Indian Oil Valuation, 7453-7475 [06-1285]

Agencies

• DEPARTMENT OF THE INTERIOR
• Minerals Management Service

[Federal Register Volume 71, Number 29 (Monday, February 13, 2006)]
[Proposed Rules]
[Pages 7453-7475]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1285]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AD00


Indian Oil Valuation

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rule.

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SUMMARY: The Minerals Management Service (MMS) is proposing to amend 
its regulations regarding valuation, for royalty purposes, of oil 
produced from Indian leases. This proposal intends to add certainty to 
Indian oil valuation, eliminate reliance on posted oil prices, and 
address unique terms of Indian leases.

DATES: Comments must be submitted on or before April 14, 2006.

ADDRESSES: Proposed Rule Comments: Submit your comments, suggestions, 
or objections regarding the proposed rule 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;
    By overnight mail or courier. Minerals Management Service, Minerals 
Revenue Management, Building 85, Room A-614, Denver Federal Center, 
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-AD00'' and your name 
and return 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.
    Information Collection Request (ICR) Comments: Submit written 
comments by either fax (202) 395-6566 or e-mail (OIRA--
Docket@omb.eop.gov) directly to the Office of Information and 
Regulatory Affairs, OMB, Attention: Desk Officer for the Department of 
the Interior [OMB Control Numbers ICR 1010-0140 (expires October 31, 
2006) and ICR 1010-0103 (expires April 30, 2006), as they relate to the 
proposed Indian oil valuation rule].
    Also submit copies of written comments to Sharron L. Gebhardt, Lead 
Regulatory Specialist, Minerals Management Service, Minerals Revenue 
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225. If you 
use an overnight courier service, our courier address is Building 85, 
Room A-614, Denver Federal Center, Denver, Colorado 80225. You may also 
e-mail your comments to us at mrm.comments@mms.gov. Include the title 
of the information collection and the OMB control number in the 
``Attention'' line of your comment. Also include your name and return 
address. Submit electronic comments as an ASCII file avoiding the use 
of special characters and any form of encryption. If you do not receive 
a confirmation that we have received your e-mail, contact Ms. Gebhardt 
at (303) 231-3211.
    The OMB has up to 60 days to approve or disapprove this collection 
of information but may respond after 30 days. Therefore, public 
comments should be submitted to OMB within 30 days in order to assure 
their maximum consideration. However, we will consider all comments 
received during the comment period for this notice of proposed 
rulemaking.

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, telephone (303) 231-
3211, fax (303) 231-3781, or e-mail Sharron.Gebhardt@mms.gov. The 
principal authors of this proposed rule are John Barder, Theresa Walsh 
Bayani, and Kenneth R. Vogel of the Minerals Revenue Management, MMS, 
Department of the Interior, and Geoffrey Heath of the Office of the 
Solicitor, Department of the Interior, in Washington, D.C.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 12, 1998, the MMS published a notice in the Federal 
Register (63 FR 7089) (February 1998 proposal) of proposed rulemaking 
applicable exclusively to the valuation of oil produced from Indian 
leases. The February 1998 proposal proposed to value oil based on the 
highest of (1) New York Mercantile Exchange (NYMEX) prices, adjusted 
for location and quality; (2) the lessee's or its affiliate's gross 
proceeds; or (3) an MMS-calculated ``major portion'' value. The MMS 
proposed further changes to the February 1998 proposal in a 
supplementary proposed rule published on January 5, 2000 (65 FR 403) 
(January 2000 proposal). Among other things, the January 2000 proposal 
proposed to replace using NYMEX futures prices with spot prices, 
including using the average of the high daily spot prices, rather than 
the average of the five highest NYMEX settle prices in a given month. 
The MMS received extensive

[[Page 7454]]

comments on both the February 1998 and January 2000 proposals.
    The MMS published a notice in the Federal Register on February 22, 
2005 (70 FR 8556) withdrawing the February 1998 and January 2000 
proposals. The MMS explained that it was beginning a new process of 
developing a proposed rule to value oil produced from Indian leases for 
royalty purposes. In the same notice, MMS scheduled public meetings in 
three different locations to consult with Indian tribes and individual 
Indian mineral owners and to obtain information from interested 
parties. The public meetings were held on March 8, 2005, in Oklahoma 
City, Oklahoma; on March 9, 2005, in Albuquerque, New Mexico; and on 
March 16, 2005, in Billings, Montana. The MMS has posted summaries of 
the discussions at the meetings on its Web site at www.mrm.mms.gov/
Laws_R_D/FRNotices/AD00.htm. In June 2005, MMS conducted five 
additional consultation meetings with tribes and with individual Indian 
mineral owners regarding this proposed rulemaking.
    The intent of this proposed rulemaking is to add more certainty to 
the valuation of oil produced from Indian lands, eliminate reliance on 
oil posted prices, and address the unique terms of Indian (tribal and 
allotted) leases--specifically, the major portion provision. Most 
Indian leases include a major portion provision, stating that value for 
royalty purposes may, in the discretion of the Secretary, be calculated 
on the basis of the highest price paid or offered at the time of 
production for the major portion of oil produced from the same field.

II. General Valuation Approach of the Proposed Rule (Proposed 30 CFR 
Sec. Sec.  206.52 and 206.53)

    Establishing proper values, for royalty purposes, of oil produced 
from Indian leases begins with an understanding of where the oil is 
produced and how it is marketed. The areas of oil production on tribal 
reservations and allotted lands are the following:
    1. The San Juan Basin in southeastern Utah, northwestern New 
Mexico, and southwestern Colorado (including Navajo tribal, Navajo 
allotted, Ute Mountain Ute tribal, Southern Ute tribal, Southern Ute 
allotted, and Jicarilla Apache tribal leases). This area accounted for 
36 percent of the oil sold from all Indian leases in 2004 (down from 
42.75 percent in 2003).
    2. Northeastern Utah (Ute tribal and allotted leases). This area 
accounted for 25 percent of the oil sold from all Indian leases in 2004 
(up from 15.32 percent in 2003).
    3. Wyoming (Shoshone and Arapaho tribal and allotted leases). This 
area accounted for 21.54 percent of the oil sold from all Indian leases 
in 2004 (down from 22.53 percent in 2003).
    4. Oklahoma (mostly allotted leases with a few leases distributed 
among several tribes). This area accounted for 9.98 percent of the oil 
sold from all Indian leases in 2004 (down from 10.89 percent in 2003).
    5. Western and central Montana (Blackfeet tribal and allotted and 
Crow tribal and allotted leases) and the Williston Basin area in 
eastern Montana and western North Dakota (Ft. Peck Assiniboine and 
Sioux tribal and allotted and Ft. Berthold Arikara, Mandan, and Hidatsa 
tribal and allotted leases). Together, these areas accounted for 6.14 
percent of the oil sold from all Indian leases in 2004 (down from 6.80 
percent in 2003).
    6. Texas (Alabama-Coushatta tribal leases). This area accounted for 
1.31 percent of the oil sold from all Indian leases in 2004 (down from 
1.68 percent in 2003).
    7. Two other leases (one in northern North Dakota and one in 
Michigan) accounted for the remaining 0.03 percent of the oil sold from 
Indian leases in 2003 and 2004.
    This overview reveals a stark contrast with the composition of 
Federal leases that produce oil. First, the vast majority of oil 
produced from Federal leases comes from the Gulf of Mexico Outer 
Continental Shelf. Second, there are numerous onshore Federal leases in 
California and Alaska (where there are no Indian leases covered by this 
proposed rule). Federal leases in the Western United States also far 
outnumber Indian leases there. These factors result in major 
differences in the marketing of oil produced from Federal and Indian 
leases.
    According to our analysis and experience, almost all oil sold from 
Indian leases (more than 98 percent in 2003 and more than 97 percent in 
2004) is sold or exchanged at arm's length before it is refined. 
Included in that percentage are volumes taken by one tribal lessor as 
royalty in kind (RIK). It appears that only one payor (who is a lessee 
in one of the producing areas) currently transports oil produced from 
Indian leases to its own refinery. The oil sold by that payor 
constituted 1.69 percent of oil sold from all Indian leases in 2003 and 
2.02 percent in 2004. There is only one producing area in which 
significant volumes (reported by one producer) are initially 
transferred to an affiliate before being resold at arm's length. There 
are other occasional non-arm's-length transfers, but they involve only 
a few payors and insignificant volumes.
    Further, the vast majority of the oil sold at arm's length appears 
to be sold at the lease. As discussed below, MMS records indicate that 
only two payors claimed transportation allowances for oil produced from 
Indian leases in 2004. Only one payor has claimed transportation 
allowances thus far in 2005.
    Further, except for the possibility of some oil sold in Oklahoma 
(which, as explained above, accounts for only about 10 percent of the 
oil sold from Indian leases), oil sold from Indian leases apparently 
does not flow to (and is not exchanged to) Cushing, Oklahoma, where 
NYMEX prices are published. Thus, with the exception of Oklahoma (and 
possibly one type of oil produced in Wyoming), it is extremely 
difficult to obtain reliable location and quality differentials between 
Cushing and areas where the large majority of the oil is produced from 
Indian leases, including the San Juan Basin, northeastern Utah, Wyoming 
(for other oil types), and Montana. Even in Oklahoma, more than 97 
percent of the oil sold from Indian leases in 2004 was reported to MMS 
as sold at arm's length.
    This contrasts sharply with the marketing and disposition of oil 
produced from Federal leases. Much of the oil produced from Federal 
leases that is ultimately sold at arm's length, whether without or 
after a transfer to an affiliate, is transported before the arm's-
length sale. Additionally, a substantial share of the oil produced from 
Federal leases, particularly oil produced offshore in the Gulf of 
Mexico, is exchanged to Cushing or flows to market centers that have 
well-established differentials between the market center and Cushing.
    Consequently, MMS is not proposing to use either NYMEX or spot 
market index pricing as primary measures of value for oil produced from 
Indian leases. Because of the environment in which Indian oil is 
produced and marketed, MMS proposes to value oil at the gross proceeds 
the lessee or its affiliate receives in an arm's-length sale. In the 
rare circumstance that the sale occurs away from the lease, the 
proposed rule would provide for appropriate transportation allowances 
discussed further below (see paragraphs (a) through (d) of proposed 
Sec.  206.52). This valuation principle would apply to almost all the 
oil produced from Indian leases on which royalty is paid in value.
    The MMS also proposes to specify in Sec.  206.52(b) that, if a 
lessee sells oil produced from a lease under multiple arm's-length 
contracts instead of just

[[Page 7455]]

one contract, the value of the oil is the volume-weighted average of 
the total consideration established under Sec.  206.52 for all 
contracts for the sale of oil produced from that lease. In the Federal 
Oil Valuation Rule, published on March 15, 2000 (65 FR 14022) (2000 
Federal Oil Rule), the regulations at 30 CFR 206.102(b) provide that, 
if a lessee has multiple arm's-length contracts for the sale of oil 
produced from a lease, the value of the oil is ``the volume-weighted 
average of the values established under this section for each contract 
for the sale of oil produced from that lease.'' The volume-weighted 
average is the sum of the unit values of each contract multiplied by 
the volume sold under each contract divided by the total volume. The 
phraseology in Sec.  206.52(b) of this proposed rule clarifies that the 
volume-weighted average is calculated on the total consideration 
received under all of the contracts.
    It is possible that the lessee or its affiliate may enter into one 
or more exchanges. The MMS anticipates that, if there are any exchanges 
of oil produced from Indian lands at all, they would be quite rare. The 
MMS does not presently know of any specific examples of exchanges, but 
the proposed rule covers this contingency (see proposed Sec.  
206.52(e)). If the lessee or its affiliate ultimately sells the oil 
received in exchange, the value would be the gross proceeds for the oil 
received in exchange, adjusted for location and quality differentials 
derived from the exchange agreement(s). If the lessee exchanges oil 
produced from Indian leases to Cushing, Oklahoma, value would be the 
NYMEX price, adjusted for location and quality differentials derived 
from the exchange agreements. If the lessee does not ultimately sell 
the oil received in exchange, and does not exchange oil to Cushing, the 
lessee must ask MMS to establish a value based on relevant matters.
    The only situation that is not covered under the proposed Sec.  
206.52 is where the lessee transports the oil produced from the lease 
to its own refinery. As mentioned above, there appears to be only one 
such case at the present time. In this circumstance, proposed Sec.  
206.53 would require the lessee to value the oil at the volume-weighted 
average of the gross proceeds paid or received by the lessee or its 
affiliate, including the refining affiliate, for purchases and sales 
under arm's-length contracts of other like-quality oil produced from 
the same field (or the same area if the lessee does not have sufficient 
arm's-length purchases and sales from the field) during the production 
month, adjusted for transportation costs. If the lessee purchases oil 
away from the field(s) and if it cannot calculate a price in the 
field(s) because it cannot determine the seller's cost of 
transportation, it would not include those purchases in the weighted-
average price calculation.

III. Calculation of the Major Portion Value

    Most Indian leases include a major portion provision, under which 
value may, in the discretion of the Secretary, be calculated on the 
basis of the ``highest price paid or offered at the time of production 
for the major portion of oil production from the same field.'' The 
current rule at 30 CFR 206.52(a)(2), promulgated in 1988 and recodified 
to its current section in 1996, provides that, if data are available to 
compute a major portion value, MMS will, where practicable, compare the 
major portion value to the value computed under the other provisions of 
that section. It further provides that the major portion value will be 
calculated using like-quality oil sold under arm's-length contracts 
from the same field (or, if necessary to obtain a reasonable sample, 
from the same area). That production is then arrayed from the highest 
price to the lowest price (at the bottom). The major portion value is 
the price at which 50 percent (by volume) plus one barrel (starting 
from the bottom) is sold.
    Historically, MMS has encountered considerable difficulty in 
calculating oil major portion values. Among other factors, complete 
sales price data for a producing field that includes particular Indian 
leases often is not available because the field also includes private 
or state leases (or both), whose working interest owners do not report 
to MMS. Quality information also has not been readily available in a 
practically usable form because currently there is no requirement to 
collect the crude oil type and API gravity (quality) information on the 
Form MMS-2014. By collecting the quality information needed to 
calculate major portion prices directly on Form MMS-2014, MMS would 
have all the necessary information to more accurately calculate major 
portion prices. For these and other reasons, calculating an accurate 
major portion value has most often not been practicable.
    For oil produced from Indian leases, this proposed rule would use 
values reported for Indian oil produced from the designated area 
(discussed below) on Form MMS-2014, Report of Sales and Royalty 
Remittance, because it is the best data available to MMS in view of the 
fact that sales price information for production from state or private 
leases (that may be within the field) is not available. The proposed 
rule would allow MMS to identify designated areas, and MMS would 
publish in the Federal Register and make available on its Web site at 
www.mrm.mms.gov a list of the Indian lease number prefixes in each 
designated area. The proposed rule would allow MMS to designate and 
publish additional areas as circumstances warrant. For example, MMS may 
designate groups of counties in Oklahoma, for purposes of calculating 
major portion values for the Indian leases in Oklahoma, after 
conducting research regarding the location of the leases and the fields 
in which they are located. Those designated areas would be identified 
in a later notice. The MMS seeks comments on:
     Whether we should include arm's-length sales of oil 
produced from Federal leases within a designated area, as reported to 
MMS, in the calculation of the major portion value; and
     Whether we should expand the boundaries of the designated 
area beyond the reservation boundaries and include arm's-length sales 
of oil produced from Federal leases in the vicinity of a reservation, 
as reported to MMS, in the calculation of the major portion value.
    The proposed rule would not use values reported for oil that is not 
ultimately sold at arm's length before being refined. Under the 
proposed rule, MMS would use the values reported to MMS under Sec.  
206.52. That will include all lessees' arm's-length sales and their 
affiliates' arm's-length re-sales. The MMS would adjust reported values 
for any applicable transportation allowances.
    One of the tribal lessors takes a substantial portion of its 
royalty in kind rather than in value. The producers nevertheless do 
report a value for that oil on Form MMS-2014. The MMS understands that 
the value reported for the royalty-in-kind volumes is the price at 
which the lessee sold its working interest share. Under the proposed 
rule, MMS would include these values in the major portion calculation. 
Not doing so would result in loss of substantial volumes from the major 
portion calculation.
    The only reported values that would not be included in the major 
portion calculation are values reported for oil that is refined without 
being sold at arm's length (i.e., values reported under Sec.  206.53 or 
Sec.  206.52(e)(4)). As noted above, MMS knows of only one such 
situation.
    The MMS would not change the percentile at which the major portion 
value is determined. The MMS

[[Page 7456]]

historically has used the 50th-percentile-plus-one-unit measure for the 
major portion calculation. Because we believe almost all oil produced 
from Indian leases is sold at arm's length, there appears to be no 
reason in the oil context to depart from the major portion measure in 
the current rule.
    There are a few older Indian leases that are still in production 
that do not contain a major portion provision and do not reserve to the 
Secretary the authority to determine the reasonable value of 
production. The major portion provisions of the proposed Sec.  206.54 
would not apply to those leases. However, the burden would be on the 
lessee to demonstrate that its lease has neither of these provisions. 
The MMS would presume that the lease has at least one of these 
provisions, unless the lessee demonstrates otherwise.
    To calculate the major portion value, MMS must normalize the 
reported values for each oil type produced from the designated area to 
a common quality basis, adjusting for API gravity using applicable 
posted price gravity adjustment scale tables. The MMS would use posted 
price adjustment tables to adjust for gravity because the posted price 
adjustment tables are the only reliable source of this information that 
is available. The MMS's experience has been that the adjustment tables 
are accurate and are consistent between different parties who post 
prices. The MMS believes that the adjustment tables are likely to 
remain reliable because the posting purchasers are in competition. The 
MMS would use the posted price adjustment tables only for purposes of 
normalizing for gravity within a particular type of oil.
    The MMS would calculate separate major portion values for different 
oil types because the lease provision expressly refers to ``like-
quality'' oil (oil of the same type is of like quality). The proposed 
rule would define ``oil type'' as a general classification of oil that 
has generally similar chemical and physical characteristics. For 
example, oil types may include classifications such as New Mexico sour, 
Wyoming sweet, Wyoming asphalt sour, black wax, yellow wax, etc. Like-
quality oil does not have to be of the same API gravity. Further 
normalizing for gravity within the oil type will yield reported prices 
in the major portion calculation that are based on a common quality. 
The MMS will designate the oil types that are produced from each 
designated area. A designated area may produce more than one oil type.
    For MMS to be able to calculate major portion values based on oil 
type, and to be able to adjust reported arm's-length gross proceeds 
values for API gravity, MMS must require the royalty payors to report 
this information on Form MMS-2014. The API gravity is currently 
reported to MMS on production reports, but not in a manner that will 
allow the data to be used in conjunction with the royalty data 
reported. If a final rule adopts the major portion methodology proposed 
here, MMS would revise the reporting requirements for Indian leases for 
Form MMS-2014 to require lessees to report oil type and API gravity for 
Indian leases.
    The MMS would then array the normalized and adjusted (for 
transportation costs) values in order from the highest to the lowest, 
together with the corresponding volumes reported at those values. The 
major portion value would be the normalized and adjusted price in the 
array that corresponds to 50 percent (by volume) plus one barrel of the 
oil (starting from the bottom). Proposed Sec.  206.54(e) contains an 
example.
    Under the proposed Sec.  206.54, lessees would initially report on 
Form MMS-2014 the value of production at the value determined under 
Sec.  206.52 or Sec.  206.53, and would pay royalty on that value. The 
MMS would calculate the major portion values as described above and 
notify lessees of the major portion values by publishing the major 
portion values for each designated area in the Federal Register and 
making them available on MMS's Web site at www.mrm.mms.gov. The values 
that MMS publishes would be at the normalized gravity, and MMS would 
include the normalized gravity and the adjustment tables in the Federal 
Register and on the Web site.
    The lessee would then compare the major portion value to the value 
initially reported on Form MMS-2014, normalized and adjusted for 
gravity and transportation. If the major portion value is higher than 
the value initially reported, normalized and adjusted for gravity and 
transportation, the lessee would have to submit an amended Form MMS-
2014, reporting the value as the major portion value, and pay any 
additional royalty owed. The Web site also would include a due date by 
which the lessee would have to submit an amended Form MMS-2014, 
together with any additional royalty due. Proposed Sec.  206.54(f) 
includes an example.
    Under proposed Sec.  206.54(g), late payment interest would not 
begin to accrue under 30 CFR 218.54 on any additional amount owed as a 
result of the higher major portion value, until after the due date of 
the amended Form MMS-2014. Further, MMS would not change the major 
portion values for a specific time period after it publishes those 
values on the Web site, unless an administrative or judicial decision 
requires MMS to make a change. The MMS will continue to calculate and 
publish major portion values for subsequent time periods.

IV. Transportation Allowances

    As explained above, lessees report very few transportation 
allowances on oil produced from Indian leases. Only two royalty payors 
on Indian leases claimed transportation allowances for oil in 2004 on 
their initial royalty reports (Form MMS-2014) before later adjustments. 
The allowances reported by one of those payors on tribal leases in one 
area constituted approximately 98 percent of the claimed allowances in 
2004.
    If the transportation arrangement is at arm's length, the proposed 
rule would incorporate the provisions of the 2000 Federal Oil Rule that 
became effective on June 1, 2000 (as amended in 2004), in calculating 
that allowance. That allowance is based on the actual cost paid to an 
unaffiliated transportation provider. While the 2004 Federal Oil Rule 
did not change the consistent historical approach of using the actual 
costs paid to the unaffiliated transporter, the Federal rule, at 30 CFR 
206.110, specifies more precisely what costs are allowable as 
transportation costs and what costs are not. As has been the case 
historically, MMS is proposing to continue to treat arm's-length 
transportation arrangements for oil produced from Indian leases 
identically to arm's-length transportation arrangements for oil 
produced from Federal leases.
    For arm's-length transportation allowances, MMS also proposes to 
eliminate the requirement in the current Indian rule, at 30 CFR 
206.55(c)(1), to file Form MMS-4110, Oil Transportation Allowance 
Report. Instead of Form MMS-4110, the lessee would have to submit 
copies of its transportation contract(s) and any amendments thereto 
within 2 months after the lessee reported the transportation allowance 
on Form MMS-2014. This change mirrors the elimination of the 
requirement to file the analogous Form MMS-4295 for arm's-length 
transportation allowances under the Indian Gas Valuation Rule, 
published on August 10, 1999 (64 FR 43506) (1999 Indian Gas Rule), and 
effective January 2000.
    For non-arm's-length transportation arrangements, the lessee would 
have to calculate its actual costs. Under the proposed rule, Form MMS-
4110 would

[[Page 7457]]

still be required, but the requirement to submit a Form MMS-4110 in 
advance with estimated information would be eliminated. Instead, the 
lessee would submit the actual cost information to support the 
allowance on Form MMS-4110 within 3 months after the end of the 12-
month period to which the allowance applies. This also mirrors the 
change made in the 1999 Indian Gas Rule at 30 CFR 206.178(b)(1)(ii).
    As MMS explained when it proposed these changes in the 1999 Indian 
Gas Rule, in the case of oil valuation, MMS ``believes this change will 
ease the burden on industry and still provide MMS with documents useful 
to verify the allowance claimed.''
    The MMS is proposing that the non-arm's-length allowance 
calculation, and the costs that would be allowable and non-allowable 
under the non-arm's-length transportation allowance provisions, be 
revised to incorporate the provisions of the 2004 Federal Oil Rule. See 
proposed Sec.  206.59(b). The MMS proposes treatment of costs identical 
to the treatment of costs in the 2004 Federal Oil Rule because it does 
not perceive any reason to treat oil pipeline transportation costs 
differently depending on lessor ownership. The MMS seeks comments on 
the question of whether allowable and non-allowable costs under this 
Indian oil valuation proposed rule should be different than the 
allowable and non-allowable costs under the 2004 Federal Oil Rule. 
Based on the comments, MMS may adopt all, part, or none of the changes 
that are different from the current Indian oil valuation regulations or 
the 1999 Indian Gas Rule.
    The 2000 Federal Oil Rule provides that the lessee must base its 
transportation allowance in a non-arm's-length or no-contract 
situation, on the lessee's actual costs. These include (1) operating 
and maintenance expenses; (2) overhead; (3) depreciation; (4) a return 
on undepreciated capital investment; and (5) a return on 10 percent of 
total capital investment once the transportation system has been 
depreciated below 10 percent of total capital investment (30 CFR 
206.111(b)). The MMS proposes to incorporate the same cost allowance 
structure into this proposed rule, as discussed in more detail below.
    Before June 1, 2000, the regulations for Federal oil valuation 
provided (as do current Indian oil valuation regulations) that, in the 
case of transportation facilities placed in service after March 1, 
1988, actual costs could include either depreciation and a return on 
undepreciated capital investment or a cost equal to the initial 
investment in the transportation system multiplied by the allowed rate 
of return. The regulations before June 1, 2000, did not provide for a 
return on 10 percent of total capital investment once the system has 
been depreciated below 10 percent of total capital investment. See 
former 30 CFR 206.105(b)(2)(iv)(A) and (B) (1999), and current 30 CFR 
206.55(b)(2)(iv)(A) and (B). The 2000 Federal Oil Rule eliminated the 
alternative of a cost equal to the initial investment in the 
transportation system multiplied by the allowed rate of return, because 
it became unnecessary in view of the other changes made in the rule 
(discussed below), and because it had been used in very few, if any, 
situations. The MMS proposes to make the same change in this rule for 
the same reason the change was made to the 2000 Federal Oil Rule. The 
MMS knows of no instance in which the alternative has been used for any 
transportation system for oil produced from Indian leases.
    Further, the 2000 Federal Oil Rule also set forth the basis for the 
depreciation schedule to be used in the depreciation calculation. See 
30 CFR 206.111(h). The MMS proposes to adopt identical provisions for 
this rule through incorporation, except that the relevant date would be 
the effective date of a final rule that adopts these provisions. In the 
2000 Federal Oil Rule, the depreciation schedule for a transportation 
system depended on whether the lessee owned the system on, or acquired 
the system after, the effective date of the final rule. The MMS 
proposes to apply the same principle in the context of Indian leases.
    Finally, the 2004 Federal Oil Rule, which amended 30 CFR 
206.111(i)(2), changed the allowed rate of return used in the non-
arm's-length actual cost calculations from the Standard & Poor's BBB 
bond rate to 1.3 times the BBB bond rate. In March 2005, MMS 
promulgated an identical change to the allowed rate of return used in 
the calculation of actual costs under non-arm's-length transportation 
arrangements in the Federal Gas Valuation Rule, published March 10, 
2005 (70 FR 11869) (2005 Federal Gas Rule), which amended 30 CFR 
206.157(b)(2)(v). The proposed change to this rule would incorporate 
this same change, for the same reasons the rate of return was changed 
in the 2004 Federal Oil and 2005 Federal Gas Rules (i.e., the 1.3 times 
BBB rate more accurately reflects the lessees' cost of capital).
    At the present time (and as has been the case for at least the last 
few years), there is only one lessee producing oil from Indian leases 
who reports transportation of oil under a non-arm's-length arrangement. 
Therefore, only one non-arm's-length oil transportation allowance 
currently is being reported to MMS. However, in 2004, that arrangement 
accounted for more than 98 percent of total oil transportation 
allowances initially reported for Indian leases. In 2005 to date, it is 
the only Indian oil transportation allowance of any kind that any 
lessee is claiming on royalty reports submitted to MMS.

V. Other Issues

    In proposed Sec.  206.50, MMS would add a provision that, if the 
regulations are inconsistent with a Federal statute, a settlement 
agreement or written agreement, or an express provision of a lease, 
then the statute, settlement agreement, written agreement, or lease 
provision would govern to the extent of the inconsistency. A 
``settlement agreement'' would mean a settlement agreement resulting 
from either administrative or judicial litigation. A ``written 
agreement'' would mean a written agreement between the lessee and the 
MMS Director (and approved by the tribal lessor for tribal leases), 
establishing a method to determine the value of production from any 
lease that MMS expects at least would approximate the value established 
under the regulations.
    The proposed provision is similar to provisions that have been 
included in the 2000 Federal Oil Rule and 2005 Federal Gas Rule. See 30 
CFR 206.100(c) (2000-present) and 206.150(b) (2005). As explained in 
the preamble to the 2005 Federal Gas Rule, ``this provision is intended 
to provide flexibility to both MMS and the lessee in those few unusual 
circumstances where a separate written agreement is reached, while at 
the same time maintaining the integrity of the regulations. The MMS 
used this provision in the June 2000 Federal Oil Valuation Rule to 
address unexpectedly difficult royalty valuation problems.''
    The MMS also proposes to add a definition of the term ``affiliate'' 
and revise the definition of ``arm's-length contract'' in Sec.  206.51 
to be identical to the 2000 Federal Oil Rule and to conform the rule to 
the court's decision in National Mining Association v. Department of 
the Interior, 177 F.3d 1 (D.C. Cir. 1999). The MMS recently made the 
same change to the 2005 Federal Gas Rule at 30 CFR 206.151.
    The MMS also proposes to modify the format of the definition of 
``Exchange agreement'' in Sec.  206.51 from the way that it is 
formatted in the 2000 Federal Oil Rule. The MMS is proposing to make 
this change only for the purpose of readability. The MMS does not 
intend

[[Page 7458]]

to change the meaning of the term ``Exchange agreement'' in any 
respect.
    The MMS is also considering whether to change the definition of the 
term ``marketable condition'' in Sec.  206.51 to mean lease products 
``that are sufficiently free from impurities and otherwise in a 
condition that they will be accepted by a purchaser under a sales 
contract or transportation contract typical for disposition of 
production from the field or area.'' This change is incorporated in the 
proposed rule. The current definition refers to lease products ``that 
are sufficiently free from impurities and otherwise in a condition that 
they will be accepted by a purchaser under a sales contract typical for 
the field or area.'' We request your comments regarding this change.
    In proposed Sec.  206.57, MMS is also seeking comments on whether 
presenting certain information in a table versus text format would be 
preferable to the reader. In the proposed table format, MMS would also 
change the grouping of the information by presenting the main ideas in 
a table and then listing the considerations applicable to that 
information below the table in text format. The MMS wishes to use the 
format that makes the regulations the most clear and easily accessible.
    Finally, proposed Sec.  206.64 regarding records retention is 
adapted from 30 CFR 206.105. The time for which records must be 
maintained is governed by Sec.  103(b) of the Federal Oil and Gas 
Royalty Management Act, 30 U.S.C. 1713(b), and is not affected by the 
change in 30 U.S.C. 1724(f), which was enacted as part of the Federal 
Oil and Gas Royalty Simplification and Fairness Act of 1996 (RSFA), 
because RSFA applies only to Federal leases. The referenced regulations 
in proposed Sec.  206.64 reflect this difference.

VI. Procedural Matters

1. Public Comment Policy

    Our practice is to make comments, including names and home 
addresses of respondents, available for public review during regular 
business hours and on our Web site at www.mrm.mms.gov. Individual 
respondents may request that we withhold their 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.

2. Summary Cost and Royalty Impact Data

    Summarized below are the estimated administrative costs and royalty 
impacts of this proposed rule to all potentially affected groups: 
industry, state and local governments, Indian tribes and individual 
Indian mineral owners, and the Federal Government. The administrative 
costs and royalty collection impacts are segregated into two 
categories--those that would accrue in the first year after the 
proposed rule becomes effective and those that would accrue on a 
continuing basis each year thereafter.
A. Industry
    For industry, we anticipate a royalty increase of $416,000 in the 
first year and each subsequent year. We also anticipate an 
administrative cost increase of $4,810,000 in the first year and, for 
subsequent years, a cost increase of $22,000 per year. In addition, we 
estimate administrative cost savings of $4,500 in the first and 
subsequent years. The following chart shows the royalty impact increase 
and summarizes the net expected change in administrative costs to 
industry.

         Net Administrative Cost and Royalty Impact to Industry
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Increase....................        $416,000        $416,000
(2) Administrative Cost Increase........       4,810,000          22,000
(3) Administrative Cost Savings.........          -4,500          -4,500
                                         -----------------
    Net Expected Change in                     4,805,500          17,500
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Industry royalty increase. The MMS estimates that the oil 
valuation changes proposed in this proposed rule would increase the 
annual royalties that industry must pay to Indian tribes and individual 
Indian mineral owners by approximately $416,000. Based on revenues 
reported by companies in calendar year 2003, we calculate that small 
businesses (by U.S. Small Business Administration criteria) would pay 
approximately $162,240, or roughly 39 percent, of the increase. The 
computations of the additional mineral revenues payable to Indian 
tribes and individual Indian mineral owners can be found in Section 
VI.2.C, Indian Tribes and Individual Indian Mineral Owners.
    (2) Industry administrative cost increase. The MMS estimates 
administrative costs to industry of $4,810,000 in the first year: (a) 
$4,788,000 for one-time equipment/software costs; (b) $200 for arm's-
length contract submission costs; (c) $21,700 for additional reporting 
requirements; and (d) $100 for recordkeeping. The MMS estimates costs 
to industry in subsequent years of $22,000 ($200 for submission of all 
contract amendments; $21,700 for additional reporting requirements; and 
$100 for recordkeeping.)
    (2a) Industry administrative cost increase--Equipment/software. 
Industry would incur a one-time cost increase for equipment/software 
modifications in order to conform to the new reporting requirements on 
Form MMS-2014. We estimate the following one-time cost to industry to 
comply with the proposed rule:

[[Page 7459]]



            Administrative Cost Detail for Equipment/Software
------------------------------------------------------------------------
                                            Cost/royalty impact amount
                                         -------------------------------
               Description                                  Subsequent
                                            First year         year
------------------------------------------------------------------------
Software development/modification:
    Electronic reporters--large               $3,000,000               0
     companies..........................
Software development/modification:
    Electronic reporters--mid-level            1,780,000               0
     companies..........................
Spreadsheet software:                     ..............
    Paper reporters.....................           8,000               0
                                         -----------------
        Total Net Cost Increase to             4,788,000               0
         Industry.......................
------------------------------------------------------------------------

    The above figures are calculated as follows: There are 
approximately 200 oil royalty reporters on Indian leases that fall into 
three groups: (1) Large companies (electronic reporters); (2) mid-level 
companies (electronic reporters); and (3) small companies (paper 
reporters). For each of the three groups of reporters, administrative 
costs are calculated as follows: large companies, $3,000,000 (6 x 
$500,000); mid-level companies, $1,780,000 (178 x $10,000); and paper 
reporters, $8,000 (16 x $500).
    (2b) Industry administrative cost increase--Filing arm's-length 
transportation contracts and amendments. Industry would also incur $200 
per year to submit a copy of each arm's-length transportation contract 
and any amendments thereto within 2 months after the date the payor 
reported the transportation allowance on Form MMS-2014. Analysis of the 
most recent information reported to MMS on Form MMS-2014 indicates that 
there are only two payors claiming transportation allowances against 
royalties, and one of the payors has an arm's-length transportation 
arrangement.
    On average, a payor would have one transportation contract to 
transport oil off the lease to a point of value determination. We 
estimate that a payor would need about 4 hours on average to gather the 
necessary contract information, copy, and submit it to MMS. Therefore, 
MMS estimates that the annual cost to industry would be $200, 
calculated as follows:
    (2b-1) Industry administrative cost increase--Filing initial year 
arm's-length contract. The first year cost is estimated at $200, 
calculated as follows: 1 payor x 1 arm's-length contract submission per 
year x 4 hours per submission = 4 burden hours per year x $50 per hour 
= $200 per year in the initial year.
    (2b-2) Industry administrative cost increase--Filing subsequent 
year arm's-length-contract amendments. In subsequent years, we estimate 
the payor would submit amendments once per year due to contract 
changes. The subsequent annual cost is estimated at $200, calculated as 
follows: 1 payor x 1 arm's-length contract amendment submission per 
year x 4 hours per submission = 4 burden hours per year x $50 per hour 
= $200 per year in subsequent years.
    (2c) Industry administrative cost increase--Filing revised Form 
MMS-2014 for major portion. The total annual estimated cost for filing 
additional Form MMS-2014 lines would be $21,700 for the entire universe 
of 200 reporters.
    Under the proposed rule, MMS would calculate a major portion value 
by oil type for each designated area. The major portion value would be 
based on arm's-length reported values from Form MMS-2014. If the MMS-
calculated major portion value is greater than what the lessee 
initially reported, the lessee would have to file a revised Form MMS-
2014 and pay additional royalties.
    Industry would incur an administrative burden as a result of filing 
revised Form MMS-2014 lines to comply with the proposed rule's major 
portion provision. The MMS analyzed reported royalty data for Indian 
leases and determined there are approximately 31,000 individual lines 
reported for oil and condensate on Form MMS-2014 annually. We estimate 
that, under the proposed rule using recent data, there would be as many 
as 12,400 additional lines reported annually, or 1,033 lines monthly. 
This estimate includes backing out previously reported lines and 
reporting new lines. The MMS bases potential impact to reporting on our 
assumption that 40 percent of Indian payors would report on initial 
value less than the major portion value and would therefore have to 
make adjustments (31,000 x 40 percent = 12,400).
    (2c-1) Industry administrative cost increase--Electronic reporting. 
Electronic reporting accounts for about 98 percent of the lines 
reported to MMS by Indian lessees on Form MMS-2014. Based on an average 
of 2 minutes per line at a cost of $50 per hour, we estimate the 
administrative burden would be $20,250 annually calculated as follows: 
98 percent electronic reporting lines x 12,400 additional royalty lines 
= 12,152 lines per year x 2 minutes per line = 24,304/60 minutes = 405 
hours per year x $50 per hour = $20,250 per year.
    (2c-2) Industry administrative cost increase--Paper reporting. The 
MMS estimates there would be 248 additional royalty lines reported 
manually (2 percent of reported Indian oil lines) and that this effort 
would stay the same in the future. Based on an average of 7 minutes per 
line at $50 per hour, the administrative burden for manual payors would 
be $1,450 annually, calculated as follows: 2 percent paper reporting 
lines x 12,400 additional royalty lines = 248 lines per year x 7 
minutes per line = 1,736/60 minutes = 29 hours per year x $50 per hour 
= $1,450 per year.
    (2d) Industry administrative cost increase--Recordkeeping for 
transportation submissions. The recordkeeping burden for transportation 
submissions, related to transportation allowances, is estimated at 2 
hours for a total cost of $100 ($50 for 1 arm's-length submission and 
$50 for 1 non-arm's-length submission), and calculated as follows: 1 
payor x 1 arm's-length submission per year x 1 hour per submission = 1 
burden hour per year x $50 per hour = $50 per year; and 1 payor x 1 
non-arm's-length submission per year x 1 hour per submission = 1 burden 
hour per year x $50 per hour = $50 per year.
    (3) Industry administrative cost savings. Industry would realize 
administrative savings because of the reduced complexity in royalty 
determination and payment in this proposed rule. Altogether, with the 
limited information we can collect and the gross estimates we made, we 
anticipate total administrative savings to industry would be $4,500. 
This includes

[[Page 7460]]

industry savings for the following: (a) $2,400 for simplified reporting 
and (b) $2,100 for reduced reporting on Form MMS-4110, Specifically, 
the proposed rule would result in:
    (3a) Industry administrative cost savings--Simplified reporting and 
valuation, coupled with certainty. We estimate the cost savings would 
be $2,400 for simplified reporting and valuation, coupled with 
certainty. We anticipate that the proposed rule would significantly 
reduce the time involved in the royalty calculation process. In the 
proposed framework, in almost all cases, the lessee would ultimately 
pay royalties based on either its (or its affiliate's) arm's-length 
gross proceeds or the major portion value applicable to its production. 
The need to work through and apply the current benchmarks for non-
arm's-length transactions would be eliminated. Further, once MMS 
calculates a major portion value, the lessee would compare this price 
to the major portion value and make adjustments as necessary. The 
lessee's reporting/pricing procedures thus should be fairly 
straightforward.
    In addition, the proposed rule parallels the transportation 
allowance requirements of the current Federal oil valuation regulations 
in many respects. It thereby would further reduce the complexity of 
valuation between Federal and Indian leases.
    The estimated savings to industry are based on the current amount 
of time spent calculating royalties. This varies greatly by company, 
depending on many variables such as the complexity of the disposition 
or sale of the product, the amount of production to account for, and 
the computation of any necessary adjustments.
    However, we assume simplified reporting in the proposed rule would 
save each payor who reports based on a non-arm's-length disposition at 
least 30 minutes per month to report. This figure realizes a reduction 
of 6 hours per year per payor at $50 per year for a savings of $300 per 
year per payor.
    Eight of the 200 oil payors reported a non-arm's-length Sales Type 
Code on the Form MMS-2014. For these payors, we estimate a total 
savings of $2,400, calculated as follows: 6 annual burden hour savings 
per payor x 8 payors = 48 hours industry savings x $50 per hour = 
$2,400 total annual industry savings.
    (3b) Industry administrative cost savings--Reduction in filing Form 
MMS-4110, Oil Transportation Allowance Report. We estimate the cost 
savings to be $2,100 for a reduction in filing Form MMS-4110. Under 
arm's-length transportation arrangements, MMS proposes to eliminate the 
requirement to file Form MMS-4110. Under non-arm's-length 
transportation arrangements, the lessee would continue to submit actual 
costs, but the requirement to submit estimated allowance information 
would be eliminated. We estimate the savings at $2,100.
    The MMS used the current information collection request data to 
calculate the estimated savings for allowance form filing under the 
proposed rule.
    (3b-1) Arm's-length transportation. Proposed requirements would 
eliminate filing both estimated and actual costs, calculated as 
follows: 3 payors x 4 hours per submission x 2 submissions per year = 
24 burden hours per year x $50 per hour = $1,200 per year savings.
    (3b-2) Non-arm's-length transportation. Proposed requirements would 
eliminate filing estimated costs, calculated as follows: 3 payors x 6 
hours per submission x 1 submission per year = 18 burden hours per year 
x $50 per hour = $900 per year savings. The requirement would continue 
for filing actual costs on Form MMS-4110, for payors with non-arm's-
length transportation arrangements.
    Summary of Impacts to Industry. The royalty impact of the proposed 
rule on industry would be $416,000 annually. Industry's administrative 
costs would increase by $4,810,000 ($4,788,000 + $200 + $21,700 + $100) 
in the first year and $22,000 ($200 + $21,700 + $100) every year 
thereafter. Industry would realize administrative cost savings of 
$4,500 ($2,400 + $2,100) in the first year and every year thereafter. 
The net expected increase in administrative costs would be $4,805,500 
($4,810,000 - $4,500) in the first year and $17,500 ($22,000 - $4,500) 
in subsequent years.
B. State and Local Governments
    No additional cost or royalty impact would be incurred by state and 
local governments as a result of the proposed rule for the first year 
or any subsequent year.
C. Indian Tribes and Individual Indian Mineral Owners
    We estimate that our proposed oil valuation regulations would 
result in increased annual Indian oil royalties of approximately 
$416,000 related to the calculation of major portion values. We do not 
estimate any decrease or increase in royalties related to the 
elimination of the current benchmarks for valuing Indian oil not sold 
at arm's-length. The proposed rule instead requires the value to be 
based on the affiliate's arm's-length resale price which should 
approximate the value determined under the benchmarks. Additionally, 
because there is only one Indian payor with a non-arm's-length 
transportation situation and that one pipeline is fully depreciated, we 
estimate no impact on Indian royalties from the change in the rate of 
return to 1.3 times the Standard & Poor's BBB bond rate.

   Net Royalty Increase to Indian Tribes and Individual Indian Mineral
                                 Owners
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Increase....................        $416,000        $416,000
(2) Administrative Cost Increase........               0               0
(3) Administrative Cost Savings.........               0               0
                                         -----------------
    Net Expected Change in                             0               0
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Indian royalty increase. (1a) Data analyzed. For the analysis 
of the potential royalty impact on the Indian tribes and individual 
Indian mineral owners or additional mineral revenues associated with 
the proposed rule, we used year 2003 royalty information reported on 
Form MMS-2014 because it (1) represents a typical production year with 
no major market interruptions, and (2) reflects data where reporting 
edits and some compliance activities have been performed.
    We performed the major portion calculations for the top designated 
areas

[[Page 7461]]

which accounted for 95.75 percent of all royalty received in value for 
oil and condensate on Indian lands. We projected the royalty impact on 
all Indian tribes and Indian mineral owners to the remaining designated 
areas.
    (1b) Determining the major portion value at the 50-percent level. 
Under the proposed rule, MMS would calculate monthly major portion 
values by arraying reported arm's-length sales and associated volumes 
from highest to lowest price and applying the price associated with the 
sale where accumulated volumes exceed 50 percent plus 1 barrel of oil 
of the total, starting from the bottom.
    In order to calculate this major portion value for the analysis, we 
used arm's-length sales of oil and condensate reported on Form MMS-2014 
for Indian leases. For each oil type in the designated areas, we 
normalized the reported prices in the array for API gravity using 
applicable posted price gravity adjustment tables for the area and 
adjusted for transportation.
    The proposed rule provides for API gravity and oil type information 
to be gathered via Form MMS-2014. In the analysis, we used the API 
gravity reported on Form MMS-4054, Oil and Gas Operations Report, and 
made assumptions in order to correlate the API gravity data to Form 
MMS-2014 royalty information. Because oil type data is not currently 
reported to MMS, we assumed different oil types by analyzing the 
reported API gravity and price differences in an attempt to 
differentiate between oil types.
    (1c) Comparison of values. We calculated the major portion 
liabilities for individual payors by comparing the major portion value 
to the reported value per barrel (normalized and adjusted for API 
gravity and transportation). If the reported value per barrel was less 
than the major portion value, the difference was multiplied times the 
associated volume subject to royalty times the royalty rate. The 
resulting amount was the additional royalties owed to the Indian tribe 
or individual Indian mineral owner.
    In the analysis, we totaled the additional royalties for both oil 
and condensate. Under the provisions of the proposed rule, the total 
additional royalties for all tribal and allotted leases is estimated at 
approximately 1.6 percent of the total royalties reported in 2003.
    Typically, the additional royalty associated with the major portion 
calculation increases as the number of payors on the reservation 
increases. We observed that, for designated areas with few payors, 
little additional royalty resulted from the major portion calculation. 
On the other hand, when many payors reported, the additional royalty 
associated with the major portion calculation increased.
    (1d) Projection of gains to all tribes and individual Indian 
mineral owners. To estimate the total annual dollar impact for all 
tribal and allotted leases from oil and condensate in 2003, MMS used 
the combined dollar increase calculated for the top nine designated 
areas in terms of royalty receipts. Royalties received by these nine 
designated areas ($24,866,256) represented 95.75 percent of the total 
Indian oil and condensate in value royalties actually reported in 2003. 
We estimated that under the proposed rule total royalties for the nine 
designated areas would increase by about 1.6 percent (percentage from 
the major portion analysis performed for 2003) or $397,860. We 
projected the increase for all Indian recipients, as follows:

($397,860 x 100)/95.75 = $415,520

    We estimated that the total increase for all Indian royalty 
recipients under the proposed rule would be approximately $416,000 
(rounded up from $415,520) or about 1.6 percent of the total royalties 
reported for Indian properties.
    (2) Indian administrative cost impact. There is no administrative 
cost to Indian tribes or individual Indian mineral owners.
    (3) Indian administrative cost savings. There is no administrative 
cost savings to Indian tribes or individual Indian mineral owners.
    Summary of Impacts to Indian Tribes and Individual Indian Mineral 
Owners. The proposed rule would result in an annual increase of 
$416,000 in royalties owed to Indian tribes and individual Indian 
mineral owners. There would be no administrative cost impacts to Indian 
tribes and individual Indian mineral owners.
D. Federal Government
    The proposed rule has no royalty impact to the Federal Government. 
We anticipate that the proposed rule would result in increased 
administrative costs to the Federal Government of $998,100 in the first 
year and $312,100 for subsequent years. The Federal Government would 
realize administrative costs savings of $900 in the first year and in 
subsequent years. The net expected change in administrative costs would 
be an increase of $997,200 for the first year and $311,200 for 
subsequent years.
    In addition, since the proposed rule would eliminate the use of the 
non-arm's-length benchmarks, the need for audit work associated with 
applying the benchmarks would also be eliminated. Any resources that 
would be designated for this audit work could be reallocated to other 
audits and increase overall coverage on Indian properties.

 Net Administrative Cost and Administrative Cost Savings to the Federal
                               Government
------------------------------------------------------------------------
                                            Administrative cost/royalty
                                                      impact
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
(1) Royalty Impact......................               0               0
(2) Administrative Cost Increase........        $998,100        $312,100
(3) Administrative Cost Savings.........            -900            -900
                                         -----------------
    Net Expected Change in                       997,200         311,200
     Administrative Costs...............
------------------------------------------------------------------------

    (1) Federal Government royalty impact. There is no royalty impact 
to the Federal Government.
    (2) Federal Government administrative cost increase. (2a) 
Implementation of the proposed rule--First year administrative costs 
(ICR 1010-0140, Form MMS-2014). These costs are estimated at $998,000 
($500,000 + $450,000 + $36,000 + $12,000 = $998,000). The MMS estimates 
that the initial set-up of the major portion calculation would be the 
greatest burden. This set-up would primarily involve researching the

[[Page 7462]]

quality aspects of the oil and condensate produced on tribal and 
allotted leases and writing the programming code to calculate the major 
portion figures for all designated areas. The initial cost of systems 
development and modification to Form MMS-2014 is estimated at $500,000. 
In addition, developing an automated tool to calculate major portion 
and identify potential underpayments is estimated at $450,000.
    There are costs associated with implementing the new rule in 
addition to systems costs. The MMS must conduct training sessions, 
update manuals, issue Dear Payor letters, etc. We estimate an 
additional $36,000 for training and $12,000 for manual updates, Dear 
Payor letters, etc. These implementation costs are associated with the 
initial year after the publication of the rule.
    (2b) MMS Major portion value calculations--Subsequent years 
administrative costs (ICR 1010-0140, Form MMS-2014). After the first 
year of implementation and set up, MMS would incur ongoing costs of 
$312,000 annually in subsequent years to calculate major portion value. 
The proposed rule would define 12 MMS-designated areas, typically 
corresponding to reservation boundaries, and require separate major 
portion calculations by oil type. Additionally, of the 12 designated 
areas, about 7 of those would require distinct oil major portion 
calculations for condensate. Considering a separate monthly price by 
oil type and product (oil/condensate), MMS would calculate over 300 
major portion values annually.
    The number of producing oil leases, payors, and complexities of 
each area would directly affect the burden of performing the major 
portion calculations. There would be an ongoing burden to MMS to 
perform the calculations for each month and update the programming code 
and quality aspects, as production is added or abandoned. There also 
would be administrative costs associated with notifying the tribes and 
payors of the major portion calculations as well as additional workload 
in performing oil major portion compliance reviews. This cost is 
estimated to involve three full time employees' time or $312,000 per 
annum (3 FTE x 2,080 hours per year x $50 per hour = $312,000).
    (2c) Processing arm's-length contracts and amendments. The MMS 
would also incur $100 per year to