98-3597. Establishing Oil Value for Royalty Due on Indian Leases

[Federal Register Volume 63, Number 29 (Thursday, February 12, 1998)]
[Proposed Rules]
[Pages 7089-7109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3597]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC24


Establishing Oil Value for Royalty Due on Indian Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This proposed rule would modify the regulations to establish 
the value for royalty purposes of oil produced from Indian leases and 
establish a new Minerals Management Service (MMS) form for collecting 
value and value differential data. These changes would decrease 
reliance on oil posted prices and use more publicly available 
information.

DATES: Comments must be submitted on or before April 13, 1998.

ADDRESSES: Mail written comments, suggestions, or objections regarding 
the proposed rule to: Minerals Management Service, Royalty Management 
Program, Rules and Publications Staff, P.O. Box 25165, MS 3021, Denver, 
Colorado 80225-0165; courier address is Building 85, Denver Federal 
Center, Denver, Colorado 80225; or e:Mail [e-mail]. MMS will 
publish a separate notice in the Federal Register indicating dates and 
locations of public hearings regarding this proposed rulemaking.

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and 
Publications Staff, telephone [phone], FAX [phone], 
e:Mail [e-mail], Minerals Management Service, Royalty 
Management Program, Rules and Publications Staff, P.O. Box 25165, MS 
3021, Denver, Colorado 80225-0165.

SUPPLEMENTARY INFORMATION: The principal authors of this proposed rule 
are David A. Hubbard of Royalty Management Program (RMP), Lakewood, 
Colorado, and Peter

[[Page 7090]]

Schaumberg of the Office of the Solicitor in Washington, D.C.

I. Introduction

    On December 20, 1995, MMS published an Advance Notice of Proposed 
Rulemaking about possible changes to the rules for royalty valuation of 
oil from Federal and Indian leases (60 FR 65610). The intent of the 
changes was to decrease reliance on oil posted prices and to develop 
valuation rules that better reflect market value. MMS requested 
comments regarding the possible changes.
    MMS used various sources of information to develop the proposed 
rule. In addition to comments received on the Advance Notice of 
Proposed Rulemaking, MMS attended a number of presentations by crude 
oil brokers and refiners, commercial oil price reporting services, 
companies that market oil directly, and private consultants 
knowledgeable in crude oil marketing. MMS's deliberations were aided 
greatly by a wide range of expert advice and direct consultations MMS 
held with various Indian representatives.
    The Department of the Interior's practice is to give the public an 
opportunity to participate in the rulemaking process. Anyone interested 
may send written comments, suggestions, or objections regarding this 
proposed rule to the location cited in the ADDRESSES section of this 
preamble. We will post public comments after the comment period closes 
on the Internet at http://www.rmp.mms.gov or contact David S. Guzy, 
Chief, Rules and Publications Staff, telephone [phone], FAX 
[phone].

II. General Description of the Proposed Rule

    MMS's existing regulations for valuing crude oil for royalty 
purposes are at 30 CFR part 206. Basically, the same regulations apply 
to Federal and Indian leases. These rules rely primarily on posted 
prices and prices under arm's-length sales to value oil. Recently, 
posted prices have become increasingly suspect as a fair measure of 
market value. As a result, for Federal lease production, MMS proposed 
new valuation rules that place substantial reliance on crude oil 
futures prices on the New York Mercantile Exchange (NYMEX). See 62 FR 
3742 (Jan. 24, 1997). Because of the different terms of Indian leases, 
MMS is proposing separate rules for Indian oil valuation.
    The proposed rulemaking would add more certainty to valuation of 
oil produced from Indian leases and eliminate any direct reliance on 
posted prices. Most Indian leases include a ``major portion'' 
provision, which says value is the highest price paid or offered at the 
time of production for the major portion of oil production from the 
same field. To lessen the current reliance on posted prices and to 
better accommodate the major portion provision, the proposed rule 
requires that royalty value be based on the highest of three different 
values: (1) A value based on NYMEX futures prices adjusted for location 
and quality differences; (2) the lessee's or its affiliate's gross 
proceeds adjusted for appropriate transportation costs; and (3) an MMS-
calculated major portion value based on prices reported by lessees and 
purchasers in MMS-designated areas typically corresponding to 
reservation boundaries.
    Because much Indian oil is disposed of under exchange agreements, 
specific guidance for applying the valuation criteria are included for 
these dispositions: (1) if the lessee or its affiliate disposes of 
production under an exchange agreement and then sells at arm's length 
the oil it receives in return, royalty value would be the resale price 
adjusted for appropriate quality differentials and transportation costs 
(unless the NYMEX or major portion values are higher); and (2) if the 
lessee or its affiliate disposes of production under an exchange 
agreement but refines rather than sells the oil it receives in return, 
royalty value would be the NYMEX value (unless the major portion value 
is higher).
    The lessee would initially report royalties based on the higher of 
the NYMEX value or its gross proceeds. After MMS does its major portion 
calculation for the production month, explained below, the lessee would 
revise its initial royalty value if the major portion value were 
higher.
    Adjustments for location and quality against the index values are 
limited to these components:
    (1) A location and/or quality differential between the index 
pricing point (West Texas Intermediate at Cushing, Oklahoma) and the 
appropriate market center (for example, West Texas Intermediate at 
Midland, Texas, or Wyoming Sweet at Guernsey, Wyoming), calculated as 
the difference between the average monthly spot prices published in an 
MMS-approved publication for the respective locations; and either;
    (2) A rate either published by MMS or contained in the lessee's 
arm's-length exchange agreement representing location and/or quality 
differentials between the market center and the boundary of the 
designated area (defined term--usually an Indian reservation); or
    (3) Where oil flows to the market center, and as determined under 
the existing allowance rules, the actual transportation costs to the 
market center from the designated area.
    Calculation of differentials could vary if the lessee takes its 
production directly to its own refinery and the movement in no way 
approximates movement to a market center.
    MMS would calculate and publish the rate from the market center to 
the designated area based on specific information it would collect on a 
new form: Form MMS-4416, Indian Crude Oil Valuation Report. This form 
would also assist MMS in verifying data used to calculate major portion 
values. It is attached to this notice of proposed rulemaking as 
Appendix A. MMS requests commenters to provide comments on this form 
according to the information under the Paperwork Reduction Act in part 
IV, Procedural Matters, of this notice.
    MMS will verify during the first 6 months after the effective date 
of this rule that the values determined by this rule are replicating 
actual market prices and satisfying Indian lease terms. Comments on how 
best to perform this analysis are also requested.
    In the next section, we describe the major regulatory changes 
proposed in this rulemaking. The proposed changes for valuing 
production are substantive. But some sections, particularly those 
involving transportation allowances, remain mostly the same. Also, to 
clarify and simplify the rules, MMS is incorporating many changes that 
are not substantive but are an effort to implement concepts of plain 
English.

III. Section-by-Section Analysis

30 CFR Part 206

    MMS proposes to amend part 206, Subpart B--Indian Oil as described 
below. Some of the provisions would be largely the same as in the 
existing rules, but would be rewritten for clarity.

Section 206.50 Purpose and Scope.

    This section's contents would remain the same except for 
clarifications. MMS rewrote it in plain English to improve clarity.

Section 206.51 Definitions.

    MMS would retain most of the definitions in Sec. 206.51. Many of 
those retained were rewritten to reflect plain English. New definitions 
to support the revised valuation procedures are proposed for: 
Designated area, Exchange agreement, Index pricing, Index pricing 
point, Location

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differential, Major portion, Market center, MMS-approved publication, 
NYMEX, Quality differential, Sale, and Settle price. The definition of 
Allowance would be amended and captured under Transportation allowance. 
The definition of Lessee would be amended to include all of a company's 
affiliates, including its production, refining, and marketing arms. The 
term ``lessee'' could include multiple parties to a transaction 
involving oil sales from Indian leases. For example, it could include 
the lessee of record, the lessee of record's marketing affiliate, the 
operator, and the purchaser, if the purchaser were paying MMS 
royalties. Thus, when the term ``lessee'' is used in the proposed 
regulations and this preamble, it is used expansively and refers to all 
persons that are lessees under the proposed definition. For example, if 
the proposed regulations require the lessee to retain all data relevant 
to the determination of royalty value, this requirement would apply to 
the producer, the marketing arm and the purchaser, if the purchaser 
paid MMS royalties. We will discuss the new and amended definitions 
below where they appear in the regulatory text.
    The proposed rule would remove the definitions of Marketing 
affiliate, Net-back method, Oil shale, Posted price, Processing, 
Selling arrangement and Tar sands because they no longer relate to how 
most crude oil is marketed or to the structure of the proposed rules. 
The definition of Like-quality lease products also would be revised 
under a new definition of Like-quality oil to support the new valuation 
publications. We will discuss this definition below where it appears in 
the regulatory text.

Section 206.52 How Does a Lessee Calculate Royalty Value for Oil?

    This section would explain how you, as a lessee, a defined term, 
must calculate the value of oil production for royalty purposes. It is 
the principal valuation section of the proposed rules.
    The current Indian oil valuation procedures rely heavily on posted 
prices and contract prices. Since many contracts use posted prices as a 
basis, the influence of posted prices is magnified. MMS is proposing a 
different valuation approach because market conditions have changed and 
because MMS believes the major portion provision of Indian leases needs 
to be better implemented. Moreover, the widespread use of exchange 
agreements and reciprocal sales, as well as the difficulties with 
relying on posted prices, suggests that many of these past pricing 
mechanisms are no longer accurate indicators of value in the 
marketplace. Given the mounting evidence that posted prices frequently 
do not reflect value in today's marketplace, the proposed valuation 
standards do not rely at all on postings. Furthermore, the prices 
referred to in exchange agreements and reciprocal sales may not 
represent market values. If two companies maintain a balance between 
purchases and sales, it is irrelevant to them whether the referenced 
price represents market value. So, after consulting various crude oil 
pricing experts and after considerable deliberation, MMS proposes to 
revise this section to value production from Indian leases at the 
highest of three values: NYMEX futures prices, gross proceeds, or a 
major portion value. These three methods would be outlined in a table 
for easy access. MMS proposes this multiple comparison largely because 
of concerns that current oil marketing practices may at least partially 
mask the actual value accruing to the lessee. Multiple sales and 
purchases between the same participants, while apparently at arm's 
length, may be suspect concerning the contractual price terms. A 
producer may have less incentive to capture full market value in its 
sales contracts if it knows it will have reciprocal dealings with the 
same participant where it, in turn, may be able to buy oil at less than 
market value. Several MMS consultants reinforced the notion that as 
long as the two parties maintain relative parity in value of oil 
production traded, the absolute contract price in any particular 
transaction has little meaning. This is particularly obvious in the 
case of exchange agreements.
    Based on the information available to the lessee at the time it 
needs to value and pay royalties on production, the lessee would first 
determine whether its gross proceeds or a NYMEX-based index price would 
yield the higher value. As explained below, MMS would later determine 
and publish a major portion value. The lessee would then determine if 
the major portion value was higher than the value it initially reported 
and paid royalties on. If so, the lessee would owe additional monies. 
Paragraphs (a), (b), (c), and (d) explain this process. They replace 
most of existing paragraphs (a), (b), and (c).
    Paragraphs (a)(1)-(5). The first of the comparative values would be 
the average of the five highest daily NYMEX futures settle prices at 
Cushing, Oklahoma, for the Domestic Sweet crude oil contract for the 
prompt month. Settle price would mean the price established by the New 
York Mercantile Exchange (NYMEX) Settlement Committee at the close of 
each trading session as the official price to be used in determining 
net gains or losses, margin requirements, and the next day's price 
limits. The prompt month would be the earliest month for which futures 
are traded on the first day of the month of production. For example, if 
the production month is April 1997, the prompt month would be May 1997, 
since that is the earliest, or nearest, month for which futures are 
traded on April 1.
    Paragraphs (a)(2) and (3) would explain that the NYMEX price would 
have to be adjusted for applicable location and quality differentials, 
and could be adjusted for transportation costs as discussed below.
    Paragraph (a)(4) would maintain that where the lessee disposes of 
production under an exchange agreement and the lessee refines rather 
than sells the oil received in return, the lessee would apply this 
paragraph (unless paragraph (c) results in a higher value). An Exchange 
agreement would be defined as an agreement by one person to deliver oil 
to another person at a specified location in exchange for reciprocal 
oil deliveries at another location. Such agreements may be made because 
each party has crude oil production closer to the other's refinery or 
transportation facilities than to its own, so each may gain locational 
advantages. Exchange agreements may or may not specify prices for the 
oil involved and frequently specify dollar amounts reflecting location, 
quality, or other differentials. Buy/sell agreements, which specify 
prices to be paid at each exchange point and may appear to be two 
separate sales within the same agreement, are considered exchange 
agreements. Transportation agreements are purely to accomplish 
transportation. They specify a location differential for moving oil 
from one point to the other, with redelivery to the first party at the 
second exchange point. They are not considered exchange agreements.
    Paragraph (a)(5) would provide that MMS would monitor the NYMEX 
prices. If MMS determines that NYMEX prices are unavailable or no 
longer represent reasonable royalty value, MMS would, by rule, amend 
this paragraph to establish a substitute valuation method.
    Attached Appendix B is an example of the NYMEX-based index pricing 
method. Assume that the production month is January 1997. The prompt 
month would then be February 1997, the prompt month in effect on 
January 1. In this instance, February 1997 oil futures are traded on 
the NYMEX from December 20, 1996, through January 21, 1997. The average 
of the five highest

[[Page 7092]]

daily NYMEX futures settle prices for the February 1997 prompt month is 
$26.25 per bbl. This price would be adjusted for location/quality 
differentials and transportation (discussed later) to determine the 
proper oil value for January production.
    MMS searched for indicators to best reflect current market prices 
and settled on NYMEX for several reasons. It represents the price for a 
widely-traded domestic crude oil (West Texas Intermediate at Cushing, 
Oklahoma), and there is little likelihood that any particular 
participant in NYMEX trading could impact the price. Also, NYMEX prices 
were regarded by many of the experts MMS consulted to be the best 
available measure of oil market value. As will be discussed in more 
detail below, the most difficult problem would be to make appropriate 
location and quality adjustments when comparing the NYMEX crude with 
the crude produced. Other indicators MMS considered included spot 
prices as tabulated by various publications and the P-plus market. The 
P-plus indicator shows premiums over posted prices to reflect oil 
market value on any given day. Spot prices offer the advantage that 
they are published for several different locations and might involve 
somewhat less difficult location and quality adjustments. MMS is 
proposing NYMEX prices primarily because they are perceived to best 
reflect current domestic crude oil market value on any given day and 
the minimal likelihood that any one party could influence them. 
Selection of the average of the five highest daily NYMEX settle prices 
for a given month is in keeping with a 75th percentile major portion 
calculation as discussed below for paragraph (c). MMS's proposal to use 
the five highest prices rather than a strict 75th percentile cutoff is 
purely for administrative simplicity. Because the number of business 
days in any given month may vary from 19 to 23, a strict application of 
the 75th percentile cutoff would lead to questions about whether four, 
five, or six daily prices should be included. Since 75 percent of the 
range from 19 to 23 is between 4.75 and 5.75, MMS suggests simply using 
the average of the five highest daily prices in the month.
    MMS also considered timing of NYMEX application. Since the prompt 
month changes around the 21st of any given production month, two 
different prompt months exist during the production month. MMS decided 
to use the prompt month in effect on the first day of the production 
month. This would result in valuing the current month's production at 
the nearest month's futures price, but would reflect the market's 
assessment of value during the production month. The daily closing 
NYMEX prices are widely available in most major newspapers and various 
other publications.
    MMS received comments on its proposed Federal oil rule (62 FR 3742, 
January 24, 1996) that we should use a one-month-earlier futures price, 
where the price would apply to deliveries in the production month but 
would be determined in an earlier time period. MMS specifically 
requests comments on the timing of the NYMEX application. MMS also 
requests comments on each of the following, and any other related 
issues you may want to address:
     Use of NYMEX as a market value indicator (index),
     Possible alternative market value indicators, and
     Use of the average of the five highest daily NYMEX settle 
prices as one of the comparison values.
    MMS also received comments on its proposed rule for Federal oil 
valuation suggesting that the NYMEX may not be reflective value for the 
Rocky Mountain Region due to the isolated nature of that market. MMS 
requests comments on whether we should use a different valuation method 
for the Rocky Mountain Region.
    Paragraphs (b)(1)-(4). The second of the comparative values would 
be the lessee's gross proceeds from the sale of its oil under an arm's-
length contract. This value could be adjusted for appropriate 
transportation costs as discussed below. If the lessee disposes of 
production under an exchange agreement and the lessee then sells the 
oil received in return at arm's length, the value would be the lessee's 
resale price adjusted for appropriate quality differentials and 
transportation costs.
    Paragraph (b)(3) would state that the lessee's reported royalty 
value is subject to monitoring, review, and audit by MMS. MMS may 
examine whether the lessee's oil sales contract reflects the total 
consideration actually transferred either directly or indirectly from 
the buyer to the lessee. If it does not, then MMS may require the 
lessee to value the oil sold under that contract at the total 
consideration it received. MMS may require the lessee to certify that 
its arm's-length contract provisions include all of the consideration 
the buyer must pay, either directly or indirectly, for the oil.
    Paragraph (b)(4) would embody the provisions of current paragraph 
(j) and would require that value be based on the highest price the 
lessee can receive through legally enforceable claims under its 
contract. If the lessee fails to take proper or timely action to 
receive prices or benefits it is entitled to, the lessee must base 
value on that obtainable price or benefit. 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 documented 
measures to force purchaser compliance, it would owe no additional 
royalties unless or until it receives monies or consideration resulting 
from the price increase or additional benefits. This paragraph would 
not permit the lessee to avoid its royalty payment obligation where a 
purchaser fails to pay, pays only in part, or pays late. Any contract 
revisions or amendments that reduce prices or benefits to which the 
lessee is entitled must be in writing and signed by all parties to the 
arm's-length contract.
    Paragraph (c)(1)-(5). The third comparative value would be a major 
portion value MMS would calculate within 120 days of the end of each 
production month based on data reported by lessees and purchasers in 
the designated area for the production month. Designated area would 
mean an area specified by MMS for valuation and transportation cost/
differential purposes, usually corresponding to an Indian reservation.
    Paragraph (c)(2) would explain that each designated area would 
apply to all Indian leases in that area. MMS would publish in the 
Federal Register a list of the leases associated with each designated 
area. This paragraph would list the fifteen initial designated areas 
based generally on Indian reservations boundaries, plus any other areas 
MMS designates. This paragraph would also provide that MMS would 
publish any new area designations in the Federal Register. MMS also 
would publish in the Federal Register a list of all Indian leases that 
are in a designated area for purposes of these regulations.
    Paragraph (c)(3) would describe how MMS would calculate the major 
portion value. MMS would use price and volume information submitted by 
lessees on Form MMS-2014, Report of Sales and Royalty Remittance. As 
explained previously, each price reported by lessees on Form MMS-2014 
would be the highest of the gross proceeds on a NYMEX-based index 
price. MMS also would use information provided by buyers and sellers of 
production from the designated area on new Form MMS-4416, Indian Crude 
Oil Valuation Report, to verify values reported on Form MMS-2014. Form 
MMS-4416 reporting is discussed in more detail below. For each 
designated area, MMS would first adjust individual

[[Page 7093]]

values for quality differences and appropriate transportation costs. 
Then MMS would array the reported values from highest to lowest. The 
major portion value would be that value at which 75 percent of the oil 
(by volume, starting from the lowest value) is bought or sold. Sales 
volumes would include those volumes taken in kind and resold by the 
Indian lessor.
    The proposed major portion calculation would be a departure from 
the current regulation, where the major portion value is the value at 
which 50 percent plus 1 barrel of oil is sold, starting from the lowest 
price. MMS and Indian representatives had considerable deliberation on 
this issue. Indian lessors have criticized MMS since the publication of 
the definition of the major portion value in 1988. They have argued 
that the definition of the major portion in the 1988 regulation does 
not adequately represent the lease terms concerning the highest price 
paid or offered for a major portion of production. They argue that 
median is not synonymous with major. Thus, MMS is proposing to use the 
value at which 75 percent or more of the oil is sold, starting with the 
lowest value, as the definition of the term major.
    Paragraph (d). This paragraph would explain how the lessee would 
report and pay royalties on the values determined under paragraphs (a), 
(b), and (c) above. It would explain that by the date the royalty 
payments are due, the lessee would be required to report, on Form MMS-
2014, and pay the value of production at the higher of the values 
determined under paragraph (a) or (b). Once MMS completes its major 
portion calculations, MMS would inform the lessee of the major portion 
value for its applicable designated area. If this value exceeds the 
value the lessee initially reported for the production month, it would 
have to adjust the value to the higher major portion value by 
submitting an amended Form MMS-2014 within 30 days after it receives 
notice from MMS of the major portion value. MMS intends to monitor 
compliance with this requirement. MMS would specify, in the MMS Oil and 
Gas Payor Handbook, additional reporting requirements related to 
paragraphs (a), (b), and (c). This paragraph would also provide that 
the lessee would not accrue late-payment interest under 30 CFR 218.54 
on any underpayment associated with a higher major portion value until 
the due date of its amended Form MMS-2014. MMS did not consider it 
equitable to assess interest for periods before MMS notifies the lessee 
of the major portion value.
    MMS believes the major portion value at the 75th percentile from 
the bottom is a reasonable safeguard to assure that major portion 
provisions of Indian leases are satisfied. Thus, to build certainty 
into the lessee's royalty valuation, MMS also proposes in paragraph (d) 
that it could not change its major portion value once it issues notice 
of the value to lessees, except as may be required by an administrative 
or judicial decision. Such a decision may include an Interior Board of 
Land Appeals, District Court, or Circuit Court decision overturning 
MMS's calculation of the major portion price. A lessee or an Indian 
lessor could appeal the major portion value if it could demonstrate 
that MMS had not performed the calculation correctly.
    MMS requests comments on the comparison of NYMEX prices, gross 
proceeds, and a major portion value as the proper method of valuing 
Indian crude oil for royalty purposes. Please also incorporate specific 
comments on the proposed major portion calculation procedure, 
particularly whether there is a more efficient and contemporaneous 
process for calculating and publishing the major portion price.
    In addition to comments on the comparison between the three 
different price bases discussed above, MMS requests specific comments 
on alternative valuation techniques based on local market indicators. 
MMS believes that today's oil marketing is driven largely by the NYMEX 
market. But the location/quality adjustments needed to derive lease 
value using NYMEX would involve considerable administrative effort for 
all involved. MMS requests suggestions on ways to value Indian oil 
production based on market indicators in the vicinity of the lease, 
with the following in mind:
    (1) The methods should not rely on posted prices unless they 
account for the difference between postings and market value.
    (2) The methods must account for value differences related to 
quality and location.
    (3) The methods must be widely applicable and flexible enough to 
apply to all Indian crude oil production.
    (4) Most importantly, the methods must address the major portion 
provisions of Indian leases--the method must reflect ``the highest 
price paid or offered at the time of production for the major portion 
of oil production from the same field.''
    MMS has considered that maximizing royalty revenues from Indian 
leases might affect the economics of mineral resource development. But 
MMS believes that specific royalty values should be independent of this 
concept and not effectively lowered as a result. Rather, this issue 
should be examined in the context of lease term adjustments by the 
Bureau of Indian Affairs and the Indian lessor. MMS requests specific 
comments on whether these proposed regulations would decrease leasing 
on Indian lands or otherwise affect the competitiveness of Indian 
leases.

Section 206.53 What Other General Responsibilities Do I have to Value 
the Oil?

    This newly designated section would include several of the 
provisions of the existing rules, but rewritten and reordered for 
clarity. These provisions would replace part or all of current 
paragraphs (d), (e), (f), and (i), under existing Sec. 206.52 and would 
state that:
    (a) The lessee must make its oil sales and volume data available to 
authorized MMS, Indian, and other representatives on request. This 
would include any relevant data it has from fee and State leases. When 
the lessee entered into the lease, it expressly agreed that the 
Secretary will determine royalty value and that value may be calculated 
based on the price paid for the major portion of oil sold from the 
field where the leased lands are located. The lessee also agreed to 
provide all records necessary to determine royalty value. Finally, the 
lessee agreed to abide by and conform to the Secretary's regulations. 
The Secretary needs the lessee's records concerning its production from 
State and fee lands to determine value under the lease terms and 
regulations. Thus, MMS may require the lessee to submit records 
concerning the volume and value of non-Federal and non-Indian oil 
production;
    (b) The lessee must retain all data relevant to royalty value 
determination according to recordkeeping requirements at 30 CFR 207.5. 
MMS or the lessor may review and audit the lessee's data, and may 
direct the lessee to use a different value if MMS determines the 
lessee's reported value is inconsistent with the requirements of this 
section;
    (c) If MMS determines that the lessee has undervalued its 
production, the lessee must pay the difference plus interest under 30 
CFR 218.54. If the lessee has a credit due, MMS will provide 
instructions for taking it; and
    (d) The lessee must place the oil in marketable condition and 
market the oil for the mutual benefit of the lessee and lessor at no 
cost to the Indian lessor unless the lease agreement or this section 
provide otherwise. We would modify this paragraph to clarify that it 
includes a duty to market the oil. This

[[Page 7094]]

is consistent with several Interior Board of Land Appeals decisions 
construing this duty. See Walter Oil and Gas Corporation, 111 IBLA 260 
(1989).

Section 206.54 May I ask MMS for Valuation Guidance?

    This new section would replace existing Sec. 206.52(g) to explain 
that MMS will provide guidance to lessees in determining value. MMS 
points out that all value determinations are subject to later review 
and audit, and the lessee later could be required to pay based on a 
different value. If so, the lessee also could be liable for additional 
royalties and late payment interest for the period it used an improper 
value for the production.

Section 206.55 Does MMS Protect Information I Provide?

    Newly designated Sec. 206.55 would include the content of existing 
Sec. 206.52(l), but would be rewritten for clarity. It would also state 
that MMS would protect information from disclosure to the extent 
allowed under applicable laws and regulations.

Deletion of existing Sec. 206.52(e)(2) and (h)

    MMS proposes to delete existing Sec. 206.52(e)(2), which requires 
lessees to notify MMS if they determine value under existing 
Sec. 206.52(c)(4) or (c)(5). Since MMS proposes to delete those 
paragraphs, paragraph (e)(2) no longer would apply.
    MMS also proposes to delete Sec. 206.52(h), which says royalty 
value will not be less than the lessee's gross proceeds, less 
applicable allowances. This clause would be redundant given that the 
lessee's gross proceeds already form one of the value bases proposed 
for comparison in Sec. 206.52.

Section 206.57 Point of Royalty Settlement

    This section would not be changed from existing Sec. 206.53, but 
would be redesignated as Sec. 206.57.

Section 206.60 What Transportation Allowances and Other Adjustments 
Apply to the Value of Oil?

Paragraph (a) Transportation Allowances
    This paragraph would be similar in scope to Sec. 206.54(a) of the 
present rule, but would apply only when the lessee values production 
based on gross proceeds (Section 206.52(b)) and under limited 
conditions when the lessee values production using NYMEX (Section 
206.52(a)) as discussed below. Paragraph (a)(1) would use a table to 
outline when a lessee may claim a transportation allowance.
    Transportation allowance would mean a deduction in determining 
royalty value for the reasonable, actual costs of moving oil from the 
designated area boundary to a point of sale or delivery off the 
designated area. The transportation allowance would not include 
gathering costs or costs of moving production from the lease to the 
designated area boundary. MMS's proposal not to allow transportation 
costs within Indian reservations would be based on consistent feedback 
from Indian lessors that such costs should not be permitted. They say 
that since their leases typically are silent on transportation costs, 
there is no specific provision permitting such deductions. But they 
acknowledge that costs to move production away from the reservation/
designated area may be legitimate deductions.
    Paragraph (a)(2) would explain that transportation allowances would 
not be permitted:
    (i) if the oil is taken in kind and delivered in the designated 
area;
    (ii) when the sale or title transfer point is within the designated 
area; or
    (iii) when the lessee values production under the major portion 
provision at Section 206.52(c)--permissible transportation costs 
already would have been deducted before MMS performs this calculation.
    MMS requests specific comments on permitting transportation 
allowances from the designated area rather than the lease.
Paragraph (b) Are There Limits on My Transportation Allowance?
    Proposed paragraphs (b)(1) and (b)(2) would include the substance 
of existing Sec. 206.54(b)(1) and (b)(2) respectively, but would be 
rewritten for clarity and to reflect plain English. Paragraph (b)(1) 
would also contain a table outlining the allowance limits. Paragraph 
(b)(1) would clarify that except as provided in paragraph (b)(2), the 
allowance deduction cannot be more than 50 percent of the oil value at 
the point of sale when valuing oil under gross proceeds. Under NYMEX 
valuation, the allowance would not be permitted to exceed 50 percent of 
the average of the five highest daily NYMEX futures settle prices 
(Cushing, Oklahoma) for the domestic Sweet crude oil contract for the 
prompt month.
Paragraph (c) Must I Allocate Transportation Costs?
    Proposed paragraph (c) would be essentially the same as existing 
Sec. 206.54(c). However, it would also point out that the lessee may 
not allocate costs to production for which those costs were not 
incurred.
Paragraph (d) What Other Adjustments Apply When I Value Production 
Based on Index Pricing?
    Proposed new paragraph (d) would state that if the lessee values 
oil based on index pricing (NYMEX) under Sec. 206.52(a), MMS would 
require certain location differentials associated with oil value 
differences between the designated area and the index pricing point 
outside the designated area. We discuss those differentials below under 
Sec. 206.61(c). If the lessee produces oil in the designated area that 
includes Cushing, Oklahoma, it would only be entitled to a quality 
adjustment.
Paragraph (e) What Additional Payments May I Be Liable For?
    Proposed paragraph (e) would contain similar requirements as 
existing Sec. 206.54(d), but would be rewritten for clarity. Further, 
because adjustments would be made for location and quality differences, 
this paragraph would provide that the lessee would be liable for 
additional payments if those adjustments were incorrect.

Section 206.61 How do lessees determine transportation allowances and 
other adjustments?

    Paragraph (a), dealing with arm's-length transportation contracts, 
would not be changed. However, MMS notes that lessees no longer are 
required to file Form MMS-4110, Oil Transportation Allowance Report, 
before claiming an arm's-length allowance on Federal leases. MMS 
requests specific comments on the benefits and drawbacks of continuing 
to require submission of Form MMS-4110 before lessees may claim an 
arm's-length transportation allowance on Indian leases.
    Paragraph (b), dealing with non-arm's-length and no contract 
situations, would be changed by deleting paragraph (b)(5). The existing 
paragraph (b)(5) allows a lessee to apply for an exception from the 
requirement that it compute actual costs of transportation; a Federal 
Energy Regulatory Commission (FERC) approved tariff could be used 
instead.
    MMS believes that the use of actual costs is fair to lessees and 
that use of a FERC-approved tariff overstates allowable costs in non-
arm's-length situations. Also, just as for arm's-length contracts, MMS 
notes that lessees of Federal lands no longer are required to file Form 
MMS-4110 before claiming a non-arm's-length transportation allowance. 
MMS requests specific comments on whether lessees should

[[Page 7095]]

still be required to submit Form MMS-4110 before claiming a non-arm's-
length transportation allowance on Indian leases.
    Paragraph (c) What adjustments apply when using index pricing? 
Proposed paragraph (c)(1) would describe adjustments the lessee must 
make to index prices where it values its oil based on index pricing 
under Sec. 206.52(a). These adjustments and deductions would reflect 
the location/quality differentials and transportation costs associated 
with value differences between oil at the designated area boundary and 
the index pricing point outside the designated area. Index pricing 
point would be the physical location where a given price index--in this 
case NYMEX--is established. For NYMEX, that location is Cushing, 
Oklahoma. Although location differentials would reflect differences in 
value of oil at different locations, they are not transportation cost 
allowances. In fact, location differentials may increase a value rather 
than decrease it. Quality differentials would reflect differences in 
the value of oil due to different API gravities, sulfur content, etc. 
Location differentials generally also encompass quality differentials. 
Proposed paragraph (c)(1) would identify the specific adjustments and 
allowances that may apply to your production. The possible adjustments 
and allowances would be:
    (i) A location differential to reflect the difference in value 
between crude oils at the index pricing point (West Texas Intermediate 
at Cushing, Oklahoma) and the appropriate market center (for example, 
West Texas Intermediate at Midland, Texas). Market center would be 
defined as a major destination point for crude oil sales, refining, or 
transshipment. As used here, market centers would be locations where 
trade publications provide crude oil spot price estimates. The market 
center that the lessee would use is the point where oil produced from 
its lease or unit ordinarily would flow towards if not disposed of at 
an earlier point.
    For any given production month, the market center-index pricing 
point location/quality differential would be the difference between the 
average spot prices for the respective locations as published in an 
MMS-approved publication. MMS-approved publication would mean a 
publication MMS approves for determining NYMEX prices or location 
differentials (MMS-approved publications are discussed further below.) 
The purpose of this differential is to derive a NYMEX price at the 
market center by adjusting the NYMEX price at the index pricing point 
to the general quality of crude typically traded at the market center, 
and otherwise to reflect location/quality value differences at the 
appropriate market center.
    Attached as Appendices C and D are examples of how the averages of 
the daily spot prices would be calculated for the index pricing point 
(Cushing, OK) and a selected market center (Midland, TX), respectively. 
The value difference between the two spot price averages would be the 
location differential between the index pricing point and the market 
center.
    As an example, assume that Platt's Oilgram is an MMS-approved 
publication. For the February 1997 delivery month, spot sales prices 
are assessed from December 26, 1996, through January 24, 1997. The 
average of the daily (mean) spot price assessments for the month is 
utilized to calculate the location differential. In this instance, the 
average spot price for Cushing is $25.38 per bbl. and the average spot 
price for Midland is $25.20 per bbl. Since the Midland price is $.18 
per bbl. lower than the Cushing price, the $.18 per bbl. would be 
deducted from the NYMEX-based price (or an addition would be made if 
the Midland price were higher than the Cushing price).
    (ii) An express location/quality differential under the lessee's 
arm's-length exchange agreement that would include a clearly 
identifiable location/quality differential for the crude oil value 
difference between the market center and the designated area boundary.
    In the cases that involve such agreements, the differential stated 
in the agreement should reflect actual value differences resulting from 
differences in location and quality between crude oils at the 
designated area boundary and the associated market center.
    (iii) A location/quality differential that MMS would publish in the 
Federal Register annually that the lessee would use if it did not 
dispose of production under an arm's-length exchange agreement that 
contains an express differential as described above. MMS would stratify 
its calculated differentials so that specific quality differentials 
attributable to different grades of crude oil would be identified 
separately from location differentials. MMS would publish differentials 
for each designated area and an associated market center outside of the 
designated area. A designated area may be associated with more than one 
market center. As discussed in more detail below, MMS would 
periodically publish in the Federal Register a list of market centers 
associated with designated areas. The differential would represent 
crude oil value differences due to location and quality factors. MMS 
would acquire the information needed to calculate these specific 
differentials from exchange agreement data provided by lessees on a new 
reporting form (Form MMS-4416) discussed below. MMS would calculate the 
differentials using a volume-weighted average of the differentials 
derived from data reported on Form MMS-4416 for the previous reporting 
year. The differentials may reflect both a location differential based 
on the market center/designated area pairs and a quality differential 
based on the different types of crude oil exchanged. The lessee would 
apply the differential on a calendar production year basis. This means 
the lessee would apply it for the reporting months of February through 
the following January.
    (iv) The lessee's actual transportation costs from the designated 
area boundary to the market center outside of the designated area as 
determined under Sec. 206.61. MMS is not proposing to change the 
existing methods to calculate transportation allowances. The allowance 
would terminate at the market center as part of the total adjustment to 
derive an index-price-based value at the lease.
    The purpose of these adjustments and allowances would be to reflect 
value differences for crude oil production of different qualities and 
at different locations to derive value at the designated area. The 
location differentials between the index pricing point and the market 
center, and between the market center and the designated area, would 
not necessarily reflect transportation alone. They would represent the 
overall market assessment of the different relative values of similar 
crude oil delivered at different locations. Only the actual 
transportation costs from the designated area to the market center 
would represent pure transportation costs.
    MMS considered alternative index price adjustment methods ranging 
from using index values with no location adjustments to picking a 
specific percentage deduction from the index value to generically 
reflect location differentials. A variation of the latter would be to 
develop percentage or absolute dollar deductions for different 
geographical zones. In addition to specific comments on the proposed 
method of adjusting index values, MMS requests suggestions on 
alternative methods.
    Proposed paragraph (c)(2) would specify which of the adjustments 
and allowances described above would

[[Page 7096]]

apply to the lessee in various situations. This paragraph would include 
a table that would outline which adjustments under paragraph (c)(1) 
would apply. If the lessee disposed of its production under an arm's-
length exchange agreement and the agreement had an express location/
quality differential to reflect the difference in value between the 
designated area boundary for its lease and an associated market center 
outside of the designated area, then it would use two of the four 
possible adjustments and allowances. Specifically, it would use the 
market center-index pricing point location/quality differential under 
paragraph (c)(1)(i) and the designated area-market center differential 
specified in its exchange agreement under paragraph (c)(1)(ii).
    Attached as Appendix E is an example of a NYMEX-based royalty 
computation for production from the Navajo reservation. The 
publications for calculating the NYMEX price and index pricing point-
market center location differential have been discussed above and are 
illustrated at Appendices B, C, and D.
    The deduction from the NYMEX-based price for the location/quality 
differential between the market center and designated area would be the 
actual exchange agreement differential or an MMS-published 
differential. (For purposes of this example, we used $.25 per bbl.)
    If the lessee moved lease production directly to an MMS-identified 
market center outside of a designated area that is also the index 
pricing point (Cushing, Oklahoma), then it would use only two of the 
adjustments and allowances. The lessee would use the designated area-
market center (index pricing point) quality differential under 
paragraph (c)(1)(iii) to determine the difference in value attributable 
to quality differences, and the actual transportation costs from the 
designated area boundary to the market center under paragraph 
(c)(1)(iv). For applying paragraph (c)(1)(iii), the lessee would use 
the quality differential published by MMS corresponding to oil similar 
to its production as compared to the quality of oil used for index 
pricing.
    If the lessee did not move lease production from a designated area 
to an MMS-identified market center, but instead moved it directly to an 
alternate disposal point (for example, its own refinery), then it would 
use only two of the adjustments and allowances. The lessee would use 
the market center-index pricing point location/quality differential 
under paragraph (c)(1)(i) and the actual transportation costs from the 
designated area boundary to the alternate disposal point outside of the 
designated area under paragraph (c)(1)(iv). The market center for 
purposes of paragraph (c)(1)(i) is the MMS-identified market center 
nearest the lease where there is a published spot price for crude oil 
of like quality to the lessee's. Like-quality oil would mean oil with 
similar chemical, physical, and legal characteristics. For example, 
West Texas Sour and Wyoming Sour would be like-quality, as would West 
Texas Intermediate and Light Louisiana Sweet. The market center for 
purposes of paragraph (c)(1)(iv) would be the alternate disposal point.
    For example, a lessee producing sour crude from Indian leases in 
Wyoming might transport its oil directly to a refinery in Salt Lake 
City, Utah, without accessing any defined market center. In this case 
West Texas Sour crude at Midland, Texas, might represent the crude oil/
market center combination most like and nearest to the oil produced. 
The market center-index pricing point location/quality differential 
under paragraph (c)(1)(i) would then be the difference in the spot 
price between West Texas Intermediate at Cushing, Oklahoma, and West 
Texas Sour at Midland, Texas as published in an MMS-approved 
publication. In addition to that adjustment, the lessee would be 
entitled to an allowance for the actual transportation costs from the 
designated area boundary in Wyoming to Salt Lake City (paragraph 
(c)(1)(iv), with Salt Lake City considered the market center for 
applying this deduction). MMS is proposing that this method is the best 
way to calculate the differences in value between the designated area 
and the index pricing point due to location, quality, and 
transportation when the production is not actually moved to a market 
center.
    In all other situations, the lessee would use the market center-
index pricing point location/quality differential (paragraph (c)(1)(i)) 
and the MMS-published designated area-market center location/quality 
differential under paragraph (c)(1)(iii). These adjustments would cover 
all location, quality, and transportation differences in value between 
the designated area and the index pricing point.
    Proposed paragraph (c)(3) would state that if an MMS-calculated 
differential does not apply to a lessee's oil, due to either location 
or quality differences, the lessee must request in writing that MMS 
calculate a location/quality differential that would apply to its oil. 
Conditions for an exception would include:
    (1) After MMS publishes its annual listing of location/quality 
differentials, the lessee must deliver to MMS its written request for 
an MMS-calculated differential;
    (2) The lessee must provide evidence demonstrating why the 
published differential(s) does not adequately reflect its 
circumstances; and
    (3) MMS will calculate a revised differential for the lessee when 
it receives the lessee's request or when it determines that the 
published differential does not apply to the lessee's oil. If 
additional royalties and interest are due, MMS then would bill for 
them. If the lessee filed a request for exception within 30 days after 
MMS publishes its annual listing of location/quality differentials, the 
MMS-calculated differential would apply as of the effective date of the 
published differentials. But if the request was received more than 30 
days after MMS publishes its differential listing, the MMS-calculated 
differential would apply beginning the first day of the month following 
the date of the lessee's application for exception. In this case the 
published differentials would apply in the interim and MMS would not 
refund any overpayments made due to failure to timely request MMS to 
calculate a differential.
    MMS would insert paragraph (c)(4) to note that it would 
periodically publish a list of MMS-approved publications in the Federal 
Register. This paragraph would also specify the criteria for 
acceptability. It would specify that the publications must:
    (i) Be frequently used by buyers and sellers;
    (ii) Be frequently mentioned in purchase or sales contracts;
    (iii) Use adequate survey techniques, including development of spot 
price estimates based on daily surveys of buyers and sellers of crude 
oil; and
    (iv) Be independent from MMS, other lessors, and lessees.
    Proposed paragraph (c)(5) would allow any publication to petition 
MMS to add them to the list of acceptable publications.
    Proposed paragraph (c)(6) would state that MMS would reference the 
specific tables in individual publications that lessees must use to 
determine location differentials.
    Proposed paragraph (c)(7) would explain that MMS would periodically 
publish in the Federal Register a list of market centers. MMS would 
monitor market activity and, if necessary, add or modify market 
centers. MMS would consider the following factors and conditions in 
specifying market centers:
    (i) Points where MMS-approved publications publish prices useful 
for index purposes;

[[Page 7097]]

    (ii) Markets served;
    (iii) Pipeline and other transportation linkage;
    (iv) Input from industry and others knowledgeable in crude oil 
marketing and transportation;
    (v) Simplification; and
    (vi) Other relevant matters.
    MMS would initially consider the following as Market Centers:

Cushing, OK;
Empire, LA;
Guernsey, WY;
Midland, TX; and
St. James, LA.

    Where Cushing, Oklahoma, is used as a market center, the index 
pricing point and market center would coincide. MMS requests specific 
comments on the initial list of market centers, including suggested 
additions, deletions and other modifications.
    (d) Reporting requirements. MMS would redesignate existing 
paragraph (c) as (d) and revise redesignated paragraphs (d)(1)(i) and 
(d)(2)(i). Paragraph (d)(3) would otherwise remain the same, except 
that MMS would delete existing paragraph (c)(2)(viii) consistent with 
the previous change to delete the use of FERC- or State-approved 
tariffs. Redesignated paragraph (d)(4) would be modified to say that 
not only transportation allowances, but also location and quality 
differentials, must be reported as separate lines on Form MMS-2014 
unless MMS approves a different procedure. MMS would provide additional 
royalty reporting details and requirements in the MMS Oil and Gas Payor 
Handbook.

(5) What Information Must a Lessee Provide To Support Index Pricing 
Deductions, and How Is It Used?

    Proposed paragraph (d)(5) would be added to require lessees and all 
other purchasers of crude oil from Indian leases to submit a new form 
to MMS. We realize this may result in some duplicate information being 
filed by buyers and sellers, but MMS believes the buyer information 
will be very useful in confirming reported royalty values. Proposed 
Form MMS-4416, Indian Crude Oil Valuation Report, would capture value 
and location differential information from all exchange agreements or 
other contracts for disposal of oil from Indian lands. MMS would use 
these data to calculate location differentials between market centers 
and designated areas and to verify values reported on Form MMS-2014. 
MMS would publish annually in the Federal Register the location 
differentials for lessees to use in royalty reporting. MMS has included 
a copy of proposed Form MMS-4416 as Appendix A to these proposed 
regulations.
    Information submitted on the new form would cover all of the 
lessee's crude oil production from Indian leases. All Indian lessees 
and all purchasers of oil from Indian lands would initially submit Form 
MMS-4416 no later than 2 months after the effective date of this 
reporting requirement, and then by October 31 of the year this 
regulation takes effect and by October 31 of each succeeding year. 
However, if October 31 of the year this regulation takes effect is less 
than 6 months after the effective date of this reporting requirement, 
the second submission of the Form MMS-4416 would not be required until 
October 31 of the succeeding year. In addition to the annual 
requirement to file this form, a new form would be required to be filed 
each time a new exchange or sales contract involving the production of 
oil from an Indian lease is executed. However, if the contract merely 
extends the time period a contract is in effect without changing any 
other terms of the contract, this requirement would not apply.
    The reporting requirement would take effect before the effective 
date of the remainder of the rule. Early submittal of this information 
would allow MMS to publish the representative market center-designated 
area location differentials in the Federal Register by the effective 
date of the final regulation. Then MMS would publish location 
differentials by January 31 of all subsequent years. MMS would publish 
differentials for different qualities/grades of crude oil if the data 
are sufficient and if multiple differentials are appropriate for the 
area. Each year following the year this regulation became effective, 
lessees would use the new published differentials beginning with 
January production royalties reported in February.
    MMS received many comments under its proposed Federal oil valuation 
rule on the administrative burden created by proposed Form MMS-4415. 
Therefore, MMS requests comments on how proposed Form MMS-4416 for 
Indian oil could be simplified, yet remain useful, in determining 
adjustments to the NYMEX-based price. Specifically, MMS requests 
comments on Form MMS-4416 (See Appendix A), including:
     Its layout and information requested;
     Frequency and timing of submittal;
     Frequency and timing of MMS's calculations and publication 
of differentials; and
     All other relevant comments.

Remainder of Section 206.55

    MMS proposes no changes to existing paragraphs (d) and (e) except 
to redesignate them as paragraphs (e) and (f).
    In addition to redesignating paragraph (f) as (g), MMS proposes to 
remove the reference to FERC- or State-approved tariffs to be 
consistent with the proposed deletion of paragraph 206.55(b)(5). MMS 
proposes no change to existing paragraph (g) except to redesignate it 
as paragraph (h).

IV. Procedural Matters

The Regulatory Flexibility Act

    The Department certifies that this rule will not have significant 
economic effect on a substantial number of small entities under the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This proposed rule 
would amend regulations governing the valuation for royalty purposes of 
crude oil produced from Indian lands. These changes would modify the 
valuation methods in the existing regulations. Small entities are 
encouraged to comment on this proposed rule.
    Approximately 125 payors pay royalties to MMS on oil production 
from Indian lands. The majority of these payors are considered small 
businesses under the criteria of the Small Business Administration (500 
employees or less). MMS estimates this proposal will have an annual 
dollar impact of $368 per payor (Total Dollar Impact of 
$45,955125 Indian Royalty Payors). The estimated yearly 
industry compliance cost under this rule is $45,955. This amount is 
based on an annual burden of 1,313 hours for 125 payors X $35 (industry 
cost per hour).
    Further, based on data obtained from the Small Business 
Administration (SBA), a small business on average has estimated 
receipts of $2,000,000. An annual cost impact of $368 for a small 
business to comply with this rule is not considered significant.
    Approximately 125 payors report and pay royalties on oil production 
from Indian mineral leases. Of these 125 companies, most would be 
considered small entities under the SBA criteria. Since there are 
15,838 small firms in the oil and gas industry in the United States, 
only about 1 percent (12515,838) are involved with MMS's 
business of reporting and paying royalty on oil produced from Indian 
lands. Accordingly, this rule will not affect a substantial number of 
small entities.

Unfunded Mandates Reform Act of 1995

    The Department of the Interior has determined and certifies 
according to the Unfunded Mandates Reform Act, 2

[[Page 7098]]

U.S.C. 1502 et seq., that this rule will not impose a cost of $100 
million or more in any given year on local, tribal, or State 
governments, or the private sector.

Executive Order 12630

    The Department certifies that the rule does not represent a 
governmental action capable of interference with constitutionally 
protected property rights. Thus, a Takings Implication Assessment need 
not be prepared under Executive Order 12630, Governmental Actions and 
Interference with Constitutionally Protected Property Rights.

Executive Order 12988

    The Department has certified to the Office of Management and Budget 
that this proposed rule meets the applicable civil justice reform 
standards provided in Sections 3(a) and 3(b)(2) of this Executive 
Order.

Executive Order 12866

    The Office of Management and Budget has determined this rule is a 
significant rule under Executive Order 12866 Section 3(f)(4)c, which 
states: ``Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
this Executive Order.'' The Office of Management and Budget has 
reviewed this rule under Executive Order 12866.
    The Department's analysis of these proposed revisions to the oil 
valuation regulations indicates these changes will not have a 
significant economic effect as defined by Section 3(f)(1) of Executive 
Order 12866.
    This rule will not have an annual effect on the economy of $100 
million or more or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, or tribal 
governments or communities. The MMS concludes that this proposed rule 
would result in an annual increase in Indian oil royalties of 
approximately $3.6 million. MMS and industry will realize 
administrative savings because of reduced complexity in royalty 
determination and payments and would introduce certainty into Indian 
royalty reporting.

Paperwork Reduction Act

    This proposed rule contains a collection of information which has 
been submitted to the Office of Management and Budget (OMB) for review 
and approval under section 3507(d) of the Paperwork Reduction Act of 
1995. As part of our continuing effort to reduce paperwork and 
respondent burden, MMS invites the public and other Federal agencies to 
comment on any aspect of the reporting burden. Submit your comments to 
the Office of Information and Regulatory Affairs, OMB, Attention Desk 
Officer for the Department of the Interior, Washington, D.C. 20503. 
Send copies of your comments to: Minerals Management Service, Royalty 
Management Program, Rules and Publications Staff, P.O. Box 25165, MS 
3021, Denver, Colorado 80225-0165; courier address is: Building 85, 
Denver Federal Center, Denver, Colorado 80225; e:Mail address is: 
[e-mail].
    OMB may make a decision to approve or disapprove this collection of 
information after 30 days from receipt of our request. Therefore, your 
comments are best assured of being considered by OMB if OMB receives 
them within that time period. However, MMS will consider all comments 
received during the comment period for this notice of proposed 
rulemaking.
    The information collection is titled Indian Crude Oil Valuation 
Report. Part of the valuation of oil under this proposed rule relies on 
price indices that lessees may adjust for location differences between 
the index pricing point and the designated area. Lessees (and their 
affiliates as appropriate) on Indian lands, as well as purchasers of 
oil from these lands, would be required to give MMS information on the 
prices and location differentials included in their various oil 
exchange agreements and sales contracts. MMS would use these data to 
calculate and publish representative location differentials for 
lessees' use in reporting royalties in different areas. MMS would also 
use these data to verify royalty values reported on Form MMS-2014. This 
process would introduce certainty into royalty reporting.
    Rules establishing the use of Form MMS-4416 to report oil values 
and location differentials are at proposed 30 CFR 206.55(d)(5). 
Information provided on the forms may be used by MMS auditors and the 
Royalty Valuation Division (RVD).
    MMS estimates the annual reporting burden at 1,313 hours. There are 
approximately 125 oil royalty payors on Indian leases. These payors 
will have varying business relationships with one or more Indian tribes 
and/or allottees. MMS estimates that, on average, a payor will have six 
exchange agreements or sales contracts which enable the Indian oil 
royalty payor to either sell or refine the oil production from the 
Indian lease(s) for which they are making royalty payments. We estimate 
that a payor will fill out Form MMS-4416 in about one-half hour; we 
estimate the payor would have to submit the form twice a year because 
of contract changes in addition to the required annual filing discussed 
below (750 agreements/contracts  x  \1/2\ hour  x  2=750 burden hours).
    In addition, MMS estimates that half of the exchange agreements or 
sales contracts would also be reported by non-payor purchasers of crude 
oil from Indian leases as required by 30 CFR 206.55(d)(5). Again, we 
estimate that the filing of Form MMS-4416 could take one-half hour per 
report to extract the data from individual exchange agreements and 
sales contracts; we also estimate that a non-payor purchaser would file 
a report twice a year for each agreement/contract (375 agreements/
contracts  x  \1/2\ hour  x  2=375 burden hours).
    To assure Indian lessors, tribes and allottees that all payors and 
non-payor purchasers are complying with these proposed Indian valuation 
regulations, we will require that Form MMS-4416 be submitted annually 
for all agreements/contracts to which payors and non-payor purchasers 
are parties, regardless of whether the agreements/contracts change or 
not. We estimate that this would require 10 minutes per report to 
indicate a no-change situation (750+375) agreements/contracts  x  \1/6\ 
hour = 187.5 burden hours). Only a minimal recordkeeping burden would 
be imposed by this collection of information. Based on $35 per hour 
cost estimate, the annual industry cost is estimated to be $45,955 
[(750+375+188) total burden hours  x  $35=$45,955].
    In compliance with the Paperwork Reduction Act of 1995, Section 
3506 (c)(2)(A), we are notifying you, members of the public and 
affected agencies, of this collection of information, and are inviting 
your comments. For instance your comments may address the following 
areas. Is this information collection necessary for us to properly do 
our job? Have we accurately estimated the industry burden for 
responding to this collection? Can we enhance the quality, utility, and 
clarity of the information we collect? Can we lessen the burden of this 
information collection on the respondents by using automated collection 
techniques or other forms of information technology?
    The Paperwork Reduction Act of 1995 provides that an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.

[[Page 7099]]

National Environmental Policy Act of 1969

    We have determined that this rulemaking is not a major Federal 
action significantly affecting the quality of the human environment, 
and a detailed statement under section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not 
required.

List of Subjects 30 CFR Part 206

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

    Dated: November 26, 1997.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
    For the reasons set out in the preamble, MMS proposes to amend 30 
CFR part 206 as follows:

PART 206--PRODUCT VALUATION

    1. The authority citation for part 206 continues to read as 
follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 96a 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 B--Indian Oil

    2. Section 206.53 is redesignated as Sec. 206.57, Sec. 206.54 is 
redesignated as Sec. 206.60, and Sec. 206.55 is redesignated as 
Sec. 206.61.
    3. Sections 206.50 through 206.52 are revised and new Secs. 206.53 
through 206.56 are added to read as follows:


Sec. 206.50  What is the purpose of this subpart?

    (a) This subpart applies to all oil produced from Indian (tribal 
and allotted) oil and gas leases (except leases on the Osage Indian 
Reservation, Osage County, Oklahoma). It explains how lessees (a 
defined term) must calculate the value of production for royalty 
purposes consistent with applicable laws and lease terms.
    (b) A provision in this subpart does not apply if it is 
inconsistent with:
    (1) A Federal statute;
    (2) A treaty;
    (3) A settlement agreement resulting from administrative or 
judicial litigation; or
    (4) An express provision of an oil and gas lease subject to this 
subpart.
    (c) MMS or Indian tribes may audit and adjust all royalty payments.
    (d) This subpart is intended to ensure that the United States 
discharges its trust responsibilities for administering Indian oil and 
gas leases under the governing mineral leasing laws, treaties, and 
lease terms.


Sec. 206.51  Definitions.

    The following definitions apply to this subpart:
    Area means a geographic region at least as large as the 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 between 
independent, nonaffiliated persons with opposing economic interests 
regarding that contract. Two persons are affiliated if one person 
controls, is controlled by, or is under common control with another 
person. Based on the instruments of ownership of the voting securities 
of an entity, or based on other forms of ownership: ownership over 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. MMS may rebut this presumption if it 
demonstrates actual or legal control, as through interlocking 
directorates. MMS may require the lessee to certify the percentage of 
ownership or control. Aside from the percentage ownership criteria, 
contracts between relatives, either by blood or by marriage, are not 
arm's-length contracts. To be considered arm's-length for any 
production month, a contract must satisfy this definition for that 
month, as well as when the contract was executed.
    Audit means a review, conducted under generally accepted accounting 
and auditing standards, of royalty payment compliance activities of 
lessees 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 processing. Condensate 
is the mixture of liquid hydrocarbons resulting 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, between two or more persons, that is enforceable by law 
and that with due consideration creates an obligation.
    Designated area means an area specified by MMS for valuation and 
transportation allowance/differential purposes, usually corresponding 
to an Indian reservation.
    Exchange agreement means an agreement where one person agrees to 
deliver oil to another person at a specified location in exchange for 
oil deliveries at another location. Exchange agreements may or may not 
specify prices for the oil involved. They frequently specify dollar 
amounts reflecting location, quality, or other differentials. Exchange 
agreements include ``buy/sell'' agreements, which specify prices to be 
paid at each exchange point and may appear to be two separate sales 
within the same agreement. Exchange agreements do not include 
``transportation'' agreements, whose principal purpose is 
transportation.
    Field means a geographic region situated over one or more 
subsurface oil and gas reservoirs and encompassing at least the 
outermost boundaries of all oil and gas accumulations known within 
those reservoirs, vertically projected to the land surface. State oil 
and gas regulatory agencies usually name onshore fields and designate 
their official boundaries.
    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 that BLM approves for onshore leases.
    Gross proceeds means the total monies and other consideration 
accruing to the lessee for the disposition of oil produced. Gross 
proceeds includes, but is not limited to, the examples discussed in 
this definition. Gross proceeds includes payments for services such as 
dehydration, measurement, and/or gathering which the lessee must 
perform at no cost to the Indian lessor. It also includes the value of 
services, such as salt water disposal, that the lessee normally 
performs but that the buyer performs on the lessee's behalf. Gross 
proceeds also includes reimbursements for terminaling fees. Tax 
reimbursements are part of the gross proceeds even though the Indian 
royalty interest may be exempt from taxation. Monies and all other 
consideration a seller is contractually or legally entitled to, but 
does not seek to collect through reasonable efforts, are also part of 
gross proceeds.
    Indian allottee means any Indian for whom the United States holds 
land or a land interest in trust or who holds title subject to Federal 
restriction against alienation.

[[Page 7100]]

    Indian tribe means any Indian Tribe, band, nation, pueblo, 
community, rancheria, colony, or other Indian group for which the 
United States holds any land or land interest in trust or which is 
subject to Federal restriction against alienation.
    Index pricing means using NYMEX futures prices for royalty 
valuation.
    Index pricing point means the physical location where an index 
price is established in an MMS-approved publication.
    Lease means any contract, profit-share arrangement, joint venture, 
or other agreement issued or approved by the United States under a 
mineral leasing law applicable to Indian lands that authorizes 
exploration for, development or extraction of, or removal of oil or gas 
products--or the land area covered by that authorization, whichever the 
context requires.
    Lessee means any person to whom an Indian Tribe or allottee issues 
a lease, and any person assigned an obligation to make royalty or other 
payments required by the lease. This includes any person holding a 
lease interest (including operating rights owners) as well as an 
operator, purchaser, or other person with no lease interest but who 
makes royalty payments to MMS or the lessor on the lessee's behalf. 
Lessee includes all affiliates, including but not limited to a 
company's production, marketing, and refining arms.
    Like-quality oil means oil with similar chemical, physical, and 
legal characteristics.
    Load oil means any oil used in 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.
    Location differential means the value difference for oil at two 
different points.
    Major portion means the highest price paid or offered at the time 
of production for the major portion of oil production from the same 
designated area. It is calculated monthly using like-quality oil from 
the same designated area (or, if the corresponding field or area is 
larger than the designated area and if necessary to obtain a reasonable 
sample, from the same field or area).
    Market center means a location MMS recognizes for oil sales, 
refining, or transshipment. Market centers generally are locations 
where MMS-approved publications publish oil spot prices.
    Marketable condition means oil sufficiently free from impurities 
and otherwise in a condition a purchaser will accept under a sales 
contract typical for the field or area.
    MMS means the Minerals Management Service of the Department of the 
Interior.
    MMS-approved publication means a publication MMS approves for 
determining NYMEX prices or location differentials.
    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.
    Netting means reducing the reported sales value to account for 
transportation instead of reporting a transportation allowance as a 
separate line on Form MMS-2014.
    NYMEX means the New York Mercantile Exchange.
    Oil means a mixture of hydrocarbons that existed in the liquid 
phase in natural underground reservoirs, remains liquid at atmospheric 
pressure after passing through surface separating facilities, and is 
marketed or used as a liquid. Condensate recovered in lease separators 
or field facilities is considered oil.
    Person means any individual, firm, corporation, association, 
partnership, consortium, or joint venture (when established as a 
separate entity).
    Quality differential means the value difference between two oils 
due to differences in their API gravity, sulfur content, viscosity, 
metals content, and other quality factors.
    Sale means a contract where:
    (1) The seller unconditionally transfers title to the oil to the 
buyer. The seller may not retain any related rights such as the right 
to buy back similar quantities of oil from the buyer elsewhere;
    (2) The buyer pays money or other consideration for the oil; and
    (3) The parties' intent is for a sale of the oil to occur.
    Settle price means the price established by NYMEX's Exchange 
Settlement Committee at the close of each trading session as the 
official price to be used in determining net gains or losses, margin 
requirements, and the next day's price limits.
    Spot price means the price under a spot sales contract where:
    (1) A seller agrees to sell to a buyer a specified amount of oil at 
a specified price over a specified period of short duration;
    (2) No cancellation notice is required to terminate the sales 
agreement; and
    (3) There is no obligation or implied intent to continue to sell in 
subsequent periods.
    Transportation allowance means a deduction in determining royalty 
value for the reasonable, actual costs of moving oil from the 
designated area boundary to a point of sale or delivery off the 
designated area. The transportation allowance does not include 
gathering costs or costs of moving production from the lease to the 
designated area boundary.


Sec. 206.52  How does a lessee determine the royalty value of the oil?

    This section explains how you must determine the value of oil 
produced from Indian leases. For royalty purposes, the value of oil 
produced from leases subject to this subpart is the value calculated 
under this section with applicable adjustments determined under this 
subpart. The following table lists three oil valuation methods. You 
must determine the value of oil using the method that yields the 
highest value. As explained under paragraph (d) of this section, you 
must select from the first two methods and make an initial value 
calculation and payment based on the method that yields the highest 
value. MMS will calculate and publish the value under the third method. 
If the third method yields a higher value than the first two methods, 
you must adjust the value from your initial calculation as explained 
under paragraph (d) of this section.

----------------------------------------------------------------------------------------------------------------
                 Valuation method                                            Subject to                         
----------------------------------------------------------------------------------------------------------------
The average of the five highest daily NYMEX        Paragraphs (a) (1)-(5) of this section.                      
 futures settle prices (Cushing, Oklahoma) for                                                                  
 the Domestic Sweet crude oil contract for the                                                                  
 prompt month.                                                                                                  
The gross proceeds from the sale of your oil       Paragraphs (b) (1)-(4) of this section.                      
 under an arm's-length contract.                                                                                
A major portion value that MMS calculates for      Paragraphs (c) (1)-(4) of this section.                      
 each designated area within 120 days of the end                                                                
 of each production month.                                                                                      
----------------------------------------------------------------------------------------------------------------

    (a) You may calculate value using the average of the five highest 
daily NYMEX futures settle prices (Cushing, Oklahoma) for the Domestic 
Sweet crude oil contract for the prompt month.

[[Page 7101]]

If you use this method, the provisions of this paragraph (a) apply.
    (1) The prompt month is the earliest month for which futures are 
traded on the first day of the month of production. For example, if the 
production month is April 1997, the prompt month would be May 1997, 
since that is the earliest month for which futures are traded on April 
1.
    (2) You must adjust the index price for applicable location and 
quality differentials under Sec. 206.61(c) of this subpart.
    (3) If applicable, you may adjust the index price for 
transportation costs under Sec. 206.61(c) of this subpart.
    (4) If you dispose of oil under an exchange agreement and you 
refine rather than sell the oil that you receive in return, you must 
use this paragraph (a) to determine initial value.
    (5) MMS will monitor the NYMEX prices. If MMS determines that NYMEX 
prices are unavailable or no longer represent reasonable royalty value, 
MMS will amend this section to establish a substitute valuation method.
    (b) You may calculate value using the gross proceeds from the sale 
of your oil under an arm's-length contract. If you use this method, the 
provisions of this paragraph (b) apply.
    (1) You may adjust the gross proceeds-based value calculated under 
this section for appropriate transportation costs under Sec. 206.61(c) 
of this subpart.
    (2) If you dispose of your oil under an exchange agreement and then 
sell the oil that you receive in return under an arm's-length contract, 
value is the sales price adjusted for appropriate quality differentials 
and transportation costs.
    (3) MMS may monitor, review, or audit the royalty value that you 
report under this paragraph (b).
    (i) MMS may examine whether your oil sales contract reflects the 
total consideration actually transferred either directly or indirectly 
from the buyer to you. If it does not, then MMS may require you to 
value the oil sold under that contract at the total consideration you 
received.
    (ii) MMS may require you to certify that the arm's-length contract 
provisions include all of the consideration the buyer must pay, either 
directly or indirectly, for the oil.
    (4) You must base value on the highest price that you can receive 
through legally enforceable claims under your oil sales contract. If 
you fail to take proper or timely action to receive prices or benefits 
you are entitled to, you must base value on that obtainable price or 
benefit.
    (i) In some cases you may apply timely for a price increase or 
benefit allowed under your oil sales contract, but the purchaser 
refuses your request. If this occurs, and you take reasonable 
documented measures to force purchaser compliance, you will owe no 
additional royalties unless or until you receive monies or 
consideration resulting from the price increase or additional benefits. 
This paragraph (b)(4) does not permit you to avoid your royalty payment 
obligation if a purchaser fails to pay, pays only in part, or pays 
late.
    (ii) Any contract revisions or amendments that reduce prices or 
benefits to which you are entitled must be in writing and signed by all 
parties to your arm's-length contract.
    (c) You may use a major portion value that MMS will calculate. If 
you use this method, the provisions of this paragraph apply.
    (1) MMS will calculate and publish the major portion value for each 
designated area within 120 days of the end of each production month.
    (2) Each designated area includes all Indian leases in that area. 
MMS will publish in the Federal Register a list of the leases in each 
designated area. The designated areas are:

(i) Alabama-Coushatta;
(ii) Blackfeet Reservation;
(iii) Crow Reservation;
(iv) Fort Belknap Reservation;
(v) Fort Peck Reservation;
(vi) Jicarilla Apache Reservation;
(vii) MMS-designated groups of counties in the State of Oklahoma;
(viii) Michigan Agency;
(ix) Navajo Reservation;
(x) Northern Cheyenne Reservation;
(xi) Southern Ute Reservation;
(xii) Turtle Mountain Reservation; (xiii) Ute Mountain Ute Reservation;
(xiv) Uintah and Ouray Reservation;
(xv) Wind River Reservation; and
(xvi) Any other area that MMS designates. MMS will publish any new area 
designations in the Federal Register.

    (3) MMS will calculate the major portion value from information 
submitted for production from leases in the designated area on Form 
MMS-2014, Report of Sales and Royalty Remittance.
    (i) MMS will use information from Form MMS-4416, Indian Crude Oil 
Valuation Report, to verify values reported on Form MMS-2014. See 
Sec. 206.61(d)(5) of this subpart for further requirements related to 
Form MMS-4416.
    (ii) MMS will arrange the reported values (adjusted for location 
and quality) from highest to lowest. The major portion value is the 
value of the 75th percentile (by volume, including volumes taken in 
kind) starting from the lowest value.
    (4) MMS will not change the major portion value after it notifies 
you of that value for your leases, unless an administrative or judicial 
decision requires MMS to make a change.
    (d) On Form MMS-2014, you must initially report and pay the value 
of production at the higher of the index-based or gross proceeds-based 
values determined under paragraphs (a) or (b) of this section, 
respectively. You must file this report and pay MMS by the date royalty 
payments are due for the lease. MMS will inform you of its calculated 
major portion value for the designated area. If this value exceeds the 
value you initially reported for the production month, you must submit 
an amended Form MMS-2014 with the higher value within 30 days after you 
receive notice from MMS of the major portion value. MMS will specify, 
in the MMS Oil and Gas Payor Handbook, additional requirements for 
reporting under paragraphs (a), (b), or (c) of this section. You will 
not begin to accrue late-payment interest under 30 CFR 218.54 on any 
underpayment until the due date of your amended Form MMS-2014.


Sec. 206.53  What other general responsibilities do I have for valuing 
oil?

    (a) On request, you must make available sales and volume data for 
production you sold, purchased, or obtained from the designated area or 
from nearby fields or areas. This includes sales and volume data from 
fee and State leases within the designated area or from nearby fields 
or areas. You must make this data available to the authorized MMS or 
Indian representatives, the Office of the Inspector General of the 
Department of the Interior, or other persons authorized to receive such 
information.
    (b) You must retain all data relevant to the determination of 
royalty value. Recordkeeping requirements are found at 30 CFR 207.5. 
MMS or the lessor may review and audit such data you possess, and MMS 
will direct you to use a different value if it determines that the 
reported value is inconsistent with the requirements of this section.
    (c) If MMS determines that you have not properly determined value, 
you must:
    (1) Pay the difference, if any, between the royalty payments you 
made and those that are due based upon the value MMS establishes;
    (2) Pay interest on the difference computed under 30 CFR 218.54; 
and

[[Page 7102]]

    (3) If you are entitled to a credit, MMS will tell you how to take 
that credit.
    (d) You must place oil in marketable condition and market the oil 
for the mutual benefit of yourself and the lessor at no cost to the 
Indian lessor, unless the lease agreement or this part provides 
otherwise. In the process of marketing the oil or placing it in 
marketable condition, your gross proceeds may be reduced because 
services are performed on your behalf that normally would be your 
responsibility. If this happens, and if you valued the oil using gross 
proceeds under Sec. 206.52(b), you must increase value to the extent 
that your gross proceeds are reduced.


Sec. 206.54  May I ask MMS for valuation guidance?

    You may ask MMS for guidance in determining value. You may propose 
a value method to MMS. Submit all available data related to your 
proposal and any additional information MMS deems necessary. MMS will 
promptly review your proposal and provide you with the guidance you 
request.


Sec. 206.55  Does MMS protect information I provide?

    MMS will keep confidential, to the extent allowed under applicable 
laws and regulations, any data you submit that is privileged, 
confidential, or otherwise exempt.
    (a) Certain information you submit to MMS to support valuation 
proposals, including transportation allowances, is exempt from 
disclosure under Federal law.
    (b) All requests for information about determinations made under 
this part must be submitted under the Freedom of Information Act 
regulation of the Department of the Interior, 43 CFR part 2.
    (c) The Indian lessor has the right to obtain directly from you or 
MMS any information to which it may be lawfully entitled under the 
terms of the lease, 30 U.S.C. 1733, or other applicable law.
    4. Newly redesignated section 206.60 is revised to read as follows:


Sec. 206.60  What transportation allowances and other adjustments apply 
to the value of oil?

    (a) Transportation allowances. (1) You may deduct a transportation 
allowance from the value of oil determined under Sec. 206.52 of this 
part as explained in the following table.

----------------------------------------------------------------------------------------------------------------
           If you value oil                      And                                  Then                      
----------------------------------------------------------------------------------------------------------------
Based on index pricing under Sec.                               You may claim a transportation allowance only   
 206.52(a).                                                      under the limited circumstances listed at Sec. 
                                                                 206.61(c)(2).                                  
Based on gross proceeds under Sec.     The movement of the oil  MMS will allow a deduction for the reasonable,  
 206.52(b).                             is not gathering.        actual costs to transport oil from the         
                                                                 designated area boundary to the sales point.   
----------------------------------------------------------------------------------------------------------------

    (i) See Sec. 206.61(a) and (b) for information on how to determine 
the transportation allowance.
    (ii) [Reserved]
    (2) You may not deduct a transportation allowance for transporting 
oil:
    (i) Taken as Royalty-In-Kind and delivered to the lessor in the 
designated area;
    (ii) When the sale or transfer point occurs within the designated 
area; or
    (iii) When you value oil based on a major portion value under 
Sec. 206.52(c).
    (b) Are there limits on my transportation allowance? (1) Except as 
provided in paragraph (b)(2) of this section:

------------------------------------------------------------------------
If you determine the value of      Then your transportation allowance   
       the oil based on                 deduction may not exceed        
------------------------------------------------------------------------
Index pricing under Sec.       50 percent of the average of the five    
 206.52(a).                     highest daily NYMEX futures settle      
                                prices (Cushing, Oklahoma) for the      
                                Domestic Sweet crude oil contract for   
                                the prompt month.                       
Gross proceeds under Sec.      50 percent of the value of the oil at the
 206.52(b).                     point of sale.                          
------------------------------------------------------------------------

    (2) If you ask, MMS may approve a transportation allowance 
deduction in excess of the limitation in paragraph (b)(1) of this 
section. You must demonstrate that the transportation costs incurred 
were reasonable, actual, and necessary. Your application for exception 
(using Form MMS-4393, Request to Exceed Regulatory Allowance 
Limitation) must contain all relevant and supporting documentation 
necessary for MMS to make a determination. You may never reduce the 
royalty value of any production to zero.
    (c) Must I allocate transportation costs? You must allocate 
transportation costs among all products produced and transported as 
provided in Sec. 206.61 of this subpart. You may not allocate 
transportation costs from production for which those costs were 
incurred to production for which those costs were not incurred. You 
must express transportation allowances for oil as dollars per barrel.
    (d) What other adjustments apply when I value production based on 
index pricing? If you value oil based on index pricing under 
Sec. 206.52(a) of this subpart, you must adjust the value for the 
differences in location and quality between oil at the designated area 
boundary and the index pricing point outside the designated area as 
specified under Sec. 206.61(c). If the oil is produced in the 
designated area that includes Cushing, Oklahoma, you are only entitled 
to a quality adjustment. See Sec. 206.61 for more information on 
adjusting for location and quality differences.
    (e) What additional payments may I be liable for? If MMS determines 
that you underpaid royalties because an excessive transportation 
allowance or other adjustment was claimed, then you must pay any 
additional royalties, plus interest under 30 CFR 218.54. You also could 
be entitled to a credit with interest if you understated the 
transportation allowance or other adjustment. If you take a deduction 
for transportation on 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, MMS may assess you an amount under 
Sec. 206.61(e) of this subpart.
    5. Newly redesignated Sec. 206.61 is amended by revising the 
section heading; removing paragraphs (b)(5) and (c)(2)(viii); 
redesignating paragraphs (c) through (g) as paragraphs (d) through (h); 
adding new paragraphs (c) and (d)(5); and revising newly redesignated

[[Page 7103]]

paragraphs (d)(1)(i), (d)(2)(i), (d)(4) and (g) to read as follows:


Sec. 206.61  How do lessees determine transportation allowances and 
other adjustments?

* * * * *
    (c) What adjustments apply when lessees use index pricing? (1) When 
you use index pricing to calculate the value of production under 
Sec. 206.52(a), you must adjust the index price for location/quality 
differentials. Your adjustments must reflect the reasonable oil value 
differences in location and quality between the designated area 
boundary and the market center and between the market center and the 
index pricing point outside the designated area. The adjustments that 
might apply to your production are listed in paragraphs (c)(1)(i) 
through (iv) of this section. See paragraphs (c)(2) and(c)(3) of this 
section to determine which adjustments you must use based on how you 
dispose of your production. These adjustments are:
    (i) A location differential to reflect the difference in value of 
crude oils at the index pricing point and the appropriate market 
center. For any production month, the location differential is the 
difference between the average spot prices for that month for the 
respective crude oils at the index pricing point and at the market 
center. Use MMS-approved publications to determine average spot prices 
and calculate the location differential;
    (ii) An express location/quality differential under your arm's-
length exchange agreement that reflects the difference in value of 
crude oil at the designated area boundary and the market center;
    (iii) A location/quality differential reflecting the crude oil 
value difference between the designated area boundary and the market 
center that MMS will publish annually based on data it collects on Form 
MMS-4416. MMS will calculate that differential using a volume-weighted 
average of the differentials reported on Form MMS-4416 for the previous 
reporting year. MMS may publish separate rates for various crude oil 
qualities that are identified separately on Form MMS-4416 (for example, 
sweet vs. sour oil, or oil in different gravity ranges). MMS will 
publish differentials that reflect both a location differential based 
on the market center/designated area pairs and a quality differential 
based on the type of crude oil. MMS will publish these differentials in 
the Federal Register by the effective date of the final regulation and 
by January 31 of all subsequent years. You must use MMS-published rates 
on a calendar year basis--apply them to January through December 
production reported February through the following January; and
    (iv) Actual transportation costs from the designated area boundary 
to the market center determined under this section.
    (2) To determine which adjustments and transportation allowances 
apply to your production, use the following table.

----------------------------------------------------------------------------------------------------------------
               If you                            And                                   Then                     
----------------------------------------------------------------------------------------------------------------
Dispose of your production under an  That exchange agreement has  Adjust your value using paragraphs (c)(1)(i)  
 arm's-length exchange agreement.     an express location          and (ii) of this section.                    
                                      differential to reflect                                                   
                                      the difference in value                                                   
                                      between the designated                                                    
                                      area boundary for the                                                     
                                      lease and the associated                                                  
                                      market center.                                                            
Move your production from a          The market center is also    Use paragraph (c)(1)(iii) to determine the    
 designated area directly to an MMS-  the index pricing point.     quality differential and paragraph (c)(1)(iv)
 identified market center.                                         to deduct the actual transportation costs to 
                                                                   that market center, subject to this paragraph
                                                                   (c)(2)(i).                                   
Do not move your production from a   You instead move it          Adjust your value using paragraphs (c)(1)(i)  
 designated area to an MMS-           directly to an alternate     and (iv) of this section, subject to this    
 identified market center.            disposal point (for          paragraph (c)(2)(ii).                        
                                      example, your own                                                         
                                      refinery).                                                                
Transport or dispose of your                                      Adjust your value using paragraphs (c)(1)(i)  
 production under any other                                        and (iii).                                   
 arrangement.                                                                                                   
----------------------------------------------------------------------------------------------------------------

    (i) If you move your production from a designated area directly to 
an MMS-identified market center that is also the index pricing point, 
use the separate MMS-published quality differential between oil similar 
to yours and the oil used for index pricing for purposes of applying 
paragraph (c)(1)(iii). For purposes of paragraph (c)(1)(i) of this 
section, the market center is the MMS-identified market center nearest 
the lease where there is a published spot price for crude oil of like 
quality to the oil being valued. The spot price you use must be for 
like-quality oil.
    (ii) The market center for purposes of paragraph (c)(1)(iv) of this 
section is the alternate disposal point.
    (3) If an MMS-calculated differential under paragraph (c)(1)(iii) 
of this section does not apply to your oil, either due to location or 
quality differences, you must request MMS to calculate a differential 
for you.
    (i) After MMS publishes its annual listing of location/quality 
differentials, you must file your request in writing with MMS for an 
MMS-calculated differential.
    (ii) You must demonstrate why the published differential does not 
adequately reflect your circumstances.
    (iii) MMS will calculate such a differential when it receives your 
request or when it discovers that the differential published under 
paragraph (c)(1)(iii) of this section does not apply to your oil. MMS 
will bill you for any additional royalties and interest due. If you 
file a request for an MMS-calculated differential within 30 days after 
MMS publishes its annual listing of location/quality differentials, the 
calculated differential will apply beginning with the effective date of 
the published differentials. Otherwise, the MMS-calculated differential 
will apply beginning the first day of the month following the date of 
your application. In this case the published differentials will apply 
in the interim and MMS will not refund any overpayments you made due to 
your failure to timely request MMS to calculate a differential for you.
    (iv) Send your request to: Minerals Management Service, Royalty 
Management Program Royalty Valuation Division P.O. Box 25165, Mail Stop 
3150 Denver, CO., 80225-0165.
    (4) For the differentials referenced in paragraph (c)(1)(i) of this 
section, periodically MMS will publish in the Federal Register a list 
of MMS-approved publications. MMS's decision to approve a publication 
will be based on criteria which include but are not limited to:

[[Page 7104]]

    (i) Publications buyers and sellers frequently use;
    (ii) Publications frequently mentioned in purchase or sales 
contracts;
    (iii) Publications which use adequate survey techniques, including 
development of spot price estimates based on daily surveys of buyers 
and sellers of crude oil; and
    (iv) Publications independent from MMS, other lessors, and lessees.
    (5) Any publication may petition MMS to be added to the list of 
acceptable publications.
    (6) MMS will specify the tables you must use in the publications to 
determine the associated location differentials.
    (7) Periodically, MMS will publish in the Federal Register a list 
of market centers. MMS will monitor market activity and, if necessary, 
modify the list of market centers and will publish such modifications 
in the Federal Register. MMS will consider the following factors and 
conditions in specifying market centers:
    (i) Points where MMS-approved publications publish prices useful 
for index purposes;
    (ii) Markets served;
    (iii) Pipeline and other transportation linkage;
    (iv) Input from industry and others knowledgeable in crude oil 
marketing and transportation;
    (v) Simplification; and
    (vi) Other relevant matters.
    (d) Reporting requirements--(1) Arm's-length contracts. (i) With 
the exception of those transportation allowances specified in 
paragraphs (d)(1)(v) and (d)(1)(vi) of this section, you must submit 
page one of the initial Form MMS-4110 (and Schedule 1), Oil 
Transportation Allowance Report, before, or at the same time as, you 
report the transportation allowance determined under an arm's-length 
contract 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 is considered to be timely received.
* * * * *
    (2) Non-arm's-length or no contract. (i) With the exception of 
those transportation allowances specified in paragraphs (d) (2) (v) and 
(d) (2) (vii) of this section, you must submit an initial Form MMS-4110 
before, or at the same time as, you report the transportation allowance 
determined under a non-arm's-length contract or no-contract situation 
on Form MMS-2014. A Form MMS-4110 received by the end of the month that 
the Form MMS-2014 is due is considered to be timely received. The 
initial report may be based upon estimated costs.
* * * * *
    (4) What additional requirements apply to Form MMS-2014 reporting? 
You must report transportation allowances, location differentials, and 
quality differentials as separate lines on Form MMS-2014, unless MMS 
approves a different reporting procedure. MMS will provide additional 
reporting details and requirements in the MMS Oil and Gas Payor 
Handbook.
    (5) What information must lessees provide to support index pricing 
adjustments, and how is it used? You must submit information on Form 
MMS-4416 related to all of your crude oil production from designated 
areas. You initially must submit Form MMS-4416 no later than [insert 
the date 2 months after the effective date of this rule] and then by 
October 31 [insert the year this regulation takes effect], and by 
October 31 of each succeeding year. In addition to the annual 
requirement to file this form, you must file a new form each time you 
execute a new exchange or sales contract involving the production of 
oil from an Indian lease. However, if the contract merely extends the 
time period a contract is in effect without changing any other terms of 
the contract, this requirement to file does not apply. All other 
purchasers of crude oil from designated areas are likewise subject to 
the requirements of this paragraph (d)(5).
* * * * *
    (g) Actual or theoretical losses. Notwithstanding any other 
provision of this subpart, for other than arm's-length contracts, no 
cost is allowed for oil transportation which results from payments 
(either volumetric or for value) for actual or theoretical losses.
* * * * *
    Note: The following Appendices will not appear in the Code of 
Federal Regulations.

Appendix A

BILLING CODE 4310-MR-P

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[[Page 7106]]

[GRAPHIC] [TIFF OMITTED] TP12FE98.001



[[Page 7107]]

[GRAPHIC] [TIFF OMITTED] TP12FE98.002



BILLING CODE 4310-MR-C

[[Page 7108]]



                                       Appendix B--NYMEX Index Price Basis                                      
                                       [January 1997 Production and Sale]                                       
----------------------------------------------------------------------------------------------------------------
               NYMEX trade date                      NYMEX Delivery (prompt) month      NYMEX daily     Close   
----------------------------------------------------------------------------------------------------------------
Jan-08-97.....................................  Feb. 1997.............................       $26.62             
Jan-06-97.....................................  Feb. 1997.............................        26.37             
Jan-07-97.....................................  Feb. 1997.............................        26.23             
Jan-10-97.....................................  Feb. 1997.............................        26.09             
Jan-15-97.....................................  Feb. 1997.............................        25.95             
Dec-31-97.....................................  Feb. 1997.............................        25.92             
Jan-02-97.....................................  Feb. 1997.............................        25.69             
Jan-09-97.....................................  Feb. 1997.............................        25.69             
Jan-03-97.....................................  Feb. 1997.............................        25.59             
Jan-16-97.....................................  Feb. 1997.............................        25.52             
Jan-17-97.....................................  Feb. 1997.............................        25.41             
Dec-30-97.....................................  Feb. 1997.............................        25.37             
Jan-20-97.....................................  Feb. 1997.............................        25.23             
Dec-27-97.....................................  Feb. 1997.............................        25.22             
Jan-13-97.....................................  Feb. 1997.............................        25.19             
Jan-14-97.....................................  Feb. 1997.............................        25.11             
Dec-24-97.....................................  Feb. 1997.............................        25.10             
Dec-20-97.....................................  Feb. 1997.............................        25.08             
Dec-26-97.....................................  Feb. 1997.............................        24.92             
Jan-21-97.....................................  Feb. 1997.............................        24.80             
Dec-23-97.....................................  Feb. 1997.............................        24.79             
NYMEX Average Price for five high daily settle    ....................................        26.25             
 prices for January 1997 production.                                                                            
----------------------------------------------------------------------------------------------------------------


                             Appendix C--WTI Spot Price, Market Center: Cushing, OK                             
                                       [January 1997 Production and Sale]                                       
----------------------------------------------------------------------------------------------------------------
                                                                                           Final                
          Cushing WTI spot trade date              Cushing WTI spot delivery assess.    cushing WTI     (Mean)  
                                                                 month                      spot                
----------------------------------------------------------------------------------------------------------------
Dec-26-96.....................................  Feb. 1997.............................       $24.88             
Dec-27-96.....................................  Feb. 1997.............................        25.09             
Dec-30-96.....................................  Feb. 1997.............................        25.23             
Dec-31-96.....................................  Feb. 1997.............................        25.78             
Jan-02-97.....................................  Feb. 1997.............................        25.80             
Jan-03-97.....................................  Feb. 1997.............................        25.59             
Jan-06-97.....................................  Feb. 1997.............................        26.34             
Jan-07-97.....................................  Feb. 1997.............................        26.28             
Jan-08-97.....................................  Feb. 1997.............................        26.53             
Jan-09-97.....................................  Feb. 1997.............................        26.30             
Jan-10-97.....................................  Feb. 1997.............................        26.18             
Jan-13-97.....................................  Feb. 1997.............................        25.16             
Jan-14-97.....................................  Feb. 1997.............................        25.11             
Jan-15-97.....................................  Feb. 1997.............................        25.88             
Jan-16-97.....................................  Feb. 1997.............................        25.41             
Jan-17-97.....................................  Feb. 1997.............................        25.28             
Jan-20-97.....................................  Feb. 1997.............................        25.14             
Jan-21-97.....................................  Feb. 1997.............................        24.57             
Jan-22-97.....................................  Feb. 1997.............................        24.32             
Jan-23-97.....................................  Feb. 1997.............................        23.97             
Jan-24-97.....................................  Feb. 1997.............................        24.05             
Cushing WTI Avg Spot Price for January 1997...    ....................................        25.38             
----------------------------------------------------------------------------------------------------------------


                             Appendix D--WTI Spot Price, Market Center: Midland, TX                             
                                       [January 1997 Production and Sale]                                       
----------------------------------------------------------------------------------------------------------------
                                                                                           Final                
          Midland WTI spot trade date              Midland WTI spot delivery assess.    Midland WTI     (Mean)  
                                                                 month                      spot                
----------------------------------------------------------------------------------------------------------------
Dec-26-96.....................................  Feb. 1997.............................       $24.88             
Dec-27-96.....................................  Feb. 1997.............................        25.08             
Dec-30-96.....................................  Feb. 1997.............................        25.08             
Dec-31-96.....................................  Feb. 1997.............................        25.77             
Jan-02-97.....................................  Feb. 1997.............................        25.80             
Jan-03-97.....................................  Feb. 1997.............................        25.58             
Jan-06-97.....................................  Feb. 1997.............................        26.33             

[[Page 7109]]

                                                                                                                
Jan-07-97.....................................  Feb. 1997.............................        26.24             
Jan-08-97.....................................  Feb. 1997.............................        26.48             
Jan-09-97.....................................  Feb. 1997.............................        26.18             
Jan-10-97.....................................  Feb. 1997.............................        26.02             
Jan-13-97.....................................  Feb. 1997.............................        24.99             
Jan-14-97.....................................  Feb. 1997.............................        24.88             
Jan-15-97.....................................  Feb. 1997.............................        25.65             
Jan-16-97.....................................  Feb. 1997.............................        25.10             
Jan-17-97.....................................  Feb. 1997.............................        24.94             
Jan-20-97.....................................  Feb. 1997.............................        24.80             
Jan-21-97.....................................  Feb. 1997.............................        24.19             
Jan-22-97.....................................  Feb. 1997.............................        23.88             
Jan-23-97.....................................  Feb. 1997.............................        23.58             
Jan-24-97.....................................  Feb. 1997.............................        23.66             
WTI Midland Avg Spot Price for January 1997...    ....................................        25.20             
----------------------------------------------------------------------------------------------------------------


 Appendix E--NYMEX-based Oil Royalty Computation, Navajo Nation, Market 
                           Center: Midland, TX                          
                   [January 1997 Production and Sale]                   
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Average of Five High Daily NYMEX                                        
 Settle Prices...................                                 $26.25
Cushing/Market Center Location                                          
 Differential:                                                          
    WTI Cushing Average Spot                                            
     Price.......................       $25.38                          
    WTI Midland Average Spot                                            
     Price.......................        25.20                          
                                  -------------                         
    WTI Midland over (under) WTI                                        
     Cushing.....................                                  (.18)
Market Center/Designated Area                                           
 Location and Quality                                                   
 Differential (Exchange                                                 
 Agreement):                                                            
    Transportation and Quality                                          
     Differential from Midland to                                       
     Navajo reservation..........                                  (.25)
Royalty Value per barrel.........                                  25.82
------------------------------------------------------------------------

[FR Doc. 98-3597 Filed 2-11-98; 8:45 am]
BILLING CODE 4310-MR-P