Reporting and Paying Royalties on Federal Leases on Takes or Entitlements Basis, 71421-71425 [05-23380]
Download as PDF
<![CDATA[
[FR Doc. 05–23404 Filed 11–28–05; 8:45 am]
BILLING CODE 6717–01–C
DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 205
RIN 1010–AC29
Reporting and Paying Royalties on
Federal Leases on Takes or
Entitlements Basis
Minerals Management Service
(MMS), Interior.
AGENCY:
VerDate Aug<31>2005
18:49 Nov 28, 2005
Jkt 208001
Advance notice of proposed
rulemaking and announcement of
public meeting.
ACTION:
SUMMARY: The MMS requests comments
and suggestions to assist us in proposing
regulations regarding so-called ‘‘takes
versus entitlements’’ reporting and
payment of royalties when oil and gas
production is commingled upstream of
the point of royalty measurement. See
IV, Description of Information
Requested, for details.
DATES: You must submit your comments
by January 30, 2006. A public meeting
will be held on December 14, 2005.
ADDRESSES: Please use the regulation
identifier number (RIN), RIN 1010–
AC29, in all your correspondence.
Submit your comments, suggestions, or
PO 00000
Frm 00013
Fmt 4702
Sfmt 4702
71421
objections regarding the advanced
notice of the proposed rulemaking by
any of the following methods:
By regular U.S. mail. Minerals
Management Service, Minerals Revenue
Management, P.O. Box 25165, MS
302B2, Denver, Colorado 80225–0165;
By overnight mail, courier, or handdelivery. Minerals Management Service,
Minerals Revenue Management,
Building 85, Room A–614, Denver
Federal Center, West 6th Avenue and
Kipling Blvd., Denver, Colorado 80225;
or
By e-mail. mrm.comments@mms.gov.
Please submit Internet comments as an
ASCII file and avoid the use of special
characters and any form of encryption.
Also, please include ‘‘Attn: RIN 1010–
AC29’’ and your name and return
E:\FR\FM\29NOP1.SGM
29NOP1
EP29no05.000</GPH>
Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Proposed Rules
71422
Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Proposed Rules
address in your Internet message. If you
do not receive a confirmation that we
have received your Internet message,
call the contact person listed below.
FOR FURTHER INFORMATION CONTACT:
Sharron L. Gebhardt, Lead Regulatory
Specialist, Minerals Management
Service, Minerals Revenue Management,
P.O. Box 25165, MS 302B2, Denver,
Colorado 80225–0165, telephone (303)
231–3211, FAX (303) 231–3781, or email Sharron.Gebhardt@mms.gov.
SUPPLEMENTARY INFORMATION:
I. Dates Information
The MMS may not necessarily
consider or include in the
Administrative Record, for any
proposed rule, comments that MMS
receives after the close of the comment
period or comments delivered to an
address other than those listed in the
ADDRESSES section of this document.
II. Public Meeting Information
The MMS will hold a public meeting
to allow the public an opportunity to
comment on how MMS should
implement the royalty reporting and
payment provision at section 6(d) of the
Federal Oil and Gas Royalty
Simplification and Fairness Act (RSFA).
The meeting will be held in Houston,
Texas, on the following date at the
following specified time and location:
Wednesday, December 14, 2005, from 9
a.m.–1 p.m. central time, in the San
Antonio Room located on the second
floor of the Sheraton North Houston
Hotel, located at 15700 John F. Kennedy
Blvd, Houston, Texas 77032. For further
information, please contact Roman A.
Geissel at (303) 231–3226.
III. Public Comment and Meeting
Procedures
A. Written Comment Procedures
We are particularly interested in
receiving comments and suggestions
about the topics identified in IV,
Description of Information Requested.
Your written comments should: (1) Be
specific; (2) explain the reason for your
comments and suggestions; (3) address
the issues outlined in this notice; and
(4) where possible, if you refer to the
specific provision, section, or paragraph
of statutory law, case law, or existing
regulations, please cite that provision.
The comments and recommendations
that are most useful and have greater
likelihood of influencing decisions on
the content of a possible future
proposed rule are: (1) Comments and
recommendations supported by
quantitative information or studies; and/
or (2) comments that include citations
VerDate Aug<31>2005
18:49 Nov 28, 2005
Jkt 208001
to, and analyses of, the applicable laws
and regulations.
organizations or businesses, available
for public inspection in their entirety.
B. Public Meeting Procedures
IV. Description of Information
Requested
At the public meeting, those attending
will be able to comment on the scope,
proposed action, and possible
alternatives the MMS should consider.
The purpose of the meeting is to gather
comments and input from a variety of
stakeholders and the public.
If you do not wish to speak at the
meeting but you have views, questions,
or concerns with regard to the MMS’s
implementation of section 6(d) of RSFA,
Public Law 104–185, Aug. 13, 1996, 110
Stat 1700, 1713–1714, as corrected by
Public Law 104–200, Sept. 22, 1996,
codified at 30 U.S.C. 1721(k), entitled
‘‘Volume Allocations of Oil and Gas
Production,’’ you may submit written
statements at the meeting for inclusion
in the public record. You may also
submit written comments and
suggestions regardless of whether you
attend or speak at the public meeting.
See the ADDRESSES section of this
document for instructions on submitting
written comments.
The site for the public meeting is
accessible to individuals with physical
impairments. If you need a special
accommodation to participate in the
meeting (e.g., interpretive service,
assistive listening device, or materials in
alternative format), please notify Lonnie
Kimball at (281) 987–6800, no later than
2 weeks prior to the scheduled meeting.
Although we will make every effort to
accommodate requests received, it may
not be possible to satisfy every request.
C. Public Comment Policy
Our practice is to make comments,
including names and home addresses of
respondents, available for public review
at our Denver office during regular
business hours and on our Web site at
https://www.mrm.mms.gov/Law_R_D/
FRNotices/FRHome.htm, or on request
to Sharron Gephardt at (303) 231–3211.
Individual respondents may request that
we withhold their individual home
address from the rulemaking record,
which we will honor to the extent
allowable by law. There also may be
circumstances in which we would
withhold from the rulemaking record a
respondent’s identity, as allowable by
law. If you wish us to withhold your
name and/or address, you must state
this prominently at the beginning of
your comments. However, we will not
consider anonymous comments. We
will make all submissions from
organizations or businesses, and from
individuals identifying themselves as
representatives or officials of
PO 00000
Frm 00014
Fmt 4702
Sfmt 4702
On August 13, 1996, the President
signed RSFA into law. Section 6(d) of
RSFA, entitled, ‘‘Volume Allocations of
Oil and Gas Production,’’ amended
section 111 of the Federal Oil and Gas
Royalty Management Act of 1982
(FOGRMA), Public Law 97–451—Jan.
12, 1983 (30 U.S.C. 1721), by adding
new paragraphs (k)(1)–(5). The proposed
rulemaking would implement RSFA
amendments to FOGRMA section
111(k)(1)–(4).
Congress enacted these amendments
to clarify and resolve the long-standing
issues regarding so-called ‘‘takes versus
entitlements.’’ Those issues arose
primarily where the amount of natural
gas taken (‘‘takes’’) and sold by a lessee
from Federal leases subject to a unit or
communitization agreement was not
equal to the lessee’s entitled share
(‘‘entitlements’’), based on its ownership
interest in leases in the unit or
communitization agreement. These
imbalances led to numerous questions
about who should report and pay on
what volumes and for what leases.
To obtain input from parties affected
by RSFA amendments to FOGRMA
section 111(k)(1)–(4), MMS formed a
consultation team comprised of
representatives from interested states,
oil and gas trade associations, and
MMS. The consultation team held
meetings on October 30, November 19,
and December 6, 1996. The meetings
resulted in general agreement on
definitions, the reporting requirements
for 100-percent Federal units and
communitization agreements, the
definition of a ‘‘marginal property,’’ and
how a marginal property reporting
exception would be determined.
Subsequent to those meetings, in the
process of trying to develop a proposed
rule implementing RSFA amendments
to FOGRMA section 111(k)(1)–(4), an
issue arose regarding the commingling
of oil and gas production from multiple
properties upstream of the point of
royalty measurement. For purposes of
this discussion:
• A ‘‘property’’ is defined as a lease,
unit, or communitization agreement.
• A ‘‘100-percent Federal unit or
communitization agreement’’ means any
unit or communitization agreement that
contains only Federal leases having the
same fixed royalty rate and funds
distribution.
• A ‘‘unit’’ means a unit participating
area, enhanced recovery unit, or fieldwide unit.
E:\FR\FM\29NOP1.SGM
29NOP1
Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Proposed Rules
• A ‘‘mixed unit or communitization
agreement’’ means any unit or
communitization agreement other than
100-percent Federal unit or
communitization agreement. These are
unit or communitization agreements
that contain any mixture of Federal,
Indian, state or private mineral estates,
or that contain all Federal leases with
different royalty rates (fixed or variable)
or different funds distribution.
• A ‘‘stand-alone lease’’ means a lease
or a portion of a lease that is not in a
unit or communitization agreement.
The RSFA cldarly identifies when it
is appropriate to initially report and pay
on a ‘‘takes’’ or ‘‘entitlements’’ basis for
production from leases, units or
communization agreements that is not
commingled with production from other
properties before the royalty
measurement point. For instance:
• When taking production from a
100-percent Federal unit or
communitization agreement, the
lessee(s) must pay on actual takes (30
U.S.C. 1721(K)(1)(A)), or
• When taking production from a
mixed Federal unit or communitization
agreement, the Federal lessee(s) must
pay on entitlements (30 U.S.C.
1721(k)(1)(B)), or
• When taking production from a
stand-alone Federal lease, the lessee(s)
must pay on takes (30 U.S.C.
1721(k)(1)(C)).
It is important to note that, while
RSFA section 6(d) amended FOGRMA
by adding section 111(k)(1), which
addressed the reporting and payment
requirements, the addition of section
111(k)(2) went on to clarify that the
requirements outlined in section
111(k)(1) ‘‘apply only to requirements
for reporting and paying royalties.
Nothing in this subsection is intended
to alter a lessee’s liability for royalties
on oil or gas production allocated to
lease, in accordance with the terms of
the lease, a unit or communitization
agreement, or any other agreement.’’
Thus, the lessee’s ultimate liability to
pay royalties on its entitled share of
production is not changed.
Commingling adds additional
complications to the issue of how to
report and pay royalties. Not only do
imbalances between operating rights
owners within a property occur, but
imbalances between properties also are
commonplace.
Commingling is the combining of
production from multiple properties
before measurement for royalty
purposes and requires approval of the
MMS Offshore Minerals Management
program for offshore leases or the
Bureau of Land Management for
onshore leases. The commingling
VerDate Aug<31>2005
18:49 Nov 28, 2005
Jkt 208001
approval identifies where the volume is
measured by royalty purposes and how
that volume must be allocated to each
property that is subject to the
commingling approval. It does not affect
how volume is allocated to leases
within a unit or communitization
agreement. Commingling can be, and
often is, approved between properties
with the same royalty rate and funds
distribution and between properties
with different royalty rates or different
funds distributions.
The RSFA provision added to
FOGRMA at 30 U.S.C. 1721(k)(1)–(5)
does not address the effect of
commingling or commingling
imbalances. Commingling complicates
reporting requirements because there is
an impact on royalty payments when
there are properties with mixed royalty
rates or funds distribution upstream of
the approved commingling point. For
example, assume that production from
two stand-alone Federal leases that are
not unitized or communitized, each
with a different royalty rate, is
commingled before the royalty
measurement point. Assume that each
lease receives a 50 percent allocation of
the total measure production (1,000
Mcf) under the commingling approval.
The lessee of the lease with a 162⁄3
percent royalty rate actually sells (takes)
750 Mcf of gas and the lessee of the
lease with the 121⁄2 percent royalty rate
actually sells (takes) 250 Mcf of gas.
Based on the commingling approval, the
leases are out of balance. The
commingling approval determines the
volume deemed to have been removed
or sold from each lease upon which the
lessees ultimately must pay royalty.
Should each lessee pay royalties on its
actual sales (takes), the Federal
Government initially would be paid
more than the royalty ultimately owed.
If the sales were reversed, the Federal
Government initially would be paid on
less than the royalty ultimately owed.
RSFA prescribes how lessees should
initially report and pay royalty on
production removed or sold from a lease
or unit or communitization agreement.
The commingling approval determines
the volume removed or sold from the
leases or unit or communitization
agreements subject to the commingling
approval. RSFA was silent on the effect
of commingling approvals. We are
asking for your input on several
questions regarding RSFA’s application
to production subject to a commingling
approval before the royalty
measurement point. Those questions
include the following:
(1) Should lessees of a lease or a 100percent Federal unit or
communitization agreement report and
PO 00000
Frm 00015
Fmt 4702
Sfmt 4702
71423
pay initially on their takes in a situation
where production from that lease or unit
or communitization agreement is
commingled with other production
upstream of the royalty measurement
point:
(2) RSFA requires that Federal lessees
in mixed unit or communitization
agreements report royalties on an
entitlement basis, regardless of whether
the unit or communitization agreement
is subject to a commingling approval.
Should MMS treat a commingling
approval as the equivalent of a unit or
communitization agreement and apply
the RSFA reporting and payment
provisions on that basis? For example,
if all properties measured at the
commingling point are 100 percent
Federal leases or units or
communitization agreements with the
same fixed royalty rate and funds
distribution, then payments could be
made on takes. If one or more of the
properties measured at or after the
commingling point have different
royalty rates (fixed or variable, different
funds distribution, or are not 100
percent Federal, all lessees would pay
on entitlements.
The three examples presented below
illustrate some alternative
methodologies to apply the provisions
of RSFA to situations where production
is commingled before royalty
measurement. For each example,
assume there is a stand-alone Federal
lease with two lessees (lessee A and
lessee B, each of whom owns 50 percent
of the working interest), a 100-percent
Federal unit or communitization
agreement with two lessees (with lessee
C owning 75 percent of the combined
working interest in the two leases, and
lessee D owning the remaining 25
percent), and a state lease, all of which
are subject to a commingling approval.
(For simplicity, assume that all of the
Federal leases have the same royalty
rate.) Additionally, assume that for each
example, the total commingled
production allocated to the properties is
100,000 Mcf of gas. Further assume that,
for the month shown in the examples,
the stand-alone Federal lease and the
state lease are each allocated 25 percent
of the commingled production under
the commingling approval, and that the
Federal unit or communitization
agreement is allocated 50 percent.
Further, assume that lessee A takes and
sells 20,000 Mcf of gas. Assume that
lessee B has no takes. Assume that
lessee C takes and sells 30,000 Mcf of
gas while lessee D takes and sells 23,000
Mcf of gas. Assume that the lessee of the
state lease takes and sells 27,000 Mcf of
gas. In each example, lessee ownership
percentages and liability remain the
E:\FR\FM\29NOP1.SGM
29NOP1
71424
Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Proposed Rules
same, but the volume on which royalty
initially must be paid varies depending
on the methology used. (The numbers
used in the following examples are
rounded to the nearest whole number.)
EXAMPLE 1—‘‘PURE TAKES’’ REPORTING AND PAYING
Allocated volume per commingling approval
(Mcf)
Property
Sales by lessees
(Mcf)
Volume on
which royalty
paid to MMS
(Takes)
(Mcf)
Lessee
50
50
75
25
........................
12,500
12,500
37,500
12,500
25,000
20,000
0
30,000
23,000
27,000
20,000
0
30,000
23,000
0
........................
100,000
100,000
73,000
Federal Lease (2 lessees) ...............................
25,000
100-percent Federal Unit or Communitization
Agreement (2 lessees).
State Lease ......................................................
50,000
25,000
A ............
B ............
C ............
D ............
................
Totals ........................................................
100,000
................
By using a pure takes methodology,
the volume deemed sold and removed
from each lease and the unit or
communitization agreement as
determined under the commingling
approval is not properly accounted for.
Under this methodology, MMS could be
paid on a volume either greater than or
less than that on which the lessees
ultimately owe royalty because the takes
Entitled share
of allocated
volume
(Mcf)
Ownership
percentage
on which the Federal lessees reported
and paid royalty would not always
equal the volume on which royalty is
due under the commingling approval. In
this example, the MMS would be paid
royalty on 2,000 Mcf less than the
volume on which the Federal lessees
ultimately owe royalty because under
the commingling approval the Federal
lessees owe royalty on 75,000 Mcf and
on a pure takes basis, the Federal lessees
only paid on 73,000 Mcf. Therefore,
adopting this methodology presumably
would require each royalty reporter to
adjust royalty payments (at least on an
annual basis) to its entitled volume
(equal to its ownership percentage times
the volume allocated to its lease or unit
or communitization agreement under
the commingling approval).
EXAMPLE 2.—‘‘PURE ENTITLEMENTS’’ REPORTING AND PAYING
Allocated volume per commingling approval
(Mcf)
Property
Sales by lessee
(Mcf)
Volume on
which royalty
paid to MMS
(entitlements)
(Mcf)
Lessee
50
50
75
25
........................
12,500
12,500
37,500
12,500
25,000
20,000
0
30,000
23,000
27,00
12,500
12,500
37,500
12,500
0
........................
100,000
100,000
75,000
Federal Lease (2 lessees) ...............................
25,000
100-percent Federal Unit or Communitization
Agreement (2 lessees).
State Lease ......................................................
50,000
25,000
A ............
B ............
C ............
D ............
................
Totals ........................................................
100,000
................
Reporting on a ‘‘pure entitlements’’
basis that the Federal government is
made whole with respect to royalties,
but would not allow for initial reporting
and payment based on takes if
Entitled share
of allocated
volume
(Mcf)
Ownership
percentage
production is commingled before the
royalty measurement point. Under this
methodology, MMS would be made
whole each month because lessees
would report and pay on their entitled
volume each month, even if a particular
lessee (lessee B in this example) took no
production. Therefore, an adjustment to
the entitled volume, as discussed above
for Example 1, would not be necessary.
EXAMPLE 3.—‘‘PROPORTIONATE TAKES’’ REPORTING AND PAYING
Allocated volume per commingling approval
(Mcf)
Property
50
50
75
25
........................
12,500
12,500
37,500
12,500
25,000
20,000
0
30,000
23,000
27,000
25,000
0
28,302
21,698
0
........................
100,000
100,000
75,000
100-percent Federal Unit or Communitization
Agreement (2 lessees).
State Lease ......................................................
50,000
25,000
A ............
B ............
C ............
D ............
................
Totals ........................................................
100,000
................
Jkt 208001
PO 00000
Frm 00016
Volume on
which royalty
paid to MMS
(proportionate
takes)
(Mcf)
Ownership
percentage
25,000
18:49 Nov 28, 2005
Sales by lessee
(Mcf)
Lessee
Federal Lease (2 lessees) ...............................
VerDate Aug<31>2005
Entitled share
of allocated
volume
(Mcf)
Fmt 4702
Sfmt 4702
E:\FR\FM\29NOP1.SGM
29NOP1
Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Proposed Rules
This methodology would combine
takes and entitlements by requiring
lessees to report and pay on volumes
equal to the sales by the lessee divided
by the total sales for the property times
the allocated volume under the
commingling approval for the property.
Consider lessees C and D: In this
example, lessee C would report and pay
on 28,302 Mcf, even though it actually
took 30,000 Mcf, and its entitled volume
is 37,500 Mcf. The 28,302 Mcf is
computed as follows:
(30,000 Mcf/53,000 Mcf) × 50,000 Mcf
= 28,302 Mcf for lessee C, where 53,000
Mcf (total sales for the property) is the
sum of 30,000 Mcf (lessee C’s total sales)
and 23,000 Mcf (lessee D’s total sales),
and 50,000 Mcf is the allocated volume
under the commingling approval for the
property. Lessee D’s initial reporting
and payment would be computed
similarly.
Considering lessees A and B: If a
lessee took no production (lessee B in
this example), it would not have to pay
any royalty. However, a lessee (lessee A
in this example) could pay royalty on a
volume greater than either its actual
takes or its entitled share. Under this
methodology, MMS would be made
whole each month because it would
receive royalty based on the total
Federal production subject to the
commingling approval each month.
Therefore, an adjustment to the entitled
volume, as discussed above for Example
1, would not be necessary. In Example
3, lessees would have to adjust their
payments among themselves.
As explained above, in instances
where a lessee pays on ‘‘Pure
Entitlements’’ such as Example 2, or
‘‘Proportionate Takes’’ such as Example
3, the lessee may take production that
is more or less than its entitled share. In
that case, a lessee would need to value
its entitled share. The MMS believes
that the best means of valuing the
entitled share is to apply a volume
weighted average of the royalty values
of the volumes actually taken to the
entitled shared volumes. The MMS
requests comments on any other
alternatives for valuing such volumes.
In addition, MMS is interested in
receiving comments on these three
Examples which describe alternative
methodologies. The MMS is also
interested in receiving comments on any
other alternative methodologies. If you
propose a methodology different from
those discussed above, please use our
example criteria and explain why you
believe your methodology is the best
alternative. In addition, MMS would
like your input on how the various
methodologies would affect your
business practices, bookkeeping, etc.
VerDate Aug<31>2005
18:49 Nov 28, 2005
Jkt 208001
Dated: November 14, 2005.
R.M. ‘‘Johnnie’’ Burton,
Assistant Secretary for Land and Minerals
Management.
[FR Doc. 05–23380 Filed 11–28–05; 8:45 am]
BILLING CODE 4310–MR–M
DEPARTMENT OF THE INTERIOR
Office of Surface Mining Reclamation
and Enforcement
30 CFR Part 925
[Docket No. MO–038–FOR]
Missouri Regulatory Program
Office of Surface Mining
Reclamation and Enforcement, Interior.
ACTION: Proposed rule; public comment
period and opportunity for public
hearing on proposed amendment.
AGENCY:
SUMMARY: We, the Office of Surface
Mining Reclamation and Enforcement
(OSM), are announcing receipt of a
proposed amendment to the Missouri
regulatory program (Missouri program)
under the Surface Mining Control and
Reclamation Act of 1977 (SMCRA or the
Act). Missouri intends to revise its
program to improve operational
efficiency.
Currently, we are substituting direct
Federal enforcement for portions of the
Missouri program. With the substitution
of Federal enforcement authority, we
outlined a process by which Missouri
could regain full authority for its
program. As part of this process,
Missouri proposes to amend its
approved regulatory program and
submitted a temporary emergency
regulatory program rule (emergency
rule). The purpose of the emergency
rule is to revise Missouri’s regulations
regarding bonding of surface coal
mining and reclamation operations to
allow Missouri to transition from a
‘‘bond pool’’ approach to a ‘‘full cost
bond’’ approach. We are announcing
receipt of the emergency rule in this
rulemaking. Missouri has indicated that,
in the near future, it will submit a
permanent regulatory program rule
(permanent rule) regarding its bonding
regulations and that this rule will
contain regulatory language that is
substantially identical to the language in
this emergency rule. If we approve the
emergency rule and Missouri submits
the permanent rule with language that
has the same meaning as the emergency
rule, we will publish a final rule and the
permanent rule will become part of the
Missouri program.
This document gives the times and
locations that the Missouri program and
PO 00000
Frm 00017
Fmt 4702
Sfmt 4702
71425
proposed amendment to that program
are available for your inspection, the
comment period during which you may
submit written comments on the
amendment, and the procedures that we
will follow for the public hearing, if one
is requested.
DATES: We will accept written
comments on this amendment until 4
p.m., c.t., December 29, 2005. If
requested, we will hold a public hearing
on the amendment on December 27,
2005. We will accept requests to speak
at a hearing until 4 p.m., c.t. on
December 14, 2005.
ADDRESSES: You may submit comments,
identified by Docket No. MO–038–FOR,
by any of the following methods:
• E-mail: IFOMAIL@osmre.gov.
Include Docket No. MO–038–FOR in the
subject line of the message.
• Mail/Hand Delivery: Andrew R.
Gilmore, Chief, Alton Field Division,
Office of Surface Mining Reclamation
and Enforcement, 501 Belle Street,
Alton, Illinois 62002.
• Fax: (618) 463–6470
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Instructions: All submissions received
must include the agency name and
docket number for this rulemaking. For
detailed instructions on submitting
comments and additional information
on the rulemaking process, see the
‘‘Public Comment Procedures’’ heading
of the SUPPLEMENTARY INFORMATION
section of this document.
Docket: For access to the docket to
review copies of the Missouri program,
this amendment, and all written
comments received in response to this
document, you must go to the address
listed below during normal business
hours, Monday through Friday,
excluding holidays. You may receive
one free copy of the amendment by
contacting OSM’s Alton Field Division.
Andrew R. Gilmore, Chief, Alton Field
Division, Office of Surface Mining
Reclamation and Enforcement, 501 Belle
Street, Alton, Illinois 62002, Telephone:
(618) 463–6460, E-mail:
IFOMAIL@osmre.gov.
In addition, you may review a copy of
the amendment during regular business
hours at the following location:
Missouri Department of Natural
Resources, Land Reclamation Program,
205 Jefferson Street, P.O. Box 176,
Jefferson City, Missouri 65102,
Telephone: (573) 751–4041.
FOR FURTHER INFORMATION CONTACT:
Andrew R. Gilmore, Chief, Alton Field
Division. Telephone: (618) 463–6460. Email: IFOMAIL@osmre.gov.
SUPPLEMENTARY INFORMATION:
E:\FR\FM\29NOP1.SGM
29NOP1
]]>Agencies
[Federal Register Volume 70, Number 228 (Tuesday, November 29, 2005)]
[Proposed Rules]
[Pages 71421-71425]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-233]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 205
RIN 1010-AC29
Reporting and Paying Royalties on Federal Leases on Takes or
Entitlements Basis
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Advance notice of proposed rulemaking and announcement of
public meeting.
-----------------------------------------------------------------------
SUMMARY: The MMS requests comments and suggestions to assist us in
proposing regulations regarding so-called ``takes versus entitlements''
reporting and payment of royalties when oil and gas production is
commingled upstream of the point of royalty measurement. See IV,
Description of Information Requested, for details.
DATES: You must submit your comments by January 30, 2006. A public
meeting will be held on December 14, 2005.
ADDRESSES: Please use the regulation identifier number (RIN), RIN 1010-
AC29, in all your correspondence. Submit your comments, suggestions, or
objections regarding the advanced notice of the proposed rulemaking by
any of the following methods:
By regular U.S. mail. Minerals Management Service, Minerals Revenue
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225-0165;
By overnight mail, courier, or hand-delivery. Minerals Management
Service, Minerals Revenue Management, Building 85, Room A-614, Denver
Federal Center, West 6th Avenue and Kipling Blvd., Denver, Colorado
80225; or
By e-mail. mrm.comments@mms.gov. Please submit Internet comments as
an ASCII file and avoid the use of special characters and any form of
encryption. Also, please include ``Attn: RIN 1010-AC29'' and your name
and return
[[Page 71422]]
address in your Internet message. If you do not receive a confirmation
that we have received your Internet message, call the contact person
listed below.
FOR FURTHER INFORMATION CONTACT: Sharron L. Gebhardt, Lead Regulatory
Specialist, Minerals Management Service, Minerals Revenue Management,
P.O. Box 25165, MS 302B2, Denver, Colorado 80225-0165, telephone (303)
231-3211, FAX (303) 231-3781, or e-mail Sharron.Gebhardt@mms.gov.
SUPPLEMENTARY INFORMATION:
I. Dates Information
The MMS may not necessarily consider or include in the
Administrative Record, for any proposed rule, comments that MMS
receives after the close of the comment period or comments delivered to
an address other than those listed in the ADDRESSES section of this
document.
II. Public Meeting Information
The MMS will hold a public meeting to allow the public an
opportunity to comment on how MMS should implement the royalty
reporting and payment provision at section 6(d) of the Federal Oil and
Gas Royalty Simplification and Fairness Act (RSFA). The meeting will be
held in Houston, Texas, on the following date at the following
specified time and location: Wednesday, December 14, 2005, from 9 a.m.-
1 p.m. central time, in the San Antonio Room located on the second
floor of the Sheraton North Houston Hotel, located at 15700 John F.
Kennedy Blvd, Houston, Texas 77032. For further information, please
contact Roman A. Geissel at (303) 231-3226.
III. Public Comment and Meeting Procedures
A. Written Comment Procedures
We are particularly interested in receiving comments and
suggestions about the topics identified in IV, Description of
Information Requested. Your written comments should: (1) Be specific;
(2) explain the reason for your comments and suggestions; (3) address
the issues outlined in this notice; and (4) where possible, if you
refer to the specific provision, section, or paragraph of statutory
law, case law, or existing regulations, please cite that provision.
The comments and recommendations that are most useful and have
greater likelihood of influencing decisions on the content of a
possible future proposed rule are: (1) Comments and recommendations
supported by quantitative information or studies; and/or (2) comments
that include citations to, and analyses of, the applicable laws and
regulations.
B. Public Meeting Procedures
At the public meeting, those attending will be able to comment on
the scope, proposed action, and possible alternatives the MMS should
consider. The purpose of the meeting is to gather comments and input
from a variety of stakeholders and the public.
If you do not wish to speak at the meeting but you have views,
questions, or concerns with regard to the MMS's implementation of
section 6(d) of RSFA, Public Law 104-185, Aug. 13, 1996, 110 Stat 1700,
1713-1714, as corrected by Public Law 104-200, Sept. 22, 1996, codified
at 30 U.S.C. 1721(k), entitled ``Volume Allocations of Oil and Gas
Production,'' you may submit written statements at the meeting for
inclusion in the public record. You may also submit written comments
and suggestions regardless of whether you attend or speak at the public
meeting. See the ADDRESSES section of this document for instructions on
submitting written comments.
The site for the public meeting is accessible to individuals with
physical impairments. If you need a special accommodation to
participate in the meeting (e.g., interpretive service, assistive
listening device, or materials in alternative format), please notify
Lonnie Kimball at (281) 987-6800, no later than 2 weeks prior to the
scheduled meeting. Although we will make every effort to accommodate
requests received, it may not be possible to satisfy every request.
C. Public Comment Policy
Our practice is to make comments, including names and home
addresses of respondents, available for public review at our Denver
office during regular business hours and on our Web site at https://
www.mrm.mms.gov/Law_R_D/FRNotices/FRHome.htm, or on request to
Sharron Gephardt at (303) 231-3211. Individual respondents may request
that we withhold their individual home address from the rulemaking
record, which we will honor to the extent allowable by law. There also
may be circumstances in which we would withhold from the rulemaking
record a respondent's identity, as allowable by law. If you wish us to
withhold your name and/or address, you must state this prominently at
the beginning of your comments. However, we will not consider anonymous
comments. We will make all submissions from organizations or
businesses, and from individuals identifying themselves as
representatives or officials of organizations or businesses, available
for public inspection in their entirety.
IV. Description of Information Requested
On August 13, 1996, the President signed RSFA into law. Section
6(d) of RSFA, entitled, ``Volume Allocations of Oil and Gas
Production,'' amended section 111 of the Federal Oil and Gas Royalty
Management Act of 1982 (FOGRMA), Public Law 97-451--Jan. 12, 1983 (30
U.S.C. 1721), by adding new paragraphs (k)(1)-(5). The proposed
rulemaking would implement RSFA amendments to FOGRMA section 111(k)(1)-
(4).
Congress enacted these amendments to clarify and resolve the long-
standing issues regarding so-called ``takes versus entitlements.''
Those issues arose primarily where the amount of natural gas taken
(``takes'') and sold by a lessee from Federal leases subject to a unit
or communitization agreement was not equal to the lessee's entitled
share (``entitlements''), based on its ownership interest in leases in
the unit or communitization agreement. These imbalances led to numerous
questions about who should report and pay on what volumes and for what
leases.
To obtain input from parties affected by RSFA amendments to FOGRMA
section 111(k)(1)-(4), MMS formed a consultation team comprised of
representatives from interested states, oil and gas trade associations,
and MMS. The consultation team held meetings on October 30, November
19, and December 6, 1996. The meetings resulted in general agreement on
definitions, the reporting requirements for 100-percent Federal units
and communitization agreements, the definition of a ``marginal
property,'' and how a marginal property reporting exception would be
determined.
Subsequent to those meetings, in the process of trying to develop a
proposed rule implementing RSFA amendments to FOGRMA section 111(k)(1)-
(4), an issue arose regarding the commingling of oil and gas production
from multiple properties upstream of the point of royalty measurement.
For purposes of this discussion:
A ``property'' is defined as a lease, unit, or
communitization agreement.
A ``100-percent Federal unit or communitization
agreement'' means any unit or communitization agreement that contains
only Federal leases having the same fixed royalty rate and funds
distribution.
A ``unit'' means a unit participating area, enhanced
recovery unit, or field-wide unit.
[[Page 71423]]
A ``mixed unit or communitization agreement'' means any
unit or communitization agreement other than 100-percent Federal unit
or communitization agreement. These are unit or communitization
agreements that contain any mixture of Federal, Indian, state or
private mineral estates, or that contain all Federal leases with
different royalty rates (fixed or variable) or different funds
distribution.
A ``stand-alone lease'' means a lease or a portion of a
lease that is not in a unit or communitization agreement.
The RSFA cldarly identifies when it is appropriate to initially
report and pay on a ``takes'' or ``entitlements'' basis for production
from leases, units or communization agreements that is not commingled
with production from other properties before the royalty measurement
point. For instance:
When taking production from a 100-percent Federal unit or
communitization agreement, the lessee(s) must pay on actual takes (30
U.S.C. 1721(K)(1)(A)), or
When taking production from a mixed Federal unit or
communitization agreement, the Federal lessee(s) must pay on
entitlements (30 U.S.C. 1721(k)(1)(B)), or
When taking production from a stand-alone Federal lease,
the lessee(s) must pay on takes (30 U.S.C. 1721(k)(1)(C)).
It is important to note that, while RSFA section 6(d) amended
FOGRMA by adding section 111(k)(1), which addressed the reporting and
payment requirements, the addition of section 111(k)(2) went on to
clarify that the requirements outlined in section 111(k)(1) ``apply
only to requirements for reporting and paying royalties. Nothing in
this subsection is intended to alter a lessee's liability for royalties
on oil or gas production allocated to lease, in accordance with the
terms of the lease, a unit or communitization agreement, or any other
agreement.'' Thus, the lessee's ultimate liability to pay royalties on
its entitled share of production is not changed.
Commingling adds additional complications to the issue of how to
report and pay royalties. Not only do imbalances between operating
rights owners within a property occur, but imbalances between
properties also are commonplace.
Commingling is the combining of production from multiple properties
before measurement for royalty purposes and requires approval of the
MMS Offshore Minerals Management program for offshore leases or the
Bureau of Land Management for onshore leases. The commingling approval
identifies where the volume is measured by royalty purposes and how
that volume must be allocated to each property that is subject to the
commingling approval. It does not affect how volume is allocated to
leases within a unit or communitization agreement. Commingling can be,
and often is, approved between properties with the same royalty rate
and funds distribution and between properties with different royalty
rates or different funds distributions.
The RSFA provision added to FOGRMA at 30 U.S.C. 1721(k)(1)-(5) does
not address the effect of commingling or commingling imbalances.
Commingling complicates reporting requirements because there is an
impact on royalty payments when there are properties with mixed royalty
rates or funds distribution upstream of the approved commingling point.
For example, assume that production from two stand-alone Federal leases
that are not unitized or communitized, each with a different royalty
rate, is commingled before the royalty measurement point. Assume that
each lease receives a 50 percent allocation of the total measure
production (1,000 Mcf) under the commingling approval. The lessee of
the lease with a 16\2/3\ percent royalty rate actually sells (takes)
750 Mcf of gas and the lessee of the lease with the 12\1/2\ percent
royalty rate actually sells (takes) 250 Mcf of gas. Based on the
commingling approval, the leases are out of balance. The commingling
approval determines the volume deemed to have been removed or sold from
each lease upon which the lessees ultimately must pay royalty. Should
each lessee pay royalties on its actual sales (takes), the Federal
Government initially would be paid more than the royalty ultimately
owed. If the sales were reversed, the Federal Government initially
would be paid on less than the royalty ultimately owed.
RSFA prescribes how lessees should initially report and pay royalty
on production removed or sold from a lease or unit or communitization
agreement. The commingling approval determines the volume removed or
sold from the leases or unit or communitization agreements subject to
the commingling approval. RSFA was silent on the effect of commingling
approvals. We are asking for your input on several questions regarding
RSFA's application to production subject to a commingling approval
before the royalty measurement point. Those questions include the
following:
(1) Should lessees of a lease or a 100-percent Federal unit or
communitization agreement report and pay initially on their takes in a
situation where production from that lease or unit or communitization
agreement is commingled with other production upstream of the royalty
measurement point:
(2) RSFA requires that Federal lessees in mixed unit or
communitization agreements report royalties on an entitlement basis,
regardless of whether the unit or communitization agreement is subject
to a commingling approval. Should MMS treat a commingling approval as
the equivalent of a unit or communitization agreement and apply the
RSFA reporting and payment provisions on that basis? For example, if
all properties measured at the commingling point are 100 percent
Federal leases or units or communitization agreements with the same
fixed royalty rate and funds distribution, then payments could be made
on takes. If one or more of the properties measured at or after the
commingling point have different royalty rates (fixed or variable,
different funds distribution, or are not 100 percent Federal, all
lessees would pay on entitlements.
The three examples presented below illustrate some alternative
methodologies to apply the provisions of RSFA to situations where
production is commingled before royalty measurement. For each example,
assume there is a stand-alone Federal lease with two lessees (lessee A
and lessee B, each of whom owns 50 percent of the working interest), a
100-percent Federal unit or communitization agreement with two lessees
(with lessee C owning 75 percent of the combined working interest in
the two leases, and lessee D owning the remaining 25 percent), and a
state lease, all of which are subject to a commingling approval. (For
simplicity, assume that all of the Federal leases have the same royalty
rate.) Additionally, assume that for each example, the total commingled
production allocated to the properties is 100,000 Mcf of gas. Further
assume that, for the month shown in the examples, the stand-alone
Federal lease and the state lease are each allocated 25 percent of the
commingled production under the commingling approval, and that the
Federal unit or communitization agreement is allocated 50 percent.
Further, assume that lessee A takes and sells 20,000 Mcf of gas. Assume
that lessee B has no takes. Assume that lessee C takes and sells 30,000
Mcf of gas while lessee D takes and sells 23,000 Mcf of gas. Assume
that the lessee of the state lease takes and sells 27,000 Mcf of gas.
In each example, lessee ownership percentages and liability remain the
[[Page 71424]]
same, but the volume on which royalty initially must be paid varies
depending on the methology used. (The numbers used in the following
examples are rounded to the nearest whole number.)
Example 1--``Pure Takes'' Reporting and Paying
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocated
volume per Entitled share Volume on
Property commingling Lessee Ownership of allocated Sales by which royalty
approval percentage volume (Mcf) lessees (Mcf) paid to MMS
(Mcf) (Takes) (Mcf)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 20,000
.............. B.......................... 50 12,500 0 0
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 30,000
Agreement (2 lessees). D.......................... 25 12,500 23,000 23,000
State Lease................................ 25,000 ........................... .............. 25,000 27,000 0
-----------------
Totals................................. 100,000 ........................... .............. 100,000 100,000 73,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
By using a pure takes methodology, the volume deemed sold and
removed from each lease and the unit or communitization agreement as
determined under the commingling approval is not properly accounted
for. Under this methodology, MMS could be paid on a volume either
greater than or less than that on which the lessees ultimately owe
royalty because the takes on which the Federal lessees reported and
paid royalty would not always equal the volume on which royalty is due
under the commingling approval. In this example, the MMS would be paid
royalty on 2,000 Mcf less than the volume on which the Federal lessees
ultimately owe royalty because under the commingling approval the
Federal lessees owe royalty on 75,000 Mcf and on a pure takes basis,
the Federal lessees only paid on 73,000 Mcf. Therefore, adopting this
methodology presumably would require each royalty reporter to adjust
royalty payments (at least on an annual basis) to its entitled volume
(equal to its ownership percentage times the volume allocated to its
lease or unit or communitization agreement under the commingling
approval).
Example 2.--``Pure Entitlements'' Reporting and Paying
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocated Volume on
volume per Entitled share which royalty
Property commingling Lessee Ownership of allocated Sales by paid to MMS
approval percentage volume (Mcf) lessee (Mcf) (entitlements)
(Mcf) (Mcf)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 12,500
.............. B.......................... 50 12,500 0 12,500
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 37,500
Agreement (2 lessees). D.......................... 25 12,500 23,000 12,500
State Lease................................ 25,000 ........................... .............. 25,000 27,00 0
-----------------
Totals................................. 100,000 ........................... .............. 100,000 100,000 75,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reporting on a ``pure entitlements'' basis that the Federal
government is made whole with respect to royalties, but would not allow
for initial reporting and payment based on takes if production is
commingled before the royalty measurement point. Under this
methodology, MMS would be made whole each month because lessees would
report and pay on their entitled volume each month, even if a
particular lessee (lessee B in this example) took no production.
Therefore, an adjustment to the entitled volume, as discussed above for
Example 1, would not be necessary.
Example 3.--``Proportionate Takes'' Reporting and Paying
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocated Volume on
volume per Entitled share which royalty
Property commingling Lessee Ownership of allocated Sales by paid to MMS
approval percentage volume (Mcf) lessee (Mcf) (proportionate
(Mcf) takes) (Mcf)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal Lease (2 lessees).................. 25,000 A.......................... 50 12,500 20,000 25,000
.............. B.......................... 50 12,500 0 0
100-percent Federal Unit or Communitization 50,000 C.......................... 75 37,500 30,000 28,302
Agreement (2 lessees). D.......................... 25 12,500 23,000 21,698
State Lease................................ 25,000 ........................... .............. 25,000 27,000 0
-----------------
Totals................................. 100,000 ........................... .............. 100,000 100,000 75,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 71425]]
This methodology would combine takes and entitlements by requiring
lessees to report and pay on volumes equal to the sales by the lessee
divided by the total sales for the property times the allocated volume
under the commingling approval for the property. Consider lessees C and
D: In this example, lessee C would report and pay on 28,302 Mcf, even
though it actually took 30,000 Mcf, and its entitled volume is 37,500
Mcf. The 28,302 Mcf is computed as follows:
(30,000 Mcf/53,000 Mcf) x 50,000 Mcf = 28,302 Mcf for lessee C,
where 53,000 Mcf (total sales for the property) is the sum of 30,000
Mcf (lessee C's total sales) and 23,000 Mcf (lessee D's total sales),
and 50,000 Mcf is the allocated volume under the commingling approval
for the property. Lessee D's initial reporting and payment would be
computed similarly.
Considering lessees A and B: If a lessee took no production (lessee
B in this example), it would not have to pay any royalty. However, a
lessee (lessee A in this example) could pay royalty on a volume greater
than either its actual takes or its entitled share. Under this
methodology, MMS would be made whole each month because it would
receive royalty based on the total Federal production subject to the
commingling approval each month. Therefore, an adjustment to the
entitled volume, as discussed above for Example 1, would not be
necessary. In Example 3, lessees would have to adjust their payments
among themselves.
As explained above, in instances where a lessee pays on ``Pure
Entitlements'' such as Example 2, or ``Proportionate Takes'' such as
Example 3, the lessee may take production that is more or less than its
entitled share. In that case, a lessee would need to value its entitled
share. The MMS believes that the best means of valuing the entitled
share is to apply a volume weighted average of the royalty values of
the volumes actually taken to the entitled shared volumes. The MMS
requests comments on any other alternatives for valuing such volumes.
In addition, MMS is interested in receiving comments on these three
Examples which describe alternative methodologies. The MMS is also
interested in receiving comments on any other alternative
methodologies. If you propose a methodology different from those
discussed above, please use our example criteria and explain why you
believe your methodology is the best alternative. In addition, MMS
would like your input on how the various methodologies would affect
your business practices, bookkeeping, etc.
Dated: November 14, 2005.
R.M. ``Johnnie'' Burton,
Assistant Secretary for Land and Minerals Management.
[FR Doc. 05-23380 Filed 11-28-05; 8:45 am]
BILLING CODE 4310-MR-M
