form
MMS-4109 in accordance with paragraph (c)(2) of this section. A
processing allowance may be claimed retroactively for a period of not
more than 3 months prior to the first day of the month that Form MMS-
4109 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee. MMS will monitor the allowance
deduction to ensure that deductions are reasonable and allowable. When
necessary or appropriate, MMS may direct a lessee to modify its actual
processing allowance.
(2) The processing allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for processing
during the reporting period, including operating and maintenance
expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the initial
depreciable investment in the processing plant multiplied by a rate of
return in accordance with paragraph
[[Page 90]]
(b)(2)(iv)(B) of this section. Allowable capital costs are generally
those costs for depreciable fixed assets (including costs of delivery
and installation of capital equipment) which are an integral part of the
processing plant.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: maintenance of the
processing plant; maintenance of equipment; maintenance labor; and other
directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the processing plant is an allowable expense. State
and Federal income taxes and severance taxes, including royalties, are
not allowable expenses.
(iv) A lessee may use either depreciation or a return on depreciable
capital investment. When a lessee has elected to use either method for a
processing plant, the lessee may not later elect to change to the other
alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the processing plant services, or a unit-
of-production method. After an election is made, the lessee may not
change methods without MMS approval. A change in ownership of a
processing plant shall not alter the depreciation schedule established
by the original processor/lessee for purposes of the allowance
calculation. With or without a change in ownership, a processing plant
shall be depreciated only once. Equipment shall not be depreciated below
a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
initial capital investment in the processing plant multiplied by the
rate of return determined pursuant to paragraph (b)(2)(v) of this
section. No allowance shall be provided for depreciation. This
alternative shall apply only to plants first placed in service after
March 1, 1988.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent processing
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) The processing allowance for each gas plant product shall be
determined based on the lessee's reasonable and actual cost of
processing the gas. Allocation of costs to each gas plant product shall
be based upon generally accepted accounting principles. The lessee may
not take an allowance for the costs of processing lease production which
is not royalty bearing.
(4) A lessee may apply to MMS for an exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1)
through (b)(3) of this section. MMS may grant the exception only if: (i)
The lessee has arm's-length contracts for processing other gas
production at the same processing plant; and (ii) at least 50 percent of
the gas processed annually at the plant is processed pursuant to arm's-
length processing contracts; if MMS grants the exception, the lessee
shall use as its processing allowance the volume weighted average prices
charged other persons pursuant to arm's-length contracts for processing
at the same plant.
(c) Reporting requirements. (1) Arm's-length contracts. (i) With the
exception of those processing allowances specified in paragraphs
(c)(1)(v) and (c)(1)(vi) of this section, the lessee shall submit page
one of the initial Form MMS-4109 (and Schedule 1) prior to the time, or
at the same time as, the processing allowance determined pursuant to an
arm's-length contract is reported on Form MMS-2014, Report of Sales and
Royalty Remittance. A Form MMS-4109 received by the end of the month
[[Page 91]]
that the Form MMS-2014 is due shall be considered to be timely received.
(ii) The initial Form MMS-4109 shall be effective for a reporting
period beginning the month that the lessee is first authorized to deduct
a processing allowance and shall continue until the end of the calendar
year, or until the applicable contract or rate terminates or is modified
or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page 1 of Form MMS-4109 (and
Schedule 1) within 3 months after the end of the calendar year, or after
the applicable contract or rate terminates or is modified or amended,
whichever is earlier, unless MMS approves a longer period (during which
period the lessee shall continue to use the allowance from the previous
reporting period).
(iv) MMS may require that a lessee submit arm's-length processing
contracts and related documents. Documents shall be submitted within a
reasonable time, as determined by MMS.
(v) Processing allowances which are based on arm's-length contracts
and which are in effect at the time these regulations become effective
will be allowed to continue until such allowances terminate. For the
purpose of this section, only those allowances that have been approved
by MMS in writing shall qualify as being in effect at the time these
regulations became effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(2) Non-arm's-length or no contract. (i) With the exception of those
processing allowances specified in paragraphs (c)(2)(v), (c)(2)(vii) and
(c)(2)(viii) of this section, the lessee shall submit an initial Form
MMS-4109 prior to, or at the same time as, the processing allowance
determined pursuant to a non-arm's-length contract or no contract
situation is reported on Form MMS-2014, Report of Sales and Royalty
Remittance. A Form MMS-4109 received by the end of the month that the
Form MMS-2014 is due shall be considered to be timely received. The
initial report may be based upon estimated costs.
(ii) The initial Form MMS-4109 shall be effective for a reporting
period beginning the month that the lessee first is authorized to deduct
a processing allowance and shall continue until the end of the calendar
year, or until the processing pursuant to the non-arm's-length contract
or the no contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4109
containing the actual costs for the previous reporting period. If gas
processing is continuing, the lessee shall include on Form MMS-4109 its
estimated costs for the next calendar year. The estimated gas processing
allowance shall be based on the actual costs for the previous period
plus or minus any adjustments which are based on the lessee's knowledge
of decreases or increases which will affect the allowance. Form MMS-4109
must be received by MMS within 3 months after the end of the previous
reporting period, unless MMS approves a longer period (during which
period the lessee shall continue to use the allowance from the previous
reporting period).
(iv) For new processing plants, the lessee's initial Form MMS-4109
shall include estimates of the allowable gas processing costs for the
applicable period. Cost estimates shall be based upon the most recently
available operations data for the plant, or if such data are not
available, the lessee shall use estimates based upon industry data for
similar gas processing plants.
(v) Processing allowances based on non-arm's-length or no contract
situations which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate
for gas production from Indian leases. For the purposes of this section,
only those allowances that have been approved by MMS in writing shall
qualify as being in effect at the time these regulations become
effective.
(vi) Upon request by MMS, the lessee shall submit all data used by
the lessee to prepare its Form MMS-4109. The data shall be provided
within a reasonable period of time, as determined by MMS.
[[Page 92]]
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
(viii) If the lessee is authorized to use the volume weighted
average prices charged other persons as its processing allowance in
accordance with paragraph (b)(4) of this section, it shall follow the
reporting requirements of paragraph (c)(1) of this section.
(3) MMS may establish reporting dates for individual leases
different from those specified in this subpart in order to provide more
effective administration. Lessees will be notified of any change in
their reporting period.
(4) Processing allowances must be reported as a separate line on the
Form MMS-2014, unless MMS approves a different reporting procedure.
(d) Interest assessments for incorrect or late reports and failure
to report. (1) If a lessee deducts a processing allowance on its Form
MMS-2014 without complying with the requirements of this section, the
lessee shall pay interest only on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a processing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.54.
(e) Adjustments. (1) If the actual gas processing allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be required
to pay additional royalties due plus interest computed pursuant to 30
CFR 218.54, retroactive to the first day of the first month the lessee
is authorized to deduct a processing allowance. If the actual processing
allowance is greater than the amount the lessee has taken on Form MMS-
2014 for each month during the allowance period, the lessee shall be
entitled to a credit, without interest.
(2) For lessees processing production from onshore Indian leases,
the lessee must submit a corrected Form MMS-2014 to reflect actual
costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Other processing cost determinations. The provisions of this
section shall apply to determine processing costs when establishing
value using a net back valuation procedure or any other procedure that
requires deduction of processing costs.
Subpart F--Federal Coal
Source: 54 FR 1523, Jan. 13, 1989, unless otherwise noted.
Sec. 206.250 Purpose and scope.
(a) This subpart is applicable to all coal produced from Federal
coal leases. The purpose of this subpart is to establish the value of
coal produced for royalty purposes, of all coal from Federal leases
consistent with the mineral leasing laws, other applicable laws and
lease terms.
(b) If the specific provisions of any statute or settlement
agreement between the United States and a lessee resulting from
administrative or judicial litigation, or any coal lease subject to the
requirements of this subpart, are inconsistent with any regulation in
this subpart then the statute, lease provision, or settlement shall
govern to the extent of that inconsistency.
(c) All royalty payments made to the Mineral Management Service
(MMS) are subject to later audit and adjustment.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5479, Feb. 12, 1996]
Sec. 206.251 Definitions.
Ad valorem lease means a lease where the royalty due to the lessor
is based upon a percentage of the amount or value of the coal.
Allowance means a deduction used in determining value for royalty
purposes. Coal washing allowance means an allowance for the reasonable,
actual costs incurred by the lessee for coal washing. Transportation
allowance means an allowance for the reasonable, actual costs incurred
by the lessee for moving coal to a point of sale or point
[[Page 93]]
of delivery remote from both the lease and mine or wash plant.
Area means a geographic region in which coal has similar quality and
economic characteristics. Area boundaries are not officially designated
and the areas are not necessarily named.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated persons
with opposing economic interests regarding that contract. For purposes
of this subpart, two persons are affiliated if one person controls, is
controlled by, or is under common control with another person. For
purposes of this subpart, based on the instruments of ownership of the
voting securities of an entity, or based on other forms of ownership:
(a) Ownership in excess of 50 percent constitutes control;
(b) Ownership of 10 through 50 percent creates a presumption of
control; and
(c) Ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. The MMS may require the lessee to certify ownership control.
To be considered arm's-length for any production month, a contract must
meet the requirements of this definition for that production month as
well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Federal leases.
BLM means the Bureau of Land Management of the Department of the
Interior.
Coal means coal of all ranks from lignite through anthracite.
Coal washing means any treatment to remove impurities from coal.
Coal washing may include, but is not limited to, operations such as
flotation, air, water, or heavy media separation; drying; and related
handling (or combination thereof).
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Gross proceeds (for royalty payment purposes) means the total monies
and other consideration accruing to a coal lessee for the production and
disposition of the coal produced. Gross proceeds includes, but is not
limited to, payments to the lessee for certain services such as
crushing, sizing, screening, storing, mixing, loading, treatment with
substances including chemicals or oils, and other preparation of the
coal to the extent that the lessee is obligated to perform them at no
cost to the Federal Government. Gross proceeds, as applied to coal, also
includes but is not limited to reimbursements for royalties, taxes or
fees, and other reimbursements. Tax reimbursements are part of the gross
proceeds accruing to a lessee even though the Federal royalty interest
may be exempt from taxation. Monies and other consideration, including
the forms of consideration identified in this paragraph, to which a
lessee is contractually or legally entitled but which it does not seek
to collect through reasonable efforts are also part of gross proceeds.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States for a Federal
coal resource under a mineral leasing law that authorizes exploration
for, development or extraction of, or removal of coal--or the land
covered by that authorization, whichever is required by the context.
Lessee means any person to whom the United States issues a lease,
and any person who has been assigned an obligation to make royalty or
other payments required by the lease. This includes any person who has
an interest in a lease as well as an operator or payor who has no
interest in the lease but who has assumed the royalty payment
responsibility.
Like-quality coal means coal has similar chemical and physical
characteristics.
[[Page 94]]
Marketable condition means coal that is sufficiently free from
impurities and otherwise in a condition that it will be accepted by a
purchaser under a sales contract typical for that area.
Mine means an underground or surface excavation or series of
excavations and the surface or underground support facilities that
contribute directly or indirectly to mining, production, preparation,
and handling of lease products.
Net-back method means a method for calculating market value of coal
at the lease or mine. Under this method, costs of transportation,
washing, handling, etc., are deducted from the ultimate proceeds
received for the coal at the first point at which reasonable values for
the coal may be determined by a sale pursuant to an arm's-length
contract or by comparison to other sales of coal, to ascertain value at
the mine.
Net output means the quantity of washed coal that a washing plant
produces.
Netting is the deduction of an allowance from the sales value by
reporting a one line net sales value, instead of correctly reporting the
deduction as a separate line item on the Form MMS-2014.
Person means by individual, firm, corporation, association,
partnership, consortium, or joint venture.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of coal are made to a purchaser.
Spot market price means the price received under any sales
transaction when planned or actual deliveries span a short period of
time, usually not exceeding one year.
[54 FR 1523, Jan. 13, 1989, as amended at 55 FR 35433, Aug. 30, 1990; 61
FR 5479, Feb. 12, 1996]
Sec. 206.252 Information collection.
The information collection requirements contained in this subpart
have been approved by the Office of Management and Budget (OMB) under 44
U.S.C. 3501 et seq. The forms, filing date, and approved OMB clearance
numbers are identified in 30 CFR 210.10 and 30 CFR 216.10.
Sec. 206.253 Coal subject to royalties--general provisions.
(a) All coal (except coal unavoidably lost as determined by BLM
under 43 CFR part 3400) from a Federal lease subject to this part is
subject to royalty. This includes coal used, sold, or otherwise disposed
of by the lessee on or off the lease.
(b) If a lessee receives compensation for unavoidably lost coal
through insurance coverage or other arrangements, royalties at the rate
specified in the lease are to be paid on the amount of compensation
received for the coal. No royalty is due on insurance compensation
received by the lessee for other losses.
(c) If waste piles or slurry ponds are reworked to recover coal, the
lessee shall pay royalty at the rate specified in the lease at the time
the recovered coal is used, sold, or otherwise finally disposed of. The
royalty rate shall be that rate applicable to the production method used
to initially mine coal in the waste pile or slurry pond; i.e.,
underground mining method or surface mining method. Coal in waste pits
or slurry ponds initially mined from Federal leases shall be allocated
to such leases regardless of whether it is stored on Federal lands. The
lessee shall maintain accurate records to determine to which individual
Federal lease coal in the waste pit or slurry pond should be allocated.
However, nothing in this section requires payment of a royalty on coal
for which a royalty has already been paid.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5479, Feb. 12, 1996]
Sec. 206.254 Quality and quantity measurement standards for reporting and paying royalties.
(a) For leases subject to Sec. 206.257 of this subpart, the quality
of coal on which royalty is due shall be reported on the basis of
percent sulfur, percent ash, and number of British thermal units (Btu)
per pound of coal. Coal quality determinations shall be made at
intervals prescribed in the lessee's sales contract. If there is no
contract, or if the contract does not specify the intervals of coal
quality determination, the lessee shall propose a quality
[[Page 95]]
test schedule to MMS. In no case, however, shall quality tests be
performed less than quarterly using standard industry-recognized testing
methods. Coal quality information shall be reported on the appropriate
forms required under 30 CFR part 216.
(b) For all leases subject to this subpart, the quantity of coal on
which royalty is due shall be measured in short tons (of 2,000 pounds
each) by methods prescribed by the BLM. Coal quantity information shall
be reported on appropriate forms required under 30 CFR part 216 and on
the Report of Sales and Royalty Remittance, Form MMS-2014, as required
under 30 CFR part 210.
[54 FR 1523, Jan. 13, 1989, as amended at 57 FR 52720, Nov. 5, 1992]
Sec. 206.255 Point of royalty determination.
(a) For all leases subject to this subpart, royalty shall be
computed on the basis of the quantity and quality of Federal coal in
marketable condition measured at the point of royalty measurement as
determined jointly by BLM and MMS.
(b) Coal produced and added to stockpiles or inventory does not
require payment of royalty until such coal is later used, sold, or
otherwise finally disposed of. MMS may ask BLM to increase the lease
bond to protect the lessor's interest when BLM determines that
stockpiles or inventory become excessive so as to increase the risk of
degradation of the resource.
(c) The lessee shall pay royalty at a rate specified in the lease at
the time the coal is used, sold, or otherwise finally disposed of,
unless otherwise provided for at Sec. 206.256(d) of this subpart.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5480, Feb. 12, 1996]
Sec. 206.256 Valuation standards for cents-per-ton leases.
(a) This section is applicable to coal leases on Federal lands which
provide for the determination of royalty on a cents-per-ton (or other
quantity) basis.
(b) The royalty for coal from leases subject to this section shall
be based on the dollar rate per ton prescribed in the lease. That dollar
rate shall be applicable to the actual quantity of coal used, sold, or
otherwise finally disposed of, including coal which is avoidably lost as
determine by BLM pursuant to 43 CFR part 3400.
(c) For leases subject to this section, there shall be no allowances
for transportation, removal of impurities, coal washing, or any other
processing or preparation of the coal.
(d) When a coal lease is readjusted pursuant to 43 CFR part 3400 and
the royalty valuation method changes from a cents-per-ton basis to an ad
valorem basis, coal which is produced prior to the effective date of
readjustment and sold or used within 30 days of the effective date of
readjustment shall be valued pursuant to this section. All coal that is
not used, sold, or otherwise finally disposed of within 30 days after
the effective date of readjustment shall be valued pursuant to the
provisions of Sec. 206.257 of this subpart, and royalties shall be paid
at the royalty rate specified in the readjusted lease.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5480, Feb. 12, 1996]
Sec. 206.257 Valuation standards for ad valorem leases.
(a) This section is applicable to coal leases on Federal lands which
provide for the determination of royalty as a percentage of the amount
of value of coal (ad valorem). The value for royalty purposes of coal
from such leases shall be the value of coal determined under this
section, less applicable coal washing allowances and transportation
allowances determined under Secs. 206.258 through 206.262 of this
subpart, or any allowance authorized by Sec. 206.265 of this subpart.
The royalty due shall be equal to the value for royalty purposes
multiplied by the royalty rate in the lease.
(b)(1) The value of coal that is sold pursuant to an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(2), (b)(3), and (b)(5) of this section. The
lessee shall have the burden of demonstrating that its contract is
arm's-length. The value which the lessee reports, for royalty purposes,
is subject to monitoring, review, and audit.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration
[[Page 96]]
actually transferred either directly or indirectly from the buyer to the
seller for the coal produced. If the contract does not reflect the total
consideration, then the MMS may require that the coal sold pursuant to
that contract be valued in accordance with paragraph (c) of this
section. Value may not be based on less than the gross proceeds accruing
to the lessee for the coal production, including the additional
consideration.
(3) If the MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, then MMS shall require that the coal
production be valued pursuant to paragraph (c)(2) (ii), (iii), (iv), or
(v) of this section, and in accordance with the notification
requirements of paragraph (d)(3) of this section. When MMS determines
that the value may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's reported coal value.
(4) The MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the coal production.
(5) The value of production for royalty purposes shall not include
payments received by the lessee pursuant to a contract which the lessee
demonstrates, to MMS's satisfaction, were not part of the total
consideration paid for the purchase of coal production.
(c)(1) The value of coal from leases subject to this section and
which is not sold pursuant to an arm's-length contract shall be
determined in accordance with this section.
(2) If the value of the coal cannot be determined pursuant to
paragraph (b) of this section, then the value shall be determined
through application of other valuation criteria. The criteria shall be
considered in the following order, and the value shall be based upon the
first applicable criterion:
(i) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract (or other disposition of produced
coal by other than an arm's-length contract), provided that those gross
proceeds are within the range of the gross proceeds derived from, or
paid under, comparable arm's-length contracts between buyers and sellers
neither of whom is affiliated with the lessee for sales, purchases, or
other dispositions of like-quality coal produced in the area. In
evaluating the comparability of arm's-length contracts for the purposes
of these regulations, the following factors shall be considered: Price,
time of execution, duration, market or markets served, terms, quality of
coal, quantity, and such other factors as may be appropriate to reflect
the value of the coal;
(ii) Prices reported for that coal to a public utility commission;
(iii) Prices reported for that coal to the Energy Information
Administration of the Department of Energy;
(iv) Other relevant matters including, but not limited to, published
or publicly available spot market prices, or information submitted by
the lessee concerning circumstances unique to a particular lease
operation or the saleability of certain types of coal;
(v) If a reasonable value cannot be determined using paragraphs
(c)(2) (i), (ii), (iii), or (iv) of this section, then a net-back method
or any other reasonable method shall be used to determine value.
(3) When the value of coal is determined pursuant to paragraph
(c)(2) of this section, that value determination shall be consistent
with the provisions contained in paragraph (b)(5) of this section.
(d)(1) Where the value is determined pursuant to paragraph (c) of
this section, that value does not require MMS's prior approval. However,
the lessee shall retain all data relevant to the determination of
royalty value. Such data shall be subject to review and audit, and MMS
will direct a lessee to use a different value if it determines that the
reported value is inconsistent with the requirements of these
regulations.
[[Page 97]]
(2) Any Federal lessee will make available upon request to the
authorized MMS or State representatives, to the Inspector General of the
Department of the Interior or other persons authorized to receive such
information, arm's-length sales value and sales quantity data for like-
quality coal sold, purchased, or otherwise obtained by the lessee from
the area.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraphs (c)(2) (ii), (iii), (iv), or (v) of this section. The
notification shall be by letter to the Associate Director for Royalty
Management of his/her designee. The letter shall identify the valuation
method to be used and contain a brief description of the procedure to be
followed. The notification required by this section is a one-time
notification due no later than the month the lessee first reports
royalties on the Form MMS-2014 using a valuation method authorized by
paragraphs (c)(2) (ii), (iii), (iv), or (v) of this section, and each
time there is a change in a method under paragraphs (c)(2) (iv) or (v)
of this section.
(e) If MMS determines that a lessee has not properly determined
value, the lessee shall be liable for the difference, if any, between
royalty payments made based upon the value it has used and the royalty
payments that are due based upon the value established by MMS. The
lessee shall also be liable for interest computed pursuant to 30 CFR
218.202. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(f) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. The MMS shall expeditiously determine the value based
upon the lessee's proposal and any additional information MMS deems
necessary. That determination shall remain effective for the period
stated therein. After MMS issues its determination, the lessee shall
make the adjustments in accordance with paragraph (e) of this section.
(g) Notwithstanding any other provisions of this section, under no
circumstances shall the value for royalty purposes be less than the
gross proceeds accruing to the lessee for the disposition of produced
coal less applicable provisions of paragraph (b)(5) of this section and
less applicable allowances determined pursuant to Secs. 206.258 through
206.262 and Sec. 206.265 of this subpart.
(h) The lessee is required to place coal in marketable condition at
no cost to the Federal Government. Where the value established under
this section is determined by a lessee's gross proceeds, that value
shall be increased to the extent that the gross proceeds has been
reduced because the purchaser, or any other person, is providing certain
services, the cost of which ordinarily is the responsibility of the
lessee to place the coal in marketable condition.
(i) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to an arm's-length contract, and may be retroactively applied to
value for royalty purposes for a period not to exceed two years, unless
MMS approves a longer period. If the lessee makes timely application for
a price increase allowed under its contract but the purchaser refuses,
and the lessee takes reasonable measures, which are documented, to force
purchaser compliance, the lessee will owe no additional royalties unless
or until monies or consideration resulting from the price increase are
received. This paragraph shall not be construed to permit a lessee to
avoid its royalty payment obligation in situations where a purchaser
fails to pay, in whole or in part or timely, for a quantity of coal.
(j) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or
[[Page 98]]
binding as against the Federal Government or its beneficiaries until the
audit period is formally closed.
(k) Certain information submitted to MMS to support valuation
proposals, including transportation, coal washing, or other allowances
under Sec. 206.265 of this subpart, is exempted from disclosure by the
Freedom of Information Act, 5 U.S.C. 522. Any data specified by the Act
to be privileged, confidential, or otherwise exempt shall be maintained
in a confidential manner in accordance with applicable law and
regulations. All requests for information about determinations made
under this part are to be submitted in accordance with the Freedom of
Information Act regulation of the Department of the Interior, 43 CFR
part 2.
[54 FR 1523, Jan. 13, 1989, as amended at 55 FR 35433, Aug. 30, 1990; 57
FR 52720, Nov. 5, 1992; 61 FR 5480, Feb. 12, 1996]
Sec. 206.258 Washing allowances--general.
(a) For ad valorem leases subject to Sec. 206.257 of this subpart,
MMS shall, as authorized by this section, allow a deduction in
determining value for royalty purposes for the reasonable, actual costs
incurred to wash coal, unless the value determined pursuant to
Sec. 206.257 of this subpart was based upon like-quality unwashed coal.
Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.262 of this subpart
reduce the value for royalty purposes to zero.
(b) If MMS determines that a lessee has improperly determined a
washing allowance authorized by this section, then the lessee shall be
liable for any additional royalties, plus interest determined in
accordance with 30 CFR 218.202, or shall be entitled to a credit without
interest.
(c) Lessees shall not disproportionately allocate washing costs to
Federal leases.
(d) No cost normally associated with mining operations and which are
necessary for placing coal in marketable condition shall be allowed as a
cost of washing.
(e) Coal washing costs shall only be recognized as allowances when
the washed coal is sold and royalties are reported and paid.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5480, Feb. 12, 1996]
Sec. 206.259 Determination of washing allowances.
(a) Arm's-length contracts. (1) For washing costs incurred by a
lessee under an arm's-length contract, the washing allowance shall be
the reasonable actual costs incurred by the lessee for washing the coal
under that contract, subject to monitoring, review, audit, and possible
future adjustment. The lessee shall have the burden of demonstrating
that its contract is arm's-length. MMS' prior approval is not required
before a lessee may deduct costs incurred under an arm's-length
contract. The lessee must claim a washing allowance by reporting it as a
separate line entry on the Form MMS-2014.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the washer for the
washing. If the contract reflects more than the total consideration
paid, then the MMS may require that the washing allowance be determined
in accordance with paragraph (b) of this section.
(3) If the MMS determines that the consideration paid pursuant to an
arm's-length washing contract does not reflect the reasonable value of
the washing because of misconduct by or between the contracting parties,
or because the lessee otherwise has breached its duty to the lessor to
market the production for the mutual benefit of the lessee and the
lessor, then MMS shall require that the washing allowance be determined
in accordance with paragraph (b) of this section. When MMS determines
that the value of the washing may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written information
justifying the lessee's washing costs.
(4) Where the lessee's payments for washing under an arm's-length
contract are not based on a dollar-per-unit basis, the lessee shall
convert whatever consideration is paid to a dollar value
[[Page 99]]
equivalent. Washing allowances shall be expressed as a cost per ton of
coal washed.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations
where the lessee performs washing for itself, the washing allowance will
be based upon the lessee's reasonable actual costs. All washing
allowances deducted under a non-arm's-length or no contract situation
are subject to monitoring, review, audit, and possible future
adjustment. The lessee must claim a washing allowance by reporting it as
a separate line entry on the Form MMS-2014. When necessary or
appropriate, MMS may direct a lessee to modify its estimated or actual
washing allowance.
(2) The washing allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for washing
during the reported period, including operating and maintenance
expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph (b)(2)(iv)
(A) of this section, or a cost equal to the depreciable investment in
the wash plant multiplied by the rate of return in accordance with
paragraph (b)(2)(iv)(B) of this section. Allowable capital costs are
generally those for depreciable fixed assets (including costs of
delivery and installation of capital equipment) which are an integral
part of the wash plant.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes, rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the wash
plant; maintenance of equipment; maintenance labor; and other directly
allocable and attributable maintenance expenses which the lessee can
document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the wash plant is an allowable expense. State and Federal
income taxes and severance taxes, including royalities, are not
allowable expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or (B) of this
section. After a lessee has elected to use either method for a wash
plant, the lessee may not later elect to change to the other alternative
without approval of the MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the wash plant services, whichever is
appropriate, or a unit of production method. After an election is made,
the lessee may not change methods without MMS approval. A change in
ownership of a wash plant shall not alter the depreciation schedule
established by the original operator/lessee for purposes of the
allowance calculation. With or without a change in ownership, a wash
plant shall be depreciated only once. Equipment shall not be depreciated
below a reasonable salvage value.
(B) The MMS shall allow as a cost an amount equal to the allowable
capital investment in the wash plant multiplied by the rate of return
determined pursuant to paragraph (b)(2)(v) of this section. No allowance
shall be provided for depreciation. This alternative shall apply only to
plants first placed in service or acquired after March 1, 1989.
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
(3) The washing allowance for coal shall be determined based on the
lessee's reasonable and actual cost of washing the coal. The lessee may
not take an allowance for the costs of washing lease production that is
not royalty bearing.
(c) Reporting requirements--(1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
[[Page 100]]
(ii) The MMS may require that a lessee submit arm's-length washing
contracts and related documents. Documents shall be submitted within a
reasonable time, as determined by MMS.
(2) Non-arm's-length or no contract. (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on the Form MMS-2014.
(ii) For new washing facilities or arrangements, the lessee's
initial washing deduction shall include estimates of the allowable coal
washing costs for the applicable period. Cost estimates shall be based
upon the most recently available operations data for the processing
system or, if such data are not available, the lessee shall use
estimates based upon industry data for similar washing systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(d) Interest and assessments. (1) If a lessee nets a washing
allowance on the Form MMS-2014, then the lessee shall be assessed an
amount up to 10 percent of the allowance netted not to exceed $250 per
lease selling arrangement per sales period.
(2) If a lessee erroneously reports a washing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.202.
(e) Adjustments. (1) If the actual coal washing allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall pay additional
royalties due plus interest computed under 30 CFR 218.202 from the date
when the lessee took the deduction to the date the lessee repays the
difference to MMS. If the actual washing allowance is greater than the
amount the lessee has taken on Form MMS-2014 for each month during the
allowance reporting period, the lessee shall be entitled to a credit
without interest.
(2) The lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Other washing cost determinations. The provisions of this
section shall apply to determine washing costs when establishing value
using a net-back valuation procedure or any other procedure that
requires deduction of washing costs.
[54 FR 1523, Jan. 13, 1989, as amended at 57 FR 52720, Nov. 5, 1992; 61
FR 5480, Feb. 12, 1996]
Sec. 206.260 Allocation of washed coal.
(a) When coal is subjected to washing, the washed coal must be
allocated to the leases from which it was extracted.
(b) When the net output of coal from a washing plant is derived from
coal obtained from only one lease, the quantity of washed coal allocable
to the lease will be based on the net output of the washing plant.
(c) When the net output of coal from a washing plant is derived from
coal obtained from more than one lease, unless determined otherwise by
BLM, the quantity of net output of washed coal allocable to each lease
will be based on the ratio of measured quantities of coal delivered to
the washing plant and washed from each lease compared to the total
measured quantities of coal delivered to the washing plant and washed.
Sec. 206.261 Transportation allowances--general.
(a) For ad valorem leases subject to Sec. 206.257 of this subpart,
where the value for royalty purposes has been determined at a point
remote from the lease or mine, MMS shall, as authorized by this section,
allow a deduction in determining value for royalty purposes for the
reasonable, actual costs incurred to:
(1) Transport the coal from a Federal lease to a sales point which
is remote from both the lease and mine; or
(2) Transport the coal from a Federal lease to a wash plant when
that plant is remote from both the lease and mine and, if applicable,
from the wash plant to a remote sales point. In-mine transportation
costs shall not be included in the transportation allowance.
[[Page 101]]
(b) Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.257 of this subpart
reduce the value of coal under any selling arrangement to zero.
(c)(1) When coal transported from a mine to a wash plant is eligible
for a transportation allowance in accordance with this section, the
lessee is not required to allocate transportation costs between the
quantity of clean coal output and the rejected waste material. The
transportation allowance shall be authorized for the total production
which is transported. Transportation allowances shall be expressed as a
cost per ton of cleaned coal transported.
(2) For coal that is not washed at a wash plant, the transportation
allowance shall be authorized for the total production which is
transported. Transportation allowances shall be expressed as a cost per
ton of coal transported.
(3) Transportation costs shall only be recognized as allowances when
the transported coal is sold and royalties are reported and paid.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
section, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.202, or shall be
entitled to a credit, without interest.
(e) Lessees shall not disproportionately allocate transportation
costs to Federal leases.
[54 FR 1523, Jan. 13, 1989, as amended at 61 FR 5481, Feb. 12, 1996]
Sec. 206.262 Determination of transportation allowances.
(a) Arm's-length contracts. (1) For transportation costs incurred by
a lessee pursuant to an arm's-length contract, the transportation
allowance shall be the reasonable, actual costs incurred by the lessee
for transporting the coal under that contract, subject to monitoring,
review, audit, and possible future adjustment. The lessee shall have the
burden of demonstrating that its contract is arm's-length. The lessee
must claim a transportation allowance by reporting it as a separate line
entry on the Form MMS-2014.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for the
transportation. If the contract reflects more than the total
consideration paid, then the MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(3) If the MMS determines that the consideration paid pursuant to an
arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar-per-unit basis, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract--(1) If a lessee has a non-
arm's-length contract or has no contract, including those situations
where the lessee performs transportation services for itself, the
transportation allowance will be based upon the lessee's reasonable
actual costs. All transportation allowances deducted under a non-arm's-
length or no contract situation are subject to monitoring, review,
audit, and possible future adjustment. The lessee must claim a
transportation allowance by reporting it as a separate line entry on the
Form MMS-2014. When necessary or appropriate, MMS may direct a lessee to
modify its estimated or actual transportation allowance deduction.
(2) The transportation allowance for non-arm's-length or no-contract
situations shall be based upon the lessee's
[[Page 102]]
actual costs for transportation during the reporting period, including
operating and maintenance expenses, overhead, and either depreciation
and a return on undepreciated capital investment in accordance with
paragraph (b)(2)(iv)(A) of this section, or a cost equal to the
depreciable investment in the transportation system multiplied by the
rate of return in accordance with paragraph (b)(2)(iv)(B) of this
section. Allowable capital costs are generally those for depreciable
fixed assets (including costs of delivery and installation of capital
equipment) which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the transportation system is an allowable expense. State
and Federal income taxes and severance taxes and other fees, including
royalties, are not allowable expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or paragraph
(b)(2)(iv)(B) of this section. After a lessee has elected to use either
method for a transportation system, the lessee may not later elect to
change to the other alternative without approval of the MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services,
whichever is appropriate, or a unit of production method. After an
election is made, the lessee may not change methods without MMS
approval. A change in ownership of a transportation system shall not
alter the depreciation schedule established by the original transporter/
lessee for purposes of the allowance calculation. With or without a
change in ownership, a transportation system shall be depreciated only
once. Equipment shall not be depreciated below a reasonable salvage
value.
(B) The MMS shall allow as a cost an amount equal to the allowable
capital investment in the transportation system multiplied by the rate
of return determined pursuant to paragraph (b)(2)(B)(v) of this section.
No allowance shall be provided for depreciation. This alternative shall
apply only to transportation facilities first placed in service or
acquired after March 1, 1989.
(v) The rate of return must be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return must be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month for which the allowance is applicable. The rate must be
redetermined at the beginning of each subsequent calendar year.
(3) A lessee may apply to MMS for exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1) and
(b)(2) of this section. MMS will grant the exception only if the lessee
has a rate for the transportation approved by a Federal agency or by a
State regulatory agency (for Federal leases). MMS shall deny the
exception request if it determines that the rate is excessive as
compared to arm's-length transportation charges by systems, owned by the
lessee or others, providing similar transportation services in that
area. If there are no arm's-length transportation charges, MMS shall
deny the exception request if:
(i) No Federal or State regulatory agency costs analysis exists and
the Federal or State regulatory agency, as applicable, has declined to
investigate under MMS timely objections upon filing; and
(ii) The rate significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements-- (1) Arm's-length contracts. (i) The
lessee must notify MMS of an allowance based on incurred costs by using
a separate line entry on the Form MMS-2014.
[[Page 103]]
(ii) The MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(2) Non-arm's-length or no contract-- (i) The lessee must notify MMS
of an allowance based on the incurred costs by using a separate line
entry on Form MMS-2014.
(ii) For new transportation facilities or arrangements, the lessee's
initial deduction shall include estimates of the allowable coal
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for the
transportation system or, if such data are not available, the lessee
shall use estimates based upon industry data for similar transportation
systems.
(iii) Upon request by MMS, the lessee shall submit all data used to
prepare the allowance deduction. The data shall be provided within a
reasonable period of time, as determined by MMS.
(iv) [Reserved]
(v) If the lessee is authorized to use its Federal- or State-agency-
approved rate as its transportation cost in accordance with paragraph
(b)(3) of this section, it shall follow the reporting requirements of
paragraph (c)(1) of this section.
(d) Interest and assessments. (1) If a lessee nets a transportation
allowance on Form MMS-2014, the lessee shall be assessed an amount of up
to 10 percent of the allowance netted not to exceed $250 per lease
selling arrangement per sales period.
(e) Adjustments. (1) If the actual coal transportation allowance is
less than the amount the lessee has taken on Form MMS-2014 for each
month during the allowance reporting period, the lessee shall pay
additional royalties due plus interest computed under 30 CFR 218.202
from the date when the lessee took the deduction to the date the lessee
repays the difference to MMS. If the actual transportation allowance is
greater than amount the lessee has taken on Form MMS-2014 for each month
during the allowance reporting period, the lessee shall be entitled to a
credit without interest.
(2) [Reserved]
(f) Other transportation cost determinations. The provisions of this
section shall apply to determine transportation costs when establishing
value using a net-back valuation procedure or any other procedure that
requires deduction of transportation costs.
[54 FR 1523, Jan. 13, 1989, as amended at 57 FR 41864, Sept. 14, 1992;
57 FR 52720, Nov. 5, 1992; 61 FR 5481, Feb. 12, 1996]
Sec. 206.263 Contract submission.
(a) The lessee and other payors shall submit to MMS, upon request,
contracts for the sale of coal from ad valorem leases subject to this
subpart. The MMS must receive the contracts within a reasonable period
of time, as specified by MMS. Lessees shall include as part of the
submittal requirements any contracts, agreements, contract amendments,
or other documents that affect the gross proceeds received for the sale
of coal, as well as any other information regarding any consideration
received for the sale or disposition of coal that is not included in
such contracts. At the time of its contract submittals, MMS may require
the lessee to certify in writing that it has provided all documents and
information that reflect the total consideration provided by purchasers
of coal from ad valorem leases subject to this subpart. Information
requested under this section may include contracts for both ad valorem
and cents-per-ton leases and shall be available in the lessee's offices
during normal business hours or provided to MMS at such time and in such
manner as may be requested by authorized Department of the Interior
personnel. Any oral sales arrangement negotiated by the lessee must be
placed in a written form and be retained by the lessee. Nothing in this
section shall be construed to limit the authority of MMS to obtain or
have access to information pursuant to 30 CFR part 212.
(b) Lessees and other payors shall designate, for each contract
submitted pursuant to this section, whether the contract in arm's-length
or non-arm's-length.
(c) A lessee's or other payor's determination that its contract is
arm's-length is subject to future audit to
[[Page 104]]
verify that the contract meets the criteria of the arm's-length contract
definition in Sec. 206.251 of this subpart.
(d) Information required to be submitted under this section that
constitutes trade secrets and commercial and financial information that
is identified as privileged or confidential shall not be available for
public inspection or made public or disclosed without the consent of the
lessee or other payor, except as otherwise provided by law or
regulation.
Sec. 206.264 In-situ and surface gasification and liquefaction operations.
In an ad valorem Federal coal lease is developed by in-situ or
surface gasification or liquefaction technology, the lessee shall
propose the value of coal for royalty purposes to MMS. The MMS will
review the lessee's proposal and issue a value determination. The lessee
may use its proposed value until MMS issues a value determination.
Sec. 206.265 Value enhancement of marketable coal.
If, prior to use, sale, or other disposition, the lessee enhances
the value of coal after the coal has been placed in marketable condition
in accordance with Sec. 206.257(h) of this subpart, the lessee shall
notify MMS that such processing is occurring or will occur. The value of
that production shall be determined as follows:
(a) A value established for the feedstock coal in marketable
condition by application of the provisions of Sec. 206.257(c)(2)(i-iv)
of this subpart; or,
(b) In the event that a value cannot be established in accordance
with subsection (a), then the value of production will be determined in
accordance with Sec. 206.257(c)(2)(v) of this subpart and the value
shall be the lessee's gross proceeds accruing from the disposition of
the enhanced product, reduced by MMS-approved processing costs and
procedures including a rate of return on investment equal to two times
the Standard and Poor's BBB bond rate applicable under
Sec. 206.259(b)(2)(v) of this subpart.
Subpart G--Other Solid Minerals
Sec. 206.301 Value basis for royalty computation.
(a) The gross value for royalty purposes shall be the sale or
contract unit price times the number of units sold, Provided, however,
That where the authorized officer determines:
(1) That a contract of sale or other business arrangement between
the lessee and a purchaser of some or all of the commodities produced
from the lease is not a bona fide transaction between independent
parties because it is based in whole or in part upon considerations
other than the value of the commodities, or
(2) That no bona fide sales price is received for some or all of
such commodities because the lessee is consuming them, the authorized
officer shall determine their gross value, taking into account: (i) All
prices received by the lessee in all bona fide transactions, (ii) Prices
paid for commodities of like quality produced from the same general
area, and (iii) Such other relevant factors as the authorized officer
may deem appropriate; and Provided further, That in a situation where an
estimated value is used, the authorized officer shall require the
payment of such additional royalties, or allow such credits or refunds
as may be necessary to adjust royalty payment to reflect the actual
gross value.
(b) The lessee is required to certify that the values reported for
royalty purposes are bona fide sales not involving considerations other
than the sale of the mineral, and he may be required by the authorized
officer to supply supporting information.
[43 FR 10341, Mar. 13, 1978. Redesignated at 48 FR 36588, Aug. 12, 1983,
and amended at 48 FR 44795, Sept. 30, 1983. Further redesignated at 51
FR 15212, Apr. 22, 1986. Redesignated at 53 FR 39461, Oct. 7, 1988]
Subpart H--Geothermal Resources
Source: 56 FR 57276, Nov. 8, 1991, unless otherwise noted.
[[Page 105]]
Sec. 206.350 Purpose and scope.
(a) This subpart is applicable to all geothermal resources produced
from Federal geothermal leases issued pursuant to the Geothermal Steam
Act of 1970, as amended (30 U.S.C. 1001 et seq.). The purpose of this
subpart is to establish the value of geothermal production for royalty
purposes.
(b) All royalty payments made to MMS are subject to audit and
adjustment.
Sec. 206.351 Definitions.
For purposes of this subpart:
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated persons
with opposing economic interests regarding that contract. For purposes
of this subpart, two persons are affiliated if one person controls, is
controlled by, or is under common control with, another person. For
purposes of this subpart, based on the instruments of ownership of the
voting securities of an entity, or based on other forms of ownership:
(1) Ownership in excess of 50 percent constitutes control;
(2) Ownership of 10 through 50 percent creates a rebuttable
presumption of control; and
(3) Ownership of less than 10 percent creates a presumption of
noncontrol which MMS may rebut if it demonstrates actual or legal
control, including the existence of interlocking directorates.
Notwithstanding any other provisions of this subpart, contracts between
relatives, either by blood or by marriage, are not arm's-length
contracts. The MMS may require the lessee to certify the claimed nature
of ownership control. To be considered arm's-length for any production
month, a contract must meet the requirements of this definition for the
production month as well as when the contract was executed.
Audit means a procedure having the same meaning and effect as that
described at 30 CFR part 217 for verifying royalty payment compliance
activities of lessees or other authorized persons who pay royalties,
rents, or bonuses on Federal geothermal leases.
Byproduct means:
(1) Any mineral or minerals (exclusive of oil, hydrocarbon gas, and
helium) which are found in solution or developed in association with
geothermal fluids and which have a value of less than 75 per centum of
the value of the geothermal energy or are not, because of quantity,
quality, or technical difficulties in extraction and production, of
sufficient value to warrant extraction and production by themselves, and
(2) Commercially demineralized water.
Byproduct recovery facility means the facility or facilities at
which byproducts are placed in marketable condition.
Byproduct transportation allowance means an approved allowance for
the lessee's reasonable, actual costs, excluding gathering, incurred for
moving byproducts, including commercially demineralized water, to a
point of sale or point of delivery off the lease, unit area, or
communitized area.
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Deduction means a subtraction used in the geothermal netback
procedure for determining the value of geothermal resources utilized by
the lessee to generate electricity. Transmission deduction means a
deduction for the lessee's reasonable actual costs incurred to wheel or
transmit the electricity from the lessee's powerplant to the purchaser's
delivery point. Generating deduction means a deduction for the lessee's
reasonable, actual costs of generating plant tailgate electricity.
Delivered electricity means the amount of electricity in
kilowatthours delivered to the purchaser.
Direct utilization means any process other than electrical
generation in which the thermal energy of the geothermal resource is
utilized, including, but not limited to, space heating, greenhouse
operations, and industrial or agricultural process heat.
Field means the land surface vertically projected over a subsurface
geothermal reservoir encompassing at least the outermost boundaries of
all
[[Page 106]]
geothermal accumulations known to be within that reservoir. Geothermal
fields are usually given names and their official boundaries are often
designated by regulatory agencies in the respective States in which the
fields are located.
Gathering means the efficient movement of lease production from the
wellhead to the point of utilization.
Geothermal netback procedure means the method of determining the
value of geothermal resources that are utilized in a lessee-owned
powerplant for the generation and sale of electricity by deducting the
lessee's reasonable, actual transmission and generating costs from the
sales price or value of the electricity to derive the value of the
geothermal resource at the powerplant inlet.
Geothermal resources means:
(1) All products of geothermal processes, including indigenous
steam, hot water, and hot brines;
(2) Steam and other gases, hot water, and hot brines resulting from
water, gas, or other fluids artificially introduced into geothermal
formations;
(3) Heat or other associated energy found in geothermal formations;
and
(4) Any byproducts.
Geothermal utilization facility means a powerplant or direct
utilization facility that utilizes the heat or other energy of the
geothermal resource.
Gross proceeds (for royalty purposes) means the total monies and
other consideration accruing to a geothermal lessee for any disposition
of geothermal resources, including total payments for the sale of
electricity generated by the lessee from lease-produced geothermal
resources. Gross proceeds includes, but is not limited to, payments to
the lessee for certain services such as effluent injection, field
operation and maintenance, drilling or workover of wells, and/or field
gathering to the extent that the lessee is obligated to perform them at
no cost to the Federal Government. Gross proceeds also includes, but is
not limited to, reimbursements for production taxes and other taxes. Tax
reimbursements are part of gross proceeds accruing to a lessee even
though the Federal royalty interest may be exempt from taxation. Monies
and other consideration, including the forms of consideration identified
in this paragraph, to which a lessee is contractually or legally
entitled but which it does not seek to collect through reasonable
efforts are also part of gross proceeds.
Lease means a geothermal lease issued under authority of the
Geothermal Steam Act of 1970, as amended (30 U.S.C. 1001 et seq.),
unless the context indicates otherwise.
Lessee means any person to whom the United States issues a
geothermal lease, and any person who has been assigned an obligation to
make royalty or other payments required by the lease. This includes any
person who has an interest in a geothermal lease as well as an operator
or payor who has no interest in the lease but who has assumed the
royalty payment responsibility. This also includes any affiliate of the
lessee that utilizes the geothermal resource to generate electricity, in
a direct utilization process, or to recover byproducts, or any affiliate
that transports lease production.
Like-quality lease products means lease products that have similar
chemical, physical, and legal characteristics.
Marketable condition means lease products that are sufficiently free
from impurities and otherwise in a condition that they will be accepted
by a purchaser under a sales contract typical for the field.
Minimum royalty means the minimum amount of annual royalty as
specified in the lease or in applicable leasing regulations that the
lessee must pay after commencement of geothermal production in
commercial quantities.
No sales means the utilization or disposal of geothermal resources
without the benefit of a sale.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture (when established as a
separate entity).
Plant tailgate electricity means the amount of electricity in
kilowatthours generated by the powerplant exclusive of plant parasitic
electricity, but inclusive of any electricity generated by the
powerplant and returned to the lease for lease operations. Plant
tailgate electricity should be measured at, or calculated for, the high
voltage side of
[[Page 107]]
the transformer in the plant switchyard.
Point of utilization means the powerplant or direct utilization
facility in which the geothermal resource (steam or hot water) is
utilized.
Reasonable alternative fuel means a conventional fuel (such as coal,
oil, gas, or wood) that would normally be used as a source of heat in
direct utilization operations.
Secretary means the Secretary of the Department of the Interior or
any person duly authorized to exercise the powers vested in that office.
Selling arrangement means the individually contracted arrangements
under which sales or dispositions of geothermal resources are made,
including sales or dispositions of byproducts and electricity sales
where the lessee generates electricity from lease geothermal production.
Spot market price means the price received under any sales
transaction when planned or actual deliveries span a short period of
time, usually not exceeding 1 year.
Wheeling means the transmission of electricity from a powerplant to
the point of delivery.
Sec. 206.352 Valuation standards for electrical generation.
(a) The value of geothermal resources produced from leases subject
to this subpart and used to generate electricity shall be determined
pursuant to this section.
(b)(1)(i) The value of geothermal resources that are sold pursuant
to an arm's-length contract shall be the gross proceeds accruing to the
lessee, except as provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of
this section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value that the lessee reports for royalty
purposes is subject to monitoring, review, and audit.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred, either
directly or indirectly, from the buyer to the seller for the geothermal
resource. If the contract does not reflect the total consideration, MMS
may require that the geothermal resource sold pursuant to that contract
be valued in accordance with paragraph (d) of this section. Value shall
not be less than the gross proceeds accruing to the lessee, including
any additional consideration received.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, MMS shall require the geothermal resource
to be valued pursuant to paragraph (d) of this section, and notification
provided to MMS in accordance with paragraph (e)(3) of this section. If
MMS determines that the value may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written information
justifying the lessee's value.
(2) The MMS may require a lessee to certify that the provisions in
its arm's-length contract include all of the consideration to be paid by
the buyer, either directly or indirectly, for the geothermal resource.
(c)(1) The value of geothermal resources subject to this section
that are sold under a non-arm's-length contract shall be determined in
accordance with the first applicable of the following paragraphs:
(i) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract provided that those gross proceeds
are not less than the gross proceeds derived from or paid under the
lowest-priced available comparable arm's-length contract for sales of
geothermal resources to the lessee-affiliate's same powerplant (the
``minimum value''). If the gross proceeds under the lessee's non-arm's-
length contract are less than the ``minimum value'' under available
comparable arm's-length contracts, or if there are no available
comparable arm's-length contracts, value will be determined by the
weighted average of the gross proceeds established under arm's-length
contracts for the sale of significant quantities of geothermal resources
to
[[Page 108]]
the same powerplant. Available contracts will mean contracts in the
possession of the lessee, the lessee's affiliate, or MMS. In evaluating
the comparability of arm's-length contracts for the purposes of these
regulations, the following factors shall be considered: Time of
execution, duration, terms, quality of the geothermal resource, volume,
dedication to the same powerplant, and other factors that may be
appropriate to reflect the value of the resource;
(ii) The value determined by the geothermal netback procedure. Under
the geothermal netback procedure, the lessee's reasonable actual costs
for the generation and transmission of electricity shall be deducted
from the lessee's gross proceeds received for the sale of electricity to
determine the value of the geothermal resource. Transmission deductions
shall be determined pursuant to Sec. 206.353 of this part. Generating
deductions shall be determined pursuant to Sec. 206.354 of this part; or
(iii) A value determined by any other reasonable valuation method
approved by MMS.
(2) Value determinations made pursuant to this paragraph are subject
to the notification requirements of paragraph (e) of this section.
(d)(1) The value of geothermal resources subject to this section
that are not subject to a sales transaction (``no sales'' geothermal
resources) but are instead utilized directly by the lessee in its own
powerplant for the generation and sale of electricity shall be
determined in accordance with the first applicable of the following
paragraphs:
(i) The weighted average of the gross proceeds established in arm's-
length contracts for the purchase of significant quantities of
geothermal resources to operate the lessee's same powerplant. In
evaluating the acceptability of arm's-length contracts, the following
factors shall be considered: Time of execution, duration, terms, volume,
quality of resource, and such other factors as may be appropriate to
reflect the value of the resource;
(ii) The value determined by the geothermal netback procedure. Under
the geothermal netback procedure, the lessee's reasonable actual costs
for the generation and transmission of electricity shall be deducted
from the lessee's gross proceeds received for the sale of electricity to
determine the value of the geothermal resource. Transmission deductions
shall be determined pursuant to Sec. 206.353 of this part. Generating
deductions shall be determined pursuant to Sec. 206.354 of this part; or
(iii) A value determined by any other reasonable valuation method
approved by MMS.
(2) Value determinations made pursuant to this paragraph are subject
to the notification requirements of paragraph (e) of this section.
(e)(1) Pursuant to subpart H of 30 CFR part 212, the lessee shall
retain all data relevant to the determination of royalty value,
particularly where the value is determined pursuant to paragraph (c) or
(d) of this section. Such data shall be subject to review and audit, and
MMS will direct a lessee to use a different value if it determines that
the reported value is inconsistent with the requirements of these
regulations.
(2) Upon request, lessees shall make available to authorized MMS
representatives or to other authorized persons any and all contracts for
the sale or other disposition of the lease production; contracts for the
sale, generation, and/or transmission of electricity attributable to
lease production; and any arm's-length sales and other data for like-
quality production sold, purchased, or otherwise obtained by the lessee
from the field as may be necessary to support a value determination.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c) or (d) of this section. The notification shall be by
letter to the MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method authorized
by paragraph (c) or (d) of this section.
[[Page 109]]
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR
218.302. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that method in determining value, for royalty purposes, until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. The MMS shall expeditiously determine the
value based upon the lessee's proposal and any additional information
MMS deems necessary. In making a value determination, MMS may use any of
the valuation criteria consistent with this subpart. That determination
shall remain effective for the period stated therein. After MMS issues
its determination, the lessee shall make the adjustments in accordance
with paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production for royalty purposes be less
than the gross proceeds accruing to the lessee where geothermal
resources are directly sold.
(i) The lessee is required to place geothermal resources in
marketable condition and to deliver geothermal resources to the
powerplant at no cost to the Federal lessor. Where the value established
pursuant to this section is determined by a lessee's gross proceeds,
that value shall be increased to the extent that the gross proceeds have
been reduced because the purchaser, or any other person, is providing
certain services the cost of which ordinarily is the responsibility of
the lessee to place the geothermal resource in marketable condition or
deliver it to the powerplant.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to the contract. If the lessee makes timely application for a
price increase or benefit allowed under its contract but the purchaser
refuses and the lessee takes reasonable measures, which are documented,
to force purchaser compliance, the lessee will owe no additional
royalties unless or until monies or consideration resulting from the
price increase or additional benefits are received. This paragraph shall
not be construed to permit a lessee to avoid its royalty payment
obligation in situations where a purchaser fails to pay, in whole or in
part or timely, for a quantity of geothermal resources.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Federal Government
or its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support value
determinations is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt will be maintained in a
confidential manner in accordance with applicable law and regulations.
All requests for information about determinations made under this
subpart are to be submitted in accordance with the Freedom of
Information Act regulations of the Department, 43 CFR part 2.
Sec. 206.353 Determination of transmission deductions.
(a) Where the value of geothermal energy is determined by the
geothermal netback procedure pursuant to paragraphs (c)(1)(ii) and
(d)(1)(ii) of Sec. 206.352 of this subpart, a transmission deduction
shall be subtracted from the lessee's gross proceeds received for the
sale of electricity to determine the plant tailgate value of the
electricity.
[[Page 110]]
The transmission deduction consists of either or both of two components:
(1) Transmission line costs as determined pursuant to paragraph (b)
of this section, and
(2) Wheeling costs if the electricity is transmitted across a third-
party's transmission line under an arm's-length wheeling agreement.
Transmission deductions are subject to the limitation prescribed in
paragraph (c) of this section.
(b)(1) Transmission-line costs shall be based on the lessee's actual
costs associated with the construction and operation of a transmission
line for the purpose of transmitting electricity attributable and
allocable to the lessee's powerplant utilizing Federal geothermal
resources. The monthly transmission line cost component of the
transmission deduction is determined by multiplying the annual
transmission line cost rate (in dollars per kilowatthour) by the amount
of electricity delivered for the reporting month. The transmission line
cost rate shall be redetermined annually at the beginning of the same
month of the year in which the transmission line was placed into
service, the same month of the year in which the powerplant was placed
into service, or, at the lessee's option, at a time concurrent with the
beginning of the lessee's annual corporate accounting period; Provided,
however, the period selected must coincide with the same period chosen
for the generating deduction pursuant to Sec. 206.354(b)(1). After a
deduction period is chosen, the lessee may not later elect to use a
different deduction period without MMS approval.
(2) Allowable transmission-line costs include operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the capital investment
in the transmission line multiplied by a rate of return in accordance
with paragraph (b)(2)(iv)(B) of this section. Allowable capital costs
are generally those costs for depreciable assets, including costs of
delivery and installation of capital equipment, that are an integral
part of the transmission line. A return on capital invested in the
purchase of real estate for transmission facilities may be allowed
provided that the lessee demonstrates the necessity for such purchase,
the purchased land is not on a Federal geothermal lease, and MMS
approves the deduction; the rate of return shall be the same rate
determined in paragraph (b)(2)(v) of this section.
(i) Allowable operating expenses include operations supervision and
engineering, operations labor, materials, ad valorem property taxes,
rent, supplies, and any other directly allocable and attributable
operating expenses that the lessee can document.
(ii) Allowable maintenance expenses include maintenance of the
transmission line, maintenance of equipment, maintenance labor, and
other directly allocable and attributable maintenance expenses that the
lessee can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the transmission line is an allowable expense. State
and Federal income taxes and severance taxes and other fees, including
royalties, are not allowable expenses.
(iv) To compute costs associated with capital investment, a lessee
may use either depreciation with a return on undepreciated capital
investment, or a return on capital investment. After a lessee has
elected to use either method, the lessee may not later elect to change
to the other alternative without MMS approval.
(A) To compute depreciation, the lessee must use a straight-line
depreciation method based on the expected life of the geothermal
project, usually the term of the electricity sales contract or other
depreciation period acceptable to MMS. A change in ownership of a
transmission line shall not alter the depreciation schedule established
by the original lessee-owner for purposes of computing transmission line
costs. With or without a change in ownership, a transmission line shall
be depreciated only once. The rate of return used to compute the return
on undepreciated capital investment shall be determined pursuant to
paragraph (b)(2)(v) of this section.
[[Page 111]]
(B) To compute a return on capital investment, the allowed cost
shall be the amount equal to the allowable capital investment in the
transmission line multiplied by the rate of return determined pursuant
to paragraph (b)(2)(v) of this section. No allowance shall be provided
for depreciation. This alternative shall apply only to transmission
lines first placed into service on or after March 1, 1988.
(v) The rate of return shall be 2 times Standard and Poor's
industrial BBB bond rate. The rate of return shall be 2 times the
monthly average rate as published in Standard and Poor's Bond Guide for
the first month of the annual deduction period and shall be effective
during the following deduction period. The rate shall be redetermined
annually at the beginning of the same month beginning the annual
deduction period chosen pursuant to paragraph (b)(1) of this section.
(3) Transmission-line cost rates, determined annually, are computed
by dividing the sum of the operating, maintenance, overhead, and capital
costs by the annual amount of delivered electricity.
(4) For new transmission lines, the lessee's costs for the first
deduction period shall be based on estimated expenses (including
overhead) for operating and maintaining the transmission line. For
subsequent deduction periods, the transmission line costs shall be
estimated based on the lessee's actual operating and maintenance
expenses for the previous period adjusted for decreases or increases
that the lessee knows will affect the deduction in the current period.
(c) Under no circumstances shall the transmission deduction plus the
generating deduction determined pursuant to Sec. 206.354 of this subpart
reduce the royalty value of the geothermal resource to zero.
(d)(1) If the actual transmission deduction determined at the end of
the annual reporting period is less than the amount the lessee estimated
and used in the netback procedure during the reporting period, the
lessee shall be required to pay additional royalties retroactive to the
first month of the reporting period, plus interest computed pursuant to
30 CFR 218.302. If the actual transmission deduction is greater than the
amount applied in the netback calculation, the lessee shall be entitled
to a credit.
(2) Lessees must submit corrected Forms MMS-2014 to reflect
adjustments to royalty payments in accordance with MMS instructions.
(e)(1) All transmission deductions are subject to review, audit, and
adjustment. When necessary or appropriate, MMS may direct a lessee to
modify its estimated or actual transmission deduction and adjust royalty
values accordingly.
(2) Pursuant to subpart H of 30 CFR part 212, the lessee must
maintain all data and records supporting its transmission deduction,
including wheeling and other transmission-related agreements. These data
and records must be made available to MMS and other authorized personnel
upon request, and shall be maintained in a confidential manner in
accordance with applicable laws and regulations pursuant to Sec. 206.352
of this subpart.
(f) A one-time refund of royalties equal to the royalty amount of
actual dismantlement costs attributable to the transmission line that
are in excess of actual income attributable to the salvage of the
transmission line will be allowed at the completion of the dismantlement
and salvage operations.
Sec. 206.354 Determination of generating deductions.
(a) Where the value of geothermal energy is determined by the
geothermal netback procedure pursuant to paragraphs (c)(1)(ii) and
(d)(1)(ii) of Sec. 206.352 of this subpart, that value shall be
determined by deducting the lessee's reasonable actual costs incurred to
generate electricity from the plant tailgate value of the electricity
(usually the transmission-reduced value of the delivered electricity).
Generating deductions are subject to the limitation prescribed in
paragraph (c) of this section.
(b)(1) Generating costs shall be based on the lessee's actual annual
costs associated with the construction and operation of a geothermal
powerplant. The monthly generating deduction is determined by
multiplying the annual generating cost rate (in dollars per
[[Page 112]]
kilowatthour) by the amount of plant tailgate electricity measured (or
computed) for the reporting month. The generating cost rate is
determined from the annual amount of plant tailgate electricity and must
be redetermined annually at the beginning of the same month of the year
in which the powerplant was placed into service or, at the lessee's
option, at a time concurrent with the beginning of the lessee's annual
corporate accounting period; Provided, however, the period selected must
coincide with the same period chosen for the transmission deduction
pursuant to Sec. 206.353(b)(1). After a deduction period is chosen, the
lessee may not later elect to use a different deduction period without
MMS approval.
(2) Allowable generating costs include operating and maintenance
expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the capital investment
in the powerplant multiplied by a rate of return in accordance with
paragraph (b)(2)(iv)(B) of this section. Allowable capital costs are
generally those costs for depreciable assets, including costs of
delivery and installation of capital equipment, that are an integral
part of the powerplant or are required by the design specifications of
the power conversion cycle. A return on capital invested in the purchase
of real estate for a powerplant site may be allowed provided that the
lessee demonstrates the necessity for such purchase, the purchased land
is not on a Federal geothermal lease, and MMS approves the deduction;
the rate of return shall be the same rate determined in paragraph
(b)(2)(v) of this section. The costs of gathering systems and other
production-related facilities are not allowed.
(i) Allowable operating expenses include operations supervision and
engineering, operations labor, materials, ad valorem property taxes,
rent, supplies, auxiliary fuel and/or utilities used to operate the
powerplant during down time, and any other directly allocable and
attributable operating expense that the lessee can document.
(ii) Allowable maintenance expenses include maintenance of the
powerplant, maintenance of equipment, maintenance labor, and other
directly allocable and attributable maintenance expenses that the lessee
can document.
(iii) Overhead directly attributable and allocable to the operation
and maintenance of the powerplant is an allowable expense. State and
Federal income taxes and severance taxes, including royalties, are not
allowable expenses.
(iv) To compute costs associated with capital investment, a lessee
may use either depreciation with a return on undepreciated capital
investment, or a return on capital investment. After a lessee has
elected to use either method, the lessee may not later elect to change
to the other alternative without MMS approval.
(A) To compute depreciation, the lessee must use a straight-line
depreciation method based on the life of the geothermal project, usually
the term of the electricity sales contract or other depreciation period
acceptable to MMS. A change in ownership of a powerplant shall not alter
the depreciation schedule established by the original lessee-owner for
computing the generating costs. With or without a change in ownership, a
powerplant shall be depreciated only once. The rate of return used to
compute the return on undepreciated capital investment shall be
determined pursuant to paragraph (b)(2)(v) of this section.
(B) To compute a return on capital investment, the allowed cost
shall be the amount equal to the allowable capital investment in the
powerplant multiplied by the rate of return determined pursuant to
paragraph (b)(2)(v) of this section. No allowance shall be provided for
depreciation. This alternative shall apply only to powerplants first
placed into service on or after March 1, 1988.
(v) The rate of return shall be 2 times Standard and Poor's
industrial BBB bond rate. The rate of return shall be 2 times the
monthly average rate as published in Standard and Poor's Bond Guide for
the first month of the annual deduction period and shall be effective
during the following deduction period.
[[Page 113]]
The rate shall be redetermined annually at the beginning of the same
month beginning the annual deduction period chosen pursuant to paragraph
(b)(1) of this section.
(3) Generating cost rates, determined annually, shall be computed by
dividing the sum of the operating, maintenance, overhead, and capital
costs by the annual amount of plant tailgate electricity.
(4) For new powerplants, the lessee's generating costs for the first
deduction period shall be based on estimated expenses (including
overhead) for operating and maintaining the powerplant. For subsequent
deduction periods, the generating costs shall be estimated based on the
lessee's actual operating and maintenance expenses for the previous
period adjusted for decreases or increases that the lessee knows will
affect the deduction in the current period.
(c) Under no circumstances shall the generating deduction plus the
transmission deduction determined pursuant to Sec. 206.353 of this
subpart reduce the royalty value of the geothermal resource to zero.
(d)(1) If the actual generating deduction determined at the end of
the annual reporting period is less than the amount the lessee estimated
and used in the netback procedure during the reporting period, the
lessee shall be required to pay additional royalties retroactive to the
first month of the reporting period, plus interest computed pursuant to
30 CFR 218.302. If the actual generating deduction is greater than the
amount applied in the netback calculation, the lessee shall be entitled
to a credit.
(2) Lessees must submit corrected Forms MMS-2014 to reflect
adjustments to royalty payments in accordance with MMS instructions.
(e)(1) All generating deductions are subject to review, audit, and
adjustment. When necessary or appropriate, MMS may direct a lessee to
modify its estimated or actual generating deduction and adjust royalty
values accordingly.
(2) Pursuant to subpart H of 30 CFR part 212, the lessee must
maintain all data and records supporting its generating deduction. These
data and records must be made available to MMS and other authorized
personnel upon request, and shall be maintained in a confidential manner
in accordance with applicable laws and regulations pursuant to
Sec. 206.352 of this subpart.
(f) A one-time refund of royalties equal to the royalty amount of
actual dismantlement costs attributable to the powerplant that are in
excess of actual income attributable to the salvage of the powerplant
will be allowed at the completion of the dismantlement and salvage
operations.
Sec. 206.355 Valuation standards for direct utilization.
(a) The value of geothermal resources produced for leases subject to
this subpart and used in direct utilization processes shall be
determined pursuant to this section.
(b)(1)(i) The value of geothermal resources that are sold pursuant
to an arm's-length contract shall be the gross proceeds accruing to the
lessee, except as provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of
this section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value that the lessee reports for royalty
purposes is subject to monitoring, review, and audit.
(ii) In conducting these reviews and audits, MMS will examine
whether or not the contract reflects the total consideration actually
transferred either directly or indirectly from the buyer to the seller
for the geothermal resource. If the contract does not reflect the total
consideration, MMS may require that the geothermal resource sold
pursuant to that contract be valued in accordance with paragraph (d) of
this section. Value shall not be less than the gross proceeds accruing
to the lessee, including any additional consideration received.
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the geothermal resource because of misconduct by or
between the contracting parties, or because the lessee otherwise has
breached its duty to the lessor to market the production for the mutual
benefit of the lessee and the
[[Page 114]]
lessor, MMS shall require the geothermal resource to be valued pursuant
to paragraph (d) of this section and in accordance with the notification
requirements of paragraph (e) of this section. When MMS determines that
the value may be unreasonable, MMS will notify the lessee and give the
lessee an opportunity to provide written information justifying the
lessee's value.
(2) The MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the geothermal resource.
(c)(1) The value of geothermal resources subject to this section
that are sold under a non-arm's-length contract shall be determined in
accordance with the first applicable of the following paragraphs:
(i) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract provided that those gross proceeds
are not less than the gross proceeds derived from or paid under the
lowest-priced available comparable arm's-length contract for sales of
geothermal resources to the lessee-affiliate's same direct utilization
facility (the ``minimun value''). If the gross proceeds under the
lessee's non-arm's-length contract are less than the ``minimum value''
under available comparable arm's-length contracts, or if there are no
available comparable arm's-length contracts, value will be determined by
the weighted average of the gross proceeds established under arm's-
length contracts for the sale of significant quantities of geothermal
resources to the same direct utilization facility. Available contracts
will mean contracts in the possession of the lessee, the lessee's
affiliate, or MMS. In evaluating the comparability of arm's-length
contracts for the purposes of these regulations, the following factors
shall be considered: Time of execution, duration, terms, quality of the
geothermal resource, volume, dedication to the same direct utilization
facility, and other factors that may be appropriate to reflect the value
of the resource;
(ii) The equivalent value of the least expensive, reasonable
alternative energy source (fuel). The equivalent value of the least
expensive, reasonable alternative energy source shall be based on the
amount of thermal energy that would otherwise be used by the direct
utilization process in place of the geothermal resource. That amount of
thermal energy (in Btu's) displaced by the geothermal resource shall be
determined by the equation
thermal energy displaced =
[GRAPHIC] [TIFF OMITTED] TC15NO91.017
where hin is the enthalpy in Btu's/lb at the utilization
facility inlet (based on measured inlet temperature), hout is
the enthalpy in Btu's/lb at the facility outlet (based on measured
outlet temperature), density is in lbs/cu ft based on inlet temperature,
the factor 0.133681 (cu ft/gal) converts gallons to cubic feet, and
volume is the quantity of geothermal fluid in gallons produced at the
wellhead or measured at an approved point. The efficiency of the
alternative energy source shall be 0.7 for coal and 0.8 for oil, natural
gas, and other fuels derived from oil and natural gas, or an efficiency
factor proposed by the lessee and approved by MMS. The methods of
measuring resource parameters (temperature, volume, etc.) and the
frequency of computing and accumulating the amount of thermal energy
displaced shall be determined and approved by BLM; or
(iii) A value determined by any other reasonable valuation method
approved by MMS.
(2) Valuations made pursuant to this paragraph are subject to the
notification requirements of paragraph (e) of this section.
(d)(1) The value of geothermal resources subject to this section
that are not subject to a sales transaction but are instead used by the
lessee in its own direct utilization facility (``no sales'' geothermal
resources) shall be determined in accordance with the first applicable
of the following paragraphs:
(i) The weighted average of the gross proceeds established in arm's-
length contracts for the purchase of significant quantities of
geothermal resources to operate the lessee's same direct utilization
facility. In evaluating
[[Page 115]]
the acceptability of arm's-length contracts, the following factors shall
be considered: Time of execution, duration, terms, volume, quality of
resource, and such other factors as may be appropriate to reflect the
value of the resource;
(ii) The equivalent value of the least expensive, reasonable
alternative energy source (fuel). The equivalent value of the least
expensive, reasonable alternative energy source shall be based on the
amount of thermal energy that would otherwise be used by the direct
utilization process in place of the geothermal resource. That amount of
thermal energy (in Btu's) displaced by the geothermal resource shall be
determined by the equation
thermal energy displaced =
[GRAPHIC] [TIFF OMITTED] TC15NO91.018
where hin is the enthalpy in Btu's/lb at the utilization
facility inlet (based on measured inlet temperature), hout is
the enthalpy in Btu's/lb at the facility outlet (based on measured
outlet temperature), density is in lbs/cu ft based on inlet temperature,
the factor 0.133681 (cu ft/gal) converts gallons to cubic feet, and
volume is the quantity of geothermal fluid in gallons produced at the
wellhead or measured at an approved point. The efficiency of the
alternative energy source shall be 0.7 for coal and 0.8 for oil, natural
gas, and other fuels derived from oil and natural gas, or an efficiency
factor proposed by the lessee and approved by MMS. The methods of
measuring resource parameters (temperature, volume, etc.) and the
frequency of computing and accumulating the amount of thermal energy
displaced shall be determined and approved by BLM; or
(iii) A value determined by any other reasonable valuation method
approved by MMS.
(2) Valuations made pursuant to this paragraph are subject to the
notification requirements of paragraph (e) of this section.
(e)(1) Pursuant to subpart H of 30 CFR part 212, the lessee shall
retain all data relevant to the determination of royalty value,
particularly where the value is determined pursuant to paragraph (c) or
(d) of this section. Such data shall be subject to review and audit, and
MMS will direct a lessee to use a different value if it determines that
the reported value is inconsistent with the requirements of these
regulations.
(2) Upon request, lessees shall make available to authorized MMS
representatives or to other authorized persons any and all contracts for
the sale or other disposition of the lease production, and any arm's-
length sales and other data for like-quality production sold, purchased,
or otherwise obtained by the lessee from the field as may be necessary
to support a value determination.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c) or (d) of this section. The notification shall be by
letter to the MMS Associate Director for Royalty Management or his/her
designee. The letter shall identify the valuation method to be used and
contain a brief description of the procedure to be followed. The
notification required by this paragraph is a one-time notification due
no later than the end of the month following the month the lessee first
reports royalties on a Form MMS-2014 using a valuation method authorized
by paragraph (c) or (d) of this section.
(f) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR
218.302. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(g) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that method in determining value, for royalty purposes, until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. The MMS shall expeditiously determine the
value based upon the lessee's proposal and any additional information
MMS deems necessary. In making a value determination, MMS may use
[[Page 116]]
any of the valuation criteria consistent with this subpart. That
determination shall remain effective for the period stated therein.
After MMS issues its determination, the lessee shall make adjustments in
accordance with paragraph (f) of this section.
(h) Notwithstanding any other provision of this section, under no
circumstances shall the value of production, for royalty purposes, be
less than the gross proceeds accruing to the lessee where geothermal
energy is directly sold.
(i) The lessee is required to place geothermal resources in
marketable condition and to deliver geothermal resources to the direct
utilization facility at no cost to the Federal lessor. Where the value
established pursuant to this section is determined by a lessee's gross
proceeds, that value shall be increased to the extent that the gross
proceeds have been reduced because the purchaser, or any other person,
is providing certain services the cost of which ordinarily is the
responsibility of the lessee to place the geothermal resource in
marketable condition or to deliver it to the direct utilization
facility.
(j) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to the contract. If the lessee makes timely application for a
price increase or benefit allowed under its contract but the purchaser
refuses and the lessee takes reasonable measures, which are documented,
to force purchaser compliance, the lessee shall owe no additional
royalties unless or until monies or consideration resulting from the
price increase or additional benefits are received. This paragraph shall
not be construed to permit a lessee to avoid its royalty payment
obligation in situations where a purchaser fails to pay, in whole or in
part or timely, for a quantity of geothermal resources.
(k) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding against the Federal Government or
its beneficiaries until the audit period is formally closed.
(l) Certain information submitted to MMS to support value
determinations is exempted from disclosure by the Freedom of Information
Act, 5 U.S.C. 552, or other Federal law. Any data specified by law to be
privileged, confidential, or otherwise exempt will be maintained in a
confidential manner in accordance with applicable laws and regulations.
All requests for information about determinations made under this
subpart are to be submitted in accordance with the Freedom of
Information Act regulation of the Department, 43 CFR part 2.
[56 FR 57276, Nov. 8, 1991; 57 FR 12376, Apr. 9, 1992]
Sec. 206.356 Valuation standards for byproducts.
(a) The value of geothermal byproducts, including commercially
demineralized water, shall be determined pursuant to this section, less
applicable byproducts transportation allowances determined pursuant to
Secs. 206.357 and 206.358 of this subpart.
(b)(1)(i) The value of byproducts that are sold pursuant to an
arm's-length contract shall be the gross proceeds accruing to the
lessee, except as provided in paragraphs (b)(1)(ii) and (b)(1)(iii) of
this section. The lessee shall have the burden of demonstrating that its
contract is arm's-length. The value that the lessee reports for royalty
purposes is subject to monitoring, review, and audit.
(ii) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred, either
directly or indirectly, from the buyer to the seller for the byproducts.
If the contract does not reflect the total consideration, MMS may
require that the byproducts sold pursuant to that contract be valued in
accordance with paragraph (c) of this section. Value may not be less
than the gross proceeds accruing to the
[[Page 117]]
lessee, including any additional consideration received .
(iii) If MMS determines that the gross proceeds accruing to the
lessee pursuant to an arm's-length contract do not reflect the
reasonable value of the production because of misconduct by or between
the contracting parties, or because the lessee otherwise has breached
its duty to the lessor to market the production for the mutual benefit
of the lessee and the lessor, MMS shall require that the byproduct
production be valued pursuant to paragraph (c) of this section and in
accordance with the notification requirements of paragraph (d) of this
section. If MMS determines that the value may be unreasonable, MMS will
notify the lessee and give the lessee an opportunity to provide written
information justifying the lessee's reported byproduct value.
(2) The MMS may require a lessee to certify that the provisions in
its arm's-length contract include all of the consideration to be paid by
the buyer, either directly or indirectly, for the byproduct.
(c) The value of byproducts that are sold pursuant to a non-arm's-
length contract or that are utilized by the lessee (no sales), except
demineralized water used for the benefit of the lease pursuant to
paragraph (b)(2) of Sec. 202.351 of this subpart, shall be determined in
accordance with the first applicable of the following paragraphs:
(1) The gross proceeds accruing to the lessee pursuant to a sale
under its non arm's-length contract (or other disposition by other than
an arm's-length contract), provided that those gross proceeds are not
less than the gross proceeds derived from or paid under the lowest-
priced available comparable arm's-length contract for sales, purchases,
or other dispositions of like-quality byproducts in the field or, if
necessary to obtain a representative sample, from the same area (the
``minimum value''). If the gross proceeds under the lessee's non-arm's-
length contract are less than the ``minimum value'' under available
comparable arms length contracts, or if there are no available
comparable arm's-length contracts, value will be determined by the
weighted average of the gross proceeds established under arm's-length
contracts for the sale of like-quality products in the field or, if
necessary to obtain a representative sample, from the same area.
Available contracts will mean contracts in the possession of the lessee,
the lessee's affiliate, or MMS. In evaluating the comparability of
arm's-length contracts for the purposes of these regulations, the
following factors shall be considered: Field or area, price, time of
execution, duration, terms, quality of the byproduct, volume, market or
markets served, and other factors that may be appropriate to reflect the
value of the byproduct;
(2) Other relevant matters including, but not limited to, published
or publicly available spot-market prices, or information submitted by
the lessee concerning circumstances unique to a particular lease
operation or the saleability of certain byproducts; or
(3) A netback method or any other reasonable method used to
determine value.
(d)(1) Pursuant to subpart H of 30 CFR part 212, the lessee shall
retain all data relevant to the determination of royalty value,
particularly where the value is determined pursuant to paragraph (c) of
this section. Such data shall be subject to review and audit, and MMS
will direct a lessee to use a different value if it determines that the
reported value is inconsistent with the requirements of these
regulations.
(2) Upon request, lessees shall make available to authorized MMS
representatives or to other authorized persons any and all contracts
and/or invoices for the sale or other disposition of the byproducts, and
any arm's-length sales and other data for like-quality production sold,
purchased, or otherwise obtained by the lessee from the field or other
area as may be necessary to support a value determination.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraph (c) of this section. The notification shall be by letter to
the MMS Associate Director for Royalty Management or his/her designee.
The letter shall identify the valuation method to be used and contain a
brief description of the procedure to be followed. The notification
required by this paragraph is
[[Page 118]]
a one-time notification due no later than the end of the month following
the month the lessee first reports royalties on a Form MMS-2014 using a
valuation method authorized by paragraph (c) of this section, and each
time there is a change in a method under paragraph (c) of this section.
(e) If MMS determines that a lessee has not properly determined
value, the lessee shall pay the difference, if any, between royalty
payments made based upon the value it has used and the royalty payments
that are due based upon the value established by MMS. The lessee shall
also pay interest on that difference computed pursuant to 30 CFR
218.302. If the lessee is entitled to a credit, MMS will provide
instructions for the taking of that credit.
(f) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method and
may use that method in determining value, for royalty purposes, until
MMS issues its decision. The lessee shall submit all available data
relevant to its proposal. The MMS shall expeditiously determine the
value based upon the lessee's proposal and any additional information
MMS deems necessary. In making a value determination, MMS may use any of
the valuation criteria consistent with this subpart. That determination
shall remain effective for the period stated therein. After MMS issues
its determination, the lessee shall make the adjustments in accordance
with paragraph (e) of this section.
(g) Notwithstanding any other provisions of the section, under no
circumstances shall the value of byproducts for royalty purposes be less
than the gross proceeds accruing to the lessee, less applicable
byproduct transportation allowances determined pursuant to Secs. 206.357
and 206.358 of this subpart.
(h) The lessee is required to place the byproducts in marketable
condition at no cost to the Federal Government. Where the value
established pursuant to this section is determined by a lessee's gross
proceeds, that value shall be increased to the extent that the gross
proceeds have been reduced because the purchaser, or any other person,
is providing certain services the cost of which ordinarily is the
responsibility of the lessee to place the byproducts in marketable
condition.
(i) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to the contract, and may be retroactively applied to value
byproducts, for royalty purposes, for a period not to exceed 2 years,
unless MMS approves a longer period. If the lessee makes timely
application for a price increase allowed under its contract but the
purchaser refuses and the lessee takes reasonable measures, which are
documented, to force purchaser compliance, the lessee will owe no
additional royalties unless or until monies or consideration resulting
from the price increase are received. This paragraph shall not be
construed to permit a lessee to avoid its royalty payment obligation in
situations where a purchaser fails to pay, in whole or in part or
timely, for a quantity of byproducts.
(j) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding against the Federal Government or
its beneficiaries until the audit period is formally closed.
(k) Certain information submitted to MMS to support valuation
proposals, including byproduct transportation allowances pursuant to
Secs. 206.357 and 206.358 of this subpart, is exempted from disclosure
by the Freedom of Information Act, 5 U.S.C. 552. Any data specified by
the act to be privileged, confidential, or otherwise exempt shall be
maintained in a confidential manner in accordance with applicable laws
and regulations. All requests for information about determinations made
under this subpart are to be submitted in accordance with the Freedom of
Information Act regulation of the Department, 43 CFR part 2.
[[Page 119]]
Sec. 206.357 Byproduct transportation allowances--general.
(a) Where the value of byproducts has been determined at a point off
the geothermal lease, unit, or participating area, MMS shall allow a
deduction in determining value, for royalty purposes, for the lessee's
reasonable, actual costs incurred to:
(1) Transport the byproducts from a Federal lease, unit, or
participating area to a sales point or point of delivery that is off the
lease, unit, or participating area; or
(2) Transport the byproducts from a Federal lease, unit, or
participating area, or from a geothermal utilization facility to a
byproduct recovery facility when that byproduct recovery facility is off
the lease, unit, or participating area and, if applicable, from the
recovery facility to a sales point or point of delivery off the lease,
unit, or participating area. Costs for transporting geothermal fluids
from the lease to the geothermal utilization facility, whether on or off
the lease, shall not be included in the transportation allowance.
(b) Under no circumstances shall the byproduct transportation
allowance authorized by paragraph (a) of this section reduce the value
of the byproducts under any selling arrangement to zero.
(c)(1) When byproducts are transported from a lease, unit,
participating area, or geothermal utilization facility to a byproduct
recovery facility, the lessee is not required to allocate transportation
costs between the quantity of marketable byproducts and the rejected
waste material. The byproduct transportation allowance shall be
authorized for the total production that is transported. Byproduct
transportation allowances shall be expressed as a cost per unit of
marketable byproducts transported.
(2) For byproducts that are extracted on the lease, unit, or
participating area, or at the geothermal utilization facility, the
byproduct transportation allowance shall be authorized for the total
production that is transported to a point of sale off the lease, unit,
or participating area. Byproduct transportation allowances shall be
expressed as a cost per unit of byproduct transported.
(3) Transportation costs shall be authorized as allowances only when
the transported byproduct is sold, delivered, or otherwise utilized by
the lessee and royalties are reported and paid.
(d) Byproduct transportation allowances are subject to monitoring,
review, and audit. If, after a review and/or audit, MMS determines that
a lessee has improperly determined a byproduct transportation allowance
authorized by this section, then the lessee shall pay any additional
royalties plus interest determined in accordance with 30 CFR 218.302, or
shall be entitled to a credit without interest.
(e) If byproducts produced from Federal and non-Federal leases are
commingled for transportation, lessees shall not disproportionately
allocate transportation costs to Federal lease production.
(f) Upon request, the lessee shall make available to authorized MMS
representatives or to other authorized persons all transportation
contracts and all other information as may be necessary to support a
byproduct transportation allowance.
(g) Byproduct transportation allowances are to be reported as
separate lines on Form MMS-2014.
Sec. 206.358 Determination of byproduct transportation allowances.
(a) Arm's-length contracts. (1) For transportation costs incurred by
a lessee pursuant to an arm's-length contract, the transportation
allowance shall be the reasonable, actual costs incurred by the lessee
for transporting the byproducts under that contract, subject to
monitoring, review, audit, and possible future adjustments. The MMS's
prior approval is not required before a lessee may deduct costs incurred
under an arm's-length transportation contract.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for the
transportation. If the contract reflects more than the
[[Page 120]]
total consideration paid, MMS may require that the byproduct
transportation allowance be determined in accordance with paragraph (b)
of this section.
(3) If MMS determines that the consideration paid pursuant to an
arm's-length byproduct transportation contract does not reflect the
reasonable value of the transportation because of misconduct by or
between the contracting parties, or because the lessee otherwise has
breached its duty to the lessor to market the production for the mutual
benefit of the lessee and the lessor, MMS shall require that the
byproduct transportation allowance be determined in accordance with
paragraph (b) of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not established on a dollars-per-unit basis, the
lessee shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length transportation contract or has no contract, including those
situations where the lessee performs transportation services for itself,
the byproduct transportation allowance shall be based upon the lessee's
reasonable actual costs. All byproduct transportation allowances
deducted under a non-arm's-length or no-contract situation are subject
to monitoring, review, audit, and possible future adjustment. Prior MMS
approval of byproduct transportation allowances is not required for non-
arm's-length or no-contract situations.
(2) The byproduct transportation allowance for non-arm's-length or
no-contract situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the capital investment
in the transportation system multiplied by the rate of return in
accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable assets, including
costs of delivery and installation of capital equipment, that are an
integral part of the transportation system. A return on capital invested
in the purchase of real estate to locate the byproduct transportation
facilities may be allowed provided that the lessee demonstrates the
necessity for such purchase, the purchased land is not on a Federal
geothermal lease, and MMS approves the deduction; the rate of return
shall be the same rate determined in paragraph (b)(2)(v) of this
section.
(i) Allowable operating expenses include operations supervision and
engineering, operations labor, fuel, utilities, materials, ad valorem
property taxes, rent, supplies, and any other allocable and attributable
operating expenses that the lessee can document.
(ii) Allowable maintenance expenses include maintenance of the
transportation system, maintenance of equipment, maintenance labor, and
other directly allocable and attributable maintenance expenses that the
lessee can document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the transportation system is an allowable expense. State
and Federal income taxes and severance taxes and other fees, including
royalties, are not allowable expenses.
(iv) To compute costs associated with capital investment, a lessee
may use either paragraph (b)(2)(iv)(A) or (b)(2)(iv)(B) of this section.
After a lessee has elected to use either method for a transportation
system, the lessee may not later elect to change to the other
alternative without MMS approval.
(A) To compute depreciation, the lessee must use a straight-line
depreciation method based on, as appropriate, either the life of
equipment or the life of the geothermal project that the transportation
system services. After an election is made, the lessee may not change
methods. A change in ownership of a transportation system shall
[[Page 121]]
not alter the depreciation schedule established by the original
transporter/lessee for purposes of the allowance calculation. With or
without a change in ownership, a transportation system shall be
depreciated only once. Equipment shall not be depreciated below a
reasonable salvage value. The rate of return used to compute the return
on undepreciated capital investment shall be determined pursuant to
paragraph (b)(2)(v) of this section.
(B) To compute a return on capital investment, the allowed cost
shall be the amount equal to the allowable capital investment in the
transportation system multiplied by the rate of return determined
pursuant to paragraph (b)(2)(v) of this section. No allowance shall be
provided for depreciation.
(v) The rate of return shall be Standard and Poor's industrial BBB
bond rate. The rate of return shall be the monthly average rate as
published in Standard and Poor's Bond Guide for the first month of the
annual reporting period for which the allowance is applicable and shall
be effective during the reporting period. The rate shall be redetermined
at the beginning of each subsequent transportation allowance reporting
period.
Subpart I--OCS Sulfur [Reserved]
Subpart J--Indian Coal
Source: 61 FR 5481, Feb. 12, 1996, unless otherwise noted.
Sec. 206.450 Purpose and scope.
(a) This subpart prescribes the procedures to establish the value,
for royalty purposes, of all coal from Indian Tribal and allotted leases
(except leases on the Osage Indian Reservation, Osage County, Oklahoma).
(b) If the specific provisions of any statute, treaty, or settlement
agreement between the Indian lessor and a lessee resulting from
administrative or judicial litigation, or any coal lease subject to the
requirements of this subpart, are inconsistent with any regulation in
this subpart, then the statute, treaty, lease provision, or settlement
shall govern to the extent of that inconsistency.
(c) All royalty payments are subject to later audit and adjustment.
(d) The regulations in this subpart are intended to ensure that the
trust responsibilities of the United States with respect to the
administration of Indian coal leases are discharged in accordance with
the requirements of the governing mineral leasing laws, treaties, and
lease terms.
Sec. 206.451 Definitions.
Ad valorem lease means a lease where the royalty due to the lessor
is based upon a percentage of the amount or value of the coal.
Allowance means an approved, or an MMS-initially accepted deduction
in determining value for royalty purposes. Coal washing allowance means
an allowance for the reasonable, actual costs incurred by the lessee for
coal washing, or an approved or MMS-initially accepted deduction for the
costs of washing coal, determined pursuant to this subpart.
Transportation allowance means an allowance for the reasonable, actual
costs incurred by the lessee for moving coal to a point of sale or point
of delivery remote from both the lease and mine or wash plant, or an
approved MMS-initially accepted deduction for costs of such
transportation, determined pursuant to this subpart.
Area means a geographic region in which coal has similar quality and
economic characteristics. Area boundaries are not officially designated
and the areas are not necessarily named.
Arm's-length contract means a contract or agreement that has been
arrived at in the marketplace between independent, nonaffiliated persons
with opposing economic interests regarding that contract. For purposes
of this subpart, two persons are affiliated if one person controls, is
controlled by, or is under common control with another person. For
purposes of this subpart, based on the instruments of ownership of the
voting securities of an entity, or based on other forms of ownership:
ownership in excess of 50 percent constitutes control; ownership of 10
through 50 percent creates a presumption of control; and ownership of
less than 10 percent creates a presumption of noncontrol which MMS may
rebut if
[[Page 122]]
it demonstrates actual or legal control, including the existence of
interlocking directorates. Notwithstanding any other provisions of this
subpart, contracts between relatives, either by blood or by marriage,
are not arm's-length contracts. MMS may require the lessee to certify
ownership control. To be considered arm's-length for any production
month, a contract must meet the requirements of this definition for that
production month, as well as when the contract was executed.
Audit means a review, conducted in accordance with generally
accepted accounting and auditing standards, of royalty payment
compliance activities of lessees or other interest holders who pay
royalties, rents, or bonuses on Indian leases.
BIA means the Bureau of Indian Affairs of the Department of the
Interior.
BLM means the Bureau of Land Management of the Department of the
Interior.
Coal means coal of all ranks from lignite through anthracite.
Coal washing means any treatment to remove impurities from coal.
Coal washing may include, but is not limited to, operations such as
flotation, air, water, or heavy media separation; drying; and related
handling (or combination thereof).
Contract means any oral or written agreement, including amendments
or revisions thereto, between two or more persons and enforceable by law
that with due consideration creates an obligation.
Gross proceeds (for royalty payment purposes) means the total monies
and other consideration accruing to a coal lessee for the production and
disposition of the coal produced. Gross proceeds includes, but is not
limited to, payments to the lessee for certain services such as
crushing, sizing, screening, storing, mixing, loading, treatment with
substances including chemicals or oils, and other preparation of the
coal to the extent that the lessee is obligated to perform them at no
cost to the Indian lessor. Gross proceeds, as applied to coal, also
includes but is not limited to reimbursements for royalties, taxes or
fees, and other reimbursements. Tax reimbursements are part of the gross
proceeds accruing to a lessee even though the Indian royalty interest
may be exempt from taxation. Monies and other consideration, including
the forms of consideration identified in this paragraph, to which a
lessee is contractually or legally entitled but which it does not seek
to collect through reasonable efforts are also part of gross proceeds.
Indian allottee means any Indian for whom land or an interest in
land is held in trust by the United States or who holds title subject to
Federal restriction against alienation.
Indian Tribe means any Indian Tribe, band, nation, pueblo,
community, rancheria, colony, or other group of Indians for which any
land or interest in land is held in trust by the United States or which
is subject to Federal restriction against alienation.
Lease means any contract, profit-share arrangement, joint venture,
or other agreement issued or approved by the United States for an Indian
coal resource under a mineral leasing law that authorizes exploration
for, development or extraction of, or removal of coal--or the land
covered by that authorization, whichever is required by the context.
Lessee means any person to whom the Indian Tribe or an Indian
allottee issues a lease, and any person who has been assigned an
obligation to make royalty or other payments required by the lease. This
includes any person who has an interest in a lease as well as an
operator or payor who has no interest in the lease but who has assumed
the royalty payment responsibility.
Like-quality coal means coal has similar chemical and physical
characteristics.
Marketable condition means coal that is sufficiently free from
impurities and otherwise in a condition that it will be accepted by a
purchaser under a sales contract typical for that area.
Mine means an underground or surface excavation or series of
excavations and the surface or underground support facilities that
contribute directly or indirectly to mining, production, preparation,
and handling of lease products.
MMS means the Minerals Management Service of the Department of the
Interior.
[[Page 123]]
Net-back method means a method for calculating market value of coal
at the lease or mine. Under this method, costs of transportation,
washing, handling, etc., are deducted from the ultimate proceeds
received for the coal at the first point at which reasonable values for
the coal may be determined by a sale pursuant to an arm's-length
contract or by comparison to other sales of coal, to ascertain value at
the mine.
Net output means the quantity of washed coal that a washing plant
produces.
Person means by individual, firm, corporation, association,
partnership, consortium, or joint venture.
Selling arrangement means the individual contractual arrangements
under which sales or dispositions of coal are made to a purchaser.
Spot market price means the price received under any sales
transaction when planned or actual deliveries span a short period of
time, usually not exceeding one year.
Sec. 206.452 Coal subject to royalties--general provisions.
(a) All coal (except coal unavoidably lost as determined by BLM
pursuant to 43 CFR group 3400) from an Indian lease subject to this part
is subject to royalty. This includes coal used, sold, or otherwise
disposed of by the lessee on or off the lease.
(b) If a lessee receives compensation for unavoidably lost coal
through insurance coverage or other arrangements, royalties at the rate
specified in the lease are to be paid on the amount of compensation
received for the coal. No royalty is due on insurance compensation
received by the lessee for other losses.
(c) If waste piles or slurry ponds are reworked to recover coal, the
lessee shall pay royalty at the rate specified in the lease at the time
the recovered coal is used, sold, or otherwise finally disposed of. The
royalty rate shall be that rate applicable to the production method used
to initially mine coal in the waste pile or slurry pond; i.e.,
underground mining method or surface mining method. Coal in waste pits
or slurry ponds initially mined from Indian leases shall be allocated to
such leases regardless of whether it is stored on Indian lands. The
lessee shall maintain accurate records to determine to which individual
Indian lease coal in the waste pit or slurry pond should be allocated.
However, nothing in this section requires payment of a royalty on coal
for which a royalty has already been paid.
Sec. 206.453 Quality and quantity measurement standards for reporting and paying royalties.
(a) For leases subject to Sec. 206.456 of this subpart, the quality
of coal on which royalty is due shall be reported on the basis of
percent sulfur, percent ash, and number of British thermal units (Btu)
per pound of coal. Coal quality determinations shall be made at
intervals prescribed in the lessee's sales contract. If there is no
contract, or if the contract does not specify the intervals of coal
quality determination, the lessee shall propose a quality test schedule
to MMS. In no case, however, shall quality tests be performed less than
quarterly using standard industry-recognized testing methods. Coal
quality information shall be reported on the appropriate forms required
under 30 CFR part 216.
(b) For all leases subject to this subpart, the quantity of coal on
which royalty is due shall be measured in short tons (of 2,000 pounds
each) by methods prescribed by the BLM. Coal quantity information shall
be reported on appropriate forms required under 30 CFR part 216 and on
the Report of Sales and Royalty Remittance, Form MMS-2014, as required
under 30 CFR part 210.
Sec. 206.454 Point of royalty determination.
(a) For all leases subject to this subpart, royalty shall be
computed on the basis of the quantity and quality of Indian coal in
marketable condition measured at the point of royalty measurement as
determined jointly by BLM and MMS.
(b) Coal produced and added to stockpiles or inventory does not
require payment of royalty until such coal is later used, sold, or
otherwise finally disposed of. MMS may ask BLM or BIA to increase the
lease bond to protect the lessor's interest when BLM determines
[[Page 124]]
that stockpiles or inventory become excessive so as to increase the risk
of degradation of the resource.
(c) The lessee shall pay royalty at a rate specified in the lease at
the time the coal is used, sold, or otherwise finally disposed of,
unless otherwise provided for at Sec. 206.455(d) of this subpart.
Sec. 206.455 Valuation standards for cents-per-ton leases.
(a) This section is applicable to coal leases on Indian Tribal and
allotted Indian lands (except leases on the Osage Indian Reservation,
Osage County, Oklahoma) which provide for the determination of royalty
on a cents-per-ton (or other quantity) basis.
(b) The royalty for coal from leases subject to this section shall
be based on the dollar rate per ton prescribed in the lease. That dollar
rate shall be applicable to the actual quantity of coal used, sold, or
otherwise finally disposed of, including coal which is avoidably lost as
determined by BLM pursuant to 43 CFR part 3400.
(c) For leases subject to this section, there shall be no allowances
for transportation, removal of impurities, coal washing, or any other
processing or preparation of the coal.
(d) When a coal lease is readjusted pursuant to 43 CFR part 3400 and
the royalty valuation method changes from a cents-per-ton basis to an ad
valorem basis, coal which is produced prior to the effective date of
readjustment and sold or used within 30 days of the effective date of
readjustment shall be valued pursuant to this section. All coal that is
not used, sold, or otherwise finally disposed of within 30 days after
the effective date of readjustment shall be valued pursuant to the
provisions of Sec. 206.456 of this subpart, and royalties shall be paid
at the royalty rate specified in the readjusted lease.
Sec. 206.456 Valuation standards for ad valorem leases.
(a) This section is applicable to coal leases on Indian Tribal and
allotted Indian lands (except leases on the Osage Indian Reservation,
Osage County, Oklahoma) which provide for the determination of royalty
as a percentage of the amount of value of coal (ad valorem). The value
for royalty purposes of coal from such leases shall be the value of coal
determined pursuant to this section, less applicable coal washing
allowances and transportation allowances determined pursuant to
Secs. 206.457 through 206.461 of this subpart, or any allowance
authorized by Sec. 206.464 of this subpart. The royalty due shall be
equal to the value for royalty purposes multiplied by the royalty rate
in the lease.
(b)(1) The value of coal that is sold pursuant to an arm's-length
contract shall be the gross proceeds accruing to the lessee, except as
provided in paragraphs (b)(2), (b)(3), and (b)(5) of this section. The
lessee shall have the burden of demonstrating that its contract is
arm's-length. The value which the lessee reports, for royalty purposes,
is subject to monitoring, review, and audit.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects the total consideration actually transferred either
directly or indirectly from the buyer to the seller for the coal
produced. If the contract does not reflect the total consideration, then
MMS may require that the coal sold pursuant to that contract be valued
in accordance with paragraph (c) of this section. Value may not be based
on less than the gross proceeds accruing to the lessee for the coal
production, including the additional consideration.
(3) If MMS determines that the gross proceeds accruing to the lessee
pursuant to an arm's-length contract do not reflect the reasonable value
of the production because of misconduct by or between the contracting
parties, or because the lessee otherwise has breached its duty to the
lessor to market the production for the mutual benefit of the lessee and
the lessor, then MMS shall require that the coal production be valued
pursuant to paragraphs (c)(2)(ii), (c)(2)(iii), (c)(2)(iv), or (c)(2)(v)
of this section, and in accordance with the notification requirements of
paragraph (d)(3) of this section. When MMS determines that the value may
be unreasonable, MMS will notify the lessee and give the lessee an
opportunity to provide written information justifying the lessee's
reported coal value.
[[Page 125]]
(4) MMS may require a lessee to certify that its arm's-length
contract provisions include all of the consideration to be paid by the
buyer, either directly or indirectly, for the coal production.
(5) The value of production for royalty purposes shall not include
payments received by the lessee pursuant to a contract which the lessee
demonstrates, to MMS' satisfaction, were not part of the total
consideration paid for the purchase of coal production.
(c)(1) The value of coal from leases subject to this section and
which is not sold pursuant to an arm's-length contract shall be
determined in accordance with this section.
(2) If the value of the coal cannot be determined pursuant to
paragraph (b) of this section, then the value shall be determined
through application of other valuation criteria. The criteria shall be
considered in the following order, and the value shall be based upon the
first applicable criterion:
(i) The gross proceeds accruing to the lessee pursuant to a sale
under its non-arm's-length contract (or other disposition of produced
coal by other than an arm's-length contract), provided that those gross
proceeds are within the range of the gross proceeds derived from, or
paid under, comparable arm's-length contracts between buyers and sellers
neither of whom is affiliated with the lessee for sales, purchases, or
other dispositions of like-quality coal produced in the area. In
evaluating the comparability of arm's-length contracts for the purposes
of these regulations, the following factors shall be considered: price,
time of execution, duration, market or markets served, terms, quality of
coal, quantity, and such other factors as may be appropriate to reflect
the value of the coal;
(ii) Prices reported for that coal to a public utility commission;
(iii) Prices reported for that coal to the Energy Information
Administration of the Department of Energy;
(iv) Other relevant matters including, but not limited to, published
or publicly available spot market prices, or information submitted by
the lessee concerning circumstances unique to a particular lease
operation or the salability of certain types of coal;
(v) If a reasonable value cannot be determined using paragraphs
(c)(2)(i), (c)(2)(ii), (c)(2)(iii), or (c)(2)(iv) of this section, then
a net-back method or any other reasonable method shall be used to
determine value.
(3) When the value of coal is determined pursuant to paragraph
(c)(2) of this section, that value determination shall be consistent
with the provisions contained in paragraph (b)(5) of this section.
(d)(1) Where the value is determined pursuant to paragraph (c) of
this section, that value does not require MMS' prior approval. However,
the lessee shall retain all data relevant to the determination of
royalty value. Such data shall be subject to review and audit, and MMS
will direct a lessee to use a different value if it determines that the
reported value is inconsistent with the requirements of these
regulations.
(2) An Indian lessee will make available upon request to the
authorized MMS or Indian representatives, or to the Inspector General of
the Department of the Interior or other persons authorized to receive
such information, arm's-length sales and sales quantity data for like-
quality coal sold, purchased, or otherwise obtained by the lessee from
the area.
(3) A lessee shall notify MMS if it has determined value pursuant to
paragraphs (c)(2)(ii), (c)(2)(iii), (c)(2)(iv), or (c)(2)(v) of this
section. The notification shall be by letter to the Associate Director
for Royalty Management or his/her designee. The letter shall identify
the valuation method to be used and contain a brief description of the
procedure to be followed. The notification required by this section is a
one-time notification due no later than the month the lessee first
reports royalties on the Form MMS-2014 using a valuation method
authorized by paragraphs (c)(2)(ii), (c)(2)(iii), (c)(2)(iv), or
(c)(2)(v) of this section, and each time there is a change in a method
under paragraphs (c)(2)(iv) or (c)(2)(v) of this section.
(e) If MMS determines that a lessee has not properly determined
value, the lessee shall be liable for the difference, if any, between
royalty payments made based upon the value it has used and the royalty
payments that are due
[[Page 126]]
based upon the value established by MMS. The lessee shall also be liable
for interest computed pursuant to 30 CFR 218.202. If the lessee is
entitled to a credit, MMS will provide instructions for the taking of
that credit.
(f) The lessee may request a value determination from MMS. In that
event, the lessee shall propose to MMS a value determination method, and
may use that method in determining value for royalty purposes until MMS
issues its decision. The lessee shall submit all available data relevant
to its proposal. MMS shall expeditiously determine the value based upon
the lessee's proposal and any additional information MMS deems
necessary. That determination shall remain effective for the period
stated therein. After MMS issues its determination, the lessee shall
make the adjustments in accordance with paragraph (e) of this section.
(g) Notwithstanding any other provisions of this section, under no
circumstances shall the value for royalty purposes be less than the
gross proceeds accruing to the lessee for the disposition of produced
coal less applicable provisions of paragraph (b)(5) of this section and
less applicable allowances determined pursuant to Secs. 206.457 through
206.461 and Sec. 206.464 of this subpart.
(h) The lessee is required to place coal in marketable condition at
no cost to the Indian lessor. Where the value established pursuant to
this section is determined by a lessee's gross proceeds, that value
shall be increased to the extent that the gross proceeds has been
reduced because the purchaser, or any other person, is providing certain
services, the cost of which ordinarily is the responsibility of the
lessee to place the coal in marketable condition.
(i) Value shall be based on the highest price a prudent lessee can
receive through legally enforceable claims under its contract. Absent
contract revision or amendment, if the lessee fails to take proper or
timely action to receive prices or benefits to which it is entitled, it
must pay royalty at a value based upon that obtainable price or benefit.
Contract revisions or amendments shall be in writing and signed by all
parties to an arm's-length contract, and may be retroactively applied to
value for royalty purposes for a period not to exceed two years, unless
MMS approves a longer period. If the lessee makes timely application for
a price increase allowed under its contract but the purchaser refuses,
and the lessee takes reasonable measures, which are documented, to force
purchaser compliance, the lessee will owe no additional royalties unless
or until monies or consideration resulting from the price increase are
received. This paragraph shall not be construed to permit a lessee to
avoid its royalty payment obligation in situations where a purchaser
fails to pay, in whole or in part or timely, for a quantity of coal.
(j) Notwithstanding any provision in these regulations to the
contrary, no review, reconciliation, monitoring, or other like process
that results in a redetermination by MMS of value under this section
shall be considered final or binding as against the Indian Tribes or
allottees until the audit period is formally closed.
(k) Certain information submitted to MMS to support valuation
proposals, including transportation, coal washing, or other allowances
pursuant to Secs. 206.457 through 206.461 and Sec. 206.464 of this
subpart, is exempted from disclosure by the Freedom of Information Act,
5 U.S.C. 522. Any data specified by the Act to be privileged,
confidential, or otherwise exempt shall be maintained in a confidential
manner in accordance with applicable law and regulations. All requests
for information about determinations made under this part are to be
submitted in accordance with the Freedom of Information Act regulation
of the Department of the Interior, 43 CFR part 2. Nothing in this
section is intended to limit or diminish in any manner whatsoever the
right of an Indian lessor to obtain any and all information as such
lessor may be lawfully entitled from MMS or such lessor's lessee
directly under the terms of the lease or applicable law.
Sec. 206.457 Washing allowances--general.
(a) For ad valorem leases subject to Sec. 206.456 of this subpart,
MMS shall, as authorized by this section, allow a deduction in
determining value for royalty purposes for the reasonable, actual
[[Page 127]]
costs incurred to wash coal, unless the value determined pursuant to
Sec. 206.456 of this subpart was based upon like-quality unwashed coal.
Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.461 of this subpart
reduce the value for royalty purposes to zero.
(b) If MMS determines that a lessee has improperly determined a
washing allowance authorized by this section, then the lessee shall be
liable for any additional royalties, plus interest determined in
accordance with 30 CFR 218.202, or shall be entitled to a credit,
without interest.
(c) Lessees shall not disproportionately allocate washing costs to
Indian leases.
(d) No cost normally associated with mining operations and which are
necessary for placing coal in marketable condition shall be allowed as a
cost of washing.
(e) Coal washing costs shall only be recognized as allowances when
the washed coal is sold and royalties are reported and paid.
Sec. 206.458 Determination of washing allowances.
(a) Arm's-length contracts. (1) For washing costs incurred by a
lessee pursuant to an arm's-length contract, the washing allowance shall
be the reasonable actual costs incurred by the lessee for washing the
coal under that contract, subject to monitoring, review, audit, and
possible future adjustment. MMS' prior approval is not required before a
lessee may deduct costs incurred under an arm's-length contract.
However, before any deduction may be taken, the lessee must submit a
completed page one of Form MMS-4292, Coal Washing Allowance Report, in
accordance with paragraph (c)(1) of this section. A washing allowance
may be claimed retroactively for a period of not more than 3 months
prior to the first day of the month that Form MMS-4292 is filed with
MMS, unless MMS approves a longer period upon a showing of good cause by
the lessee.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the washer for the
washing. If the contract reflects more than the total consideration
paid, then MMS may require that the washing allowance be determined in
accordance with paragraph (b) of this section.
(3) If MMS determines that the consideration paid pursuant to an
arm's-length washing contract does not reflect the reasonable value of
the washing because of misconduct by or between the contracting parties,
or because the lessee otherwise has breached its duty to the lessor to
market the production for the mutual benefit of the lessee and the
lessor, then MMS shall require that the washing allowance be determined
in accordance with paragraph (b) of this section. When MMS determines
that the value of the washing may be unreasonable, MMS will notify the
lessee and give the lessee an opportunity to provide written information
justifying the lessee's washing costs.
(4) Where the lessee's payments for washing under an arm's-length
contract are not based on a dollar-per-unit basis, the lessee shall
convert whatever consideration is paid to a dollar value equivalent.
Washing allowances shall be expressed as a cost per ton of coal washed.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations
where the lessee performs washing for itself, the washing allowance will
be based upon the lessee's reasonable actual costs. All washing
allowances deducted under a non-arm's-length or no contract situation
are subject to monitoring, review, audit, and possible future
adjustment. Prior MMS approval of washing allowances is not required for
non-arm's-length or no contract situations. However, before any
estimated or actual deduction may be taken, the lessee must submit a
completed Form MMS-4292 in accordance with paragraph (c)(2) of this
section. A washing allowance may be claimed retroactively for a period
of not more than 3 months prior to the first day of the month that Form
MMS-4292 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee.
[[Page 128]]
MMS will monitor the allowance deduction to ensure that deductions are
reasonable and allowable. When necessary or appropriate, MMS may direct
a lessee to modify its actual washing allowance.
(2) The washing allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for washing
during the reported period, including operating and maintenance
expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable
investment in the wash plant multiplied by the rate of return in
accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and installation of capital equipment)
which are an integral part of the wash plant.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the wash
plant; maintenance of equipment; maintenance labor; and other directly
allocable and attributable maintenance expenses which the lessee can
document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the wash plant is an allowable expense. State and Federal
income taxes and severance taxes, including royalties, are not allowable
expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or
(b)(2)(iv)(B) of this section. After a lessee has elected to use either
method for a wash plant, the lessee may not later elect to change to the
other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the wash plant services, whichever is
appropriate, or a unit of production method. After an election is made,
the lessee may not change methods without MMS approval. A change in
ownership of a wash plant shall not alter the depreciation schedule
established by the original operator/lessee for purposes of the
allowance calculation. With or without a change in ownership, a wash
plant shall be depreciated only once. Equipment shall not be depreciated
below a reasonable salvage value.
(B) MMS shall allow as a cost an amount equal to the allowable
capital investment in the wash plant multiplied by the rate of return
determined pursuant to paragraph (b)(2)(v) of this section. No allowance
shall be provided for depreciation. This alternative shall apply only to
plants first placed in service or acquired after March 1, 1989.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average rate as published in Standard and Poor's Bond Guide for the
first month of the reporting period for which the allowance is
applicable and shall be effective during the reporting period. The rate
shall be redetermined at the beginning of each subsequent washing
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) The washing allowance for coal shall be determined based on the
lessee's reasonable and actual cost of washing the coal. The lessee may
not take an allowance for the costs of washing lease production that is
not royalty bearing.
(c) Reporting requirements. (1) Arm's-length contracts. (i) With the
exception of those washing allowances specified in paragraphs (c)(1)(v)
and (c)(1)(vi) of this section, the lessee shall submit page one of the
initial Form MMS-4292 prior to, or at the same time, as the washing
allowance determined pursuant to an arm's-length contract is reported on
Form MMS-2014, Report of Sales and Royalty Remittance. A Form MMS-4292
received by the end of the month that the Form MMS-2014 is due shall be
considered to be received timely.
[[Page 129]]
(ii) The initial Form MMS-4292 shall be effective for a reporting
period beginning the month that the lessee is first authorized to deduct
a washing allowance and shall continue until the end of the calendar
year, or until the applicable contract or rate terminates or is modified
or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4292 within
3 months after the end of the calendar year, or after the applicable
contract or rate terminates or is modified or amended, whichever is
earlier, unless MMS approves a longer period (during which period the
lessee shall continue to use the allowance from the previous reporting
period).
(iv) MMS may require that a lessee submit arm's-length washing
contracts and related documents. Documents shall be submitted within a
reasonable time, as determined by MMS.
(v) Washing allowances which are based on arm's-length contracts and
which are in effect at the time these regulations become effective will
be allowed to continue until such allowances terminate. For the purposes
of this section, only those allowances that have been approved by MMS in
writing shall qualify as being in effect at the time these regulations
become effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(2) Non-arm's-length or no contract. (i) With the exception of those
washing allowances specified in paragraphs (c)(2)(v) and (c)(2)(vii) of
this section, the lessee shall submit an initial Form MMS-4292 prior to,
or at the same time as, the washing allowance determined pursuant to a
non-arm's-length contract or no contract situation is reported on Form
MMS-2014, Report of Sales and Royalty Remittance. A Form MMS-4292
received by the end of the month that the Form MMS-2014 is due shall be
considered to be timely received. The initial reporting may be based on
estimated costs.
(ii) The initial Form MMS-4292 shall be effective for a reporting
period beginning the month that the lessee first is authorized to deduct
a washing allowance and shall continue until the end of the calendar
year, or until the washing under the non-arm's-length contract or the no
contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4292
containing the actual costs for the previous reporting period. If coal
washing is continuing, the lessee shall include on Form MMS-4292 its
estimated costs for the next calendar year. The estimated coal washing
allowance shall be based on the actual costs for the previous period
plus or minus any adjustments which are based on the lessee's knowledge
of decreases or increases which will affect the allowance. Form MMS-4292
must be received by MMS within 3 months after the end of the previous
reporting period, unless MMS approves a longer period (during which
period the lessee shall continue to use the allowance from the previous
reporting period).
(iv) For new wash plants, the lessee's initial Form MMS-4292 shall
include estimates of the allowable coal washing costs for the applicable
period. Cost estimates shall be based upon the most recently available
operations data for the plant, or if such data are not available, the
lessee shall use estimates based upon industry data for similar coal
wash plants.
(v) Washing allowances based on non-arm's-length or no contract
situations which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For the purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) Upon request by MMS, the lessee shall submit all data used by
the lessee to prepare its Forms MMS-4292. The data shall be provided
within a reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements which are different from the requirements of this section.
[[Page 130]]
(3) MMS may establish coal washing allowance reporting dates for
individual leases different from those specified in this subpart in
order to provide more effective administration. Lessees will be notified
of any change in their reporting period.
(4) Washing allowances must be reported as a separate line on the
Form MMS-2014, unless MMS approves a different reporting procedure.
(d) Interest assessments for incorrect or late reports and failure
to report. (1) If a lessee deducts a washing allowance on its Form MMS-
2014 without complying with the requirements of this section, the lessee
shall be liable for interest on the amount of such deduction until the
requirements of this section are complied with. The lessee also shall
repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a washing allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.202.
(e) Adjustments. (1) If the actual coal washing allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be required
to pay additional royalties due plus interest computed pursuant to 30
CFR 218.202, retroactive to the first month the lessee is authorized to
deduct a washing allowance. If the actual washing allowance is greater
than the amount the lessee has estimated and taken during the reporting
period, the lessee shall be entitled to a credit, without interest.
(2) The lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Other washing cost determinations. The provisions of this
section shall apply to determine washing costs when establishing value
using a net-back valuation procedure or any other procedure that
requires deduction of washing costs.
Sec. 206.459 Allocation of washed coal.
(a) When coal is subjected to washing, the washed coal must be
allocated to the leases from which it was extracted.
(b) When the net output of coal from a washing plant is derived from
coal obtained from only one lease, the quantity of washed coal allocable
to the lease will be based on the net output of the washing plant.
(c) When the net output of coal from a washing plant is derived from
coal obtained from more than one lease, unless determined otherwise by
BLM, the quantity of net output of washed coal allocable to each lease
will be based on the ratio of measured quantities of coal delivered to
the washing plant and washed from each lease compared to the total
measured quantities of coal delivered to the washing plant and washed.
Sec. 206.460 Transportation allowances--general.
(a) For ad valorem leases subject to Sec. 206.456 of this subpart,
where the value for royalty purposes has been determined at a point
remote from the lease or mine, MMS shall, as authorized by this section,
allow a deduction in determining value for royalty purposes for the
reasonable, actual costs incurred to:
(1) Transport the coal from an Indian lease to a sales point which
is remote from both the lease and mine; or
(2) Transport the coal from an Indian lease to a wash plant when
that plant is remote from both the lease and mine and, if applicable,
from the wash plant to a remote sales point. In-mine transportation
costs shall not be included in the transportation allowance.
(b) Under no circumstances shall the washing allowance and the
transportation allowance authorized by Sec. 206.456 of this subpart
reduce the value of coal under any selling arrangement to zero.
(c)(1) When coal transported from a mine to a wash plant is eligible
for a transportation allowance in accordance with this section, the
lessee is not required to allocate transportation costs between the
quantity of clean coal output and the rejected waste material. The
transportation allowance shall be authorized for the total production
[[Page 131]]
which is transported. Transportation allowances shall be expressed as a
cost per ton of cleaned coal transported.
(2) For coal that is not washed at a wash plant, the transportation
allowance shall be authorized for the total production which is
transported. Transportation allowances shall be expressed as a cost per
ton of coal transported.
(3) Transportation costs shall only be recognized as allowances when
the transported coal is sold and royalties are reported and paid.
(d) If, after a review and/or audit, MMS determines that a lessee
has improperly determined a transportation allowance authorized by this
section, then the lessee shall pay any additional royalties, plus
interest, determined in accordance with 30 CFR 218.202, or shall be
entitled to a credit, without interest.
(e) Lessees shall not disproportionately allocate transportation
costs to Indian leases.
Sec. 206.461 Determination of transportation allowances.
(a) Arm's-length contracts. (1) For transportation costs incurred by
a lessee pursuant to an arm's-length contract, the transportation
allowance shall be the reasonable, actual costs incurred by the lessee
for transporting the coal under that contract, subject to monitoring,
review, audit, and possible future adjustment. MMS' prior approval is
not required before a lessee may deduct costs incurred under an arm's-
length contract. However, before any deduction may be taken, the lessee
must submit a completed page one of Form MMS-4293, Coal Transportation
Allowance Report, in accordance with paragraph (c)(1) of this section. A
transportation allowance may be claimed retroactively for a period of
not more than 3 months prior to the first day of the month that Form
MMS-4293 is filed with MMS, unless MMS approves a longer period upon a
showing of good cause by the lessee.
(2) In conducting reviews and audits, MMS will examine whether the
contract reflects more than the consideration actually transferred
either directly or indirectly from the lessee to the transporter for the
transportation. If the contract reflects more than the total
consideration paid, then MMS may require that the transportation
allowance be determined in accordance with paragraph (b) of this
section.
(3) If MMS determines that the consideration paid pursuant to an
arm's-length transportation contract does not reflect the reasonable
value of the transportation because of misconduct by or between the
contracting parties, or because the lessee otherwise has breached its
duty to the lessor to market the production for the mutual benefit of
the lessee and the lessor, then MMS shall require that the
transportation allowance be determined in accordance with paragraph (b)
of this section. When MMS determines that the value of the
transportation may be unreasonable, MMS will notify the lessee and give
the lessee an opportunity to provide written information justifying the
lessee's transportation costs.
(4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar-per-unit basis, the lessee
shall convert whatever consideration is paid to a dollar value
equivalent for the purposes of this section.
(b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations
where the lessee performs transportation services for itself, the
transportation allowance will be based upon the lessee's reasonable
actual costs. All transportation allowances deducted under a non-arm's-
length or no contract situation are subject to monitoring, review,
audit, and possible future adjustment. Prior MMS approval of
transportation allowances is not required for non-arm's-length or no
contract situations. However, before any estimated or actual deduction
may be taken, the lessee must submit a completed Form MMS-4293 in
accordance with paragraph (c)(2) of this section. A transportation
allowance may be claimed retroactively for a period of not more than 3
months prior to the first day of the month that Form MMS-4293 is filed
with MMS, unless MMS approves a longer period upon a showing of good
cause by the
[[Page 132]]
lessee. MMS will monitor the allowance deductions to ensure that
deductions are reasonable and allowable. When necessary or appropriate,
MMS may direct a lessee to modify its estimated or actual transportation
allowance deduction.
(2) The transportation allowance for non-arm's-length or no contract
situations shall be based upon the lessee's actual costs for
transportation during the reporting period, including operating and
maintenance expenses, overhead, and either depreciation and a return on
undepreciated capital investment in accordance with paragraph
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable
investment in the transportation system multiplied by the rate of return
in accordance with paragraph (b)(2)(iv)(B) of this section. Allowable
capital costs are generally those for depreciable fixed assets
(including costs of delivery and installation of capital equipment)
which are an integral part of the transportation system.
(i) Allowable operating expenses include: Operations supervision and
engineering; operations labor; fuel; utilities; materials; ad valorem
property taxes; rent; supplies; and any other directly allocable and
attributable operating expense which the lessee can document.
(ii) Allowable maintenance expenses include: Maintenance of the
transportation system; maintenance of equipment; maintenance labor; and
other directly allocable and attributable maintenance expenses which the
lessee can document.
(iii) Overhead attributable and allocable to the operation and
maintenance of the transportation system is an allowable expense. State
and Federal income taxes and severance taxes and other fees, including
royalties, are not allowable expenses.
(iv) A lessee may use either paragraph (b)(2)(iv)(A) or paragraph
(b)(2)(iv)(B) of this section. After a lessee has elected to use either
method for a transportation system, the lessee may not later elect to
change to the other alternative without approval of MMS.
(A) To compute depreciation, the lessee may elect to use either a
straight-line depreciation method based on the life of equipment or on
the life of the reserves which the transportation system services,
whichever is appropriate, or a unit of production method. After an
election is made, the lessee may not change methods without MMS
approval. A change in ownership of a transportation system shall not
alter the depreciation schedule established by the original transporter/
lessee for purposes of the allowance calculation. With or without a
change in ownership, a transportation system shall be depreciated only
once. Equipment shall not be depreciated below a reasonable salvage
value.
(B) MMS shall allow as a cost an amount equal to the allowable
capital investment in the transportation system multiplied by the rate
of return determined pursuant to paragraph (b)(2)(B)(v) of this section.
No allowance shall be provided for depreciation. This alternative shall
apply only to transportation facilities first placed in service or
acquired after March 1, 1989.
(v) The rate of return shall be the industrial rate associated with
Standard and Poor's BBB rating. The rate of return shall be the monthly
average as published in Standard and Poor's Bond Guide for the first
month of the reporting period of which the allowance is applicable and
shall be effective during the reporting period. The rate shall be
redetermined at the beginning of each subsequent transportation
allowance reporting period (which is determined pursuant to paragraph
(c)(2) of this section).
(3) A lessee may apply to MMS for exception from the requirement
that it compute actual costs in accordance with paragraphs (b)(1) and
(b)(2) of this section. MMS will grant the exception only if the lessee
has a rate for the transportation approved by a Federal agency for
Indian leases. MMS shall deny the exception request if it determines
that the rate is excessive as compared to arm's-length transportation
charges by systems, owned by the lessee or others, providing similar
transportation services in that area. If there are no arm's-length
transportation charges, MMS shall deny the exception request if:
[[Page 133]]
(i) No Federal regulatory agency cost analysis exists and the
Federal regulatory agency has declined to investigate pursuant to MMS
timely objections upon filing; and
(ii) The rate significantly exceeds the lessee's actual costs for
transportation as determined under this section.
(c) Reporting requirements. (1) Arm's-length contracts. (i) With the
exception of those transportation allowances specified in paragraphs
(c)(1)(v) and (c)(1)(vi) of this section, the lessee shall submit page
one of the initial Form MMS-4293 prior to, or at the same time as, the
transportation allowance determined pursuant to an arm's-length contract
is reported on Form MMS-2014, Reports of Sales and Royalty Remittance.
(ii) The initial Form MMS-4293 shall be effective for a reporting
period beginning the month that the lessee is first authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until the applicable contract or rate terminates or is
modified or amended, whichever is earlier.
(iii) After the initial reporting period and for succeeding
reporting periods, lessees must submit page one of Form MMS-4293 within
3 months after the end of the calendar year, or after the applicable
contract or rate terminates or is modified or amended, whichever is
earlier, unless MMS approves a longer period (during which period the
lessee shall continue to use the allowance from the previous reporting
period). Lessees may request special reporting procedures in unique
allowance reporting situations, such as those related to spot sales.
(iv) MMS may require that a lessee submit arm's-length
transportation contracts, production agreements, operating agreements,
and related documents. Documents shall be submitted within a reasonable
time, as determined by MMS.
(v) Transportation allowances that are based on arm's-length
contracts and which are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For the purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(2) Non-arm's-length or no contract. (i) With the exception of those
transportation allowances specified in paragraphs (c)(2)(v) and
(c)(2)(vii) of this section, the lessee shall submit an initial Form
MMS-4293 prior to, or at the same time as, the transportation allowance
determined pursuant to a non-arm's-length contract or no contract
situation is reported on Form MMS-2014, Report of Sales and Royalty
Remittance. The initial report may be based on estimated costs.
(ii) The initial Form MMS-4293 shall be effective for a reporting
period beginning the month that the lessee first is authorized to deduct
a transportation allowance and shall continue until the end of the
calendar year, or until the transportation under the non-arm's-length
contract or the no contract situation terminates, whichever is earlier.
(iii) For calendar-year reporting periods succeeding the initial
reporting period, the lessee shall submit a completed Form MMS-4293
containing the actual costs for the previous reporting period. If the
transportation is continuing, the lessee shall include on Form MMS-4293
its estimated costs for the next calendar year. The estimated
transportation allowance shall be based on the actual costs for the
previous reporting period plus or minus any adjustments that are based
on the lessee's knowledge of decreases or increases that will affect the
allowance. Form MMS-4293 must be received by MMS within 3 months after
the end of the previous reporting period, unless MMS approves a longer
period (during which period the lessee shall continue to use the
allowance from the previous reporting period).
(iv) For new transportation facilities or arrangements, the lessee's
initial Form MMS-4293 shall include estimates of the allowable
transportation costs for the applicable period. Cost estimates shall be
based upon the most recently available operations data for
[[Page 134]]
the transportation system, or, if such data are not available, the
lessee shall use estimates based upon industry data for similar
transportation systems.
(v) Non-arm's-length contract or no contract-based transportation
allowances that are in effect at the time these regulations become
effective will be allowed to continue until such allowances terminate.
For purposes of this section, only those allowances that have been
approved by MMS in writing shall qualify as being in effect at the time
these regulations become effective.
(vi) Upon request by MMS, the lessee shall submit all data used to
prepare its Form MMS-4293. The data shall be provided within a
reasonable period of time, as determined by MMS.
(vii) MMS may establish, in appropriate circumstances, reporting
requirements that are different from the requirements of this section.
(viii) If the lessee is authorized to use its Federal-agency-
approved rate as its transportation cost in accordance with paragraph
(b)(3) of this section, it shall follow the reporting requirements of
paragraph (c)(1) of this section.
(3) MMS may establish reporting dates for individual lessees
different than those specified in this paragraph in order to provide
more effective administration. Lessees will be notified as to any change
in their reporting period.
(4) Transportation allowances must be reported as a separate line
item on Form MMS-2014, unless MMS approves a different reporting
procedure.
(d) Interest assessments for incorrect or late reports and failure
to report. (1) If a lessee deducts a transportation allowance on its
Form MMS-2014 without complying with the requirements of this section,
the lessee shall be liable for interest on the amount of such deduction
until the requirements of this section are complied with. The lessee
also shall repay the amount of any allowance which is disallowed by this
section.
(2) If a lessee erroneously reports a transportation allowance which
results in an underpayment of royalties, interest shall be paid on the
amount of that underpayment.
(3) Interest required to be paid by this section shall be determined
in accordance with 30 CFR 218.202.
(e) Adjustments. (1) If the actual transportation allowance is less
than the amount the lessee has taken on Form MMS-2014 for each month
during the allowance form reporting period, the lessee shall be required
to pay additional royalties due plus interest, computed pursuant to 30
CFR 218.202, retroactive to the first month the lessee is authorized to
deduct a transportation allowance. If the actual transportation
allowance is greater than the amount the lessee has estimated and taken
during the reporting period, the lessee shall be to a credit, without
interest.
(2) The lessee must submit a corrected Form MMS-2014 to reflect
actual costs, together with any payment, in accordance with instructions
provided by MMS.
(f) Other transportation cost determinations. The provisions of this
section shall apply to determine transportation costs when establishing
value using a net-back valuation procedure or any other procedure that
requires deduction of transportation costs.
Sec. 206.462 Contract submission.
(a) The lessee and other payors shall submit to MMS, upon request,
contracts for the sale of coal from ad valorem leases subject to this
subpart. MMS must receive the contracts within a reasonable period of
time, as specified by MMS. Lessees shall include as part of the
submittal requirements any contracts, agreements, contract amendments,
or other documents that affect the gross proceeds received for the sale
of coal, as well as any other information regarding any consideration
received for the sale or disposition of coal that is not included in
such contracts. At the time of its contract submittals, MMS may require
the lessee to certify in writing that it has provided all documents and
information that reflect the total consideration provided by purchasers
of coal from ad valorem leases subject to this subpart. Information
requested under this section may include contracts for both ad valorem
and cents-per-ton leases and shall be available in the lessee's offices
during normal business hours or provided to
[[Page 135]]
MMS at such time and in such manner as may be requested by authorized
Department of the Interior personnel. Any oral sales arrangement
negotiated by the lessee must be placed in a written form and be
retained by the lessee. Nothing in this section shall be construed to
limit the authority of MMS to obtain or have access to information
pursuant to 30 CFR part 212.
(b) Lessees and other payors shall designate, for each contract
submitted pursuant to this section, whether the contract in arm's-length
or non-arm's-length.
(c) A lessee's or other payor's determination that its contract is
arm's-length is subject to future audit to verify that the contract
meets the criteria of the arm's-length contract definition in
Sec. 206.251 of this subpart.
(d) Information required to be submitted under this section that
constitutes trade secrets and commercial and financial information that
is identified as privileged or confidential shall not be available for
public inspection or made public or disclosed without the consent of the
lessee or other payor, except as otherwise provided by law or
regulation.
Sec. 206.463 In-situ and surface gasification and liquefaction operations.
In an ad valorem Federal coal lease is developed by in-situ or
surface gasification or liquefaction technology, the lessee shall
propose the value of coal for royalty purposes to MMS. MMS will review
the lessee's proposal and issue a value determination. The lessee may
use its proposed value until MMS issues a value determination.
Sec. 206.464 Value enhancement of marketable coal.
If, prior to use, sale, or other disposition, the lessee enhances
the value of coal after the coal has been placed in marketable condition
in accordance with Sec. 206.456(h) of this subpart, the lessee shall
notify MMS that such processing is occurring or will occur. The value of
that production shall be determined as follows:
(a) A value established for the feedstock coal in marketable
condition by application of the provisions of Sec. 206.465(c)(2) (i)
through (iv) of this subpart; or,
(b) In the event that a value cannot be established in accordance
with paragraph (a) of this section, then the value of production will be
determined in accordance with Sec. 206.456(c)(2)(v) of this subpart and
the value shall be the lessee's gross proceeds accruing from the
disposition of the enhanced product, reduced by MMS-approved processing
costs and procedures including a rate of return on investment equal to
two times the Standard and Poor's BBB bond rate applicable under
Sec. 206.458(b)(2)(v) of this subpart.
PART 207--SALES AGREEMENTS OR CONTRACTS GOVERNING THE DISPOSAL OF LEASE PRODUCTS--Table of Contents
Subpart A--General Provisions
Sec.
207.1 Required recordkeeping.
207.2 Definitions.
207.3 Contracts made pursuant to new form leases.
207.4 Contracts made pursuant to old form leases.
207.5 Contract and sales agreement retention.
Subpart B--Oil, Gas and OCS Sulfur, General [Reserved]
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal [Reserved]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources [Reserved]
Subpart I--OCS Sulfur [Reserved]
Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq.; 25 U.S.C.
396a et seq.; 25 U.S.C. 2101 et seq.; 30 U.S.C. 181 et seq.; 30 U.S.C.
351 et seq.; 30 U.S.C. 1001 et seq.; 30 U.S.C. 1701 et seq.; 31 U.S.C.
3716 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq.; 43 U.S.C. 1331 et
seq.; and 43 U.S.C. 1801 et seq.
[[Page 136]]
Source: 53 FR 1225, Jan. 15, 1988, unless otherwise noted.
Subpart A--General Provisions
Sec. 207.1 Required recordkeeping.
(a) The information collection and recordkeeping requirements
contained in this part have been approved by OMB under 44 U.S.C. 3501 et
seq. and assigned OMB Clearance Number 1010-0061. The information
collected will be used to determine a proper transportation allowance
for the cost of transporting royalty oil from the lease to a delivery
point remote from the lease. The information is required in order to
obtain a benefit and is collected in accordance with the Federal Oil and
Gas Royalty Management Act of 1982, 30 U.S.C. 1701 et seq.
(b) Public reporting burden is estimated to average 30 minutes per
year for each record keeper to maintain copies of sales contracts,
agreements, or other documents relevant to the valuation of production.
Send any comments regarding this burden estimate or any other aspect of
this requirement to the Information Collection Clearance Officer,
Minerals Management Service, 381 Elden Street, Herndon, VA 22070, and to
the Office of Information and Regulatory Affairs, Office of Management
and Budget, Paperwork Reduction Project 1010-0061, Washington, DC 20503.
[57 FR 41864, Sept. 14, 1992, as amended at 58 FR 64901, Dec. 10, 1994]
Sec. 207.2 Definitions.
The definitions in part 206 of this title are applicable to this
part.
Sec. 207.3 Contracts made pursuant to new form leases.
On November 29, 1950 (15 FR 8585), a new lease form was adopted
(Form 4-1158, 15 FR 8585) containing provisions whereby the lessee
agrees that nothing in any contract or other arrangement made for the
sale or disposal of oil, gas, natural gasoline, and other products of
the leased land, shall be construed as modifying any of the provisions
of the lease, including, but not limited to, provisions relating to gas
waste, taking royalty-in-kind, and the method of computing royalties due
as based on a minimum valuation and in accordance with the oil and gas
valuation regulations. A contract or agreement pursuant to a lease
containing such provisions may be made without obtaining prior approval
of the United States as lessor, but must be retained as provided in
Sec. 207.5 of this subpart.
Sec. 207.4 Contracts made pursuant to old form leases.
(a) Old form leases are those containing provisions prohibiting
sales or disposal of oil, gas, natural gasoline, and other products of
the lease except in accordance with a contract or other arrangement
approved by the Secretary of the Interior, or by the Director of the
Minerals Management Service or his/her representative. A contract or
agreement made pursuant to an old form lease may be made without
obtaining approval if the contract or agreement contains either the
substance of or is accompanied by the stipulation set forth in paragraph
(b) of this section, signed by the seller (lessee or operator).
(b) The stipulation, the substance of which must be included in the
contract, or be made the subject matter of a separate instrument
properly identifying the leases affected thereby, is as follows:
It is hereby understood and agreed that nothing in the written
contract or in any approval thereof shall be construed as affecting any
of the relations between the United States and its lessee, particularly
in matters of gas waste, taking royalty in kind, and the method of
computing royalties due as based on a minimum valuation and in
accordance with the terms and provisions of the oil and gas valuation
regulations applicable to the lands covered by said contract.
Sec. 207.5 Contract and sales agreement retention.
Copies of all sales contracts, posted price bulletins, etc., and
copies of all agreements, other contracts, or other documents which are
relevant to the valuation of production are to be maintained by the
lessee and made available upon request during normal working hours to
authorized MMS, State or Indian representatives, other MMS or BLM
officials, auditors of the General Accounting Office, or other persons
authorized to receive such documents, or
[[Page 137]]
shall be submitted to MMS within a reasonable period of time, as
determined by MMS. Any oral sales arrangement negotiated by the lessee
must be placed in written form and retained by the lessee. Records shall
be retained in accordance with 30 CFR part 212.
Subpart B--Oil, Gas, and OCS Sulfur, General [Reserved]
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General [Reserved]
Subpart F--Coal [Reserved]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources [Reserved]
Subpart I--OCS Sulfur [Reserved]
PART 208--SALE OF FEDERAL ROYALTY OIL--Table of Contents
Subpart A--General Provisons
Sec.
208.1 General.
208.2 Definitions.
208.3 Information collection.
208.4 Royalty oil sales to eligible refiners.
208.5 Notice of royalty oil sale.
208.6 General application procedures.
208.7 Determination of eligibility.
208.8 Transportation and delivery.
208.9 Agreements.
208.10 Notices.
208.11 Surety requirements.
208.12 Payment requirements.
208.13 Reporting requirements.
208.14 Civil and criminal penalties.
208.15 Audits.
208.16 How to appeal a contracting officer's decision that you receive.
208.17 Suspensions for national emergencies.
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; 41 U.S.C. 601 et seq.; 43 U.S.C. 1301 et
seq., 1331 et seq., and 1801 et seq.
Source: 52 FR 41913, Oct. 30, 1987, unless otherwise noted.
Subpart A--General Provisions
Sec. 208.1 General.
The regulations in this part govern the sale of royalty oil by the
United States to eligible refiners. The regulations apply to royalty oil
from leases on Federal lands onshore and on the Outer Continental Shelf
(OCS).
Sec. 208.2 Definitions.
Allotment means the quantity of royalty oil that DOI determines is
available to each eligible refiner that has applied for a portion of the
total volume of royalty oil offered in a given royalty oil sale.
Application means the formal written request to DOI on Form MMS-4070
by an eligible refiner interested in purchasing a quantity of royalty
oil from the approximate volume announced by DOI in a given ``Notice of
Availability of Royalty Oil.''
Area or Region means the geographic territory having Federal oil and
gas leases over which MMS has jurisdiction, unless the context in which
those words are used indicates that a different meaning is intended.
Contracting officer means the Director, his or her delegate, or the
person designated under a royalty oil purchase contract.
Contracting officer's decision means an MMS order or decision that a
contracting officer issues under this part to a purchaser of oil under a
royalty oil purchase contract.
Delivery point means the point where the lessor, in accordance with
lease terms, directs the lessee to deliver royalty oil to a purchaser.
Title to the royalty oil, or to the quantity thereof in a commingled
stream, passes from the Federal Government to the purchaser at this
designated point, which is specified in the royalty oil contract. For
onshore leases, the delivery point will be on or adjacent to the lease,
except as provided in Sec. 208.8(a) of this part. In instances where an
onshore delivery point is designated for offshore royalty oil, such
point generally will be the first onshore point where the
[[Page 138]]
price of the oil, including transportation costs, can be determined and
where the purchaser can either exchange or take delivery of the oil. The
Government does not guarantee physical access to the oil at such point.
Director means the Director of MMS, who is responsible for its
overall direction, or his or her delegate(s).
DOI means the Department of the Interior, including the Secretary or
his or her delegate(s).
Eligible refiner means a refiner of crude oil that meets the
following criteria for eligibility to purchase royalty oil:
(1) For the purchase of royalty oil from onshore leases, it means a
refiner that qualifies as a small and independent refiner as those terms
are defined in sections 3(3) and 3(4) of the Emergency Petroleum
Allocation Act, 15 U.S.C. 751 et seq., except that the time period for
determination contained in section 3(3)(A) would be the calendar quarter
immediately preceding the date of the applicable ``Notice of
Availability of Royalty Oil.'' A refiner that, together with all persons
controlled by, in control of, under common control with, or otherwise
affiliated with the refiner, inputs a volume of domestic crude oil from
its own production exceeding 30 percent of its total refinery input of
crude oil is ineligible to participate in royalty oil sales under this
part. Crude oil received in exchange for such refiner's own production
is considered to be that refiner's own production for purposes of this
section.
(2) For the purchase of royalty oil from leases on the OCS, it means
a refiner that qualifies as a small business enterprise under the rules
of the Small Business Administration (13 CFR part 121).
Entitlement means the volume of royalty oil from the Federal
Government's share of production from a Federal lease which a purchaser
is entitled to receive under a royalty oil contract.
Exchange agreement means a written agreement between the purchaser
and another person for the exchange of royalty oil purchased under this
part for other oil on a volume or equivalent value basis.
Fair market value means the value of oil--(1) Computed at a unit
price equivalent to the average unit price at which oil was sold
pursuant to a lease during the period for which any royalty or net
profit share is accrued or reserved to the United States pursuant to
such lease, or
(2) If there were no such sales, or if the Secretary finds that
there were an insufficient number of such sales to equitably determine
such value, computed at the average unit price at which oil was sold
pursuant to other leases in the same region of the OCS during such
period, or
(3) If there were no sales of oil from such region during such
period, or if the Secretary finds that there are an insufficient number
of such sales to equitably determine such value, at an appropriate price
determined by the Secretary.
Federal lease means a contractual agreement with the Federal
Government which authorizes the exploration, development, and production
of oil and gas on Federal lands onshore or on the OCS.
Interim sale means a sale conducted as a result of substantial
additional royalty oil becoming available in a specific area prior to
the scheduled expiration date of royalty oil contracts in effect for
that area.
Lessee means any person to whom the United States issues a lease, or
any person who has been assigned an obligation to make royalty or other
payments required by the lease.
MMS means the Minerals Management Service of the Department of the
Interior.
Notice of Availability of Royalty Oil means a notice published by
DOI in the Federal Register (and in other printed media when
appropriate, such as a newspaper or magazine of general or specialized
circulation) to advise interested parties of the availability of royalty
oil for purchase by eligible refiners and the approximate volume of
royalty oil available to the applicants.
OCS means the Outer Continental Shelf, as defined in 43 U.S.C.
1331(a).
OCSLA means the Outer Continental Shelf Lands Act (43 U.S.C. 1331 et
seq., as amended by 43 U.S.C. 1801 et seq.).
[[Page 139]]
Oil means a mixture of hydrocarbons that existed in the liquid phase
in natural underground reservoirs and remains liquid at atmospheric
pressure after passing through surface separating facilities and is
marketed or used as such. Condensate recovered in lease separators or
field facilities is considered to be oil.
Operator means any person, including a lessee, who has control of or
who manages operations on an oil and gas lease site on Federal onshore
lands or on the OCS.
Payor means any person responsible for reporting royalties from a
Federal lease or leases on Form MMS-2014.
Person means any individual, firm, corporation, association,
partnership, consortium, or joint venture.
Preference eligible refiner means an eligible refiner with at least
one operating refinery which is located within the area designated as
the preference eligible area in the ``Notice of Availability of Royalty
Oil.'' A refiner may be deemed to be a preference eligible refiner if it
owns a refinery located in the preference eligible area which is not
operational if the refiner meets the requirements of Sec. 208.7(g) of
this part.
Purchaser means anyone who acquires royalty oil sold by DOI under
the Federal Government's Royalty-in-Kind (RIK) Program and who has a
contractual obligation under an agreement to purchase royalty oil.
Reallocation means an offering of royalty oil previously allocated
in a specific sale but subsequently turned back to MMS. A reallocation
would only be made if substantial amounts of royalty oil are turned
back.
Refined petroleum product means gasoline, kerosene, distillates
(including Number 2 fuel oil), refined lubricating oils, or diesel fuel.
Royalty oil means that amount of oil that DOI takes in kind in
partial or full satisfaction of a lessee's royalty or net profit share
obligations as determined by whatever lease interest the lessee holds
under an applicable mineral leasing law.
Secretary means the Secretary of the Department of the Interior or
his/her delegate(s).
Section 6 lease means an oil and gas lease originally issued by any
State and currently maintained in effect pursuant to section 6 of the
OCSLA.
Section 8 lease means an oil and gas lease originally issued by the
United States pursuant to section 8 of the OCSLA.
[52 FR 41913, Oct. 30, 1987; 52 FR 45528, Nov. 30, 1987, as amended at
58 FR 64901, Dec. 10, 1993; 64 FR 26251, May 13, 1999]
Sec. 208.3 Information collection.
The information collection requirements contained in this part have
been approved by OMB under 44 U.S.C. 3501 et seq. The form, filing date,
and approved OMB clearance number are identified in 30 CFR 210.10.
[58 FR 64901, Dec. 10, 1993]
Sec. 208.4 Royalty oil sales to eligible refiners.
(a) Determination to take royalty oil in kind. The Secretary may
evaluate crude oil market conditions from time to time. The evaluation
will include, among other things, the availability of crude oil and the
crude oil requirements of the Federal Government, primarily those
requirements concerning matters of national interest and defense. The
Secretary will review these items and will determine whether eligible
refiners have access to adequate supplies of crude oil and whether such
oil is available to eligible refiners at equitable prices. Such
determinations may be made on a regional basis. The determination by the
Secretary shall be published in the Federal Register concurrent with or
included in the ``Notice of Availability of Royalty Oil'' required by 30
CFR 208.5.
(b) Sale to eligible refiners. (1) Upon a determination by the
Secretary under paragraph (a) of this section that eligible refiners do
not have access to adequate supplies of crude oil at equitable prices,
the Secretary, at his or her discretion, may elect to take in kind some
or all of the royalty oil accruing to the United States from oil and gas
leases on Federal lands onshore and on the OCS. The Secretary may
authorize MMS to offer royalty oil for sale to eligible refiners only
for use in their refineries and not for resale (other than under an
exchange agreement).
[[Page 140]]
(2) All sales of royalty oil from onshore leases will be priced at
the royalty value that would have been determined for that oil pursuant
to 30 CFR part 206 had the royalties been paid in value rather than
taken in kind. All sales of royalty oil from OCS leases will be priced
at the fair market value of the oil including associated transportation
costs to the designated delivery point, if applicable.
(3) An eligible refiner must have a representative at a sale in
order to participate. The Secretary may, at his or her discretion,
establish purchase limitations and withhold any royalty oil from any
offering.
(4) The MMS will recover the administrative costs of the RIK Program
through the collection of administrative fees. The fees will consist of
an initial nonrefundable contract fee for each executed contract and a
monthly variable charge applied to each lease under contract. The amount
of the initial contract fee shall be determined prior to a sale and
published in the ``Notice of Availability of Royalty Oil.'' The initial
contract fee will be payable in equal installments due at the end of the
first and second months of the contract. These contract fees will be
applied against the RIK Program's administrative costs, and the
remainder of the administrative costs will be recovered through the
monthly variable charges per lease, which will be billed and payable
concurrently with the monthly actual billings for royalty oil. The rate
per lease will be determined by dividing the remaining recoverable
administrative costs by the total number of leases under contract. The
rate may change depending upon whether total administrative costs change
and/or whether the number of leases taken in kind changes from one month
to another. In instances where production from a lease is sold on a
percentage basis to two or more purchasers, each percentage portion of
the lease will be considered a separate lease for purposes of
administrative fee determination.
(c) Upon a determination by the Secretary under paragraph (a) of
this section that eligible refiners do have access to adequate supplies
of crude oil at equitable prices, MMS will not take royalties in kind
from oil and gas leases for exclusive sale to such refiners. Such
determinations may be made on a regional basis.
(d) Interim sales. The MMS generally will not conduct interim sales.
However, interim sales may be held at the discretion of the Secretary if
substantial addition royalty oil becomes available. The potentially
eligible refiners, individually or collectively, must submit
documentation demonstrating that adequate supplies of crude oil at
equitable prices are not available for purchase. Although sufficient
documentation must be submitted, it is not mandatory for each
potentially eligible refiner to participate in a submission of such
documentation to be determined eligible. The documentation must be
submitted to MMS for a determination as to whether an interim sale is
needed.
Sec. 208.5 Notice of royalty oil sale.
If the Secretary decides to take royalty oil in kind for sale to
eligible refiners, MMS will issue a ``Notice of Availability of Royalty
Oil'' specifying the manner in which the sale is to be effected, the
approximate quantity of royalty oil to be offered, information required
in applications, the closing date for the receipt of applications for
royalty oil, and other general administrative details concerning the
application, allocation, and contract award process for the royalty oil.
The Notice will describe generally the terms under which the royalty oil
contracts will be awarded and will specify which applicants will be
deemed preference eligible refiners in the sale proceedings. The Notice
will also contain guidelines for reallocation procedures in the event
substantial quantities of royalty oil sold in that specific sale are
subsequently turned back to MMS. Only those purchasers that hold ongoing
contracts from that specific sale will be allowed to participate in any
reallocation, which would be voluntary, and then only if they continue
to meet eligibility requirements as set forth in 30 CFR 208.2 and 208.7.
If a reallocation is held prior to the effective date of the contracts
as specified in the ``Notice of Availability of Royalty Oil'', all
eligible refiners that selected a lease or
[[Page 141]]
leases in that specific sale would be allowed to participate, pursuant
to the procedures in the Notice.
Sec. 208.6 General application procedures.
(a) To apply for the purchase of royalty oil, an applicant must file
a Form MMS-4070 with MMS in accordance with instructions provided in the
``Notice of Availability of Royalty Oil'' and in accordance with any
instructions issued by MMS for completion of Form MMS-4070. The
applicant will be required to submit a letter of intent from a qualified
financial institution stating that it would be granted surety coverage
for the royalty oil for which it is applying, or other such proof of
surety coverage, as deemed acceptable by MMS. The letter of intent must
be submitted with a completed Form MMS-4070.
(b) In addition to any other application requirements specified in
the Notice, the following information is required on Form MMS-4070 at
the time of application:
(1) Name and address of the applicant, the location of the
applicant's refinery or refineries, and disclosure of the applicant's
affiliation with any other persons.
(2) The capacity of the applicant's refineries in barrels of crude
oil throughput per calendar day and a tabulation for the past 12 months
of oil processed for each refinery, identified as to source (from own
production or from other sources).
(3) Identification of any Government royalty oil contracts under
which the applicant is currently receiving royalty oil.
(4) Identification of the locations (area/region and State) where
the applicant proposes to purchase royalty oil, the volume of oil
requested, and the specific refineries in which the oil will be refined.
(5) A certification from the applicant that it is an eligible
refiner for the purchase of Government royalty oil, as defined in
Sec. 208.2 of this part.
[52 FR 41913, Oct. 30, 1987, as amended at 58 FR 64901, Dec. 10, 1993]
Sec. 208.7 Determination of eligibility.
(a) The MMS will examine each application and may request additional
information if the information in the application is inadequate. An
application received after the close of the application period will be
rejected. If additional information is requested by MMS, it must be
received by the time specified or the application will be rejected.
(b) After the close of the application period and the receipt of any
additional requested information, MMS will determine which applicants
may participate in the royalty oil sale and the quantity of royalty oil
which each applicant is authorized to purchase.
(c) When applications are filed by two or more eligible refiners for
the same royalty oil, the oil will be allocated among such applicants on
an equitable basis as determined by MMS. Preference eligible refiners
will be given priority in the allocation procedures in sales and
subsequent reallocations of royalty oil.
(d) No eligible refiner shall be awarded contracts for volumes of
royalty oil that, when added to volumes of other Federal royalty oil
being received, are in excess of 60 percent of the combined refinery
capacity of that refiner.
(e) The MMS may exclude any section 6 lease from a royalty oil sale.
(f) If two or more eligible refiners are related through common
ownership or control or otherwise affiliated, only one of them shall be
entitled to an allotment of royalty oil from a specific sale.
(g) Any applicant whose refinery is not in operation during the 60-
day period prior to the date of the royalty oil sale shall not be
entitled to participate in the sale unless such applicant self-certifies
and demonstrates to the satisfaction of MMS that it will begin
operations by the first month in which oil becomes available under a
royalty oil contract. If operations do not begin by that month, MMS will
terminate the contract.
(h) Applicants or purchasers that have delinquent balances with MMS
as
[[Page 142]]
of the date of a royalty oil sale or subsequent reallocation will not be
allowed to participate in that sale or reallocation. If a person which
is controlled by, in control of, under common control with, or otherwise
affiliated with an applicant or purchaser has such delinquent balances,
the applicant or purchaser will not be allowed to participate in a
royalty oil sale or reallocation. To the extent a purchaser or
affiliated person has appealed a billing and posted a surety instrument
in accordance with the contract terms and applicable MMS regulations or
other law, the balance shall not be considered delinquent.
(i) A purchaser must meet the eligibility criteria on the date of
contract issuance. However, a change in a purchaser's eligibility status
during the term of the contract will not affect the purchaser's right to
continue that contract until its term expires, including any extensions
thereof.
[52 FR 41913, Oct. 30, 1987, as amended at 58 FR 64901, Dec. 10, 1993]
Sec. 208.8 Transportation and delivery.
(a) The lessee shall deliver royalty oil from onshore leases to the
purchaser at a point on or adjacent to the lease pursuant to the terms
of the lease. If the purchaser does not have access to its onshore
royalty oil entitlement at facilities on or adjacent to the lease, the
operator of the lease must designate an alternate delivery point at no
additional cost to the purchaser or the Government. The purchaser must
have physical access to the oil at the alternate delivery point and such
point must be approved by MMS.
(b) The lessee shall deliver royalty oil from section 8 offshore
leases issued after September 1969 at a delivery point to be designated
by MMS. The lessee shall deliver royalty oil from section 8 offshore
leases issued before October 1969 or from section 6 leases at a delivery
point to be designated by the lessee. If the delivery point is on or
immediately adjacent to the lease, the royalty oil will be delivered
without cost to the Federal Government as an undivided portion of
production in marketable condition at pipeline connections or other
facilities provided by the lessee, unless other arrangements are
approved by MMS. If the delivery point is not on or immediately adjacent
to the lease, MMS will reimburse the lessee for the reasonable cost of
transportation to such point in an amount not to exceed the
transportation allowance determined pursuant to 30 CFR part 206. The MMS
will include such transportation costs in the price charged for the oil
taken in kind to reflect the value of the oil at the delivery point.
Arrangements for delivery of the royalty oil from, or exchange of the
oil at, the delivery point, and related transportation costs, are the
responsibility of the purchaser of the royalty oil. In addition, quality
differentials between the royalty oil to which a purchaser is entitled
and the oil which is made available at the delivery point are matters to
be resolved between the purchaser and the operator.
(c) When the purchaser has physical access to the royalty oil at the
delivery point, the lessee shall deliver such oil in marketable
condition at pipeline connections or other facilities designated by MMS.
If the lessee is unable to provide the royalty portion of actual
production from the lease, the lessee must provide crude oil to the
purchaser which is equivalent in volume or value to the royalty oil to
which the purchaser is entitled. The lessee will deliver the royalty oil
to the purchaser during normal operating hours and in reasonable
quantities and intervals. The lessee will make available and the
purchaser will accept delivery of the royalty oil entitlement no later
than the last day of the calendar month immediately following the
calendar month in which the oil was produced. Failure to accept
deliveries shall constitute grounds for the termination of the contract.
(d) Upon termination of deliveries under a royalty oil contract, the
transportation allowance and delivery point designation authorized by
this section no longer will remain in effect.
Sec. 208.9 Agreements.
(a) A purchaser must submit to MMS two copies of any written third-
party agreements, or two copies of a full written explanation of any
oral third-
[[Page 143]]
party agreements, relating to the method and costs of delivery of
royalty oil, or crude oil exchanged for the royalty oil, from the point
of delivery under the contract to the purchaser's refinery. In addition,
the purchaser must submit copies of agreements pertaining to quality
differentials which may occur between leases and delivery points.
(b) A purchaser may not sell royalty oil which it purchases pursuant
to this part except for purposes of an exchange for other crude oil on a
volume or equivalent value basis.
(c) Royalty oil purchased under this part, or crude oil received in
exchange for such royalty oil, must be processed into refined petroleum
products in the purchaser's refinery.
Sec. 208.10 Notices.
(a) The MMS shall notify each operator, by certified mail, of the
Secretary's decision to take royalty oil in kind. This notice shall be
mailed at least 45 days in advance of the effective date of delivery and
will specify delivery points for offshore oil for OCS leases issued
after September 1969.
(b) Deliveries of royalty oil may be partially terminated only with
the written approval of the Director, MMS.
(c) Before terminating the delivery of royalty oil taken in kind,
MMS, if possible, will notify each operator by certified mail of the
change in requirements at least 30 days in advance of the effective
date.
(d) After MMS notification that royalty oil will be taken in kind,
the operator shall be responsible for notifying each working interest on
the Federal lease. As soon as practicable after the date of each royalty
oil sale, MMS will publish in the Federal Register a notice of the
leases from which royalty oil will be taken, the purchasers of the
royalty oil, and the leases from which royalty oil deliveries will be
discontinued on terminated contracts.
(e) A purchaser cannot transfer, assign, or sell its rights or
interest in a royalty oil contract without written approval of the
Director, MMS. If the purchaser changes ownership or its assets are sold
or liquidated for any reason, it cannot transfer, assign, or sell its
rights or interest in the royalty oil contract without written approval
of the Director, MMS. Without express written consent from MMS for a
change in ownership, the royalty oil contract shall be terminated. The
successor company must meet the definition of an eligible refiner in
Sec. 208.2 of this part for MMS to consider assignment of the royalty
oil contract.
Sec. 208.11 Surety requirements.
(a) The eligible purchaser, prior to execution of the contract,
shall furnish an ``MMS-specified surety instrument,'' in an amount equal
to the estimated value of royalty oil that could be taken by the
purchaser in a 99-day period, plus related administrative charges. The
MMS may require the purchaser to increase the amount of the surety
instrument when necessary to protect the Government's interest or may
allow the purchaser to decrease the amount of the surety instrument
where necessary to further the purposes of the Royalty-in-Kind Program.
(b) If a letter of credit is furnished as the surety instrument, it
must be effective for a 9-month period beginning the first day the
royalty oil contract is effective, with a clause providing for automatic
renewal monthly for a new 9-month period. The purchaser or its surety
company may elect not to renew the letter of credit at any monthly
anniversary date, but must notify MMS of its intent not to renew at
least 30 days prior to the anniversary date. The MMS may grant the
purchaser 45 days to obtain a new surety instrument. If no replacement
surety instrument is provided, MMS will terminate the contract effective
at least 6 months prior to the expiration date of the letter of credit.
Notwithstanding the above provisions, the letter of credit also may
contain a clause providing for automatic termination 6 months after the
royalty oil contract terminates. If a certificate of deposit is
furnished as the surety instrument, it must be effective for the life of
the contract plus 6 months after the royalty oil contract terminates.
(c) For the purposes of this section, an ``MMS-specified surety
instrument'' means either: an MMS-specified surety
[[Page 144]]
bond, an MMS-specified irrevocable letter of credit, or a financial
institution book-entry certificate of deposit.
(d) The ``MMS-specified surety instrument'' shall be in a form
specified by MMS instructions or approved by MMS. A bond must be issued
by a qualified surety company that has been approved by the Department
of the Treasury. An irrevocable letter of credit or a certificate of
deposit must be from a financial institution acceptable to MMS. The MMS
will use a bank rating service to determine whether a financial
institution has an acceptable rating to provide a surety instrument
deemed adequate to indemnify the Government from loss or damage.
(e) All surety instruments must be in a form acceptable to MMS and
must include such other specific requirements as MMS may require
adequately to protect the Government's interests.
[58 FR 64901, Dec. 10, 1993]
Sec. 208.12 Payment requirements.
(a) All payments to MMS by a purchaser of royalty oil will be due on
the date and at the location specified in the contract, or, if there is
no contractual provision, as specified by MMS. The purchaser shall
tender all payments to MMS in accordance with 30 CFR 218.51. Payments
made by a payor pursuant to the requirements of paragraph (b) of this
section and Sec. 208.13 also shall be tendered in accordance with 30 CFR
218.51.
(b)(1) Payments from a purchaser of royalty oil not received by MMS
when due, or that portion of the payment less than the full amount due,
will be subject to a late payment charge equivalent to an interest
assessment on the amount past due for the number of days that the
payment is late at the underpayment rate applicable under section 6621
of the Internal Revenue Code of 1954.
(2) The MMS may assess interest to a payor for any underpayments
which are the result of the payor's late or underreporting, or for
adjustments reported by the payor, or made as a result of audit,
reconciliation, or other procedures. The interest for late payment and
underpayment will be assessed pursuant to 30 CFR 218.54.
(c) If payment for royalty oil is not received by the due date
specified in the contract, a notice of nonreceipt will be sent to the
purchaser by certified mail. If payment is not received by MMS within 15
days from the date of such notice, MMS may cancel the contract and
collect under the MMS-specified surety instrument. See Sec. 208.11.
(d) If the purchaser disagrees with the amount of payment due, it
must pay the amount due as computed by MMS, unless the purchaser appeals
the amount and posts an MMS-specified surety instrument pursuant to the
provisions of 30 CFR part 243. The MMS may, at its discretion, waive the
appeal surety requirements if it determines that the contract surety
instrument is sufficient protection for an amount under appeal.
[52 FR 41913, Oct. 30, 1987, as amended at 64901, Dec. 10, 1993]
Sec. 208.13 Reporting requirements.
If MMS underbills a purchaser under a royalty oil contract because
of a payor's underreporting or failure to report on Form MMS-2014
pursuant to 30 CFR 210.52, the payor will be liable for payment of such
underbilled amounts plus interest if they are unrecoverable from the
purchaser or the surety instrument related to the contract.
[58 FR 64902, Dec. 10, 1993]
Sec. 208.14 Civil and criminal penalties.
Failure to abide by the regulations in this part may result in civil
and criminal penalties being levied on that person as specified in
sections 109 and 110 of the Federal Oil and Gas Royalty Management Act
of 1982, 30 U.S.C. 1719-20, and regulations at 30 CFR part 241. Civil
penalties applicable under the OCSLA and the Mineral Leasing Act of 1920
may also be imposed.
Sec. 208.15 Audits.
Audits of the accounts and books of lessees, operators, payors, and/
or purchasers of royalty oil taken in kind may be made annually or at
such other times as may be directed by MMS. Such audits will be for the
purpose of
[[Page 145]]
determining compliance with applicable statutes, regulations, and
royalty oil contracts.
Sec. 208.16 How to appeal a contracting officer's decision that you receive.
If you receive a contracting officer's decision, you may:
(a) Appeal that decision to the Board of Contract Appeals in the
Office of Hearings and Appeals, Office of the Secretary, in accordance
with the procedures provided in 43 CFR part 4, subpart C; or
(b) File an action in the United States Court of Federal Claims.
[64 FR 26251, May 13, 1999]
Sec. 208.17 Suspensions for national emergencies.
The Secretary of the Department of the Interior, upon a
recommendation by the Secretary of Defense or the Secretary of Energy
and with the approval of the President, may suspend operations under
these regulations and suspend royalty oil contracts during a national
emergency declared by the Congress or the President.
PART 210--FORMS AND REPORTS--Table of Contents
Subpart A--General Provisions
Sec.
210.10 Information collection.
Subpart B--Oil, Gas, and OCS Sulfur--General
210.50 Required recordkeeping.
210.51 Payor information form.
210.52 Report of sales and royalty remittance.
210.53 Reporting instructions.
210.54 Definitions.
210.55 Special forms or reports.
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General
210.200 Required recordkeeping.
210.201 Solid minerals payor information form.
210.202 Report of sales and royalty remittance--solid minerals.
210.203 Special forms and reports.
210.204 Reporting instructions.
Subpart F--Coal [Reserved]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources
210.350 Definitions.
210.351 Required recordkeeping.
210.352 Payor information forms.
210.353 Special forms and reports.
210.354 Monthly report of sales and royalty.
210.355 Reporting instructions.
Subpart I--OCS Sulfur [Reserved]
Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq.; 25 U.S.C.
396a et seq.; 25 U.S.C. 2101 et seq.; 30 U.S.C. 181 et seq.; 30 U.S.C.
351 et seq.; 30 U.S.C. 1001 et seq.; 30 U.S.C. 1701 et seq.; 31 U.S.C.
3716 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq.; 43 U.S.C. 1331 et
seq.; and 43 U.S.C. 1801 et seq.
Subpart A--General Provisions
Sec. 210.10 Information collection.
(a) Forms--This section identifies required MMS Royalty Management
Program forms for reporting sales and royalties, production information,
claiming a processing or transportation allowance, or claiming a reward
for providing original information. The information collection
requirements associated with the forms identified in this section have
been approved by OMB under 44 U.S.C. 3501 et seq. The forms, filing
dates, and approved OMB clearance numbers are summarized below:
------------------------------------------------------------------------
Form No., name, and filing date OMB No.
------------------------------------------------------------------------
MMS-2014--Report of Sales and Royalty Remittance--Due by the 1010-0022
end of first month following production month for royalty
payment and for rentals no later than anniversary date of
the lease..................................................
MMS-3160--Monthly Report of Operations-- Due by the 15th day 1010-0040
of the second month following the production month.........
MMS-4025--Oil and Gas Payor Information Form-- Due 30 days 1010-0033
after issuance of a new lease or change to an existing
lease......................................................
MMS-4030--Solid Minerals Payor Information Form-- Due 30 1010-0064
days after issuance of a new lease or change to an existing
account established by an earlier form.....................
MMS-4051--Facility and Measurement Information Form and 1010-0040
Supplement-- Due at the request of MMS during the initial
conversion of the facility and measurement device operators
MMS-4053--First Purchaser Report-- Due at the request of MMS 1010-0040
[[Page 146]]
MMS-4054--Oil and Gas Operations Report-- Due by the 15th 1010-0040
day of the second month following the production month.....
MMS-4055--Gas Analysis Report-- Due by the 15th day of the 1010-0040
second month following the production month................
MMS-4056--Gas Plant Operations Report-- Due by the 15th day 1010-0040
of the second month following the production month.........
MMS-4058--Production Allocation Schedule Report-- Due by the 1010-0040
15th day of the second month following the production month
MMS-4059--Solid Minerals Operation Report-- Due by the 15th 1010-0063
day of the second month following the production month.....
MMS-4060--Solid Minerals Facility Report-- Due by the 15th 1010-0063
day of the second month following the production month.....
MMS-4070--Application of the Purchase of Royalty Oil-- Due 1010-0042
prior to the date of sale in accordance with the
instructions in the Notice of Availability of Royalty Oil..
MMS-4109--Gas Processing Allowance Summary Report-- Initial 1010-0075
report due within 3 months following the last day of the
month for which an allowance is first claimed, unless a
longer period is approved by MMS...........................
MMS-4110--Oil Transportation Allowance Report-- Initial 1010-0061
report due within 3 months following the last day of the
month for which an allowance is first claimed, unless a
longer period is approved by MMS...........................
MMS-4280--Application for Reward for Original Information-- 1010-0076
Due when a reward is claimed for information provided which
may lead to the recovery of royalty or other payments owed
to the United States.......................................
MMS-4292--Coal Washing Allowance Report-- Due prior to or at 1010-0074
the same time that the allowance is first reported on Form
MMS-2014 and annually thereafter if the allowance does not
change.....................................................
MMS-4293--Coal Transportation Allowance Report-- Due prior 1010-0074
to or at the same time that the allowance is first reported
on Form MMS-2014 and annually thereafter if the allowance
does not change............................................
MMS-4295--Gas Transportation Allowance Report-- Initial 1010-0075
report due within 3 months following the last day of month
for which an allowance is first claimed unless a longer
period is approved by MMS..................................
MMS-4377--Stripper Royalty Rate Reduction Notification-- Due 1010-0090
for each 12-month qualifying period that a reduced royalty
rate is granted by the Bureau of Land Management...........
------------------------------------------------------------------------
The information required on the forms identified in the table above is
being collected by the Department of the Interior to meet its
congressionally mandated accounting and auditing responsibilities
relating to Federal and Indian mineral royalty management. The purpose
of the forms and the estimated public reporting burden associated with
each form are described in paragraph (c) of this section. With the
exception of Forms MMS-4109, MMS-4110, MMS-4280, MMS-4292, MMS-4293, and
MMS-4295, the forms are mandatory. Information on Forms MMS-4109, MMS-
4110, MMS-4292, MMS-4293, and MMS-4295 is required to receive a benefit.
Information required on Form MMS-4280 must be provided voluntarily to
claim a reward. Information collected relative to production, royalties,
and other payments due the Government from activities on leased Federal
or Indian land is authorized by the Federal Oil and Gas Royalty
Management Act of 1982, 30 U.S.C. 1701 et seq. for oil and gas
production, and by 30 U.S.C. 189, 30 U.S.C. 359, and 30 U.S.C. 396d for
solid mineral production.
(b) MMS mailing addresses--This paragraph identifies the MMS
address(es) to be used for requesting forms and/or for mailing completed
forms to MMS.
(1) Requests for Forms MMS-2014 or MMS-4070 should be addressed to
the Minerals Management Service, Royalty Management Program, P.O. Box
5760, Denver, Colorado 80217-5760. The completed Form MMS-2014 should be
mailed to the Minerals Management Service, Royalty Management Program,
P.O. Box 5810, Denver, Colorado 80217-5810. The address to which a
completed Form MMS-4070 should be mailed will be identified in a Federal
Register Notice of Availability of Royalty Oil. (See 30 CFR 208.5.)
(2) Requests for Forms MMS-4025 or MMS-4030 should be addressed to
the Minerals Management Service, Royalty Management Program, P.O. Box
5760, Denver, Colorado 80217-5760. The completed forms should be mailed
to the same address.
(3) Requests for Forms MMS-3160, MMS-4051, MMS-4052, MMS-4053, MMS-
4054, MMS-4055, MMS-4056, MMS-4057, MMS-4058, MMS-4059, MMS-4060, or
MMS-4061 should be addressed to the Minerals Management Service, Royalty
Management Program, P.O. Box 17110, Denver, Colorado 80217-0110. The
completed forms should be mailed to the same address.
(4) Requests for processing or transportation allowance forms (Forms
MMS-4109, MMS-4110, MMS-4292, MMS-4293, or MMS-4295) should be addressed
to the Minerals Management Service, Royalty Management Program, P.O. Box
25165, Denver, Colorado 80225-0165. The completed allowance forms should
[[Page 147]]
be mailed to the Minerals Management Service, Royalty Management
Program, P.O. Box 5200, Denver, Colorado 80217-5200.
(5) Requests for Form MMS-4280 should be addressed to the Minerals
Management Service, Royalty Management Program, P.O. Box 25165, Denver,
Colorado 80225-0165. The completed form should be mailed to the same
address. (See 30 CFR 218.57(b)).
(6) Reports delivered to MMS by special couriers or overnight mail
shall be addressed as follows: Minerals Management Service, Royalty
Management Program, Building 85, Denver Federal Center, room A-212,
Denver, Colorado 80225.
(c) Purpose of forms and estimated public reporting burden--This
paragraph describes the purpose of the information being collected and
the estimated public reporting burden associated with the OMB approved
forms identified in paragraph (a) of this section.
(1) MMS-2014--Used monthly to report lease-related transactions
essential for royalty management to determine the correct royalty amount
due, reconcile or audit data, and distribute payments to appropriate
accounts. Public reporting burden is estimated to average 7 minutes to
complete each line item on the form, including the time necessary to
assemble data, calculate value and royalty, and enter data on the form.
Companies with equipment enabling them to report using tape media may
average 3 minutes to complete each line item on the form. Comments
submitted relative to this information collection should reference
Paperwork Reduction Project 1010-0022.
(2) MMS-3160--Used by onshore oil and gas lease operators to report
monthly oil and gas production to MMS. Public reporting burden is
estimated to average 15 minutes per form including time spent reading
instructions, completing, and mailing the form. Comments submitted
relative to this information collection should reference Paperwork
Reduction Project 1010-0040.
(3) MMS-4025--This form is used to establish a data base of payor
accounts for oil and gas leases on Federal or Indian lands, reporting
changes in payor accounts, and notifying MMS of the products on which
royalties will be paid. Public reporting burden is estimated to average
30 minutes per form, including time spent reading instructions,
completing, and mailing the form. Comments submitted relative to this
information collection should reference Paperwork Reduction Project
1010-0033.
(4) MMS-4030--This form is used to establish a data base of payor
accounts for solid mineral leases on Federal or Indian lands, reporting
any changes to the accounts, and identifying the type of mine and
product produced. Public reporting burden is estimated to average 30
minutes per form, including time spent reading instructions, completing,
and mailing the form. Comments submitted relative to this information
collection should reference Paperwork Reduction Project 1010-0064.
(5) MMS-4051--Used to establish a reference data base identifying
the facilities where oil and gas production is stored or processed and
the metering points where production is measured for sale or transfer.
Public reporting burden is estimated to average 30 minutes per form for
facility operators to review and update the data base. Comments
submitted relative to this information collection should reference
Paperwork Reduction Project 1010-0040.
(6) MMS-4053--Designed as an audit tool to be used to confirm sales
data. Public reporting burden is estimated to average 30 minutes per
form, including time spent reading instructions, completing, and mailing
the form. Comments submitted relative to this information collection
should reference Paperwork Reduction Project 1010-0040.
(7) MMS-4054--This three-part form identifies all oil and gas lease
production from Federal and Indian lands. The MMS uses information from
this form to track oil and gas from the point of production to the point
of first sale or other disposition. Respondents will generally not use
all three parts of the form. Public reporting burden is estimated to
average 30 minutes per month, including time gathering data, completing,
and mailing the form. Comments submitted relative to this information
collection should reference Paperwork Reduction Project 1010-0040.
[[Page 148]]
(8) MMS-4055--This report identifies the separate components of
natural gas production. It is submitted quarterly or semiannually by
lease operators when gas production is processed before royalty value
has been determined. Public reporting burden is estimated to average 15
minutes per form including time required gathering data, completing, and
mailing the form. Comments submitted relative to this information
collection should reference Paperwork Reduction Project 1010-0040.
(9) MMS-4056--Submitted monthly by gas plant operators to identify
components and disposition of natural gas from Federal and Indian
leases. Public reporting burden is estimated to average 30 minutes per
form, including time required gathering data, completing, and mailing
the form. Comments submitted relative to this information collection
should reference Paperwork Reduction Project 1010-0040.
(10) MMS-4058--Submitted monthly by operators of the facilities and
measurement points where production from a Federal or Indian lease is
commingled with production from other sources before it is measured for
royalty determination. The data reported is used to determine whether
sales reported by lessees are reasonable. Public reporting burden is
estimated to average 15 minutes per form, including time required
gathering data, completing, and mailing the form. Comments submitted
relative to this information collection should reference Paperwork
Reduction Project 1010-0040.
(11) MMS-4059--This form consists of parts A and B. It is submitted
by all operators of Federal or Indian solid mineral leases on a schedule
established on the lease. Public reporting burden is estimated to range
from 30 minutes per form for the majority of operators who submit only
part A to report production and disposition of raw materials, to 1.25
hours for operators submitting both parts A and B to report sales of
mine production from a facility beyond the mine site. Comments submitted
relative to this information collection should reference Paperwork
Reduction Project 1010-0063.
(12) MMS-4060--Submitted by operators of secondary processing or
remote storage facilities that handle solid mineral production on which
royalties have not been determined. The form is usually submitted
monthly and requires 1 to 2 hours to complete depending on the
processes, inventory, and production disposition to be reported.
Comments submitted relative to this information collection should
reference Paperwork Reduction Project 1010-0063.
(13) MMS-4070--After publication in the Federal Register of a Notice
of Availability of Royalty Oil, refiners interested in the purchase of
royalty oil should submit their applications using this form. The
information collected is used by MMS to determine if the applicant meets
eligibility requirements to contract to purchase the oil. Public
reporting burden is estimated to average 1 hour per form, including time
required gathering data, completing, and mailing the form. Comments
submitted relative to this information collection should reference
Paperwork Reduction Project 1010-0042.
(14) MMS-4109--Used to claim an allowance for the reasonable, actual
costs of removing hydrocarbon and nonhydrocarbon elements or compounds
from the gas streams. Public reporting burden varies depending on the
type of contract involved. Under an arm's-length contract, burden is
estimated to average 1 hour for the submission of page 1 and schedule 1
of the form requiring the lessee's name and address, payor code, plant
name, accounting identification number, product code, and selling
arrangement. Nonarm's-length contract claims require completion of all
pages of the form including calculations of allowable operating and
maintenance costs, overhead, depreciation, and return on undepreciated
capital investment. Public reporting burden is estimated to average 10
hours to complete the entire form. Comments submitted relative to this
information collection should reference Paperwork Reduction Project
1010-0075.
(15) MMS-4110--Used to claim an allowance for expenses incurred by a
lessee in transporting oil from the lease site to a point remote from
the lease where value is determined. Public reporting burden varies
depending on the type of contract involved. Under an
[[Page 149]]
arm's-length contract, burden is estimated to average 2 hours for the
submission of page 1 and schedule 1 of the form requiring the lessee's
name and address, payor code, accounting identification number, product
code, and selling arrangement. Nonarm's-length contract claims require
completion of all pages of the form including calculations of allowable
operating and maintenance costs, overhead, depreciation, and return on
undepreciated capital investment. Public reporting burden is estimated
to average 5 hours to complete the entire form. Comments submitted
relative to this information collection should reference Paperwork
Reduction Project 1010-0061.
(16) MMS-4280--This form is used to claim a reward for information
leading to the recovery of payments owed to the United States from oil
and gas leases on Federal land or the Outer Continental Shelf. Claimants
must provide name, address, Social Security number, and a brief
description of the violation being reported. Public reporting burden is
estimated to average 30 minutes to complete this form. Comments
submitted relative to this information collection should reference
Paperwork Reduction Project 1010-0076.
(17) MMS-4292--This form is used to claim an allowance for the
reasonable, actual costs incurred to wash coal. Public reporting burden
varies depending on the type of contract involved. Under an arm's-length
contract, burden is estimated to average 1 hour for the submission of
page 1 of the form requiring the lessee's name and address, payor code,
accounting identification number, product code, and selling arrangement.
Nonarm's-length contract claims require completion of all pages of the
form including calculations of allowable operating and maintenance
costs, overhead, depreciation, and return on undepreciated capital
investment. Public reporting burden is estimated to average 40 hours to
complete the entire form. Comments submitted relative to this
information collection should reference Paperwork Reduction Project
1010-0074.
(18) MMS-4293--Used to claim an allowance for the reasonable, actual
costs of transporting coal to a sales point or a washing facility remote
from the mine or lease. Public reporting burden varies depending on the
type of contract involved. Under an arm's-length contract, burden is
estimated to average 1 hour for the submission of page 1 of the form
requiring the lessee's name and address, payor code, accounting
identification number, product code, and selling arrangement. Nonarm's-
length contract claims require completion of all pages of the form
including calculations of allowable operating and maintenance costs,
overhead, depreciation, and return on undepreciated capital investment.
Public reporting burden is estimated to average 40 hours to complete the
entire form. Comments submitted relative to this information collection
should reference Paperwork Reduction Project 1010-0074.
(19) MMS-4295-- This form is used to claim an allowance for the
reasonable, actual costs of transporting gas from the lease to the point
of first sale. Public reporting burden varies depending on the type of
contract involved. Under an arm's-length contract, burden is estimated
to average 1 hour for the submission of page 1 and schedule 1 of the
form requiring the lessee's name and address, payor code, accounting
identification number, product code, and selling arrangement. Nonarm's-
length contract claims require completion of all pages of the form
including calculations of allowable operating and maintenance costs,
overhead, depreciation, and return on undepreciated capital investment.
Public reporting burden is estimated to average 3 hours to complete the
entire form. Comments submitted relative to this information collection
should reference Paperwork Reduction Project 1010-0075.
(20) MMS-4377-- This form must be submitted by operators of stripper
oil properties to notify MMS of reduced royalty rates granted by the
Bureau of Land Management under 43 CFR 3103.4-1 for each 12-month
qualifying period. Reporting burden is estimated to require an average
of 30 minutes per form to supply the operator name, lease and agreement
numbers, calculated and current royalty rate, and the period covered.
Comments submitted relative to this information collection should
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reference Paperwork Reduction Project 1010-0090.
(d) Comments on burden estimates. Send comments regarding the burden
estimates or any other aspect of these information collections,
including suggestions for reducing burden, to the Information Collection
Clearance Officer, Minerals Management Service, 381 Elden Street,
Herndon, VA 22070; and to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Paperwork Reduction Project
1010-XXXX, Washington, DC 20503.
[57 FR 41864, Sept. 14, 1992]
Subpart B--Oil, Gas, and OCS Sulfur--General
Authority: The Federal Oil and Gas Royalty Management Act of 1982
(30 U.S.C. 1701 et seq.).
Source: 49 FR 37345, Sept. 21, 1984, unless otherwise noted.
Sec. 210.50 Required recordkeeping.
Information required by the MMS shall be filed using the forms
prescribed in this subpart, which are available from MMS. Records may be
maintained in microfilm, microfiche, or other recorded media that is
easily reproducible and readable.
Sec. 210.51 Payor information form.
The Payor Information Form (Form MMS-4025) must be filed for each
Federal or Indian lease on which royalties are paid. Where specifically
determined by MMS, Form MMS-4025 is also required for all Federal leases
on which rent is due. The completed form must be filed by the party who
is making the rent or royalty payment (payor) for each revenue source.
Form MMS-4025 must be filed no later than 30 days after issuance of a
new lease or a modification to an existing lease which changes the
paying responsibility on the lease.
Sec. 210.52 Report of sales and royalty remittance.
A completed Report of Sales and Royalty Remittance (Form MMS-2014)
must accompany all payments to MMS for royalties and, where specified,
for rents on nonproducing leases. Payors who submit Form MMS-2014 data
on magnetic tape will not be required to submit the form itself.
Completed Form MMS-2014's (or magnetic tape) for royalty payments
including those covering payments by electronic funds transfer, are due
by the end of the month following the production month. Where
applicable, completed Form MMS-2014's for rental payments are due no
later than the anniversary date of the lease. This section does not
prohibit payors from making early payments voluntarily.
Sec. 210.53 Reporting instructions.
(a) Specific guidance on how to prepare and submit required
information collection reports and forms to MMS is contained in an MMS
``Oil and Gas Payor Handbook,'' a ``Production Accounting and Auditing
System Reporter Handbook,'' and a ``PAAS Onshore Oil and Gas Reporter
Handbook.'' The Payor Handbook is available from the Minerals Management
Service, Royalty Management Program, P.O. Box 5760, Denver, Colorado
80217-5760. The Reporter Handbooks are available from the Minerals
Management Service, Royalty Management Program, P.O. Box 17110, Denver,
Colorado 80217-0110.
(b) Royalty payors or production reporters should refer to these
handbooks for specific guidance with respect to oil and gas reporting
requirements. If additional information is required, the payor or
reporter should contact the MMS at the above address. The appropriate
telephone numbers are listed in the handbooks.
[51 FR 45882, Dec. 23, 1986, as amended at 53 FR 16412, May 9, 1988; 57
FR 41867, Sept. 14, 1992; 58 FR 64902, Dec. 10, 1993]
Sec. 210.54 Definitions.
Terms used in this subpart shall have the same meaning as in 30
U.S.C. 1702.
[49 FR 37345, Sept. 21, 1984. Redesignated at 51 FR 45882, Dec. 23,
1986]
Sec. 210.55 Special forms or reports.
(a) MMS may require you to submit additional information, forms, or
reports other than those specifically referred to in this subpart. MMS
will give
[[Page 151]]
you instructions for providing such information or filing such reports
or forms. MMS will make requests for additional information, forms, or
reports under this section in conformity with the Paperwork Reduction
Act of 1995, 44 U.S.C. 3501, and other applicable laws.
(b) If you file a Form MMS-4025, Payor Information Form (PIF) under
Sec. 210.51, you must provide the following information to MMS upon
request for each PIF:
(1) The AID number for the lease;
(2) The name, address, Taxpayer Identification Number (TIN), and
phone number of the person for whom you are reporting and paying
royalties or making other payments under the PIF;
(3) Whether the person you named in paragraph (b)(2) of this section
with respect to the lease for which you filed the PIF is a:
(i) Lessee of record (record title owner);
(ii) Operating rights owner (working interest owner); or
(iii) Operator;
(4) The name, address, and phone number of the individual to contact
for the person you named in paragraph (b)(2) of this section;
(5) Your TIN; and
(6) Whether you are the Designee of the person you named in
paragraph (b)(2) of this section under 30 U.S.C. 1712(a), and, if so:
(i) The date your designation became effective; and
(ii) The date your designation terminates, if applicable; and
(iii) A copy of the written designation;
(c) If you have been identified under paragraph (b)(2) of this
section, you must provide the following information to MMS upon request:
(1) Confirmation that you are the person identified under paragraph
(b)(2) of this section;
(2) Confirmation that the person identified in paragraph (b)(6) of
this section is your designee; and
(3) A designation under Sec. 218.52 of this title if the person
identified in paragraph (b)(6) of this section is not your Designee, and
if you are not reporting and paying royalties and making other payments
to MMS.
[62 FR 42066, Aug. 5, 1997]
Subpart C--Federal and Indian Oil [Reserved]
Subpart D--Federal and Indian Gas [Reserved]
Subpart E--Solid Minerals, General
Source: 51 FR 15766, Apr. 28, 1986, unless otherwise noted.
Sec. 210.200 Required recordkeeping.
Information required by the Minerals Management Service (MMS) shall
be filed using the forms prescribed in this subpart, copies of which are
available from MMS. Instructions on the completion of these forms are
provided in the Payor Handbook--Solid Minerals, also available from MMS.
Records and supporting data may be maintained in hardcopy, microfilm,
microfiche, or other recorded media that is readily available and
readable.
Sec. 210.201 Solid minerals payor information form.
A Solid Minerals Payor Information Form (Form MMS-4030) must be
submitted to MMS for each Federal and Indian solid minerals lease on
which royalties, rentals or minimum royalties are paid. This form does
not change any requirement for a separate approval, if required, by the
Department of the Interior. The Form MMS-4030 shall identify the payor
of rent, minimum royalty, advance royalty and production royalty, and
identify revenue sources and selling arrangements for all lease
products. The completed form must be filed by each royalty payor no
later than 30 days after MMS provides notice that the payor is converted
to the Auditing and Financial System (AFS). After filing the initial
form, a new Form MMS-4030 must be filed no later than 30 days after the
occurrence of any of the following:
(a) Assignment of all or any part of the lease;
(b) Adoption of a new mining method;
(c) Production of a new product;
[[Page 152]]
(d) A change in a selling arrangement;
(e) Change in royalty rate;
(f) Change of payor; or
(g) Abandonment of a lease.
Sec. 210.202 Report of sales and royalty remittance--solid minerals.
A completed Report of Sales and Royalty Remittance (Form MMS-2014)
must accompany all payments to MMS for rents (other than first year) and
royalties for Federal and Indian solid minerals leases. On leases where
payment is remitted directly to an Indian tribe or Bureau of Indian
Affairs office, the payor also must send a completed form MMS-2014 to
MMS for processing in AFS. The Form MMS-2014 shall identify the payor
and the lease subaccounts, contain production, sales, and royalty data,
and identify the time period applicable to the data. Completed forms are
due at the end of the month following the production or sales period as
applicable. Unless the lease terms specify a different royalty payment
frequency, all reports and payments are due monthly. If the lease terms
do specify a different frequency for payment, the reporting must
coincide with the payment. The Form MMS-2014 for rental payments is due
no later than the rental payment date specified in the lease terms.
[51 FR 15766, Apr. 28, 1986, as amended at 57 FR 52720, Nov. 5, 1992]
Sec. 210.203 Special forms and reports.
The MMS may require submission of additional information on special
forms or reports. When special forms or reports other than those
referred to in this subpart are necessary, instructions for the filing
of such forms or reports will be given by MMS. Requests for the
submission of such forms will be made in conformity with the
requirements of the Paperwork Reduction Act of 1980 and other applicable
laws.
Sec. 210.204 Reporting instructions.
(a) Specific guidance on how to prepare and submit required
information collection reports and forms to MMS is contained in an ``MMS
Payor Handbook--Solid Minerals'' and a ``Production Accounting and
Auditing System Reporter Handbook.'' The Payor Handbook is available
from the Minerals Management Service, Royalty Management Program, P.O.
Box 5760, Denver, Colorado 80217-5760. The Reporter Handbook is
available from the Minerals Management Service, Royalty Management
Program, P.O. Box 17110, Denver, Colorado 80217-0110.
(b) Royalty payors or production reporters should refer to these
handbooks for specific guidance with respect to solid minerals reporting
requirements. If additional information is required, the payor or
reporter should contact the MMS at the above address. The appropriate
telephone numbers are listed in the handbooks.
[51 FR 45883, Dec. 23, 1986, as amended at 57 FR 41867, Sept. 14, 1992;
58 FR 64902, Dec. 10, 1993]
Subpart F--Coal [Reserved]
Subpart G--Other Solid Minerals [Reserved]
Subpart H--Geothermal Resources
Source: 56 FR 57286, Nov. 8, 1991, unless otherwise noted.
Sec. 210.350 Definitions.
Terms used in this subpart shall have the same meaning as in 30 CFR
206.351.
Sec. 210.351 Required recordkeeping.
Information required by MMS shall be filed using the forms
prescribed in this subpart, which are available from MMS. Records may be
maintained on microfilm, microfiche, or other recorded media that are
easily reproducible and readable. See subpart H of 30 CFR part 212.