Consolidated Federal Oil and Gas and Federal and Indian Coal Valuation Reform, 62016-62052 [2020-20560]

Agencies

• DEPARTMENT OF THE INTERIOR
• Office of Natural Resources Revenue

[Federal Register Volume 85, Number 191 (Thursday, October 1, 2020)]
[Rules and Regulations]
[Pages 62016-62052]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20560]



[[Page 62015]]

Vol. 85

Thursday,

No. 191

October 1, 2020

Part II





Department of the Interior





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Office of Natural Resources Revenue





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30 CFR Parts 1202 and 1206





Consolidated Federal Oil and Gas and Federal and Indian Coal Valuation 
Reform; Final Rule

Federal Register / Vol. 85 , No. 191 / Thursday, October 1, 2020 / 
Rules and Regulations

[[Page 62016]]


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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1202 and 1206

[Docket No. ONRR-2012-0004; DS63644000 DRT000000.CH7000 201D1113RT]
RIN 1012-AA26


Consolidated Federal Oil and Gas and Federal and Indian Coal 
Valuation Reform

AGENCY: Office of Natural Resources Revenue (ONRR), Interior.

ACTION: Final rule.

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SUMMARY: ONRR is re-issuing certain regulations associated with the 
valuation of Federal oil and gas and Federal and Indian coal to 
implement a March 29, 2019 Court order that vacated ONRR's 2017 repeal 
of those regulations. These republished regulations implement the 
court's order by recodifying the regulations that were in effect prior 
to the vacated rulemaking.

DATES: This rule is effective on September 7, 2017 because a Court 
vacated the rule that became effective on that date (82 FR 36934). The 
vacated rule repealed the original publication of this rule (81 FR 
43338). The attempted postponement of the effectiveness of the original 
publication (82 FR 11823) was also vacated by Court order. The combined 
effect of the original publication, vacated postponement, and vacated 
repeal rule is that industry must comply with these regulations for 
production occurring from and after January 1, 2017.

FOR FURTHER INFORMATION CONTACT: For questions on technical issues, 
contact Ms. Amy Lunt at (303) 231-3746, or Mr. Dane Templin at (303) 
231-3125.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

    ONRR published the Consolidated Federal Oil & Gas and Federal & 
Indian Coal Valuation Reform Rule (``2016 Valuation Rule'') on July 1, 
2016 (81 FR 43338), with an effective date of January 1, 2017. However, 
Federal and Indian Lessees were not required to report and pay 
royalties under the 2016 Valuation Rule until February 28, 2017. On 
February 27, 2017, after the 2016 Valuation Rule had been codified in 
the CFR, ONRR attempted to postpone the effectiveness of the 2016 
Valuation Rule pursuant to 5 U.S.C. 705 of the Administrative Procedure 
Act with the publication of the Postponement of Effectiveness of the 
Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation 
Reform Rule (``2017 Postponement Rule;'' published at 82 FR 11823). 
Litigation challenging the 2017 Postponement Rule was filed and, on 
August 30, 2017, a Federal judge ruled ONRR's attempted postponement 
violated the Administrative Procedures Act. Becerra, et al. v. U.S. 
Dep't of the Interior, et al., 276 F.Supp3d 953 (N.D. Cali. 2017).
    On August 7, 2017, ONRR repealed the 2016 Valuation Rule by 
publishing the Repeal of the Consolidated Federal Oil & Gas and Federal 
& Indian Coal Valuation Reform Rule (``2017 Repeal Rule'') (81 FR 
36934). The States of California and New Mexico filed litigation to 
challenge the 2017 Repeal Rule. On March 29, 2019, the United States 
District Court for the Northern District of California issued a 
decision vacating the 2017 Repeal Rule. See California, et al., v. U.S. 
Dep't. of the Int., et al., 381 F.Supp.3d 1153 (N.D. Ca. 2019). The 
Court's vacatur of the 2017 Postponement Rule and the 2017 Repeal Rule 
``reinstat[ed] the [2016] Valuation Rule.'' State of California, et al. 
v. U.S. Dep't of the Interior, et al., Case No.: C 17-5948 SBA, Order 
dated July 30, 2020, pp. 1, 6. Thus, compliance is required with the 
requirements of the 2016 Valuation Rule from and after its original 
effective date, January 1, 2017. ONRR is reissuing the 2016 Valuation 
Rule to recodify the 2016 Valuation Rule in the Code of Federal 
Regulations (CFR).
    Following the reinstatement of the 2016 Valuation Rule, industry 
filed litigation to challenge the 2016 Valuation Rule. That litigation 
is currently pending in the United States District Court for the 
District of Wyoming. On October 8, 2019, the Court entered an order 
granting in part and denying in part industry's request for a 
preliminary injunction. The Court refused to enjoin the portions of the 
2016 Valuation Rule applicable to Federal oil and gas but enjoined the 
portions of the 2016 Valuation Rule applicable to Federal and Indian 
coal. Cloud Peak Energy Inc., et al., v. U.S. Dep't. of the Int., et 
al., 415 F.Supp.3d 1034 (D. Wyo. 2019). Thus, as of the date of this 
Federal Register notice, the portions of 2016 Valuation Rule applicable 
to coal produced from Federal and Indian leases are enjoined. Id. at 
1053. For Federal and Indian coal valuation only, you should continue 
to refer to the 2015 annual edition of 30 CFR 1206 subparts F (Federal 
coal) and J (Indian coal).

II. Procedural Matters

    Because it is undisputed that the 2016 Valuation Rule was 
reinstated by operation of law, ONRR finds good cause to issue this 
final rule without notice and opportunity for public comment under 5 
U.S.C. 553(b)(3)(B). Additionally, a 30-day period is not required 
between publication of a final rule and its effective date under 5 
U.S.C. 553(d). As mentioned above, the Court's Order reinstated the 
2016 Valuation Rule, effective January 1, 2017.

1. Derivation Table

    The following derivation table lists the sections of the respective 
subparts to be changed:

                     Derivation Table for Part 1206
------------------------------------------------------------------------
      The requirements of section:          Are derived from section:
------------------------------------------------------------------------
                         Subpart C--Federal Oil
------------------------------------------------------------------------
1206.20................................  1206.101; 1206.151; 1206.251;
                                          1206.451.
1206.101...............................  1206.102.
1206.102...............................  1206.103.
1206.103...............................  1206.104.
1206.106...............................  1206.105.
1206.107...............................  1206.106.
1206.108...............................  1206.107.
1206.109...............................  1206.108.
1206.110...............................  1206.109.
1206.111...............................  1206.110.
1206.112...............................  1206.111.

[[Page 62017]]

 
1206.113...............................  1206.112.
1206.114...............................  1206.113.
1206.115...............................  1206.114.
1206.116...............................  1206.115.
1206.117...............................  1206.116.
1206.118...............................  1206.117.
------------------------------------------------------------------------
                         Subpart D--Federal Gas
------------------------------------------------------------------------
1206.140...............................  1206.150.
1206.141(a)(1)-(3).....................  1206.152(a)(1).
1206.141(b)(1)-(3).....................  1206.152(a)(2).
1206.141(b)(4).........................  1206.152(b)(1)(iv).
1206.142(a)(4).........................  1206.153(a)(1).
1206.142(b)............................  1206.153(a)(2).
1206.142(c)............................  1206.153(b)(1)(i).
1206.143(a)(1) and (b).................  1206.152(b)(1)(ii);
                                          1206.153(b)(1)(ii).
1206.143(a)(2).........................  1206.152(f); 1206.153(f).
1206.143(c)............................  1206.152(b)(1)(iii);1206.153(b)
                                          (1)(iii).
1206.144...............................  1206.152(c)(1)-(3);
                                          1206.153(c)(1)-(3).
1206.145...............................  1206.152(e)(1) and (2);
                                          1206.153(e)(1) and (2);
                                          1206.157(c)(1)(ii) and
                                          (c)(2)(iii);
                                          1206.159(c)(1)(ii) and
                                          (c)(2)(iii).
1206.146...............................  1206.152(i); 1206.153(i).
1206.147...............................  1206.152(k); 1206.153(k).
1206.148...............................  1206.152(g); 1206.153(g).
1206.149...............................  1206.152(l); 1206.153(l).
1206.150...............................  1206.154.
1206.151...............................  1206.155.
1206.152(a)............................  1206.156(a).
1206.152(b)............................  1206.156(b); 1206.157(a)(2) and
                                          (b)(3).
1206.152(c)(1).........................  1206.157(a)(2) and (b)(4).
1206.152(f)............................  1206.157(a)(4).
1206.153(b)............................  1206.157(f).
1206.153(c)............................  1206.157(g).
1206.154(a)............................  1206.157(b).
1206.154(e)-(h)........................  1206.157(b)(2)(i)-(iii).
1206.154(i)............................  1206.157(b)(2)(iv).
1206.154(i)(3).........................  1206.157(b)(2)(v).
1206.155...............................  1206.157(c)(1)(i)-(ii).
1206.156...............................  1206.157(c)(2)(i)-(iv).
1206.157(a)(1) and (c).................  1206.156(d).
1206.157(a)(2) and 1206.158............  1206.157(e).
1206.159(a)(1).........................  1206.158(a).
1206.159(b)............................  1206.158(b).
1206.159(c)(1) and (2).................  1206.158(c)(1) and (2).
1206.159(d)............................  1206.158(d)(1).
1206.160...............................  1206.159(a).
1206.161...............................  1206.159(b).
1206.162...............................  1206.159(c)(1).
1206.163...............................  1206.159(c)(2).
1206.164...............................  1206.159(d).
1206.165...............................  1206.159(e).
------------------------------------------------------------------------
                         Subpart F--Federal Coal
------------------------------------------------------------------------
1206.250...............................  1206.250.
1206.251...............................  1206.254; 1206.255; 1206.260.
1206.252(d)............................  1206.258(a); 1206.261(b).
1206.260(a)(1) and (b).................  1206.261(a).
1206.260(c)(2).........................  1206.261(a)(2).
1206.260(d)............................  1206.261(c)(3).
1206.260(e)............................  1206.261(c)(1), (c)(2), and
                                          (e).
1206.260(f)............................  1206.262(a)(4).
1206.260(g)............................  1206.262(a)(2) and (a)(3).
1206.261...............................  1206.262(a)(1).
1206.262...............................  1206.262(b).
1206.263...............................  1206.262(c)(1).
1206.264...............................  1206.262(c)(2).
1206.265...............................  1206.262(d).
1206.266...............................  1206.262(e).
1206.267(a)............................  1206.258(a).
1206.267(b)(2).........................  1206.258(c); 1206.260.

[[Page 62018]]

 
1206.267(c)............................  1206.259(a)(4).
1206.267(d)............................  1206.259(a)(2) and (a)(3).
1206.267(e)............................  1206.258(e).
1206.268...............................  1206.259(a)(1).
1206.269...............................  1206.259(b).
1206.270...............................  1206.259(c)(1).
1206.271...............................  1206.259(c)(2).
1206.272...............................  1206.259(d).
1206.273...............................  1206.259(e).
------------------------------------------------------------------------
                         Subpart J--Indian Coal
------------------------------------------------------------------------
1206.450...............................  1206.450.
1206.451...............................  1206.453; 1206.454; 1206.459.
1206.460...............................  1206.461(a)(1).
1206.463...............................  1206.461(c).
------------------------------------------------------------------------

2. Regulatory Planning and Review (Executive Orders 12866 and 13563)

    Executive Order (E.O.) 12866 provides that the Office of 
Information and Regulatory Affairs (OIRA) of the Office of Management 
and Budget (OMB) will review all significant rulemakings. While the 
2016 Valuation Rule was considered significant when originally 
published, its republication here is not significant. The republication 
restates existing law, and does not change the law in any way.
    Executive Order 13563 reaffirms the principles of E.O. 12866, while 
calling for improvements in the nation's regulatory system to promote 
predictability, to reduce uncertainty, and to use the best, most 
innovative, and least burdensome tools for achieving regulatory ends. 
This rule is consistent with the requirements of E.O. 13563 because it 
restates the law without change, as required by court order.

3. Regulatory Flexibility Act

    The Department certified that the 2016 Valuation Rule did not have 
a significant economic effect on a substantial number of small entities 
under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Thus, a 
Regulatory Flexibility Analysis was not required, and, accordingly, a 
Small Entity Compliance Guide was not required. Similarly, the 
Regulatory Flexibility Analysis and Small Entity Compliance Guide are 
not required to republish the 2016 Valuation Rule.
    Your comments are important. The Small Business and Agriculture 
Regulatory Enforcement Ombudsman and ten Regional Fairness Boards 
receive comments from small businesses about Federal agency enforcement 
actions. The Ombudsman annually evaluates the enforcement activities 
and rates each agency's responsiveness to small business. If you wish 
to comment on ONRR's actions, call 1 (888) 734-3247. You may comment to 
the Small Business Administration without fear of retaliation. 
Allegations of discrimination/retaliation filed with the Small Business 
Administration will be investigated for appropriate action.

4. Small Business Regulatory Enforcement Fairness Act

    The 2016 Valuation Rule was not a major rule under 5 U.S.C. 804(2), 
the Small Business Regulatory Enforcement Fairness Act. The rule:
    a. Did not have an annual effect on the economy of $100 million or 
more.
    b. Did not cause a major increase in costs or prices for consumers; 
individual industries; Federal, State, or local government agencies; or 
geographic regions.
    c. Did not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
U.S.-based enterprises to compete with foreign-based enterprises. ONRR 
is the only agency that promulgates rules for royalty valuation on 
Federal oil and gas leases and Federal and Indian coal leases.
    This republication of the 2016 Valuation Rule is not a major rule 
because it simply republishes the law, as determined by court order.

5. Unfunded Mandates Reform Act

    The 2016 Valuation Rule did not impose an unfunded mandate on 
State, local, or Tribal governments or the private sector of more than 
$100 million per year. The 2016 Valuation Rule did not have a 
significant or unique effect on State, local, or Tribal governments or 
the private sector. ONRR was not required to provide a statement 
containing the information that the Unfunded Mandates Reform Act (2 
U.S.C. 1501 et seq.) requires because the 2016 Valuation Rule was not 
an unfunded mandate. Similarly, this republication of the 2016 
Valuation Rule is not an unfunded mandate.

6. Takings (E.O. 12630)

    Under the criteria in section 2 of E.O. 12630, the 2016 Valuation 
Rule did not have any significant takings implications. The rule did 
not impose conditions or limitations on the use of any private 
property. The rule applied to Federal oil, Federal gas, Federal coal, 
and Indian coal leases only. Therefore, the rule did not require a 
Takings Implication Assessment, and this republication of the 2016 
Valuation Rule does not either.

7. Federalism (E.O. 13132)

    Under the criteria in section 1 of E.O. 13132, the 2016 Valuation 
Rule did not have sufficient Federalism implications to warrant the 
preparation of a Federalism summary impact statement. The management of 
Federal oil leases, Federal gas leases, and Federal and Indian coal 
leases is the responsibility of the Secretary of the Interior, and ONRR 
distributes all of the royalties that it collects from the leases to 
States, Tribes, and individual Indian mineral owners. The rule did not 
impose administrative costs on States or local governments. The rule 
also did not substantially and directly affect the relationship between 
the Federal and State governments. Similarly, the republication of the 
2016 Valuation Rule does not require a Federalism summary impact 
statement either.

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

    The 2016 Valuation Rule, as well as the republication, comply with 
the

[[Page 62019]]

requirements of E.O. 12988. Specifically, the republished rule:
    a. Meets the criteria of section 3(a), which requires that ONRR 
review all regulations to eliminate errors and ambiguity and write them 
to minimize litigation.
    b. Meets the criteria of section 3(b)(2), which requires that ONRR 
write all regulations in clear language using clear legal standards.

9. Consultation With Indian Tribal Governments (E.O. 13175)

    Under the criteria in E.O. 13175, ONRR evaluated the 2016 Valuation 
Rule, and determined that it potentially affected Federally-recognized 
Indian Tribes. Specifically, the rule changed the valuation method for 
coal produced from Indian leases. Accordingly:
    a. ONRR held a public workshop on October 20, 2011, in Albuquerque, 
New Mexico, to consider Tribal comments on the Indian coal valuation 
regulations.
    b. ONRR solicited comments from all Tribes and received comments 
from a Tribe through an Advance Notice of Proposed Rulemaking published 
on May 27, 2011 (76 FR 30881).
    c. ONRR requested further comments from its Tribal partners through 
our bi-annual State and Tribal Royalty Audit Committee meetings held in 
May and November 2015.
    d. ONRR considered Tribal views in the 2016 Valuation Rule. See 82 
FR 36952.
    Because this rule republishes the 2016 Valuation Rule without 
change, ONRR did not solicit Tribal comments on the republication.

10. Paperwork Reduction Act

    The 2016 Valuation Rule:
    a. Did not contain any new information collection requirements.
    b. Did not require a submission to OMB under the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
    The rule also referred to, but did not change, the information 
collection requirements that OMB already approved under OMB Control 
Numbers 1012-0004, 1012-0005, and 1012-0010. Similarly, this 
republication of the 2016 Valuation Rule does not contain any new 
information collection requirements or submissions to OMB. Since the 
rule reorganized ONRR's regulations, please refer to the Derivations 
Table in Section II for specifics. The corresponding information 
collection burden tables will be updated during the normal renewal 
cycle. See 5 CFR 1320.4(a)(2).

11. National Environmental Policy Act

    The 2016 Valuation Rule did not constitute a major Federal action 
significantly affecting the quality of the human environment. ONRR was 
not required to provide a detailed statement under the National 
Environmental Policy Act of 1969 (NEPA) because the rule qualified for 
a categorical exclusion under 43 CFR 46.210(c) and (i) and the DOI 
Departmental Manual, part 516, section 15.4.D: ``(c) Routine financial 
transactions including such things as . . . audits, fees, bonds, and 
royalties . . . (i) Policies, directives, regulations, and guidelines: 
That are of an administrative, financial, legal, technical, or 
procedural nature.'' ONRR also determined that the rule was not 
involved in any of the extraordinary circumstances listed in 43 CFR 
46.215 that require further analysis under NEPA. The procedural changes 
resulting from the amendments had no consequence on the physical 
environment. The rule did not alter, in any material way, natural 
resources exploration, production, or transportation. Likewise, this 
republication of the 2016 Valuation Rule does not alter, in any 
material way, natural resources exploration, production, or 
transportation because it republishes the law, as determined by court 
order.

12. Effects on the Nation's Energy Supply (E.O. 13211)

    The 2016 Valuation Rule was not a significant energy action under 
the definition in E.O. 13211. Nor is this republication of the 2016 
Valuation Rule a significant energy action under the definition in E.O. 
13211. Thus, a Statement of Energy Effects is not required.

List of Subjects in 30 CFR Parts 1202 and 1206

    Coal, Continental shelf, Government contracts, Indian lands, 
Mineral royalties, Natural gas, Oil, Oil and gas exploration, Public 
lands--mineral resources, Reporting and recordkeeping requirements.

Kimbra G. Davis,
Director for Office of Natural Resources Revenue.

Authority and Issuance

    For the reasons discussed in the preamble, ONRR amends 30 CFR parts 
1202 and 1206 as set forth below:

PART 1202--ROYALTIES

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

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

Subpart B--Oil, Gas, and OCS Sulfur, General

0
2. In Sec.  1202.51, revise paragraph (b) to read as follows:


Sec.  1202.51  Scope and definitions.

* * * * *
    (b) The definitions in Sec.  1206.20 of this chapter are applicable 
to subparts B, C, D, and J of this part.

Subpart F--Coal

0
3. Add Sec.  1202.251 to subpart F to read as follows:


Sec.  1202.251  What coal is subject to royalties?

    (a) All coal (except coal unavoidably lost as BLM determines under 
43 CFR part 3400) from a Federal or Indian lease is subject to royalty. 
This includes coal used, sold, or otherwise disposed of by you on or 
off of the lease.
    (b) If you receive compensation for unavoidably lost coal through 
insurance coverage or other arrangements, you must pay royalties at the 
rate specified in the lease on the amount of compensation that you 
receive for the coal. No royalty is due on insurance compensation that 
you received for other losses.
    (c) If you rework waste piles or slurry ponds to recover coal, you 
must pay royalty at the rate specified in the lease at the time when 
you use, sell, or otherwise finally dispose of the recovered coal.
    (1) The applicable royalty rate depends on the production method 
that you used to initially mine the coal contained in the waste pile or 
slurry pond (such as an underground mining method or a surface mining 
method).
    (2) You must allocate coal in waste pits or slurry ponds that you 
initially mined from Federal or Indian leases to those Federal or 
Indian leases regardless of whether it is stored on Federal or Indian 
lands.
    (3) You must maintain accurate records demonstrating how to 
allocate the coal in the waste pit or slurry pond to each individual 
Federal or Indian coal lease.

PART 1206--PRODUCT VALUATION

0
4. The authority citation for part 1206 continues to read as follows:

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


0
5. Revise subpart A to read as follows:

[[Page 62020]]

Subpart A--General Provisions and Definitions
Sec.
1206.10 Has the Office of Management and Budget (OMB) approved the 
information collection requirements in this part?
1206.20 What definitions apply to this part?

Subpart A--General Provisions and Definitions


Sec.  1206.10  Has the Office of Management and Budget (OMB) approved 
the information collection requirements in this part?

    OMB has approved the information collection requirement contained 
in this part under 44 U.S.C. 3501 et seq. See 30 CFR part 1210 for 
details concerning the estimated reporting burden and how to comment on 
the accuracy of the burden estimate.


Sec.  1206.20  What definitions apply to this part?

    Ad valorem lease means a lease where the royalty due to the lessor 
is based upon a percentage of the amount or value of the coal.
    Affiliate means a person who controls, is controlled by, or is 
under common control with another person. For the purposes of this 
subpart:
    (1) Ownership or common ownership of more than 50 percent of the 
voting securities, or instruments of ownership or other forms of 
ownership, of another person constitutes control. Ownership of less 
than 10 percent constitutes a presumption of non-control that ONRR may 
rebut.
    (2) If there is ownership or common ownership of 10 through 50 
percent of the voting securities or instruments of ownership, or other 
forms of ownership, of another person, ONRR will consider each of the 
following factors to determine if there is control under the 
circumstances of a particular case:
    (i) The extent to which there are common officers or directors.
    (ii) With respect to the voting securities, or instruments of 
ownership or other forms of ownership: The percentage of ownership or 
common ownership, the relative percentage of ownership or common 
ownership compared to the percentage(s) of ownership by other persons, 
if a person is the greatest single owner, or if there is an opposing 
voting bloc of greater ownership.
    (iii) Operation of a lease, plant, pipeline, or other facility.
    (iv) The extent of others owners' participation in operations and 
day-to-day management of a lease, plant, or other facility.
    (v) Other evidence of power to exercise control over or common 
control with another person.
    (3) Regardless of any percentage of ownership or common ownership, 
relatives, either by blood or marriage, are affiliates.
    ANS means Alaska North Slope.
    Area means a geographic region at least as large as the limits of 
an oil and/or gas field, in which oil and/or gas lease products have 
similar quality and economic characteristics. Area boundaries are not 
officially designated and the areas are not necessarily named.
    Arm's-length-contract means a contract or agreement between 
independent persons who are not affiliates and who have opposing 
economic interests regarding that contract. To be considered arm's-
length for any production month, a contract must satisfy this 
definition for that month, as well as when the contract was executed.
    Audit means an examination, conducted under the generally accepted 
Governmental Auditing Standards, of royalty reporting and payment 
compliance activities of lessees, designees or other persons who pay 
royalties, rents, or bonuses on Federal leases or Indian leases.
    BIA means the Bureau of Indian Affairs of the Department of the 
Interior.
    BLM means the Bureau of Land Management of the Department of the 
Interior.
    BOEM means the Bureau of Ocean Energy Management of the Department 
of the Interior.
    BSEE means the Bureau of Safety and Environmental Enforcement of 
the Department of the Interior.
    Coal means coal of all ranks from lignite through anthracite.
    Coal cooperative means an entity organized to provide coal or coal-
related services to the entity's members (who may or may not also be 
owners of the entity), partners, and others. The entity may operate as 
a coal lessee, operator, payor, logistics provider, or electricity 
generator, or any of their affiliates, and may be organized to be non-
profit or for-profit.
    Coal washing means any treatment to remove impurities from coal. 
Coal washing may include, but is not limited to, operations, such as 
flotation, air, water, or heavy media separation; drying; and related 
handling (or combination thereof).
    Compression means the process of raising the pressure of gas.
    Condensate means liquid hydrocarbons (normally exceeding 40 degrees 
of API gravity) recovered at the surface without processing. Condensate 
is the mixture of liquid hydrocarbons resulting from condensation of 
petroleum hydrocarbons existing initially in a gaseous phase in an 
underground reservoir.
    Constraint means a reduction in, or elimination of, gas flow, 
deliveries, or sales required by the delivery system.
    Contract means any oral or written agreement, including amendments 
or revisions, between two or more persons, that is enforceable by law 
and that, with due consideration, creates an obligation.
    Designee means the person whom the lessee designates to report and 
pay the lessee's royalties for a lease.
    Exchange agreement means an agreement where one person agrees to 
deliver oil to another person at a specified location in exchange for 
oil deliveries at another location. Exchange agreements may or may not 
specify prices for the oil involved. They frequently specify dollar 
amounts reflecting location, quality, or other differentials. Exchange 
agreements include buy/sell agreements, which specify prices to be paid 
at each exchange point and may appear to be two separate sales within 
the same agreement. Examples of other types of exchange agreements 
include, but are not limited to, exchanges of produced oil for specific 
types of crude oil (such as West Texas Intermediate); exchanges of 
produced oil for other crude oil at other locations (Location Trades); 
exchanges of produced oil for other grades of oil (Grade Trades); and 
multi-party exchanges.
    FERC means Federal Energy Regulatory Commission.
    Field means a geographic region situated over one or more 
subsurface oil and gas reservoirs and encompassing at least the 
outermost boundaries of all oil and gas accumulations known within 
those reservoirs, vertically projected to the land surface. State oil 
and gas regulatory agencies usually name onshore fields and designate 
their official boundaries. BOEM names and designates boundaries of OCS 
fields.
    Gas means any fluid, either combustible or non-combustible, 
hydrocarbon or non-hydrocarbon, which is extracted from a reservoir and 
which has neither independent shape nor volume, but tends to expand 
indefinitely. It is a substance that exists in a gaseous or rarefied 
state under standard temperature and pressure conditions.
    Gas plant products means separate marketable elements, compounds, 
or mixtures, whether in liquid, gaseous, or solid form, resulting from 
processing gas, excluding residue gas.
    Gathering means the movement of lease production to a central 
accumulation or treatment point on the lease, unit, or communitized 
area, or to

[[Page 62021]]

a central accumulation or treatment point off of the lease, unit, or 
communitized area that BLM or BSEE approves for onshore and offshore 
leases, respectively, including any movement of bulk production from 
the wellhead to a platform offshore.
    Geographic region means, for Federal gas, an area at least as large 
as the defined limits of an oil and or gas field in which oil and/or 
gas lease products have similar quality and economic characteristics.
    Gross proceeds means the total monies and other consideration 
accruing for the disposition of any of the following:
    (1) Oil. Gross proceeds also include, but are not limited to, the 
following examples:

(i) Payments for services such as dehydration, marketing, measurement, 
or gathering which the lessee must perform at no cost to the Federal 
Government
(ii) The value of services, such as salt water disposal, that the 
producer normally performs but that the buyer performs on the 
producer's behalf
(iii) Reimbursements for harboring or terminalling fees, royalties, and 
any other reimbursements
(iv) Tax reimbursements, even though the Federal royalty interest may 
be exempt from taxation
(v) Payments made to reduce or buy down the purchase price of oil 
produced in later periods by allocating such payments over the 
production whose price that the payment reduces and including the 
allocated amounts as proceeds for the production as it occurs
(vi) Monies and all other consideration to which a seller is 
contractually or legally entitled but does not seek to collect through 
reasonable efforts

    (2) Gas, residue gas, and gas plant products. Gross proceeds also 
include, but are not limited to, the following examples:

(i) Payments for services such as dehydration, marketing, measurement, 
or gathering that the lessee must perform at no cost to the Federal 
Government
(ii) Reimbursements for royalties, fees, and any other reimbursements
(iii) Tax reimbursements, even though the Federal royalty interest may 
be exempt from taxation
(iv) Monies and all other consideration to which a seller is 
contractually or legally entitled, but does not seek to collect through 
reasonable efforts

    (3) Coal. Gross proceeds also include, but are not limited to, the 
following examples:

(i) Payments for services such as crushing, sizing, screening, storing, 
mixing, loading, treatment with substances including chemicals or oil, 
and other preparation of the coal that the lessee must perform at no 
cost to the Federal Government or Indian lessor
(ii) Reimbursements for royalties, fees, and any other reimbursements
(iii) Tax reimbursements even though the Federal or Indian royalty 
interest may be exempt from taxation
(iv) Monies and all other consideration to which a seller is 
contractually or legally entitled, but does not seek to collect through 
reasonable efforts

    Index means:

    (1) For gas, the calculated composite price ($/MMBtu) of spot 
market sales that a publication that meets ONRR-established criteria 
for acceptability at the index pricing point publishes
    (2) For oil, the calculated composite price ($/barrel) of spot 
market sales that a publication that meets ONRR-established criteria 
for acceptability at the index pricing point publishes.
    Index pricing point means any point on a pipeline for which there 
is an index, which ONRR-approved publications may refer to as a trading 
location.
    Index zone means a field or an area with an active spot market and 
published indices applicable to that field or an area that is 
acceptable to ONRR under Sec.  1206.141(d)(1).
    Indian Tribe means any Indian Tribe, band, nation, pueblo, 
community, rancheria, colony, or other group of Indians for which any 
minerals or interest in minerals is held in trust by the United States 
or is subject to Federal restriction against alienation.
    Individual Indian mineral owner means any Indian for whom minerals 
or an interest in minerals is held in trust by the United States or who 
holds title subject to Federal restriction against alienation.
    Keepwhole contract means a processing agreement under which the 
processor delivers to the lessee a quantity of gas after processing 
equivalent to the quantity of gas that the processor received from the 
lessee prior to processing, normally based on heat content, less gas 
used as plant fuel and gas unaccounted for and/or lost. This includes, 
but is not limited to, agreements under which the processor retains all 
NGLs that it recovered from the lessee's gas.
    Lease means any contract, profit-sharing arrangement, joint 
venture, or other agreement issued or approved by the United States 
under any mineral leasing law, including the Indian Mineral Development 
Act, 25 U.S.C. 2101-2108, that authorizes exploration for, extraction 
of, or removal of lease products. Depending on the context, lease may 
also refer to the land area that the authorization covers.
    Lease products mean any leased minerals, attributable to, 
originating from, or allocated to a lease or produced in association 
with a lease.
    Lessee means any person to whom the United States, an Indian Tribe, 
and/or individual Indian mineral owner issues a lease, and any person 
who has been assigned all or a part of record title, operating rights, 
or an obligation to make royalty or other payments required by the 
lease. Lessee includes:
    (1) Any person who has an interest in a lease.
    (2) In the case of leases for Indian coal or Federal coal, an 
operator, payor, or other person with no lease interest who makes 
royalty payments on the lessee's behalf.
    Like quality means similar chemical and physical characteristics.
    Location differential means an amount paid or received (whether in 
money or in barrels of oil) under an exchange agreement that results 
from differences in location between oil delivered in exchange and oil 
received in the exchange. A location differential may represent all or 
part of the difference between the price received for oil delivered and 
the price paid for oil received under a buy/sell exchange agreement.
    Market center means a major point that ONRR recognizes for oil 
sales, refining, or transshipment. Market centers generally are 
locations where ONRR-approved publications publish oil spot prices.
    Marketable condition means lease products which are sufficiently 
free from impurities and otherwise in a condition that they will be 
accepted by a purchaser under a sales contract typical for the field or 
area for Federal oil and gas, and region for Federal and Indian coal.
    Mine means an underground or surface excavation or series of 
excavations and the surface or underground support facilities that 
contribute directly or indirectly to mining, production, preparation, 
and handling of lease products.
    Misconduct means any failure to perform a duty owed to the United 
States under a statute, regulation, or lease, or unlawful or improper 
behavior, regardless of the mental state of the lessee or any 
individual employed by or associated with the lessee.
    Net output means the quantity of:

[[Page 62022]]

    (1) For gas, residue gas and each gas plant product that a 
processing plant produces.
    (2) For coal, the quantity of washed coal that a coal wash plant 
produces.
    Netting means reducing the reported sales value to account for an 
allowance instead of reporting the allowance as a separate entry on the 
Report of Sales and Royalty Remittance (Form ONRR-2014) or the Solid 
Minerals Production and Royalty Report (Form ONRR-4430).
    NGLs means Natural Gas Liquids.
    NYMEX price means the average of the New York Mercantile Exchange 
(NYMEX) settlement prices for light sweet crude oil delivered at 
Cushing, Oklahoma, calculated as follows:
    (1) First, sum the prices published for each day during the 
calendar month of production (excluding weekends and holidays) for oil 
to be delivered in the prompt month corresponding to each such day.
    (2) Second, divide the sum by the number of days on which those 
prices are published (excluding weekends and holidays).
    Oil means a mixture of hydrocarbons that existed in the liquid 
phase in natural underground reservoirs, remains liquid at atmospheric 
pressure after passing through surface separating facilities, and is 
marketed or used as a liquid. Condensate recovered in lease separators 
or field facilities is oil.
    ONRR means the Office of Natural Resources Revenue of the 
Department of the Interior.
    ONRR-approved commercial price bulletin means a publication that 
ONRR approves for determining NGLs prices.
    ONRR-approved publication means:
    (1) For oil, a publication that ONRR approves for determining ANS 
spot prices or WTI differentials.
    (2) For gas, a publication that ONRR approves for determining index 
pricing points.
    Outer Continental Shelf (OCS) means all submerged lands lying 
seaward and outside of the area of lands beneath navigable waters, as 
defined in Section 2 of the Submerged Lands Act (43 U.S.C. 1301), and 
of which the subsoil and seabed appertain to the United States and are 
subject to its jurisdiction and control.
    Payor means any person who reports and pays royalties under a 
lease, regardless of whether that person also is a lessee.
    Person means any individual, firm, corporation, association, 
partnership, consortium, or joint venture (when established as a 
separate entity).
    Processing means any process designed to remove elements or 
compounds (hydrocarbon and non-hydrocarbon) from gas, including 
absorption, adsorption, or refrigeration. Field processes which 
normally take place on or near the lease, such as natural pressure 
reduction, mechanical separation, heating, cooling, dehydration, and 
compression, are not considered processing. The changing of pressures 
and/or temperatures in a reservoir is not considered processing. The 
use of a Joule-Thomson (JT) unit to remove NGLs from gas is considered 
processing regardless of where the JT unit is located, provided that 
you market the NGLs as NGLs.
    Processing allowance means a deduction in determining royalty value 
for the reasonable, actual costs the lessee incurs for processing gas.
    Prompt month means the nearest month of delivery for which NYMEX 
futures prices are published during the trading month.
    Quality differential means an amount paid or received under an 
exchange agreement (whether in money or in barrels of oil) that results 
from differences in API gravity, sulfur content, viscosity, metals 
content, and other quality factors between oil delivered and oil 
received in the exchange. A quality differential may represent all or 
part of the difference between the price received for oil delivered and 
the price paid for oil received under a buy/sell agreement.
    Region for coal means the eight Federal coal production regions, 
which the Bureau of Land Management designates as follows: Denver-Raton 
Mesa Region, Fort Union Region, Green River-Hams Fork Region, Powder 
River Region, San Juan River Region, Southern Appalachian Region, 
Uinta-Southwestern Utah Region, and Western Interior Region. See 44 FR 
65197 (1979).
    Residue gas means that hydrocarbon gas consisting principally of 
methane resulting from processing gas.
    Rocky Mountain Region means the States of Colorado, Montana, North 
Dakota, South Dakota, Utah, and Wyoming, except for those portions of 
the San Juan Basin and other oil-producing fields in the ``Four 
Corners'' area that lie within Colorado and Utah.
    Roll means an adjustment to the NYMEX price that is calculated as 
follows: Roll = .6667 x (P0-P1) + .3333 x 
(P0-P2), where: P0 = the average of 
the daily NYMEX settlement prices for deliveries during the prompt 
month that is the same as the month of production, as published for 
each day during the trading month for which the month of production is 
the prompt month; P1 = the average of the daily NYMEX 
settlement prices for deliveries during the month following the month 
of production, published for each day during the trading month for 
which the month of production is the prompt month; and P2 = 
the average of the daily NYMEX settlement prices for deliveries during 
the second month following the month of production, as published for 
each day during the trading month for which the month of production is 
the prompt month. Calculate the average of the daily NYMEX settlement 
prices using only the days on which such prices are published 
(excluding weekends and holidays).
    (1) Example 1. Prices in Out Months are Lower Going Forward: The 
month of production for which you must determine royalty value is 
December. December was the prompt month (for year 2011) from October 21 
through November 18. January was the first month following the month of 
production, and February was the second month following the month of 
production. P0, therefore, is the average of the daily NYMEX 
settlement prices for deliveries during December published for each 
business day between October 21 and November 18. P1 is the 
average of the daily NYMEX settlement prices for deliveries during 
January published for each business day between October 21 and November 
18. P2 is the average of the daily NYMEX settlement prices 
for deliveries during February published for each business day between 
October 21 and November 18. In this example, assume that P0 
= $95.08 per bbl, P1 = $95.03 per bbl, and P2 = 
$94.93 per bbl. In this example (a declining market), Roll = .6667 x 
($95.08-$95.03) + .3333 x ($95.08-$94.93) = $0.03 + $0.05 = $0.08. You 
add this number to the NYMEX price.
    (2) Example 2. Prices in Out Months are Higher Going Forward: The 
month of production for which you must determine royalty value is 
November. November was the prompt month (for year 2012) from September 
21 through October 22. December was the first month following the month 
of production, and January was the second month following the month of 
production. P0, therefore, is the average of the daily NYMEX 
settlement prices for deliveries during November published for each 
business day between September 21 and October 22. P1 is the 
average of the daily NYMEX settlement prices for deliveries during 
December published for each business day between September 21 and 
October 22. P2 is the average of the daily NYMEX settlement 
prices for deliveries during January published for each business day 
between September 21 and October 22. In this example, assume that

[[Page 62023]]

P0 = $91.28 per bbl, P1 = $91.65 per bbl, and 
P2 = $92.10 per bbl. In this example (a rising market), Roll 
= .6667 x ($91.28-$91.65) + .3333 x ($91.28-$92.10) = (-$0.25) + (-
$0.27) = (-$0.52). You add this negative number to the NYMEX price 
(effectively, a subtraction from the NYMEX price).
    Sale means a contract between two persons where:
    (1) The seller unconditionally transfers title to the oil, gas, gas 
plant product, or coal to the buyer and does not retain any related 
rights, such as the right to buy back similar quantities of oil, gas, 
gas plant product, or coal from the buyer elsewhere; and
    (2) The buyer pays money or other consideration for the oil, gas, 
gas plant product, or coal; and
    (3) The parties' intent is for a sale of the oil, gas, gas plant 
product, or coal to occur.
    Section 6 lease means an OCS lease subject to section 6 of the 
Outer Continental Shelf Lands Act, as amended, 43 U.S.C. 1335.
    Short ton means 2,000 pounds.
    Spot price means the price under a spot sales contract where:
    (1) A seller agrees to sell to a buyer a specified amount of oil at 
a specified price over a specified period of short duration.
    (2) No cancellation notice is required to terminate the sales 
agreement.
    (3) There is no obligation or implied intent to continue to sell in 
subsequent periods.
    Tonnage means tons of coal measured in short tons.
    Trading month means the period extending from the second business 
day before the 25th day of the second calendar month preceding the 
delivery month (or, if the 25th day of that month is a non-business 
day, the second business day before the last business day preceding the 
25th day of that month) through the third business day before the 25th 
day of the calendar month preceding the delivery month (or, if the 25th 
day of that month is a non-business day, the third business day before 
the last business day preceding the 25th day of that month), unless the 
NYMEX publishes a different definition or different dates on its 
official website, www.cmegroup.com, in which case, the NYMEX definition 
will apply.
    Transportation allowance means a deduction in determining royalty 
value for the reasonable, actual costs that the lessee incurs for 
moving:
    (1) Oil to a point of sale or delivery off of the lease, unit area, 
or communitized area. The transportation allowance does not include 
gathering costs.
    (2) Unprocessed gas, residue gas, or gas plant products to a point 
of sale or delivery off of the lease, unit area, or communitized area, 
or away from a processing plant. The transportation allowance does not 
include gathering costs.
    (3) Coal to a point of sale remote from both the lease and mine or 
wash plant.
    Washing allowance means a deduction in determining royalty value 
for the reasonable, actual costs the lessee incurs for coal washing.
    WTI differential means the average of the daily mean differentials 
for location and quality between a grade of crude oil at a market 
center and West Texas Intermediate (WTI) crude oil at Cushing published 
for each day for which price publications perform surveys for 
deliveries during the production month, calculated over the number of 
days on which those differentials are published (excluding weekends and 
holidays). Calculate the daily mean differentials by averaging the 
daily high and low differentials for the month in the selected 
publication. Use only the days and corresponding differentials for 
which such differentials are published.

0
6. Revise subpart C to read as follows:
Subpart C--Federal Oil
1206.100 What is the purpose of this subpart?
1206.101 How do I calculate royalty value for oil I or my affiliate 
sell(s) under an arm's-length contract?
1206.102 How do I value oil not sold under an arm's-length contract?
1206.103 What publications does ONRR approve?
1206.104 How will ONRR determine if my royalty payments are correct?
1206.105 How will ONRR determine the value of my oil for royalty 
purposes?
1206.106 What records must I keep to support my calculations of 
value under this subpart?
1206.107 What are my responsibilities to place production into 
marketable condition and to market production?
1206.108 How do I request a valuation determination?
1206.109 Does ONRR protect information I provide?
1206.110 What general transportation allowance requirements apply to 
me?
1206.111 How do I determine a transportation allowance if I have an 
arm's-length transportation contract?
1206.112 How do I determine a transportation allowance if I do not 
have an arm's-length transportation contract?
1206.113 What adjustments and transportation allowances apply when I 
value oil production from my lease using NYMEX prices or ANS spot 
prices?
1206.114 How will ONRR identify market centers?
1206.115 What are my reporting requirements under an arm's-length 
transportation contract?
1206.116 What are my reporting requirements under a non-arm's-length 
transportation contract?
1206.117 What interest and penalties apply if I improperly report a 
transportation allowance?
1206.118 What reporting adjustments must I make for transportation 
allowances?
1206.119 How do I determine royalty quantity and quality?

Subpart C--Federal Oil


Sec.  1206.100  What is the purpose of this subpart?

    (a) This subpart applies to all oil produced from Federal oil and 
gas leases onshore and on the OCS. It explains how you, as a lessee, 
must calculate the value of production for royalty purposes consistent 
with mineral leasing laws, other applicable laws, and lease terms.
    (b) If you are a designee and if you dispose of production on 
behalf of a lessee, the terms ``you'' and ``your'' in this subpart 
refer to you and not to the lessee. In this circumstance, you must 
determine and report royalty value for the lessee's oil by applying the 
rules in this subpart to your disposition of the lessee's oil.
    (c) If you are a designee and only report for a lessee and do not 
dispose of the lessee's production, references to ``you'' and ``your'' 
in this subpart refer to the lessee and not the designee. In this 
circumstance, you as a designee must determine and report royalty value 
for the lessee's oil by applying the rules in this subpart to the 
lessee's disposition of its oil.
    (d) If the regulations in this subpart are inconsistent with a(an): 
Federal statute; settlement agreement between the United States and a 
lessee resulting from administrative or judicial litigation; written 
agreement between the lessee and ONRR's Director establishing a method 
to determine the value of production from any lease that ONRR expects 
would at least approximate the value established under this subpart; 
express provision of an oil and gas lease subject to this subpart, then 
the statute, settlement agreement, written agreement, or lease 
provision will govern to the extent of the inconsistency.
    (e) ONRR may audit, monitor, or review and adjust all royalty 
payments.


Sec.  1206.101  How do I calculate royalty value for oil I or my 
affiliate sell(s) under an arm's-length contract?

    (a) The value of oil under this section for royalty purposes is the 
gross proceeds accruing to you or your

[[Page 62024]]

affiliate under the arm's-length contract less applicable allowances 
determined under Sec.  1206.111 or Sec.  1206.112. This value does not 
apply if you exercise an option to use a different value provided in 
paragraph (c)(1) or (c)(2)(i) of this section or if ONRR decides to 
value your oil under Sec.  1206.105. You must use this paragraph (a) to 
value oil when:
    (1) You sell under an arm's-length sales contract; OR
    (2) You sell or transfer to your affiliate or another person under 
a non-arm's-length contract and that affiliate or person, or another 
affiliate of either of them, then sells the oil under an arm's-length 
contract, unless you exercise the option provided in paragraph 
(c)(2)(i) of this section.
    (b) If you have multiple arm's-length contracts to sell oil 
produced from a lease that is valued under paragraph (a) of this 
section, 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.
    (c)(1) If you enter into an arm's-length exchange agreement, or 
multiple sequential arm's-length exchange agreements, and following the 
exchange(s) that you or your affiliate sell(s) the oil received in the 
exchange(s) under an arm's-length contract, then you may use either 
paragraph (a) of this section or Sec.  1206.102 to value your 
production for royalty purposes. If you fail to make the election 
required under this paragraph, you may not make a retroactive election, 
and ONRR may decide your value under Sec.  1206.105.
    (i) If you use paragraph (a) of this section, your gross proceeds 
are the gross proceeds under your or your affiliate's arm's-length 
sales contract after the exchange(s) occur(s). You must adjust your 
gross proceeds for any location or quality differential, or other 
adjustments, that you received or paid under the arm's-length exchange 
agreement(s). If ONRR determines that any arm's-length exchange 
agreement does not reflect reasonable location or quality 
differentials, ONRR may decide your value under Sec.  1206.105. You may 
not otherwise use the price or differential specified in an arm's-
length exchange agreement to value your production.
    (ii) When you elect under paragraph (c)(1) of this section to use 
paragraph (a) of this section or Sec.  1206.102, you must make the same 
election for all of your production from the same unit, communitization 
agreement, or lease (if the lease is not part of a unit or 
communitization agreement) sold under arm's-length contracts following 
arm's-length exchange agreements. You may not change your election more 
often than once every two years.
    (2)(i) If you sell or transfer your oil production to your 
affiliate, and that affiliate or another affiliate then sells the oil 
under an arm's-length contract, you may use either paragraph (a) of 
this section or Sec.  1206.102 to value your production for royalty 
purposes.
    (ii) When you elect under paragraph (c)(2)(i) of this section to 
use paragraph (a) of this section or Sec.  1206.102, you must make the 
same election for all of your production from the same unit, 
communitization agreement, or lease (if the lease is not part of a unit 
or communitization agreement) that your affiliates resell at arm's-
length. You may not change your election more often than once every two 
years.


Sec.  1206.102  How do I value oil not sold under an arm's-length 
contract?

    This section explains how to value oil that you may not value under 
Sec.  1206.101 or that you elect under Sec.  1206.101(c)(1) to value 
under this section, unless ONRR decides to value your oil under 
1206.105. First, determine if paragraph (a), (b), or (c) of this 
section applies to production from your lease, or if you may apply 
paragraph (d) or (e) of this section with ONRR's approval.
    (a) Production from leases in California or Alaska. Value is the 
average of the daily mean ANS spot prices published in any ONRR-
approved publication during the trading month most concurrent with the 
production month. For example, if the production month is June, 
calculate the average of the daily mean prices using the daily ANS spot 
prices published in the ONRR-approved publication for all of the 
business days in June.
    (1) To calculate the daily mean spot price, you must average the 
daily high and low prices for the month in the selected publication.
    (2) You must use only the days and corresponding spot prices for 
which such prices are published.
    (3) You must adjust the value for applicable location and quality 
differentials, and you may adjust it for transportation costs, under 
Sec.  1206.111.
    (4) After you select an ONRR-approved publication, you may not 
select a different publication more often than once every two years, 
unless the publication you use is no longer published or ONRR revokes 
its approval of the publication. If you must change publications, you 
must begin a new two-year period.
    (b) Production from leases in the Rocky Mountain Region. This 
paragraph provides methods and options for valuing your production 
under different factual situations. You must consistently apply 
paragraph (b)(2) or (3) of this section to value all of your production 
from the same unit, communitization agreement, or lease (if the lease 
or a portion of the lease is not part of a unit or communitization 
agreement) that you cannot value under Sec.  1206.101 or that you elect 
under Sec.  1206.101(c)(1) to value under this section.
    (1) You may elect to value your oil under either paragraph (b)(2) 
or (3) of this section. After you select either paragraph (b)(2) or (3) 
of this section, you may not change to the other method more often than 
once every two years, unless the method you have been using is no 
longer applicable and you must apply the other paragraph. If you change 
methods, you must begin a new two-year period.
    (2) Value is the volume-weighted average of the gross proceeds 
accruing to the seller under your or your affiliate's arm's-length 
contracts for the purchase or sale of production from the field or area 
during the production month.
    (i) The total volume purchased or sold under those contracts must 
exceed 50 percent of your and your affiliate's production from both 
Federal and non-Federal leases in the same field or area during that 
month.
    (ii) Before calculating the volume-weighted average, you must 
normalize the quality of the oil in your or your affiliate's arm's-
length purchases or sales to the same gravity as that of the oil 
produced from the lease.
    (3) Value is the NYMEX price (without the roll), adjusted for 
applicable location and quality differentials and transportation costs 
under Sec.  1206.113.
    (4) If you demonstrate to ONRR's satisfaction that paragraphs 
(b)(2) through (3) of this section result in an unreasonable value for 
your production as a result of circumstances regarding that production, 
ONRR's Director may establish an alternative valuation method.
    (c) Production from leases not located in California, Alaska, or 
the Rocky Mountain Region.
    (1) Value is the NYMEX price, plus the roll, adjusted for 
applicable location and quality differentials and transportation costs 
under Sec.  1206.113.
    (2) If ONRR's Director determines that the use of the roll no 
longer reflects prevailing industry practice in crude oil sales 
contracts or that the most common formula that industry uses to 
calculate the roll changes, ONRR may terminate

[[Page 62025]]

or modify the use of the roll under paragraph (c)(1) of this section at 
the end of each two-year period as of January 1, 2017, through a notice 
published in the Federal Register not later than 60 days before the end 
of the two-year period. ONRR will explain the rationale for terminating 
or modifying the use of the roll in this notice.
    (d) Unreasonable value. If ONRR determines that the NYMEX price or 
ANS spot price does not represent a reasonable royalty value in any 
particular case, ONRR may decide to value your oil under Sec.  
1206.105.
    (e) Production delivered to your refinery and the NYMEX price or 
ANS spot price is an unreasonable value. If ONRR determines that the 
NYMEX price or ANS spot price does not represent a reasonable royalty 
value in any particular case, ONRR may decide to value your oil under 
Sec.  1206.105.


Sec.  1206.103  What publications does ONRR approve?

    (a) ONRR will periodically publish on www.onrr.gov a list of ONRR-
approved publications for the NYMEX price and ANS spot price based on 
certain criteria including, but not limited to:
    (1) Publications buyers and sellers frequently use.
    (2) Publications frequently mentioned in purchase or sales 
contracts.
    (3) Publications that use adequate survey techniques, including 
development of estimates based on daily surveys of buyers and sellers 
of crude oil, and, for ANS spot prices, buyers and sellers of ANS crude 
oil.
    (4) Publications independent from ONRR, other lessors, and lessees.
    (b) Any publication may petition ONRR to be added to the list of 
acceptable publications.
    (c) ONRR will specify the tables that you must use in the 
acceptable publications.
    (d) ONRR may revoke its approval of a particular publication if we 
determine that the prices or differentials published in the publication 
do not accurately represent NYMEX prices or differentials or ANS spot 
market prices or differentials.


Sec.  1206.104  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report, and, if ONRR determines that your reported value is 
inconsistent with the requirements of this subpart, ONRR may direct you 
to use a different measure of royalty value or decide your value under 
Sec.  1206.105.
    (2) If ONRR directs you to use a different royalty value, you must 
either pay any additional royalties due, plus late payment interest 
calculated under Sec. Sec.  1218.54 and 1218.102 of this chapter), or 
report a credit for--or request a refund of--any overpaid royalties.
    (b) When the provisions in this subpart refer to gross proceeds, in 
conducting reviews and audits, ONRR will examine if your or your 
affiliate's contract reflects the total consideration actually 
transferred, either directly or indirectly, from the buyer to you or to 
your affiliate for the oil. If ONRR determines that a contract does not 
reflect the total consideration, ONRR may decide your value under Sec.  
1206.105.
    (c) ONRR may decide your value under Sec.  1206.105 if ONRR 
determines that the gross proceeds accruing to you or your affiliate 
under a contract do not reflect reasonable consideration because:
    (1) There is misconduct by or between the contracting parties; or
    (2) You have breached your duty to market the oil for the mutual 
benefit of yourself and the lessor by selling your oil at a value that 
is unreasonably low. ONRR may consider a sales price to be unreasonably 
low if it is 10 percent less than the lowest reasonable measures of 
market price including--but not limited to--index prices and prices 
reported to ONRR for like quality oil; or
    (3) ONRR cannot determine if you properly valued your oil under 
Sec.  1206.101 or Sec.  1206.102 for any reason including--but not 
limited to--your or your affiliate's failure to provide documents that 
ONRR requests under 30 CFR part 1212, subpart B.
    (d) You have the burden of demonstrating that your or your 
affiliate's contract is arm's-length.
    (e) ONRR may require you to certify that the provisions in your or 
your affiliate's contract include all of the consideration that the 
buyer paid to you or your affiliate, either directly or indirectly, for 
the oil.
    (f)(1) Absent contract revision or amendment, if you or your 
affiliate fail(s) to take proper or timely action to receive prices or 
benefits to which you or your affiliate are entitled, you must pay 
royalty based upon that obtainable price or benefit.
    (2) If you or your affiliate apply in a timely manner for a price 
increase or benefit allowed under your or your affiliate's contract, 
but the purchaser refuses and you or your affiliate take reasonable 
documented measures to force purchaser compliance, you will not owe 
additional royalties unless or until you or your affiliate receive 
additional monies or consideration resulting from the price increase. 
You may not construe this paragraph to permit you to avoid your royalty 
payment obligation in situations where a purchaser fails to pay, in 
whole or in part or in a timely manner, for a quantity of oil.
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing, and all parties to the contract 
must sign the contract, contract revisions, or amendments.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may determine your value under Sec.  
1206.105.
    (3) This provision applies notwithstanding any other provisions in 
this title 30 to the contrary.


Sec.  1206.105  How will ONRR determine the value of my oil for royalty 
purposes?

    If ONRR decides that we will value your oil for royalty purposes 
under Sec.  1206.104, or any other provision in this subpart, then we 
will determine value, for royalty purposes, by considering any 
information that we deem relevant, which may include, but is not 
limited to, the following:

(a) The value of like-quality oil in the same field or nearby fields or 
areas
(b) The value of like-quality oil from the refinery or area
(c) Public sources of price or market information that ONRR deems 
reliable
(d) Information available and reported to ONRR, including but not 
limited to on form ONRR-2014 and the Oil and Gas Operations Report 
(Form ONRR-4054)
(e) Costs of transportation or processing if ONRR determines that they 
are applicable
(f) Any information that ONRR deems relevant regarding the particular 
lease operation or the salability of the oil


Sec.  1206.106  What records must I keep to support my calculations of 
value under this subpart?

    If you determine the value of your oil under this subpart, you must 
retain all data relevant to the determination of royalty value.
    (a) You must show both of the following:
    (1) How you calculated the value that you reported, including all 
adjustments for location, quality, and transportation.
    (2) How you complied with these rules.
    (b) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.
    (c) ONRR may review and audit your data, and ONRR will direct you 
to use a different value if we determine that the reported value is 
inconsistent with the requirements of this subpart.

[[Page 62026]]

Sec.  1206.107  What are my responsibilities to place production into 
marketable condition and to market production?

    (a) You must place oil in marketable condition and market the oil 
for the mutual benefit of the lessee and the lessor at no cost to the 
Federal government.
    (b) If you use gross proceeds under an arm's-length contract in 
determining value, you must increase those gross proceeds to the extent 
that the purchaser, or any other person, provides certain services that 
the seller normally would be responsible to perform to place the oil in 
marketable condition or to market the oil.


Sec.  1206.108  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any oil produced. Your request must:
    (1) Be in writing;
    (2) Identify, specifically, all leases involved, all interest 
owners of those leases, the designee(s), and the operator(s) for those 
leases;
    (3) Completely explain all relevant facts; you must inform ONRR of 
any changes to relevant facts that occur before we respond to your 
request;
    (4) Include copies of all relevant documents;
    (5) Provide your analysis of the issue(s), including citations to 
all relevant precedents (including adverse precedents); and
    (6) Suggest your proposed valuation method.
    (b) In response to your request, ONRR may:
    (1) Request that the Assistant Secretary for Policy, Management and 
Budget issue a valuation determination;
    (2) Decide that ONRR will issue guidance; or
    (3) Inform you in writing that ONRR will not provide a 
determination or guidance. Situations in which ONRR typically will not 
provide any determination or guidance include, but are not limited to, 
the following:

(i) Requests for guidance on hypothetical situations
(ii) Matters that are the subject of pending litigation or 
administrative appeals

    (c)(1) A valuation determination that the Assistant Secretary for 
Policy, Management and Budget signs is binding on both you and ONRR 
until the Assistant Secretary modifies or rescinds it.
    (2) After the Assistant Secretary issues a valuation determination, 
you must make any adjustments to royalty payments that follow from the 
determination and, if you owe additional royalties, you must pay the 
additional royalties due, plus late payment interest calculated under 
Sec. Sec.  1218.54 and 1218.102 of this chapter.
    (3) A valuation determination that the Assistant Secretary signs is 
the final action of the Department and is subject to judicial review 
under 5 U.S.C. 701-706.
    (d) Guidance that ONRR issues is not binding on ONRR, delegated 
States, or you with respect to the specific situation addressed in the 
guidance.
    (1) Guidance and ONRR's decision whether or not to issue guidance 
or request an Assistant Secretary determination, or neither, under 
paragraph (b) of this section, are not appealable decisions or orders 
under 30 CFR part 1290.
    (2) If you receive an order requiring you to pay royalty on the 
same basis as the guidance, you may appeal that order under 30 CFR part 
1290.
    (e) ONRR or the Assistant Secretary may use any of the applicable 
valuation criteria in this subpart to provide guidance or to make a 
determination.
    (f) A change in an applicable statute or regulation on which ONRR 
or the Assistant Secretary based any determination or guidance takes 
precedence over the determination or guidance, regardless of whether 
ONRR or the Assistant Secretary modifies or rescinds the determination 
or guidance.
    (g) ONRR or the Assistant Secretary generally will not 
retroactively modify or rescind a valuation determination issued under 
paragraph (d) of this section, unless:
    (1) There was a misstatement or omission of material facts; or
    (2) The facts subsequently developed are materially different from 
the facts on which the guidance was based.
    (h) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.109.


Sec.  1206.109  Does ONRR protect information that I provide?

    (a) Certain information that you or your affiliate submit(s) to 
ONRR regarding valuation of oil, including transportation allowances, 
may be exempt from disclosure.
    (b) To the extent that applicable laws and regulations permit, ONRR 
will keep confidential any data that you or your affiliate submit(s) 
that is privileged, confidential, or otherwise exempt from disclosure.
    (c) You and others must submit all requests for information under 
the Freedom of Information Act regulations of the Department of the 
Interior at 43 CFR part 2.


Sec.  1206.110  What general transportation allowance requirements 
apply to me?

    (a) ONRR will allow a deduction for the reasonable, actual costs to 
transport oil from the lease to the point off of the lease under Sec.  
1206.110, Sec.  1206.111, or Sec.  1206.112, as applicable. You may not 
deduct transportation costs that you incur to move a particular volume 
of production to reduce royalties that you owe on production for which 
you did not incur those costs. This paragraph applies when:
    (1)(i) The movement to the sales point is not gathering;
    (ii) For oil produced on the OCS, the movement of oil from the 
wellhead to the first platform is not transportation; and
    (2) You value oil under Sec.  1206.101 based on a sale at a point 
off of the lease, unit, or communitized area where the oil is produced; 
or
    (3) You do not value your oil under Sec.  1206.102(a)(3) or (b)(3).
    (b) You must calculate the deduction for transportation costs based 
on your or your affiliate's cost of transporting each product through 
each individual transportation system. If your or your affiliate's 
transportation contract includes more than one liquid product, you must 
allocate costs consistently and equitably to each of the liquid 
products that are transported. Your allocation must use the same 
proportion as the ratio of the volume of each liquid product (excluding 
waste products with no value) to the volume of all liquid products 
(excluding waste products with no value).
    (1) You may not take an allowance for transporting lease production 
that is not royalty-bearing.
    (2) You may propose to ONRR a prospective cost allocation method 
based on the values of the liquid products transported. ONRR will 
approve the method if it is consistent with the purposes of the 
regulations in this subpart.
    (3) You may use your proposed procedure to calculate a 
transportation allowance beginning with the production month following 
the month when ONRR received your proposed procedure until ONRR accepts 
or rejects your cost allocation. If ONRR rejects your cost allocation, 
you must amend your form ONRR-2014 for the months that you used the 
rejected method and pay any additional royalty due, plus late payment 
interest.
    (c)(1) Where you or your affiliate transport(s) both gaseous and 
liquid products through the same transportation system, you must 
propose a cost allocation procedure to ONRR.

[[Page 62027]]

    (2) You may use your proposed procedure to calculate a 
transportation allowance until ONRR accepts or rejects your cost 
allocation. If ONRR rejects your cost allocation, you must amend your 
form ONRR-2014 for the months when you used the rejected method and pay 
any additional royalty and interest due.
    (3) You must submit your initial proposal, including all available 
data, within three months after you first claim the allocated 
deductions on form ONRR-2014.
    (d)(1) Your transportation allowance may not exceed 50 percent of 
the value of the oil, as determined under Sec.  1206.101 of this 
subpart.
    (2) If ONRR approved your request to take a transportation 
allowance in excess of the 50-percent limitation under former Sec.  
1206.109(c), that approval is terminated as of January 1, 2017.
    (e) You must express transportation allowances for oil as a dollar-
value equivalent. If your or your affiliate's payments for 
transportation under a contract are not on a dollar-per-unit basis, you 
must convert whatever consideration you or your affiliate are paid to a 
dollar-value equivalent.
    (f) ONRR may determine your transportation allowance under Sec.  
1206.105 because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the oil for the mutual benefit of yourself and the 
lessor by transporting your oil at a cost that is unreasonably high. We 
may consider a transportation allowance to be unreasonably high if it 
is 10 percent higher than the highest reasonable measures of 
transportation costs including, but not limited to, transportation 
allowances reported to ONRR and tariffs for gas, residue gas, or gas 
plant product transported through the same system; or
    (3) ONRR cannot determine if you properly calculated a 
transportation allowance under Sec.  1206.111 or Sec.  1206.112 for any 
reason, including, but not limited to, your or your affiliate's failure 
to provide documents that ONRR requests under 30 CFR part 1212, subpart 
B.
    (g) You do not need ONRR's approval before reporting a 
transportation allowance.


Sec.  1206.111  How do I determine a transportation allowance if I have 
an arm's-length transportation contract?

    (a)(1) If you or your affiliate incur transportation costs under an 
arm's-length transportation contract, you may claim a transportation 
allowance for the reasonable, actual costs incurred, as more fully 
explained in paragraph (b) of this section, except as provided in Sec.  
1206.110(f) and subject to the limitation in Sec.  1206.110(d).
    (2) You must be able to demonstrate that your or your affiliate's 
contract is at arm's-length.
    (3) You do not need ONRR's approval before reporting a 
transportation allowance for costs incurred under an arm's-length 
transportation contract.
    (b) Subject to the requirements of paragraph (c) of this section, 
you may include, but are not limited to, the following costs to 
determine your transportation allowance under paragraph (a) of this 
section; you may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section including, but 
not limited to:
    (1) The amount that you pay under your arm's-length transportation 
contract or tariff.
    (2) Fees paid (either in volume or in value) for actual or 
theoretical line losses.
    (3) Fees paid for administration of a quality bank.
    (4) Fees paid to a terminal operator for loading and unloading of 
crude oil into or from a vessel, vehicle, pipeline, or other 
conveyance.
    (5) Fees paid for short-term storage (30 days or less) incidental 
to transportation as a transporter requires.
    (6) Fees paid to pump oil to another carrier's system or vehicles 
as required under a tariff.
    (7) Transfer fees paid to a hub operator associated with physical 
movement of crude oil through the hub when you do not sell the oil at 
the hub. These fees do not include title transfer fees.
    (8) Payments for a volumetric deduction to cover shrinkage when 
high-gravity petroleum (generally in excess of 51 degrees API) is mixed 
with lower gravity crude oil for transportation.
    (9) Costs of securing a letter of credit, or other surety, that the 
pipeline requires you, as a shipper, to maintain.
    (10) Hurricane surcharges that you or your affiliate actually 
pay(s).
    (11) The cost of carrying on your books as inventory a volume of 
oil that the pipeline operator requires you, as a shipper, to maintain 
and that you do maintain in the line as line fill. You must calculate 
this cost as follows:
    (i) First, multiply the volume that the pipeline requires you to 
maintain--and that you do maintain--in the pipeline by the value of 
that volume for the current month calculated under Sec.  1206.101 or 
Sec.  1206.102, as applicable.
    (ii) Second, multiply the value calculated under paragraph 
(b)(11)(i) of this section by the monthly rate of return, calculated by 
dividing the rate of return specified in Sec.  1206.112(i)(3) by 12.
    (c) You may not include the following costs to determine your 
transportation allowance under paragraph (a) of this section:

(1) Fees paid for long-term storage (more than 30 days)
(2) Administrative, handling, and accounting fees associated with 
terminalling
(3) Title and terminal transfer fees
(4) Fees paid to track and match receipts and deliveries at a market 
center or to avoid paying title transfer fees
(5) Fees paid to brokers
(6) Fees paid to a scheduling service provider
(7) Internal costs, including salaries and related costs, rent/space 
costs, office equipment costs, legal fees, and other costs to schedule, 
nominate, and account for sale or movement of production
(8) Gauging fees

    (d) If you have no written contract for the arm's-length 
transportation of oil, then ONRR will determine your transportation 
allowance under Sec.  1206.105. You may not use this paragraph (d) if 
you or your affiliate perform(s) your own transportation.
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.108(a).
    (2) You may use that method to determine your allowance until ONRR 
issues its determination.


Sec.  1206.112  How do I determine a transportation allowance if I do 
not have an arm's-length transportation contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length transportation contract, including situations where you 
or your affiliate provide your own transportation services. You must 
calculate your transportation allowance based on your or your 
affiliate's reasonable, actual costs for transportation during the 
reporting period using the procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include the 
following:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (e), (f), and (g) of this section.
    (2) Overhead under paragraph (h) of this section.

[[Page 62028]]

    (3)(i) Depreciation and a return on undepreciated capital 
investment under paragraph (i)(1) of this section, or you may elect to 
use a cost equal to a return on the initial depreciable capital 
investment in the transportation system under paragraph (i)(2) of this 
section. After you have elected to use either method for a 
transportation system, you may not later elect to change to the other 
alternative without ONRR's approval. If ONRR accepts your request to 
change methods, you may use your changed method beginning with the 
production month following the month when ONRR received your change 
request.
    (ii) A return on the reasonable salvage value under paragraph 
(i)(1)(iii) of this section after you have depreciated the 
transportation system to its reasonable salvage value.
    (c) To the extent not included in costs identified in paragraphs 
(e) through (h) of this section.
    (1) If you or your affiliate incur(s) the following actual costs 
under your or your affiliate's non-arm's-length contract, you may 
include these costs in your calculations under this section:

(i) Fees paid to a non-affiliated terminal operator for loading and 
unloading of crude oil into or from a vessel, vehicle, pipeline, or 
other conveyance
(ii) Transfer fees paid to a hub operator associated with physical 
movement of crude oil through the hub when you do not sell the oil at 
the hub; these fees do not include title transfer fees
(iii) A volumetric deduction to cover shrinkage when high-gravity 
petroleum (generally in excess of 51 degrees API) is mixed with lower 
gravity crude oil for transportation
(iv) Fees paid to a non-affiliated quality bank administrator for 
administration of a quality bank
(v) The cost of carrying on your books as inventory a volume of oil 
that the pipeline operator requires you, as a shipper, to maintain--and 
that you do maintain--in the line as line fill; you must calculate this 
cost as follows:

    (A) First, multiply the volume that the pipeline requires you to 
maintain--and that you do maintain--in the pipeline by the value of 
that volume for the current month calculated under Sec.  1206.101 or 
Sec.  1206.102, as applicable.
    (B) Second, multiply the value calculated under paragraph 
(c)(1)(v)(A) of this section by the monthly rate of return, calculated 
by dividing the rate of return specified in paragraph (i)(3) of this 
section by 12.
    (2) You may not include in your transportation allowance:
    (i) Any of the costs identified under Sec.  1206.111(c); and/or
    (ii) Fees paid (either in volume or in value) for actual or 
theoretical line losses.
    (d) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (e) Allowable capital investment costs are generally those for 
depreciable fixed assets (including the costs of delivery and 
installation of capital equipment) that are an integral part of the 
transportation system.
    (f) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expense 
that you can document

    (g) Allowable maintenance expenses include the following:

(1) Maintenance of the transportation system
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (h) Overhead, directly attributable and allocable to the operation 
and maintenance of the transportation system, is an allowable expense. 
State and Federal income taxes and severance taxes and other fees, 
including royalties, are not allowable expenses.
    (i)(1) To calculate depreciation and a return on undepreciated 
capital investment, you may elect to use either a straight-line 
depreciation method (based on the life of equipment or on the life of 
the reserves that the transportation system services), or you may elect 
to use a unit-of-production method. After you make an election, you may 
not change methods without ONRR's approval. If ONRR accepts your 
request to change methods, you may use your changed method beginning 
with the production month following the month when ONRR received your 
change request.
    (i) A change in ownership of a transportation system will not alter 
the depreciation schedule that the original transporter/lessee 
established for purposes of the allowance calculation.
    (ii) You may depreciate a transportation system, with or without a 
change in ownership, only once.
    (iii)(A) To calculate the return on undepreciated capital 
investment, you may use an amount equal to the undepreciated capital 
investment in the transportation system multiplied by the rate of 
return that you determine under paragraph (i)(3) of this section.
    (B) After you have depreciated a transportation system to the 
reasonable salvage value, you may continue to include in the allowance 
calculation a cost equal to the reasonable salvage value multiplied by 
a rate of return under paragraph (i)(3) of this section.
    (2) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the transportation system multiplied by 
the rate of return determined under paragraph (i)(3) of this section. 
You may not include depreciation in your allowance.
    (3) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (i) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (ii) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.113  What adjustments and transportation allowances apply 
when I value oil production from my lease using NYMEX prices or ANS 
spot prices?

    This section applies when you use NYMEX prices or ANS spot prices 
to calculate the value of production under Sec.  1206.102. As specified 
in this section, you must adjust the NYMEX price to reflect the 
difference in value between your lease and Cushing, Oklahoma, or adjust 
the ANS spot price to reflect the difference in value between your 
lease and the appropriate ONRR-recognized market center at which the 
ANS spot price is published (for example, Long Beach, California, or 
San Francisco, California). Paragraph (a) of this section explains how 
you adjust the value between the lease and the market center, and 
paragraph (b) of this section explains how you adjust the value between 
the market center and Cushing when you use NYMEX prices. Paragraph (c) 
of this section explains how adjustments may be made for quality 
differentials that are not accounted for through exchange agreements. 
Paragraph (d) of this section gives some examples. References in this 
section to ``you'' include your affiliates, as applicable.
    (a) To adjust the value between the lease and the market center:

[[Page 62029]]

    (1)(i) For oil that you exchange at arm's-length between your lease 
and the market center (or between any intermediate points between those 
locations), you must calculate a lease-to-market center differential by 
the applicable location and quality differentials derived from your 
arm's-length exchange agreement applicable to production during the 
production month.
    (ii) For oil that you exchange between your lease and the market 
center (or between any intermediate points between those locations) 
under an exchange agreement that is not at arm's-length, you must 
obtain approval from ONRR for a location and quality differential. 
Until you obtain such approval, you may use the location and quality 
differential derived from that exchange agreement applicable to 
production during the production month. If ONRR prescribes a different 
differential, you must apply ONRR's differential to all periods for 
which you used your proposed differential. You must pay any additional 
royalties due resulting from using ONRR's differential, plus late 
payment interest from the original royalty due date, or you may report 
a credit for any overpaid royalties, plus interest, under 30 U.S.C. 
1721(h).
    (2) For oil that you transport between your lease and the market 
center (or between any intermediate points between those locations), 
you may take an allowance for the cost of transporting that oil between 
the relevant points, as determined under Sec.  1206.111 or 1206.112, as 
applicable.
    (3) If you transport or exchange at arm's-length (or both transport 
and exchange) at least 20 percent--but not all--of your oil produced 
from the lease to a market center, you must determine the adjustment 
between the lease and the market center for the oil that is not 
transported or exchanged (or both transported and exchanged) to or 
through a market center as follows:
    (i) Determine the volume-weighted average of the lease-to-market 
center adjustment calculated under paragraphs (a)(1) and (2) of this 
section for the oil that you do transport or exchange (or both 
transport and exchange) from your lease to a market center.
    (ii) Use that volume-weighted average lease-to-market center 
adjustment as the adjustment for the oil that you do not transport or 
exchange (or both transport and exchange) from your lease to a market 
center.
    (4) If you transport or exchange (or both transport and exchange) 
less than 20 percent of the crude oil produced from your lease between 
the lease and a market center, you must propose to ONRR an adjustment 
between the lease and the market center for the portion of the oil that 
you do not transport or exchange (or both transport and exchange) to a 
market center. Until you obtain such approval, you may use your 
proposed adjustment. If ONRR prescribes a different adjustment, you 
must apply ONRR's adjustment to all periods for which you used your 
proposed adjustment. You must pay any additional royalties due 
resulting from using ONRR's adjustment, plus late payment interest from 
the original royalty due date, or you may report a credit for any 
overpaid royalties plus interest under 30 U.S.C. 1721(h).
    (5) You may not both take a transportation allowance and use a 
location and quality adjustment or exchange differential for the same 
oil between the same points.
    (b) For oil that you value using NYMEX prices, you must adjust the 
value between the market center and Cushing, Oklahoma, as follows:
    (1) If you have arm's-length exchange agreements between the market 
center and Cushing under which you exchange to Cushing at least 20 
percent of all of the oil that you own at the market center during the 
production month, you must use the volume-weighted average of the 
location and quality differentials from those agreements as the 
adjustment between the market center and Cushing for all of the oil 
that you produce from the leases during that production month for which 
that market center is used.
    (2) If paragraph (b)(1) of this section does not apply, you must 
use the WTI differential published in an ONRR-approved publication for 
the market center nearest to your lease, for crude oil most similar in 
quality to your production, as the adjustment between the market center 
and Cushing. For example, for light sweet crude oil produced offshore 
of Louisiana, you must use the WTI differential for Light Louisiana 
Sweet crude oil at St. James, Louisiana. After you select an ONRR-
approved publication, you may not select a different publication more 
often than once every two years, unless the publication you use is no 
longer published or ONRR revokes its approval of the publication. If 
you must change publications, you must begin a new two-year period.
    (3) If neither paragraph (b)(1) nor (2) of this section applies, 
you may propose an alternative differential to ONRR. Until you obtain 
such approval, you may use your proposed differential. If ONRR 
prescribes a different differential, you must apply ONRR's differential 
to all periods for which you used your proposed differential. You must 
pay any additional royalties due resulting from using ONRR's 
differential, plus late payment interest from the original royalty due 
date, or you may report a credit for any overpaid royalties plus 
interest under 30 U.S.C. 1721(h).
    (c)(1) If you adjust for location and quality differentials or for 
transportation costs under paragraphs (a) and (b) of this section, you 
also must adjust the NYMEX price or ANS spot price for quality based on 
premiums or penalties determined by pipeline quality bank 
specifications at intermediate commingling points or at the market 
center if those points are downstream of the royalty measurement point 
that BSEE or BLM, as applicable, approve. You must make this adjustment 
only if, and to the extent that, such adjustments were not already 
included in the location and quality differentials determined from your 
arm's-length exchange agreements.
    (2) If the quality of your oil, as adjusted, is still different 
from the quality of the representative crude oil at the market center 
after making the quality adjustments described in paragraphs (a), (b), 
and (c)(1) of this section, you may make further gravity adjustments 
using posted price gravity tables. If quality bank adjustments do not 
incorporate or provide for adjustments for sulfur content, you may make 
sulfur adjustments, based on the quality of the representative crude 
oil at the market center, of 5.0 cents per one-tenth percent difference 
in sulfur content.
    (i) You may request prior ONRR approval to use a different 
adjustment.
    (ii) If ONRR approves your request to use a different quality 
adjustment, you may begin using that adjustment for the production 
month following the month when ONRR received your request.
    (d) The examples in this paragraph illustrate how to apply the 
requirement of this section.

    (1) Example 1. Assume that a Federal lessee produces crude oil 
from a lease near Artesia, New Mexico. Further, assume that the 
lessee transports the oil to Roswell, New Mexico, and then exchanges 
the oil to Midland, Texas. Assume that the lessee refines the oil 
received in exchange at Midland. Assume that the NYMEX price is 
$86.21/bbl, adjusted for the roll; that the WTI differential 
(Cushing to Midland) is-$2.27/bbl; that the lessee's exchange 
agreement between Roswell and Midland results in a location and 
quality differential of-$0.08/bbl; and that the lessee's actual cost 
of transporting the oil from Artesia to Roswell is $0.40/bbl. In 
this example, the royalty value of the oil is $86.21-$2.27-$0.08 -
$0.40 = $83.46/bbl.
    (2) Example 2. Assume the same facts as in the example in 
paragraph (d)(1) of this

[[Page 62030]]

section, except that the lessee transports and exchanges to Midland 
40 percent of the production from the lease near Artesia and 
transports the remaining 60 percent directly to its own refinery in 
Ohio. In this example, the 40 percent of the production would be 
valued at $83.46/bbl, as explained in the previous example. In this 
example, the other 60 percent also would be valued at $83.46/bbl.
    (3) Example 3. Assume that a Federal lessee produces crude oil 
from a lease near Bakersfield, California. Further, assume that the 
lessee transports the oil to Hynes Station and then exchanges the 
oil to Cushing, which it further exchanges with oil that it refines. 
Assume that the ANS spot price is $105.65/bbl and that the lessee's 
actual cost of transporting the oil from Bakersfield to Hynes 
Station is $0.28/bbl. The lessee must request approval from ONRR for 
a location and quality adjustment between Hynes Station and Long 
Beach. For example, the lessee likely would propose using the tariff 
on Line 63 from Hynes Station to Long Beach as the adjustment 
between those points. Assume that adjustment to be $0.72, including 
the sulfur and gravity bank adjustments, and that ONRR approves the 
lessee's request. In this example, the preliminary (because the 
location and quality adjustment is subject to ONRR's review) royalty 
value of the oil is $105.65 -$0.72 -$0.28 = $104.65/bbl. The fact 
that oil was exchanged to Cushing does not change the use of ANS 
spot prices for royalty valuation.


Sec.  1206.114  How will ONRR identify market centers?

    ONRR will monitor market activity and, if necessary, add to or 
modify the list of market centers that we publish to www.onrr.gov. ONRR 
will consider the following factors and conditions in specifying market 
centers:

(a) Points where ONRR-approved publications publish prices useful for 
index purposes
(b) Markets served
(c) Input from industry and others knowledgeable in crude oil marketing 
and transportation
(d) Simplification
(e) Other relevant matters


Sec.  1206.115  What are my reporting requirements under an arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on transportation costs that you or your 
affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
transportation contracts, production agreements, operating agreements, 
and related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.


Sec.  1206.116  What are my reporting requirements under a non-arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on transportation costs that you or your 
affiliate incur(s).
    (b)(1) For new non-arm's-length transportation facilities or 
arrangements, you must base your initial deduction on estimates of 
allowable transportation costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the transportation system as your estimate, if 
available. If such data is not available, you must use estimates based 
on data for similar transportation systems.
    (3) Section 1206.118 applies when you amend your report based on 
the actual costs.
    (c) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You may find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.
    (d) If you are authorized under Sec.  1206.112(j) to use an 
exception to the requirement to calculate your actual transportation 
costs, you must follow the reporting requirements of Sec.  1206.115.


Sec.  1206.117  What interest and penalties apply if I improperly 
report a transportation allowance?

    (a) If you deduct a transportation allowance on form ONRR-2014 that 
exceeds 50 percent of the value of the oil transported, you must pay 
additional royalties due, plus late payment interest calculated under 
Sec. Sec.  1218.54 and 1218.102 of this chapter, on the excess 
allowance amount taken from the date when that amount is taken to the 
date when you pay the additional royalties due.
    (b) If you improperly net a transportation allowance against the 
oil instead of reporting the allowance as a separate entry on form 
ONRR-2014, ONRR may assess a civil penalty under 30 CFR part 1241.


Sec.  1206.118  What reporting adjustments must I make for 
transportation allowances?

    (a) If your actual transportation allowance is less than the amount 
that you claimed on form ONRR-2014 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec. Sec.  1218.54 and 1218.102 of 
this chapter from the date when you took the deduction to the date when 
you repay the difference.
    (b) If the actual transportation allowance is greater than the 
amount that you claimed on form ONRR-2014 for any month during the 
period reported on the allowance form, you are entitled to a credit 
plus interest.


Sec.  1206.119  How do I determine royalty quantity and quality?

    (a) You must calculate royalties based on the quantity and quality 
of oil as measured at the point of royalty settlement that BLM or BSEE 
approves for onshore leases and OCS leases, respectively.
    (b) If you base the value of oil determined under this subpart on a 
quantity and/or quality that is different from the quantity and/or 
quality at the point of royalty settlement that BLM or BSEE approves, 
you must adjust that value for the differences in quantity and/or 
quality.
    (c) You may not make any deductions from the royalty volume or 
royalty value for actual or theoretical losses. Any actual loss that 
you sustain before the royalty settlement metering or measurement point 
is not subject to royalty if BLM or BSEE, whichever is appropriate, 
determines that such loss was unavoidable.
    (d) You must pay royalties on 100 percent of the volume measured at 
the approved point of royalty settlement. You may not claim a reduction 
in that measured volume for actual losses beyond the approved point of 
royalty settlement or for theoretical losses that you claim to have 
taken place either before or after the approved point of royalty 
settlement.

0
7. Revise subpart D to read as follows:
Subpart D--Federal Gas
1206.140 What is the purpose and scope of this subpart?
1206.141 How do I calculate royalty value for unprocessed gas that I 
or my affiliate sell(s) under an arm's-length or non-arm's-length 
contract?
1206.142 How do I calculate royalty value for processed gas that I 
or my affiliate sell(s) under an arm's-length or non-arm's-length 
contract?
1206.143 How will ONRR determine if my royalty payments are correct?
1206.144 How will ONRR determine the value of my gas for royalty 
purposes?
1206.145 What records must I keep in order to support my 
calculations of royalty under this subpart?
1206.146 What are my responsibilities to place production into 
marketable condition and to market production?
1206.147 When is an ONRR audit, review, reconciliation, monitoring, 
or other like process considered final?
1206.148 How do I request a valuation determination?
1206.149 Does ONRR protect information that I provide?
1206.150 How do I determine royalty quantity and quality?

[[Page 62031]]

1206.151 [Reserved]
1206.152 What general transportation allowance requirements apply to 
me?
1206.153 How do I determine a transportation allowance if I have an 
arm's-length transportation contract?
1206.154 How do I determine a transportation allowance if I have a 
non-arm's-length transportation contract?
1206.155 What are my reporting requirements under an arm's-length 
transportation contract?
1206.156 What are my reporting requirements under a non-arm's-length 
transportation contract?
1206.157 What interest and penalties apply if I improperly report a 
transportation allowance?
1206.158 What reporting adjustments must I make for transportation 
allowances?
1206.159 What general processing allowances requirements apply to 
me?
1206.160 How do I determine a processing allowance if I have an 
arm's-length processing contract?
1206.161 How do I determine a processing allowance if I have a non-
arm's-length processing contract?
1206.162 What are my reporting requirements under an arm's-length 
processing contract?
1206.163 What are my reporting requirements under a non-arm's-length 
processing contract?
1206.164 What interest and penalties apply if I improperly report a 
processing allowance?
1206.165 What reporting adjustments must I make for processing 
allowances?

Subpart D--Federal Gas


Sec.  1206.140  What is the purpose and scope of this subpart?

    (a) This subpart applies to all gas produced from Federal oil and 
gas leases onshore and on the Outer Continental Shelf (OCS). It 
explains how you, as a lessee, must calculate the value of production 
for royalty purposes consistent with mineral leasing laws, other 
applicable laws, and lease terms.
    (b) The terms ``you'' and ``your'' in this subpart refer to the 
lessee.
    (c) If the regulations in this subpart are inconsistent with a(an): 
Federal statute; settlement agreement between the United States and a 
lessee resulting from administrative or judicial litigation; written 
agreement between the lessee and ONRR's Director establishing a method 
to determine the value of production from any lease that ONRR expects 
would at least approximate the value established under this subpart; 
express provision of an oil and gas lease subject to this subpart, then 
the statute, settlement agreement, written agreement, or lease 
provision will govern to the extent of the inconsistency.
    (d) ONRR may audit and order you to adjust all royalty payments.


Sec.  1206.141  How do I calculate royalty value for unprocessed gas 
that I or my affiliate sell(s) under an arm's-length or non-arm's-
length contract?

    (a) This section applies to unprocessed gas. Unprocessed gas is:
    (1) Gas that is not processed;
    (2) Any gas that you are not required to value under Sec.  1206.142 
or that ONRR does not value under Sec.  1206.144; or
    (3) Any gas that you sell prior to processing based on a price per 
MMBtu or Mcf when the price is not based on the residue gas and gas 
plant products.
    (b) The value of gas under this section for royalty purposes is the 
gross proceeds accruing to you or your affiliate under the first arm's-
length contract less a transportation allowance determined under Sec.  
1206.152. This value does not apply if you exercise the option in 
paragraph (c) of this section or if ONRR decides to value your gas 
under Sec.  1206.144. You must use this paragraph (b) to value gas 
when:
    (1) You sell under an arm's-length contract;
    (2) You sell or transfer unprocessed gas to your affiliate or 
another person under a non-arm's-length contract and that affiliate or 
person, or an affiliate of either of them, then sells the gas under an 
arm's-length contract, unless you exercise the option provided in 
paragraph (c) of this section;
    (3) You, your affiliate, or another person sell(s) unprocessed gas 
produced from a lease under multiple arm's-length contracts, and that 
gas is valued under this paragraph. Unless you exercise the option 
provided in paragraph (c) of this section, the value of the gas is the 
volume-weighted average of the values, established under this 
paragraph, for each contract for the sale of gas produced from that 
lease; or
    (4) You or your affiliate sell(s) under a pipeline cash-out 
program. In that case, for over-delivered volumes within the tolerance 
under a pipeline cash-out program, the value is the price that the 
pipeline must pay you or your affiliate under the transportation 
contract. You must use the same value for volumes that exceed the over-
delivery tolerances, even if those volumes are subject to a lower price 
under the transportation contract.
    (c) If you do not sell under an arm's-length contract, you may 
elect to value your gas under this paragraph (c). You may not change 
your election more often than once every two years.
    (1)(i) If you can only transport gas to one index pricing point 
published in an ONRR-approved publication, available at www.onrr.gov, 
your value, for royalty purposes, is the highest reported monthly 
bidweek price for that index pricing point for the production month.
    (ii) If you can transport gas to more than one index pricing point 
published in an ONRR-approved publication available at www.onrr.gov, 
your value, for royalty purposes, is the highest reported monthly 
bidweek price for the index pricing points to which your gas could be 
transported for the production month, whether or not there are 
constraints for that production month.
    (iii) If there are sequential index pricing points on a pipeline, 
you must use the first index pricing point at or after your gas enters 
the pipeline.
    (iv) You must reduce the number calculated under paragraphs 
(c)(1)(i) and (c)(1)(ii) of this section by 5 percent for sales from 
the OCS Gulf of Mexico and by 10 percent for sales from all other 
areas, but not by less than 10 cents per MMBtu or more than 30 cents 
per MMBtu.
    (v) After you select an ONRR-approved publication available at 
www.onrr.gov, you may not select a different publication more often 
than once every two years.
    (vi) ONRR may exclude an individual index pricing point found in an 
ONRR-approved publication if ONRR determines that the index pricing 
point does not accurately reflect the values of production. ONRR will 
publish a list of excluded index pricing points available at 
www.onrr.gov.
    (2) You may not take any other deductions from the value calculated 
under this paragraph (c).
    (d) If some of your gas is used, lost, unaccounted for, or retained 
as a fee under the terms of a sales or service agreement, that gas will 
be valued for royalty purposes using the same royalty valuation method 
for valuing the rest of the gas that you do sell.
    (e) If you have no written contract for the sale of gas or no sale 
of gas subject to this section and:
    (1) There is an index pricing point for the gas, then you must 
value your gas under paragraph (c) of this section; or
    (2) There is not an index pricing point for the gas, then ONRR will 
decide the value under Sec.  1206.144.
    (i) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.148(a).
    (ii) You may use that method to determine value, for royalty 
purposes, until ONRR issues our decision.
    (iii) After ONRR issues our determination, you must make the 
adjustments under Sec.  1206.143(a)(2).

[[Page 62032]]

Sec.  1206.142  How do I calculate royalty value for processed gas that 
I or my affiliate sell(s) under an arm's-length or non-arm's-length 
contract?

    (a) This section applies to the valuation of processed gas, 
including but not limited to:
    (1) Gas that you or your affiliate do not sell, or otherwise 
dispose of, under an arm's-length contract prior to processing.
    (2) Gas where your or your affiliate's arm's-length contract for 
the sale of gas prior to processing provides for payment to be 
determined on the basis of the value of any products resulting from 
processing, including residue gas or natural gas liquids.
    (3) Gas that you or your affiliate process under an arm's-length 
keepwhole contract.
    (4) Gas where your or your affiliate's arm's-length contract 
includes a reservation of the right to process the gas, and you or your 
affiliate exercise(s) that right.
    (b) The value of gas subject to this section, for royalty purposes, 
is the combined value of the residue gas and all gas plant products 
that you determine under this section plus the value of any condensate 
recovered downstream of the point of royalty settlement without 
resorting to processing that you determine under subpart C of this part 
less applicable transportation and processing allowances that you 
determine under this subpart, unless you exercise the option provided 
in paragraph (d) of this section.
    (c) The value of residue gas or any gas plant product under this 
section for royalty purposes is the gross proceeds accruing to you or 
your affiliate under the first arm's-length contract. This value does 
not apply if you exercise the option provided in paragraph (d) of this 
section, or if ONRR decides to value your residue gas or any gas plant 
product under Sec.  1206.144. You must use this paragraph (c) to value 
residue gas or any gas plant product when:
    (1) You sell under an arm's-length contract;
    (2) You sell or transfer to your affiliate or another person under 
a non-arm's-length contract, and that affiliate or person, or another 
affiliate of either of them, then sells the residue gas or any gas 
plant product under an arm's-length contract, unless you exercise the 
option provided in paragraph (d) of this section;
    (3) You, your affiliate, or another person sell(s), under multiple 
arm's-length contracts, residue gas or any gas plant products recovered 
from gas produced from a lease that you value under this paragraph. In 
that case, unless you exercise the option provided in paragraph (d) of 
this section, because you sold non-arm's-length to your affiliate or 
another person, the value of the residue gas or any gas plant product 
is the volume-weighted average of the gross proceeds established under 
this paragraph for each arm's-length contract for the sale of residue 
gas or any gas plant products recovered from gas produced from that 
lease; or
    (4) You or your affiliate sell(s) under a pipeline cash-out 
program. In that case, for over-delivered volumes within the tolerance 
under a pipeline cash-out program, the value is the price that the 
pipeline must pay to you or your affiliate under the transportation 
contract. You must use the same value for volumes that exceed the over-
delivery tolerances, even if those volumes are subject to a lower price 
under the transportation contract.
    (d) If you do not sell under an arm's-length contract, you may 
elect to value your residue gas and NGLs under this paragraph (d). You 
may not change your election more often than once every two years.
    (1)(i) If you can only transport residue gas to one index pricing 
point published in an ONRR-approved publication available at 
www.onrr.gov, your value, for royalty purposes, is the highest reported 
monthly bidweek price for that index pricing point for the production 
month.
    (ii) If you can transport residue gas to more than one index 
pricing point published in an ONRR-approved publication available at 
www.onrr.gov, your value, for royalty purposes, is the highest reported 
monthly bidweek price for the index pricing points to which your gas 
could be transported for the production month, whether or not there are 
constraints, for the production month.
    (iii) If there are sequential index pricing points on a pipeline, 
you must use the first index pricing point at or after your residue gas 
enters the pipeline.
    (iv) You must reduce the number calculated under paragraphs 
(d)(1)(i) and (ii) of this section by 5 percent for sales from the OCS 
Gulf of Mexico and by 10 percent for sales from all other areas, but 
not by less than 10 cents per MMBtu or more than 30 cents per MMBtu.
    (v) After you select an ONRR-approved publication available at 
www.onrr.gov, you may not select a different publication more often 
than once every two years.
    (vi) ONRR may exclude an individual index pricing point found in an 
ONRR-approved publication if ONRR determines that the index pricing 
point does not accurately reflect the values of production. ONRR will 
publish a list of excluded index pricing points on www.onrr.gov.
    (2)(i) If you sell NGLs in an area with one or more ONRR-approved 
commercial price bulletins available at www.onrr.gov, you must choose 
one bulletin, and your value, for royalty purposes, is the monthly 
average price for that bulletin for the production month.
    (ii) You must reduce the number calculated under paragraph 
(d)(2)(i) of this section by the amounts that ONRR posts at 
www.onrr.gov for the geographic location of your lease. The methodology 
that ONRR will use to calculate the amounts is set forth in the 
preamble to this regulation. This methodology is binding on you and 
ONRR. ONRR will update the amounts periodically using this methodology.
    (iii) After you select an ONRR-approved commercial price bulletin 
available at www.onrr.gov, you may not select a different commercial 
price bulletin more often than once every two years.
    (3) You may not take any other deductions from the value calculated 
under this paragraph (d).
    (4) ONRR will post changes to any of the rates in this paragraph 
(d) on its website.
    (e) If some of your gas or gas plant products are used, lost, 
unaccounted for, or retained as a fee under the terms of a sales or 
service agreement, that gas will be valued for royalty purposes using 
the same royalty valuation method for valuing the rest of the gas or 
gas plant products that you do sell.
    (f) If you have no written contract for the sale of gas or no sale 
of gas subject to this section and:
    (1) There is an index pricing point or commercial price bulletin 
for the gas, then you must value your gas under paragraph (d) of this 
section.
    (2) There is not an index pricing point or commercial price 
bulletin for the gas, then ONRR will determine the value under Sec.  
1206.144.
    (i) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.148(a).
    (ii) You may use that method to determine value, for royalty 
purposes, until ONRR issues our decision.
    (iii) After ONRR issues our determination, you must make the 
adjustments under Sec.  1206.143(a)(2).


Sec.  1206.143  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report. If

[[Page 62033]]

ONRR determines that your reported value is inconsistent with the 
requirements of this subpart, ONRR will direct you to use a different 
measure of royalty value or decide your value under Sec.  1206.144.
    (2) If ONRR directs you to use a different royalty value, you must 
either pay any additional royalties due, plus late payment interest 
calculated under Sec. Sec.  1218.54 and 1218.102 of this chapter, or 
report a credit for, or request a refund of, any overpaid royalties.
    (b) When the provisions in this subpart refer to gross proceeds, in 
conducting reviews and audits, ONRR will examine if your or your 
affiliate's contract reflects the total consideration actually 
transferred, either directly or indirectly, from the buyer to you or 
your affiliate for the gas, residue gas, or gas plant products. If ONRR 
determines that a contract does not reflect the total consideration, 
ONRR may decide your value under Sec.  1206.144.
    (c) ONRR may decide your value under Sec.  1206.144 if ONRR 
determines that the gross proceeds accruing to you or your affiliate 
under a contract do not reflect reasonable consideration because:
    (1) There is misconduct by or between the contracting parties;
    (2) You have breached your duty to market the gas, residue gas, or 
gas plant products for the mutual benefit of yourself and the lessor by 
selling your gas, residue gas, or gas plant products at a value that is 
unreasonably low. ONRR may consider a sales price unreasonably low if 
it is 10 percent less than the lowest reasonable measures of market 
price, including, but not limited to, index prices and prices reported 
to ONRR for like-quality gas, residue gas, or gas plant products; or
    (3) ONRR cannot determine if you properly valued your gas, residue 
gas, or gas plant products under Sec.  1206.141 or Sec.  1206.142 for 
any reason, including, but not limited to, your or your affiliate's 
failure to provide documents that ONRR requests under 30 CFR part 1212, 
subpart B.
    (d) You have the burden of demonstrating that your or your 
affiliate's contract is arm's-length.
    (e) ONRR may require you to certify that the provisions in your or 
your affiliate's contract include(s) all of the consideration that the 
buyer paid to you or your affiliate, either directly or indirectly, for 
the gas, residue gas, or gas plant products.
    (f)(1) Absent contract revision or amendment, if you or your 
affiliate fail(s) to take proper or timely action to receive prices or 
benefits to which you or your affiliate are entitled, you must pay 
royalty based upon that obtainable price or benefit.
    (2) If you or your affiliate make timely application for a price 
increase or benefit allowed under your or your affiliate's contract, 
but the purchaser refuses, and you or your affiliate take reasonable, 
documented measures to force purchaser compliance, you will not owe 
additional royalties unless or until you or your affiliate receive 
additional monies or consideration resulting from the price increase. 
You may not construe this paragraph to permit you to avoid your royalty 
payment obligation in situations where a purchaser fails to pay, in 
whole or in part, or in a timely manner, for a quantity of gas, residue 
gas, or gas plant products.
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing, and all parties to the contract 
must sign the contract, contract revisions, or amendments.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may decide your value under Sec.  
1206.144.
    (3) This provision applies notwithstanding any other provisions in 
this title 30 to the contrary.


Sec.  1206.144  How will ONRR determine the value of my gas for royalty 
purposes?

    If ONRR decides to value your gas, residue gas, or gas plant 
products for royalty purposes under Sec.  1206.143, or any other 
provision in this subpart, then ONRR will determine the value, for 
royalty purposes, by considering any information that we deem relevant, 
which may include, but is not limited to:
    (a) The value of like-quality gas in the same field or nearby 
fields or areas.
    (b) The value of like-quality residue gas or gas plant products 
from the same plant or area.
    (c) Public sources of price or market information that ONRR deems 
to be reliable.
    (d) Information available or reported to ONRR, including, but not 
limited to, on form ONRR-2014 and form ONRR-4054.
    (e) Costs of transportation or processing if ONRR determines that 
they are applicable.
    (f) Any information that ONRR deems relevant regarding the 
particular lease operation or the salability of the gas.


Sec.  1206.145  What records must I keep in order to support my 
calculations of royalty under this subpart?

    If you value your gas under this subpart, you must retain all data 
relevant to the determination of the royalty that you paid. You can 
find recordkeeping requirements in parts 1207 and 1212 of this chapter.
    (a) You must show:
    (1) How you calculated the royalty value, including all allowable 
deductions; and
    (2) How you complied with this subpart.
    (b) Upon request, you must submit all data to ONRR. You must comply 
with any such requirement within the time that ONRR specifies.


Sec.  1206.146  What are my responsibilities to place production into 
marketable condition and to market production?

    (a) You must place gas, residue gas, and gas plant products in 
marketable condition and market the gas, residue gas, and gas plant 
products for the mutual benefit of the lessee and the lessor at no cost 
to the Federal government.
    (b) If you use gross proceeds under an arm's-length contract to 
determine royalty, you must increase those gross proceeds to the extent 
that the purchaser, or any other person, provides certain services that 
you normally are responsible to perform in order to place the gas, 
residue gas, and gas plant products in marketable condition or to 
market the gas.


Sec.  1206.147  When is an ONRR audit, review, reconciliation, 
monitoring, or other like process considered final?

    Notwithstanding any provision in these regulations to the contrary, 
ONRR does not consider any audit, review, reconciliation, monitoring, 
or other like process that results in ONRR re-determining royalty due, 
under this subpart, final or binding as against the Federal government 
or its beneficiaries unless ONRR chooses to, in writing, formally close 
the audit period.


Sec.  1206.148  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any gas produced. Your request must:
    (1) Be in writing;
    (2) Identify specifically all leases involved, all interest owners 
of those leases, the designee(s), and the operator(s) for those leases;
    (3) Completely explain all relevant facts. You must inform ONRR of 
any changes to relevant facts that occur before we respond to your 
request;
    (4) Include copies of all relevant documents;
    (5) Provide your analysis of the issue(s), including citations to 
all relevant precedents (including adverse precedents); and

[[Page 62034]]

    (6) Suggest your proposed valuation method.
    (b) In response to your request, ONRR may:
    (1) Request that the Assistant Secretary for Policy, Management and 
Budget issue a determination;
    (2) Decide that ONRR will issue guidance; or
    (3) Inform you in writing that ONRR will not provide a 
determination or guidance. Situations in which ONRR typically will not 
provide any determination or guidance include, but are not limited to:
    (i) Requests for guidance on hypothetical situations; or
    (ii) Matters that are the subject of pending litigation or 
administrative appeals.
    (c)(1) A determination that the Assistant Secretary for Policy, 
Management and Budget signs is binding on both you and ONRR until the 
Assistant Secretary modifies or rescinds it.
    (2) After the Assistant Secretary issues a determination, you must 
make any adjustments to royalty payments that follow from the 
determination, and, if you owe additional royalties, you must pay the 
additional royalties due, plus late payment interest calculated under 
Sec. Sec.  1218.54 and 1218.102 of this chapter.
    (3) A determination that the Assistant Secretary signs is the final 
action of the Department and is subject to judicial review under 5 
U.S.C. 701-706.
    (d) Guidance that ONRR issues is not binding on ONRR, delegated 
States, or you with respect to the specific situation addressed in the 
guidance.
    (1) Guidance and ONRR's decision whether or not to issue guidance 
or to request an Assistant Secretary determination, or neither, under 
paragraph (b) of this section, are not appealable decisions or orders 
under part 1290 of this title.
    (2) If you receive an order requiring you to pay royalty on the 
same basis as the guidance, you may appeal that order under part 1290 
of this title.
    (e) ONRR or the Assistant Secretary may use any of the applicable 
criteria in this subpart to provide guidance or to make a 
determination.
    (f) A change in an applicable statute or regulation on which ONRR 
based any guidance, or the Assistant Secretary based any determination, 
takes precedence over the determination or guidance after the effective 
date of the statute or regulation, regardless of whether ONRR or the 
Assistant Secretary modifies or rescinds the guidance or determination.
    (g) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.149.


Sec.  1206.149  Does ONRR protect information that I provide?

    (a) Certain information that you or your affiliate submit(s) to 
ONRR regarding royalties on gas, including deductions and allowances, 
may be exempt from disclosure.
    (b) To the extent that applicable laws and regulations permit, ONRR 
will keep confidential any data that you or your affiliate submit(s) 
that is privileged, confidential, or otherwise exempt from disclosure.
    (c) You and others must submit all requests for information under 
the Freedom of Information Act regulations of the Department of the 
Interior at 43 CFR part 2.


Sec.  1206.150  How do I determine royalty quantity and quality?

    (a)(1) You must calculate royalties based on the quantity and 
quality of unprocessed gas as measured at the point of royalty 
settlement that BLM or BSEE approves for onshore leases and OCS leases, 
respectively.
    (2) If you base the value of gas determined under this subpart on a 
quantity and/or quality that is different from the quantity and/or 
quality at the point of royalty settlement that BLM or BSEE approves, 
you must adjust that value for the differences in quantity and/or 
quality.
    (b)(1) For residue gas and gas plant products, the quantity basis 
for computing royalties due is the monthly net output of the plant, 
even though residue gas and/or gas plant products may be in temporary 
storage.
    (2) If you value residue gas and/or gas plant products determined 
under this subpart on a quantity and/or quality of residue gas and/or 
gas plant products that is different from that which is attributable to 
a lease determined under paragraph (c) of this section, you must adjust 
that value for the differences in quantity and/or quality.
    (c) You must determine the quantity of the residue gas and gas 
plant products attributable to a lease based on the following 
procedure:
    (1) When you derive the net output of the processing plant from gas 
obtained from only one lease, you must base the quantity of the residue 
gas and gas plant products for royalty computation on the net output of 
the plant.
    (2) When you derive the net output of a processing plant from gas 
obtained from more than one lease producing gas of uniform content, you 
must base the quantity of the residue gas and gas plant products 
allocable to each lease on the same proportions as the ratios obtained 
by dividing the amount of gas delivered to the plant from each lease by 
the total amount of gas delivered from all leases.
    (3) When the net output of a processing plant is derived from gas 
obtained from more than one lease producing gas of non-uniform content:
    (i) You must determine the quantity of the residue gas allocable to 
each lease by multiplying the amount of gas delivered to the plant from 
the lease by the residue gas content of the gas, and dividing that 
arithmetical product by the sum of the similar arithmetical products 
separately obtained for all leases from which gas is delivered to the 
plant, and then multiplying the net output of the residue gas by the 
arithmetic quotient obtained.
    (ii) You must determine the net output of gas plant products 
allocable to each lease by multiplying the amount of gas delivered to 
the plant from the lease by the gas plant product content of the gas, 
dividing that arithmetical product by the sum of the similar 
arithmetical products separately obtained for all leases from which gas 
is delivered to the plant, and then multiplying the net output of each 
gas plant product by the arithmetic quotient obtained.
    (4) You may request prior ONRR approval of other methods for 
determining the quantity of residue gas and gas plant products 
allocable to each lease. If approved, you must apply that method to all 
gas production from Federal leases that is processed in the same plant. 
You must do so beginning with the production month following the month 
when ONRR received your request to use another method.
    (d)(1) You may not make any deductions from the royalty volume or 
royalty value for actual or theoretical losses. Any actual loss of 
unprocessed gas that you sustain before the royalty settlement meter or 
measurement point is not subject to royalty if BLM or BSEE, whichever 
is appropriate, determines that such loss was unavoidable.
    (2) Except as provided in paragraph (d)(1) of this section and 
Sec.  1202.151(c), you must pay royalties due on 100 percent of the 
volume determined under paragraphs (a) through (c) of this section. You 
may not reduce that determined volume for actual losses after you have 
determined the quantity basis, or for theoretical losses that you claim 
to have taken place. Royalties are due on 100 percent of the value of 
the unprocessed gas, residue gas, and/or gas plant products, as 
provided in this subpart, less applicable allowances. You may not take 
any deduction from the value of the unprocessed gas, residue gas, and/
or gas plant products to

[[Page 62035]]

compensate for actual losses after you have determined the quantity 
basis or for theoretical losses that you claim to have taken place.


Sec.  1206.151  [Reserved]


Sec.  1206.152  What general transportation allowance requirements 
apply to me?

    (a) ONRR will allow a deduction for the reasonable, actual costs to 
transport residue gas, gas plant products, or unprocessed gas from the 
lease to the point off of the lease under Sec.  1206.153 or Sec.  
1206.154, as applicable. You may not deduct transportation costs that 
you incur when moving a particular volume of production to reduce 
royalties that you owe on production for which you did not incur those 
costs. This paragraph applies when:
    (1) You value unprocessed gas under Sec.  1206.141(b) or residue 
gas and gas plant products under Sec.  1206.142(b) based on a sale at a 
point off of the lease, unit, or communitized area where the residue 
gas, gas plant products, or unprocessed gas is produced; and
    (2)(i) The movement to the sales point is not gathering.
    (ii) For gas produced on the OCS, the movement of gas from the 
wellhead to the first platform is not transportation.
    (b) You must calculate the deduction for transportation costs based 
on your or your affiliate's cost of transporting each product through 
each individual transportation system. If your or your affiliate's 
transportation contract includes more than one product in a gaseous 
phase, you must allocate costs consistently and equitably to each of 
the products transported. Your allocation must use the same proportion 
as the ratio of the volume of each product (excluding waste products 
with no value) to the volume of all products in the gaseous phase 
(excluding waste products with no value).
    (1) You may not take an allowance for transporting lease production 
that is not royalty-bearing.
    (2) You may propose to ONRR a prospective cost allocation method 
based on the values of the products transported. ONRR will approve the 
method if it is consistent with the purposes of the regulations in this 
subpart.
    (3) You may use your proposed procedure to calculate a 
transportation allowance beginning with the production month following 
the month when ONRR received your proposed procedure until ONRR accepts 
or rejects your cost allocation. If ONRR rejects your cost allocation, 
you must amend your form ONRR-2014 for the months when you used the 
rejected method and pay any additional royalty due, plus late payment 
interest calculated under Sec. Sec.  1218.54 and 1218.102 of this 
chapter.
    (c)(1) Where you or your affiliate transport(s) both gaseous and 
liquid products through the same transportation system, you must 
propose a cost allocation procedure to ONRR.
    (2) You may use your proposed procedure to calculate a 
transportation allowance until ONRR accepts or rejects your cost 
allocation. If ONRR rejects your cost allocation, you must amend your 
form ONRR-2014 for the months when you used the rejected method and pay 
any additional royalty due, plus late payment interest calculated under 
Sec. Sec.  1218.54 and 1218.102 of this chapter.
    (3) You must submit your initial proposal, including all available 
data, within three months after you first claim the allocated 
deductions on form ONRR-2014.
    (d) If you value unprocessed gas under Sec.  1206.141(c) or residue 
gas and gas plant products under Sec.  1206.142 (d), you may not take a 
transportation allowance.
    (e)(1) Your transportation allowance may not exceed 50 percent of 
the value of the residue gas, gas plant products, or unprocessed gas as 
determined under Sec.  1206.141 or Sec.  1206.142 of this subpart.
    (2) If ONRR approved your request to take a transportation 
allowance in excess of the 50-percent limitation under former Sec.  
1206.156(c)(3), that approval is terminated as of January 1, 2017.
    (f) You must express transportation allowances for residue gas, gas 
plant products, or unprocessed gas as a dollar-value equivalent. If 
your or your affiliate's payments for transportation under a contract 
are not on a dollar-per-unit basis, you must convert whatever 
consideration that you or your affiliate are/is paid to a dollar-value 
equivalent.
    (g) ONRR may determine your transportation allowance under Sec.  
1206.144 because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length transportation contract does not 
reflect the reasonable cost of the transportation because you breached 
your duty to market the gas, residue gas, or gas plant products for the 
mutual benefit of yourself and the lessor by transporting your gas, 
residue gas, or gas plant products at a cost that is unreasonably high. 
We may consider a transportation allowance unreasonably high if it is 
10 percent higher than the highest reasonable measures of 
transportation costs, including, but not limited to, transportation 
allowances reported to ONRR and tariffs for gas, residue gas, or gas 
plant products transported through the same system; or
    (3) ONRR cannot determine if you properly calculated a 
transportation allowance under Sec.  1206.153 or Sec.  1206.154 for any 
reason, including, but not limited to, your or your affiliate's failure 
to provide documents that ONRR requests under 30 CFR part 1212, subpart 
B.
    (h) You do not need ONRR's approval before reporting a 
transportation allowance.


Sec.  1206.153  How do I determine a transportation allowance if I have 
an arm's-length transportation contract?

    (a)(1) If you or your affiliate incur transportation costs under an 
arm's-length transportation contract, you may claim a transportation 
allowance for the reasonable, actual costs incurred, as more fully 
explained in paragraph (b) of this section, except as provided in Sec.  
1206.152(g) and subject to the limitation in Sec.  1206.152(e).
    (2) You must be able to demonstrate that your or your affiliate's 
contract is arm's-length.
    (b) Subject to the requirements of paragraph (c) of this section, 
you may include, but are not limited to, the following costs to 
determine your transportation allowance under paragraph (a) of this 
section; you may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section:
    (1) Firm demand charges paid to pipelines. You may deduct firm 
demand charges or capacity reservation fees that you or your affiliate 
paid to a pipeline, including charges or fees for unused firm capacity 
that you or your affiliate have not sold before you report your 
allowance. If you or your affiliate receive(s) a payment from any party 
for release or sale of firm capacity after reporting a transportation 
allowance that included the cost of that unused firm capacity, or if 
you or your affiliate receive(s) a payment or credit from the pipeline 
for penalty refunds, rate case refunds, or other reasons, you must 
reduce the firm demand charge claimed on form ONRR-2014 by the amount 
of that payment. You must modify form ONRR-2014 by the amount received 
or credited for the affected reporting period and pay any resulting 
royalty due, plus late payment interest calculated under Sec. Sec.  
1218.54 and 1218.102 of this chapter.
    (2) Gas Supply Realignment (GSR) costs. The GSR costs result from a 
pipeline reforming or terminating

[[Page 62036]]

supply contracts with producers in order to implement the restructuring 
requirements of FERC Orders in 18 CFR part 284.
    (3) Commodity charges. The commodity charge allows the pipeline to 
recover the costs of providing service.
    (4) Wheeling costs. Hub operators charge a wheeling cost for 
transporting gas from one pipeline to either the same or another 
pipeline through a market center or hub. A hub is a connected manifold 
of pipelines through which a series of incoming pipelines are 
interconnected to a series of outgoing pipelines.
    (5) Gas Research Institute (GRI) fees. The GRI conducts research, 
development, and commercialization programs on natural gas-related 
topics for the benefit of the U.S. gas industry and gas customers. GRI 
fees are allowable, provided that such fees are mandatory in FERC-
approved tariffs.
    (6) Annual Charge Adjustment (ACA) fees. FERC charges these fees to 
pipelines to pay for its operating expenses.
    (7) Payments (either volumetric or in value) for actual or 
theoretical losses. Theoretical losses are not deductible in 
transportation arrangements unless the transportation allowance is 
based on arm's-length transportation rates charged under a FERC or 
State regulatory-approved tariff. If you or your affiliate receive(s) 
volumes or credit for line gain, you must reduce your transportation 
allowance accordingly and pay any resulting royalties plus late payment 
interest calculated under Sec. Sec.  1218.54 and 1218.102 of this 
chapter;
    (8) Temporary storage services. This includes short-duration 
storage services that market centers or hubs (commonly referred to as 
``parking'' or ``banking'') offer or other temporary storage services 
that pipeline transporters provide, whether actual or provided as a 
matter of accounting. Temporary storage is limited to 30 days or fewer.
    (9) Supplemental costs for compression, dehydration, and treatment 
of gas. ONRR allows these costs only if such services are required for 
transportation and exceed the services necessary to place production 
into marketable condition required under Sec.  1206.146 of this part.
    (10) Costs of surety. You may deduct the costs of securing a letter 
of credit, or other surety, that the pipeline requires you or your 
affiliate, as a shipper, to maintain under a transportation contract.
    (11) Hurricane surcharges. You may deduct hurricane surcharges that 
you or your affiliate actually pay(s).
    (c) You may not include the following costs to determine your 
transportation allowance under paragraph (a) of this section:
    (1) Fees or costs incurred for storage. This includes storing 
production in a storage facility, whether on or off of the lease, for 
more than 30 days.
    (2) Aggregator/marketer fees. This includes fees that you or your 
affiliate pay(s) to another person (including your affiliates) to 
market your gas, including purchasing and reselling the gas or finding 
or maintaining a market for the gas production.
    (3) Penalties that you or your affiliate incur(s) as a shipper. 
These penalties include, but are not limited to:
    (i) Over-delivery cash-out penalties. This includes the difference 
between the price that the pipeline pays to you or your affiliate for 
over-delivered volumes outside of the tolerances and the price that you 
or your affiliate receive(s) for over-delivered volumes within the 
tolerances.
    (ii) Scheduling penalties. This includes penalties that you or your 
affiliate incur(s) for differences between daily volumes delivered into 
the pipeline and volumes scheduled or nominated at a receipt or 
delivery point.
    (iii) Imbalance penalties. This includes penalties that you or your 
affiliate incur(s) (generally on a monthly basis) for differences 
between volumes delivered into the pipeline and volumes scheduled or 
nominated at a receipt or delivery point.
    (iv) Operational penalties. This includes fees that you or your 
affiliate incur(s) for violation of the pipeline's curtailment or 
operational orders issued to protect the operational integrity of the 
pipeline.
    (4) Intra-hub transfer fees. These are fees that you or your 
affiliate pay(s) to hub operators for administrative services (such as 
title transfer tracking) necessary to account for the sale of gas 
within a hub.
    (5) Fees paid to brokers. This includes fees that you or your 
affiliate pay(s) to parties who arrange marketing or transportation, if 
such fees are separately identified from aggregator/marketer fees.
    (6) Fees paid to scheduling service providers. This includes fees 
that you or your affiliate pay(s) to parties who provide scheduling 
services, if such fees are separately identified from aggregator/
marketer fees.
    (7) Internal costs. This includes salaries and related costs, rent/
space costs, office equipment costs, legal fees, and other costs to 
schedule, nominate, and account for the sale or movement of production.
    (8) Other non-allowable costs. Any cost you or your affiliate 
incur(s) for services that you are required to provide at no cost to 
the lessor, including, but not limited to, costs to place your gas, 
residue gas, or gas plant products into marketable condition disallowed 
under Sec.  1206.146 and costs of boosting residue gas disallowed under 
Sec.  1202.151(b).
    (d) If you have no written contract for the transportation of gas, 
then ONRR will determine your transportation allowance under Sec.  
1206.144. You may not use this paragraph (d) if you or your affiliate 
perform(s) your own transportation.
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.148(a).
    (2) You may use that method to determine your allowance until ONRR 
issues its determination.


Sec.  1206.154  How do I determine a transportation allowance if I have 
a non-arm's-length transportation contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length transportation contract, including situations where you 
or your affiliate provide your own transportation services. You must 
calculate your transportation allowance based on your or your 
affiliate's reasonable, actual costs for transportation during the 
reporting period using the procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (e), (f), and (g) of this section.
    (2) Overhead under paragraph (h) of this section.
    (3) Depreciation and a return on undepreciated capital investment 
under paragraph (i)(1) of this section, or you may elect to use a cost 
equal to a return on the initial depreciable capital investment in the 
transportation system under paragraph (i)(2) of this section. After you 
have elected to use either method for a transportation system, you may 
not later elect to change to the other alternative without ONRR's 
approval. If ONRR accepts your request to change methods, you may use 
your changed method beginning with the production month following the 
month when ONRR received your change request.
    (4) A return on the reasonable salvage value under paragraph 
(i)(1)(iii) of this section, after you have depreciated the 
transportation system to its reasonable salvage value.
    (c)(1) To the extent not included in costs identified in paragraphs 
(e) through (g) of this section, if you or your

[[Page 62037]]

affiliate incur(s) the actual transportation costs listed under Sec.  
1206.153(b)(2), (5), and (6) of this subpart under your or your 
affiliate's non-arm's-length contract, you may include those costs in 
your calculations under this section. You may not include any of the 
other costs identified under Sec.  1206.153(b).
    (2) You may not include in your calculations under this section any 
of the non-allowable costs listed under Sec.  1206.153(c).
    (d) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (e) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment) that are an integral part of the transportation 
system.
    (f) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expense 
that you can document

    (g) Allowable maintenance expenses include the following:

(i) Maintenance of the transportation system
(ii) Maintenance of equipment
(iii) Maintenance labor
(iv) Other directly allocable and attributable maintenance expenses 
that you can document

    (h) Overhead, directly attributable and allocable to the operation 
and maintenance of the transportation system, is an allowable expense. 
State and Federal income taxes and severance taxes and other fees, 
including royalties, are not allowable expenses.
    (i)(1) To calculate depreciation and a return on undepreciated 
capital investment, you may elect to use either a straight-line 
depreciation method based on the life of equipment or on the life of 
the reserves that the transportation system services, or you may elect 
to use a unit-of-production method. After you make an election, you may 
not change methods without ONRR's approval. If ONRR accepts your 
request to change methods, you may use your changed method beginning 
with the production month following the month when ONRR received your 
change request.
    (i) A change in ownership of a transportation system will not alter 
the depreciation schedule that the original transporter/lessee 
established for the purposes of the allowance calculation.
    (ii) You may depreciate a transportation system only once with or 
without a change in ownership.
    (iii)(A) To calculate the return on undepreciated capital 
investment, you may use an amount equal to the undepreciated capital 
investment in the transportation system multiplied by the rate of 
return that you determine under paragraph (i)(3) of this section.
    (B) After you have depreciated a transportation system to the 
reasonable salvage value, you may continue to include in the allowance 
calculation a cost equal to the reasonable salvage value multiplied by 
a rate of return under paragraph (i)(3) of this section.
    (2) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the transportation system multiplied by 
the rate of return determined under paragraph (i)(3) of this section. 
You may not include depreciation in your allowance.
    (3) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (i) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (ii) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.155  What are my reporting requirements under an arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on transportation costs that you or your 
affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
transportation contracts, production agreements, operating agreements, 
and related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.


Sec.  1206.156  What are my reporting requirements under a non-arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on non-arm's-length transportation costs that you 
or your affiliate incur(s).
    (b)(1) For new non-arm's-length transportation facilities or 
arrangements, you must base your initial deduction on estimates of 
allowable transportation costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the transportation system as your estimate. If such 
data is not available, you must use estimates based on data for similar 
transportation systems.
    (3) Section 1206.158 applies when you amend your report based on 
your actual costs.
    (c) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.


Sec.  1206.157  What interest and penalties apply if I improperly 
report a transportation allowance?

    (a)(1) If ONRR determines that you took an unauthorized 
transportation allowance, then you must pay any additional royalties 
due, plus late payment interest calculated under Sec. Sec.  1218.54 and 
1218.102 of this chapter.
    (2) If you understated your transportation allowance, you may be 
entitled to a credit, with interest.
    (b) If you deduct a transportation allowance on form ONRR-2014 that 
exceeds 50 percent of the value of the gas, residue gas, or gas plant 
products transported, you must pay late payment interest on the excess 
allowance amount taken from the date when that amount is taken until 
the date when you pay the additional royalties due.
    (c) If you improperly net a transportation allowance against the 
sales value of the residue gas, gas plant products, or unprocessed gas 
instead of reporting the allowance as a separate entry on form ONRR-
2014, ONRR may assess a civil penalty under 30 CFR part 1241.


Sec.  1206.158  What reporting adjustments must I make for 
transportation allowances?

    (a) If your actual transportation allowance is less than the amount 
that you claimed on form ONRR-2014 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec. Sec.  1218.54 and 1218.102 of 
this chapter from the date when you took the deduction to the date when 
you repay the difference.
    (b) If the actual transportation allowance is greater than the 
amount that you claimed on form ONRR-2014 for any month during the 
period reported on the allowance form, you are entitled to a credit, 
plus interest.

[[Page 62038]]

Sec.  1206.159  What general processing allowances requirements apply 
to me?

    (a)(1) When you value any gas plant product under Sec.  1206.142(c) 
of this subpart, you may deduct from the value the reasonable, actual 
costs of processing.
    (2) You do not need ONRR's approval before reporting a processing 
allowance.
    (b) You must allocate processing costs among the gas plant 
products. You must determine a separate processing allowance for each 
gas plant product and processing plant relationship. ONRR considers 
NGLs to be one product.
    (c)(1) You may not apply the processing allowance against the value 
of the residue gas.
    (2) The processing allowance deduction on the basis of an 
individual product may not exceed 66\2/3\ percent of the value of each 
gas plant product determined under Sec.  1206.142(c). Before you 
calculate the 66\2/3\-percent limit, you must first reduce the value 
for any transportation allowances related to post-processing 
transportation authorized under Sec.  1206.152.
    (3) If ONRR approved your request to take a processing allowance in 
excess of the limitation in paragraph (c)(2) of this section under 
former Sec.  1206.158(c)(3), that approval is terminated as of January 
1, 2017.
    (4) If ONRR approved your request to take an extraordinary cost 
processing allowance under former Sec.  1206.158(d), ONRR terminates 
that approval as of January 1, 2017.
    (d)(1) ONRR will not allow a processing cost deduction for the 
costs of placing lease products in marketable condition, including 
dehydration, separation, compression, or storage, even if those 
functions are performed off the lease or at a processing plant.
    (2) Where gas is processed for the removal of acid gases, commonly 
referred to as ``sweetening,'' ONRR will not allow processing cost 
deductions for such costs unless the acid gases removed are further 
processed into a gas plant product.
    (A) In such event, you are eligible for a processing allowance 
determined under this subpart.
    (B) ONRR will not grant any processing allowance for processing 
lease production that is not royalty bearing.
    (e) ONRR may determine your processing allowance under Sec.  
1206.144 because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length processing contract does not 
reflect the reasonable cost of the processing because you breached your 
duty to market the gas, residue gas, or gas plant products for the 
mutual benefit of yourself and the lessor by processing your gas, 
residue gas, or gas plant products at a cost that is unreasonably high. 
We may consider a processing allowance unreasonably high if it is 10 
percent higher than the highest reasonable measures of processing 
costs, including, but not limited to, processing allowances reported to 
ONRR; or
    (3) ONRR cannot determine if you properly calculated a processing 
allowance under Sec.  1206.160 or Sec.  1206.161 for any reason, 
including, but not limited to, your or your affiliate's failure to 
provide documents that ONRR requests under 30 CFR part 1212, subpart B.


Sec.  1206.160  How do I determine a processing allowance if I have an 
arm's-length processing contract?

    (a)(1) If you or your affiliate incur processing costs under an 
arm's-length processing contract, you may claim a processing allowance 
for the reasonable, actual costs incurred, as more fully explained in 
paragraph (b) of this section, except as provided in paragraphs 
(a)(3)(i) and (a)(3)(ii) of this section and subject to the limitation 
in Sec.  1206.159(c)(2).
    (2) You must be able to demonstrate that your or your affiliate's 
contract is arm's-length.
    (b)(1) If your or your affiliate's arm's-length processing contract 
includes more than one gas plant product, and you can determine the 
processing costs for each product based on the contract, then you must 
determine the processing costs for each gas plant product under the 
contract.
    (2) If your or your affiliate's arm's-length processing contract 
includes more than one gas plant product, and you cannot determine the 
processing costs attributable to each product from the contract, you 
must propose an allocation procedure to ONRR.
    (i) You may use your proposed allocation procedure until ONRR 
issues its determination.
    (ii) You must submit all relevant data to support your proposal.
    (iii) ONRR will determine the processing allowance based upon your 
proposal and any additional information that ONRR deems necessary.
    (iv) You must submit the allocation proposal within three months of 
claiming the allocated deduction on form ONRR-2014.
    (3) You may not take an allowance for the costs of processing lease 
production that is not royalty-bearing.
    (4) If your or your affiliate's payments for processing under an 
arm's-length contract are not based on a dollar-per-unit basis, you 
must convert whatever consideration that you or your affiliate paid to 
a dollar-value equivalent.
    (c) If you have no written contract for the arm's-length processing 
of gas, then ONRR will determine your processing allowance under Sec.  
1206.144. You may not use this paragraph (c) if you or your affiliate 
perform(s) your own processing.
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.148(a).
    (2) You may use that method to determine your allowance until ONRR 
issues a determination.


Sec.  1206.161  How do I determine a processing allowance if I have a 
non-arm's-length processing contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length processing contract, including situations where you or 
your affiliate provide your own processing services. You must calculate 
your processing allowance based on your or your affiliate's reasonable, 
actual costs for processing during the reporting period using the 
procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (d), (e), and (f) of this section.
    (2) Overhead under paragraph (g) of this section.
    (3) Depreciation and a return on undepreciated capital investment 
in accordance with paragraph (h)(1) of this section, or you may elect 
to use a cost equal to the initial depreciable capital investment in 
the processing plant under paragraph (h)(2) of this section. After you 
have elected to use either method for a processing plant, you may not 
later elect to change to the other alternative without ONRR's approval. 
If ONRR accepts your request to change methods, you may use your 
changed method beginning with the production month following the month 
when ONRR received your change request.
    (4) A return on the reasonable salvage value under paragraph 
(h)(1)(iii) of this section, after you have depreciated the processing 
plant to its reasonable salvage value.
    (c) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (d) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment), which are an integral part of the processing 
plant.

[[Page 62039]]

    (e) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expense 
that you can document

    (f) Allowable maintenance expenses may include the following:

(1) Maintenance of the processing plant
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (g) Overhead, directly attributable and allocable to the operation 
and maintenance of the processing plant, is an allowable expense. State 
and Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (h)(1) To calculate depreciation and a return on undepreciated 
capital investment, you may elect to use either a straight-line 
depreciation method based on the life of equipment or on the life of 
the reserves that the processing plant services, or you may elect to 
use a unit-of-production method. After you make an election, you may 
not change methods without ONRR's approval. If ONRR accepts your 
request to change methods, you may use your changed method beginning 
with the production month following the month when ONRR received your 
change request.
    (i) A change in ownership of a processing plant will not alter the 
depreciation schedule that the original processor/lessee established 
for purposes of the allowance calculation.
    (ii) You may depreciate a processing plant only once with or 
without a change in ownership.
    (iii)(A) To calculate a return on undepreciated capital investment, 
you may use an amount equal to the undepreciated capital investment in 
the processing plant multiplied by the rate of return that you 
determine under paragraph (h)(3) of this section.
    (B) After you have depreciated a processing plant to its reasonable 
salvage value, you may continue to include in the allowance calculation 
a cost equal to the reasonable salvage value multiplied by a rate of 
return under paragraph (h)(3) of this section.
    (2) You may use as a cost an amount equal to the allowable initial 
capital investment in the processing plant multiplied by the rate of 
return determined under paragraph (h)(3) of this section. You may not 
include depreciation in your allowance.
    (3) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (i) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (ii) You must re-determine the rate at the beginning of each 
subsequent calendar year.
    (i)(1) You must determine the processing allowance for each gas 
plant product based on your or your affiliate's reasonable and actual 
cost of processing the gas. You must base your allocation of costs to 
each gas plant product upon generally accepted accounting principles.
    (2) You may not take an allowance for processing lease production 
that is not royalty-bearing.
    (j) You may apply for an exception from the requirement to 
calculate actual costs under paragraphs (a) and (b) of this section.
    (1) ONRR will grant the exception if:
    (i) You have or your affiliate has arm's-length contracts for 
processing other gas production at the same processing plant; and
    (ii) At least 50 percent of the gas processed annually at the plant 
is processed under arm's-length processing contracts.
    (2) If ONRR grants the exception, you must use as your processing 
allowance the volume-weighted average prices charged to other persons 
under arm's-length contracts for processing at the same plant.


Sec.  1206.162  What are my reporting requirements under an arm's-
length processing contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on arm's-length processing costs that you or your 
affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
processing contracts, production agreements, operating agreements, and 
related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.


Sec.  1206.163  What are my reporting requirements under a non-arm's-
length processing contract?

    (a) You must use a separate entry on form ONRR-2014 to notify ONRR 
of an allowance based on non-arm's-length processing costs that you or 
your affiliate incur(s).
    (b)(1) For new non-arm's-length processing facilities or 
arrangements, you must base your initial deduction on estimates of 
allowable gas processing costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the processing plant as your estimate, if 
available. If such data is not available, you must use estimates based 
on data for similar processing plants.
    (3) Section 1206.165 applies when you amend your report based on 
your actual costs.
    (c) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.
    (d) If you are authorized under Sec.  1206.161(j) to use an 
exception to the requirement to calculate your actual processing costs, 
you must follow the reporting requirements of Sec.  1206.162.


Sec.  1206.164  What interest and penalties apply if I improperly 
report a processing allowance?

    (a)(1) If ONRR determines that you took an unauthorized processing 
allowance, then you must pay any additional royalties due, plus late 
payment interest calculated under Sec. Sec.  1218.54 and 1218.102 of 
this chapter.
    (2) If you understated your processing allowance, you may be 
entitled to a credit, with interest.
    (b) If you deduct a processing allowance on form ONRR-2014 that 
exceeds 66\2/3\ percent of the value of a gas plant product, you must 
pay late payment interest on the excess allowance amount taken from the 
date when that amount is taken until the date when you pay the 
additional royalties due.
    (c) If you improperly net a processing allowance against the sales 
value of a gas plant product instead of reporting the allowance as a 
separate entry on form ONRR-2014, ONRR may assess a civil penalty under 
30 CFR part 1241.


Sec.  1206.165  What reporting adjustments must I make for processing 
allowances?

    (a) If your actual processing allowance is less than the amount 
that you claimed on form ONRR-2014 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec. Sec.  1218.54 and 1218.102 of 
this chapter from the date when you took the deduction to the date when 
you repay the difference.
    (b) If the actual processing allowance is greater than the amount 
that you

[[Page 62040]]

claimed on form ONRR-2014 for any month during the period reported on 
the allowance form, you are entitled to a credit, plus interest.

0
8. Revise subpart F to read as follows:
Subpart F--Federal Coal
1206.250 What is the purpose and scope of this subpart?
1206.251 How do I determine royalty quantity and quality?
1206.252 How do I calculate royalty value for coal that I or my 
affiliate sell(s) under an arm's-length or non-arm's-length 
contract?
1206.253 How will ONRR determine if my royalty payments are correct?
1206.254 How will ONRR determine the value of my coal for royalty 
purposes?
1206.255 What records must I keep in order to support my 
calculations of royalty under this subpart?
1206.256 What are my responsibilities to place production into 
marketable condition and to market production?
1206.257 When is an ONRR audit, review, reconciliation, monitoring, 
or other like process considered final?
1206.258 How do I request a valuation determination?
1206.259 Does ONRR protect information that I provide?
1206.260 What general transportation allowance requirements apply to 
me?
1206.261 How do I determine a transportation allowance if I have an 
arm's-length transportation contract or no written arm's-length 
contract?
1206.262 How do I determine a transportation allowance if I do not 
have an arm's-length transportation contract?
1206.263 What are my reporting requirements under an arm's-length 
transportation contract?
1206.264 What are my reporting requirements under a non-arm's-length 
transportation contract?
1206.265 What interest and penalties apply if I improperly report a 
transportation allowance?
1206.266 What reporting adjustments must I make for transportation 
allowances?
1206.267 What general washing allowance requirements apply to me?
1206.268 How do I determine washing allowances if I have an arm's-
length washing contract or no written arm's-length contract?
1206.269 How do I determine washing allowances if I do not have an 
arm's-length washing contract?
1206.270 What are my reporting requirements under an arm's-length 
washing contract?
1206.271 What are my reporting requirements under a non-arm's-length 
washing contract?
1206.272 What interest and penalties apply if I improperly report a 
washing allowance?
1206.273 What reporting adjustments must I make for washing 
allowances?

Subpart F--Federal Coal


Sec.  1206.250  What is the purpose and scope of this subpart?

    (a) This subpart applies to all coal produced from Federal coal 
leases. It explains how you, as the lessee, must calculate the value of 
production for royalty purposes consistent with the mineral leasing 
laws, other applicable laws, and lease terms.
    (b) The terms ``you'' and ``your'' in this subpart refer to the 
lessee.
    (c) If the regulations in this subpart are inconsistent with a(an): 
Federal statute; settlement agreement between the United States and a 
lessee resulting from administrative or judicial litigation; written 
agreement between the lessee and ONRR's Director establishing a method 
to determine the value of production from any lease that ONRR expects, 
at least, would approximate the value established under this subpart; 
or express provision of a coal lease subject to this subpart, then the 
statute, settlement agreement, written agreement, or lease provision 
will govern to the extent of the inconsistency.
    (d) ONRR may audit and order you to adjust all royalty payments.


Sec.  1206.251  How do I determine royalty quantity and quality?

    (a) You must calculate royalties based on the quantity and quality 
of coal at the royalty measurement point that ONRR and BLM jointly 
determine.
    (b) You must measure coal in short tons using the methods that BLM 
prescribes for Federal coal leases under 43 CFR part 3000. You must 
report coal quantity on appropriate forms required in 30 CFR part 
1210--Forms and Reports.
    (c)(1) You are not required to pay royalties on coal that you 
produce and add to stockpiles or inventory until you use, sell, or 
otherwise finally dispose of such coal.
    (2) ONRR may request that BLM require you to increase your lease 
bond if BLM determines that stockpiles or inventory are excessive such 
that they increase the risk of resource degradation.
    (d) You must pay royalty at the rate specified in your lease at the 
time when you use, sell, or otherwise finally dispose of the coal.
    (e) You must allocate washed coal by attributing the washed coal to 
the leases from which it was extracted.
    (1) If the wash plant washes coal from only one lease, the quantity 
of washed coal allocable to the lease is the total output of washed 
coal from the plant.
    (2) If the wash plant washes coal from more than one lease, you 
must determine the tonnage of washed coal attributable to each lease 
by:
    (i) First, calculating the input ratio of washed coal allocable to 
each lease by dividing the tonnage of coal input to the wash plant from 
each lease by the total tonnage of coal input to the wash plant from 
all leases.
    (ii) Second, multiplying the input ratio derived under paragraph 
(e)(2)(i) of this section by the tonnage of total output of washed coal 
from the plant.


Sec.  1206.252  How do I calculate royalty value for coal that I or my 
affiliate sell(s) under an arm's-length or non-arm's-length contract?

    (a) The value of coal under this section for royalty purposes is 
the gross proceeds accruing to you or your affiliate under the first 
arm's-length contract, less an applicable transportation allowance 
determined under Sec. Sec.  1206.260 through 1206.262 and washing 
allowance under Sec. Sec.  1206.267 through 1206.269. You must use this 
paragraph (a) to value coal when:
    (1) You sell under an arm's-length contract; or
    (2) You sell or transfer to your affiliate or another person under 
a non-arm's-length contract, and that affiliate or person, or another 
affiliate of either of them, then sells the coal under an arm's-length 
contract.
    (b) If you have no contract for the sale of coal subject to this 
section because you or your affiliate used the coal in a power plant 
that you or your affiliate own(s) for the generation and sale of 
electricity, one of the following applies:
    (1) You or your affiliate sell(s) the electricity, then the value 
of the coal subject to this section, for royalty purposes, is the gross 
proceeds accruing to you for the power plant's arm's-length sales of 
the electricity less applicable transportation and washing deductions 
determined under Sec. Sec.  1206.260 through 1206.262 and Sec. Sec.  
1206.267 through 1206.269 of this subpart and, if applicable, 
transmission and generation deductions determined under Sec. Sec.  
1206.353 and 1206.354 of subpart H.
    (2) You or your affiliate do(es) not sell the electricity at arm's-
length (for example you or your affiliate deliver(s) the electricity 
directly to the grid), then ONRR will determine the value of the coal 
under Sec.  1206.254.
    (i) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.258(a).
    (ii) You may use that method to determine value, for royalty 
purposes, until ONRR issues a determination.

[[Page 62041]]

    (iii) After ONRR issues a determination, you must make the 
adjustments under Sec.  1206.253(a)(2).
    (c) If you are a coal cooperative, or a member of a coal 
cooperative, one of the following applies:
    (1) You sell or transfer coal to another member of the coal 
cooperative, and that member of the coal cooperative then sells the 
coal under an arm's-length contract, then you must value the coal under 
paragraph (a) of this section.
    (2) You sell or transfer coal to another member of the coal 
cooperative, and you, the coal cooperative, or another member of the 
coal cooperative use the coal in a power plant for the generation and 
sale of electricity, then you must value the coal under paragraph (b) 
of this section.
    (d) If you are entitled to take a washing allowance and 
transportation allowance for royalty purposes under this section, under 
no circumstances may the washing allowance plus the transportation 
allowance reduce the royalty value of the coal to zero.
    (e) The values in this section do not apply if ONRR decides to 
value your coal under Sec.  1206.254.


Sec.  1206.253  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report. If ONRR determines that your reported value is inconsistent 
with the requirements of this subpart, ONRR will direct you to use a 
different measure of royalty value, or decide your value, under Sec.  
1206.254.
    (2) If ONRR directs you to use a different royalty value, you must 
either pay any underpaid royalties due, plus late payment interest 
calculated under Sec.  1218.202 of this chapter, or report a credit 
for--or request a refund of--any overpaid royalties.
    (b) When the provisions in this subpart refer to gross proceeds, in 
conducting reviews and audits, ONRR will examine if your or your 
affiliate's contract reflects the total consideration that is actually 
transferred, either directly or indirectly, from the buyer to you or 
your affiliate for the coal. If ONRR determines that a contract does 
not reflect the total consideration, ONRR may decide your value under 
Sec.  1206.254.
    (c) ONRR may decide to value your coal under Sec.  1206.254 if ONRR 
determines that the gross proceeds accruing to you or your affiliate 
under a contract do not reflect reasonable consideration because:
    (1) There is misconduct by or between the contracting parties;
    (2) You breached your duty to market the coal for the mutual 
benefit of yourself and the lessor by selling your coal at a value that 
is unreasonably low. ONRR may consider a sales price unreasonably low 
if it is 10 percent less than the lowest other reasonable measures of 
market price, including, but not limited to, prices reported to ONRR 
for like-quality coal; or
    (3) ONRR cannot determine if you properly valued your coal under 
Sec.  1206.252 for any reason, including, but not limited to, your or 
your affiliate's failure to provide documents to ONRR under 30 CFR part 
1212, subpart E.
    (d) You have the burden of demonstrating that your or your 
affiliate's contract is arm's-length.
    (e) ONRR may require you to certify that the provisions in your or 
your affiliate's contract include(s) all of the consideration that the 
buyer paid to you or your affiliate, either directly or indirectly, for 
the coal.
    (f)(1) Absent any contract revisions or amendments, if you or your 
affiliate fail(s) to take proper or timely action to receive prices or 
benefits to which you or your affiliate are entitled, you must pay 
royalty based upon that obtainable price or benefit.
    (2) If you or your affiliate apply in a timely manner for a price 
increase or benefit allowed under your or your affiliate's contract, 
but the purchaser refuses, and you or your affiliate take reasonable, 
documented measures to force purchaser compliance, you will not owe 
additional royalties unless or until you or your affiliate receive 
additional monies or consideration resulting from the price increase. 
You may not construe this paragraph to permit you to avoid your royalty 
payment obligation in situations where a purchaser fails to pay in 
whole or in part, or in a timely manner, for a quantity of coal.
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing, and all parties to the contract 
must sign the contract, contract revisions, or amendments.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may decide to value your coal under Sec.  
1206.254.
    (3) This provision applies notwithstanding any other provisions in 
this title 30 to the contrary.


Sec.  1206.254  How will ONRR determine the value of my coal for 
royalty purposes?

    If ONRR decides to value your coal for royalty purposes under Sec.  
1206.253, or any other provision in this subpart, then ONRR will 
determine value by considering any information that we deem relevant, 
which may include, but is not limited to:
    (a) The value of like-quality coal from the same mine, nearby 
mines, the same region, other regions, or washed in the same or nearby 
wash plant.
    (b) Public sources of price or market information that ONRR deems 
reliable, including, but not limited to, the price of electricity.
    (c) Information available to ONRR and information reported to us, 
including, but not limited to, on form ONRR-4430.
    (d) Costs of transportation or washing, if ONRR determines that 
they are applicable.
    (e) Any other information that ONRR deems relevant regarding the 
particular lease operation or the salability of the coal.


Sec.  1206.255  What records must I keep in order to support my 
calculations of royalty under this subpart?

    If you value your coal under this subpart, you must retain all data 
relevant to the determination of the royalty that you paid. You can 
find recordkeeping requirements in parts 1207 and 1212 of this chapter.
    (a) You must show:
    (1) How you calculated the royalty value, including all allowable 
deductions; and
    (2) How you complied with this subpart.
    (b) Upon request, you must submit all data to ONRR. You must comply 
with any such requirement within the time that ONRR specifies.


Sec.  1206.256  What are my responsibilities to place production into 
marketable condition and to market production?

    (a) You must place coal in marketable condition and market the coal 
for the mutual benefit of the lessee and the lessor at no cost to the 
Federal Government.
    (b) If you use gross proceeds under an arm's-length contract in 
order to determine royalty, you must increase those gross proceeds to 
the extent that the purchaser, or any other person, provides certain 
services that you normally are responsible to perform in order to place 
the coal in marketable condition or to market the coal.


Sec.  1206.257  When is an ONRR audit, review, reconciliation, 
monitoring, or other like process considered final?

    Notwithstanding any provision in these regulations to the contrary, 
ONRR will not consider any audit, review, reconciliation, monitoring, 
or other like process that results in ONRR re-determining royalty due, 
under this subpart, final or binding as against the

[[Page 62042]]

Federal government or its beneficiaries unless ONRR chooses to, in 
writing, formally close the audit period.


Sec.  1206.258  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any coal produced. Your request must:
    (1) Be in writing;
    (2) Identify specifically all leases involved, all interest owners 
of those leases, and the operator(s) for those leases;
    (3) Completely explain all relevant facts. You must inform ONRR of 
any changes to relevant facts that occur before we respond to your 
request;
    (4) Include copies of all relevant documents;
    (5) Provide your analysis of the issue(s), including citations to 
all relevant precedents (including adverse precedents);
    (6) Suggest a proposed valuation method.
    (b) In response to your request, ONRR may:
    (1) Request that the Assistant Secretary for Policy, Management and 
Budget issue a determination;
    (2) Decide that ONRR will issue guidance; or
    (3) Inform you in writing that ONRR will not provide a 
determination or guidance. Situations in which ONRR typically will not 
provide any determination or guidance include, but are not limited to:
    (i) Requests for guidance on hypothetical situations; or
    (ii) Matters that are the subject of pending litigation or 
administrative appeals.
    (c)(1) A determination that the Assistant Secretary for Policy, 
Management and Budget signs is binding on both you and ONRR until the 
Assistant Secretary modifies or rescinds it.
    (2) After the Assistant Secretary issues a determination, you must 
make any adjustments in royalty payments that follow from the 
determination and, if you owe additional royalties, you must pay any 
additional royalties due, plus late payment interest calculated under 
Sec.  1218.202 of this chapter.
    (3) A determination that the Assistant Secretary signs is the final 
action of the Department and is subject to judicial review under 5 
U.S.C. 701-706.
    (d) Guidance that ONRR issues is not binding on ONRR, delegated 
States, or you with respect to the specific situation addressed in the 
guidance.
    (1) Guidance and ONRR's decision whether or not to issue guidance 
or to request an Assistant Secretary determination, or neither, under 
paragraph (b) of this section, are not appealable decisions or orders 
under 30 CFR part 1290.
    (2) If you receive an order requiring you to pay royalty on the 
same basis as the guidance, you may appeal that order under 30 CFR part 
1290.
    (e) ONRR or the Assistant Secretary may use any of the applicable 
criteria in this subpart to provide guidance or to make a 
determination.
    (f) A change in an applicable statute or regulation on which ONRR 
based any guidance, or the Assistant Secretary based any determination, 
takes precedence over the determination or guidance after the effective 
date of the statute or regulation, regardless of whether ONRR or the 
Assistant Secretary modifies or rescinds the guidance or determination.
    (g) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.259.


Sec.  1206.259  Does ONRR protect information that I provide?

    (a) Certain information that you or your affiliate submit(s) to 
ONRR regarding royalties on coal, including deductions and allowances, 
may be exempt from disclosure.
    (b) To the extent that applicable laws and regulations permit, ONRR 
will keep confidential any data that you or your affiliate submit(s) 
that is privileged, confidential, or otherwise exempt from disclosure.
    (c) You and others must submit all requests for information under 
the Freedom of Information Act regulations of the Department of the 
Interior at 43 CFR part 2.


Sec.  1206.260  What general transportation allowance requirements 
apply to me?

    (a)(1) ONRR will allow a deduction for the reasonable, actual costs 
to transport coal from the lease to the point off of the lease or mine 
as determined under Sec.  1206.261 or Sec.  1206.262, as applicable.
    (2) You do not need ONRR's approval before reporting a 
transportation allowance for costs incurred.
    (b) You may take a transportation allowance when:
    (1) You value coal under Sec.  1206.252 of this part;
    (2) You transport the coal from a Federal lease to a sales point, 
which is remote from both the lease and mine; or
    (3) You transport the coal from a Federal lease to a wash plant 
when that plant is remote from both the lease and mine and, if 
applicable, from the wash plant to a remote sales point.
    (c) You may not take an allowance for:
    (1) Transporting lease production that is not royalty-bearing;
    (2) In-mine movement of your coal; or
    (3) Costs to move a particular tonnage of production for which you 
did not incur those costs.
    (d) You may only claim a transportation allowance when you sell the 
coal and pay royalties.
    (e) You must allocate transportation allowances to the coal 
attributed to the lease from which it was extracted.
    (1) If you commingle coal produced from Federal and non-Federal 
leases, you may not disproportionately allocate transportation costs to 
Federal lease production. Your allocation must use the same proportion 
as the ratio of the tonnage from the Federal lease production to the 
tonnage from all production.
    (2) If you commingle coal produced from more than one Federal 
lease, you must allocate transportation costs to each Federal lease, as 
appropriate. Your allocation must use the same proportion as the ratio 
of the tonnage of each Federal lease production to the tonnage of all 
production.
    (3) For washed coal, you must allocate the total transportation 
allowance only to washed products.
    (4) For unwashed coal, you may take a transportation allowance for 
the total coal transported.
    (5)(i) You must report your transportation costs on form ONRR-4430 
as clean coal short tons sold during the reporting period multiplied by 
the sum of the per-short-ton cost of transporting the raw tonnage to 
the wash plant and, if applicable, the per-short-ton cost of 
transporting the clean coal tons from the wash plant to a remote sales 
point.
    (ii) You must determine the cost per short ton of clean coal 
transported by dividing the total applicable transportation cost by the 
number of clean coal tons resulting from washing the raw coal 
transported.
    (f) You must express transportation allowances for coal as a 
dollar-value equivalent per short ton of coal transported. If you do 
not base your or your affiliate's payments for transportation under a 
transportation contract on a dollar-per-unit basis, you must convert 
whatever consideration that you or your affiliate paid to a dollar-
value equivalent.
    (g) ONRR may determine your transportation allowance under Sec.  
1206.254 because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate

[[Page 62043]]

paid under an arm's-length transportation contract does not reflect the 
reasonable cost of the transportation because you breached your duty to 
market the coal for the mutual benefit of yourself and the lessor by 
transporting your coal at a cost that is unreasonably high. We may 
consider a transportation allowance unreasonably high if it is 10 
percent higher than the highest reasonable measures of transportation 
costs, including, but not limited to, transportation allowances 
reported to ONRR and the cost to transport coal through the same 
transportation system; or
    (3) ONRR cannot determine if you properly calculated a 
transportation allowance under Sec.  1206.261 or Sec.  1206.262 for any 
reason, including, but not limited to, your or your affiliate's failure 
to provide documents that ONRR requests under 30 CFR part 1212, subpart 
E.


Sec.  1206.261  How do I determine a transportation allowance if I have 
an arm's-length transportation contract or no written arm's-length 
contract?

    (a) If you or your affiliate incur(s) transportation costs under an 
arm's-length transportation contract, you may claim a transportation 
allowance for the reasonable, actual costs incurred for transporting 
the coal under that contract.
    (b) You must be able to demonstrate that your or your affiliate's 
contract is at arm's-length.
    (c) If you have no written contract for the arm's-length 
transportation of coal, then ONRR will determine your transportation 
allowance under Sec.  1206.254. You may not use this paragraph (c) if 
you or your affiliate perform(s) your own transportation.
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.258(a).
    (2) You may use that method to determine your allowance until ONRR 
issues a determination.


Sec.  1206.262  How do I determine a transportation allowance if I do 
not have an arm's-length transportation contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length transportation contract, including situations where you 
or your affiliate provide your own transportation services. You must 
calculate your transportation allowance based on your or your 
affiliate's reasonable, actual costs for transportation during the 
reporting period using the procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (d), (e), and (f) of this section.
    (2) Overhead under paragraph (g) of this section.
    (3) Depreciation under paragraph (h) of this section and a return 
on undepreciated capital investment under paragraph (i) of this 
section, or you may elect to use a cost equal to a return on the 
initial depreciable capital investment in the transportation system 
under paragraph (j) of this section. After you have elected to use 
either method for a transportation system, you may not later elect to 
change to the other alternative without ONRR's approval. If ONRR 
accepts your request to change methods, you may use your changed method 
beginning with the production month following the month when ONRR 
received your change request.
    (4) A return on the reasonable salvage value, under paragraph (i) 
of this section, after you have depreciated the transportation system 
to its reasonable salvage value.
    (c) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (d) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment), which are an integral part of the transportation 
system.
    (e) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expenses 
that you can document

    (f) Allowable maintenance expenses include the following:

(1) Maintenance of the transportation system
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (g) Overhead, directly attributable and allocable to the operation 
and maintenance of the transportation system, is an allowable expense. 
State and Federal income taxes and severance taxes and other fees, 
including royalties, are not allowable expenses.
    (h)(1) To calculate depreciation, you may elect to use either (i) a 
straight-line depreciation method based on the life of the 
transportation system or the life of the reserves that the 
transportation system services, or you may elect to use (ii) a unit-of-
production method. After you make an election, you may not change 
methods without ONRR's approval. If ONRR accepts your request to change 
methods, you may use your changed method beginning with the production 
month following the month when ONRR received your change request.
    (2) A change in ownership of a transportation system will not alter 
the depreciation schedule that the original transporter/lessee 
established for the purposes of the allowance calculation.
    (3) You may depreciate a transportation system only once with or 
without a change in ownership.
    (i)(1) To calculate a return on undepreciated capital investment, 
you must multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the 
transportation allowance by the rate of return provided in paragraph 
(k) of this section.
    (2) After you have depreciated a transportation system to its 
reasonable salvage value, you may continue to include in the allowance 
calculation a cost equal to the reasonable salvage value multiplied by 
a rate of return determined under paragraph (k) of this section.
    (j) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the transportation system multiplied by 
the rate of return determined under paragraph (k) of this section. You 
may not include depreciation in your allowance
    (k) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (1) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (2) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.263  What are my reporting requirements under an arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on transportation costs that you or your 
affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
transportation contracts, production

[[Page 62044]]

agreements, operating agreements, and related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.


Sec.  1206.264  What are my reporting requirements under a non-arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on non-arm's-length transportation costs you or 
your affiliate incur(s).
    (b)(1) For new non-arm's-length transportation facilities or 
arrangements, you must base your initial deduction on estimates of 
allowable transportation costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the transportation system as your estimate, if 
available. If such data is not available, you must use estimates based 
on data for similar transportation systems.
    (3) Section 1206.266 applies when you amend your report based on 
the actual costs.
    (c) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.


Sec.  1206.265  What interest and penalties apply if I improperly 
report a transportation allowance?

    (a)(1) If ONRR determines that you took an unauthorized 
transportation allowance, then you must pay any additional royalties 
due, plus late payment interest calculated under Sec.  1218.202 of this 
chapter.
    (2) If you understated your transportation allowance, you may be 
entitled to a credit without interest.
    (b) If you improperly net a transportation allowance against the 
sales value of the coal instead of reporting the allowance as a 
separate entry on form ONRR-4430, ONRR may assess a civil penalty under 
30 CFR part 1241.


Sec.  1206.266  What reporting adjustments must I make for 
transportation allowances?

    (a) If your actual transportation allowance is less than the amount 
that you claimed on form ONRR-4430 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter from 
the date when you took the deduction to the date when you repay the 
difference.
    (b) If the actual transportation allowance is greater than the 
amount that you claimed on form ONRR-4430 for any month during the 
period reported on the allowance form, you are entitled to a credit 
without interest.


Sec.  1206.267  What general washing allowance requirements apply to 
me?

    (a)(1) If you determine the value of your coal under Sec.  1206.252 
of this subpart, you may take a washing allowance for the reasonable, 
actual costs to wash the coal. The allowance is a deduction when 
determining coal royalty value for the costs that you incur to wash 
coal.
    (2) You do not need ONRR's approval before reporting a washing 
allowance.
    (b) You may not:
    (1) Take an allowance for the costs of washing lease production 
that is not royalty bearing.
    (2) Disproportionately allocate washing costs to Federal leases. 
You must allocate washing costs to washed coal attributable to each 
Federal lease by multiplying the input ratio determined under Sec.  
1206.251(e)(2)(i) by the total allowable costs.
    (c)(1) You must express washing allowances for coal as a dollar-
value equivalent per short ton of coal washed.
    (2) If you do not base your or your affiliate's payments for 
washing under an arm's-length contract on a dollar-per-unit basis, you 
must convert whatever consideration that you or your affiliate paid to 
a dollar-value equivalent.
    (d) ONRR may determine your washing allowance under Sec.  1206.254 
because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length washing contract does not reflect 
the reasonable cost of the washing because you breached your duty to 
market the coal for the mutual benefit of yourself and the lessor by 
washing your coal at a cost that is unreasonably high. We may consider 
a washing allowance unreasonably high if it is 10 percent higher than 
the highest other reasonable measures of washing, including, but not 
limited to, washing allowances reported to ONRR and costs for coal 
washed in the same plant or other plants in the region;or
    (3) ONRR cannot determine if you properly calculated a washing 
allowance under Sec. Sec.  1206.267 through 1206.269 for any reason, 
including, but not limited to, your or your affiliate's failure to 
provide documents that ONRR requests under 30 CFR part 1212, subpart E.
    (e) You may only claim a washing allowance when you sell the washed 
coal and report and pay royalties.


Sec.  1206.268  How do I determine washing allowances if I have an 
arm's-length washing contract or no written arm's-length contract?

    (a) If you or your affiliate incur(s) washing costs under an arm's-
length washing contract, you may claim a washing allowance for the 
reasonable, actual costs incurred.
    (b) You must be able to demonstrate that your or your affiliate's 
contract is arm's-length.
    (c) If you have no written contract for the arm's-length washing of 
coal, then ONRR will determine your washing allowance under Sec.  
1206.254. You may not use this paragraph (c) if you or your affiliate 
perform(s) your own washing. If you or your affiliate perform(s) the 
washing, then
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.258(a).
    (2) You may use that method to determine your allowance until ONRR 
issues a determination.


Sec.  1206.269  How do I determine washing allowances if I do not have 
an arm's-length washing contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length washing contract, including situations where you or 
your affiliate provides your own washing services. You must calculate 
your washing allowance based on your or your affiliate's reasonable, 
actual costs for washing during the reporting period using the 
procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (d), (e), and (f) of this section.
    (2) Overhead under paragraph (g) of this section.
    (3) Depreciation under paragraph (h) of this section and a return 
on undepreciated capital investment under paragraph (i) of this 
section, or you may elect to use a cost equal to a return on the 
initial depreciable capital investment in the wash plant under 
paragraph (j) of this section. After you have elected to use either 
method for a wash plant, you may not later elect to change to the other 
alternative without ONRR's approval. If ONRR accepts your request to 
change methods, you may use your changed method beginning with the 
production month following the month when ONRR received your change 
request.
    (4) A return on the reasonable salvage value, under paragraph (i) 
of this section, after you have depreciated the wash plant to its 
reasonable salvage value.

[[Page 62045]]

    (c) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (d) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment), which are an integral part of the wash plant.
    (e) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expenses 
that you can document

    (f) Allowable maintenance expenses include the following:

(1) Maintenance of the wash plant
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (g) Overhead, directly attributable and allocable to the operation 
and maintenance of the wash plant, is an allowable expense. State and 
Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (h)(1) To calculate depreciation, you may elect to use either a 
straight-line depreciation method based on the life of the wash plant 
or the life of the reserves that the wash plant services, or you may 
elect to use a unit-of-production method. After you make an election, 
you may not change methods without ONRR's approval. If ONRR accepts 
your request to change methods, you may use your changed method 
beginning with the production month following the month when ONRR 
received your change request.
    (2) A change in ownership of a wash plant will not alter the 
depreciation schedule that the original washer/lessee established for 
purposes of the allowance calculation.
    (3) With or without a change in ownership, you may depreciate a 
wash plant only once.
    (i)(1) To calculate a return on undepreciated capital investment, 
you must multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the washing 
allowance by the rate of return provided in paragraph (k) of this 
section.
    (2) After you have depreciated a wash plant to its reasonable 
salvage value, you may continue to include in the allowance calculation 
a cost equal to the salvage value multiplied by a rate of return 
determined under paragraph (k) of this section.
    (j) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the wash plant multiplied by the rate of 
return as determined under paragraph (k) of this section. You may not 
include depreciation in your allowance.
    (k) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (1) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (2) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.270  What are my reporting requirements under an arm's-
length washing contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on washing costs that you or your affiliate 
incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
washing contracts, production agreements, operating agreements, and 
related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.


Sec.  1206.271  What are my reporting requirements under a non-arm's-
length washing contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on non-arm's-length washing costs that you or 
your affiliate incur(s).
    (b)(1) For new non-arm's-length washing facilities or arrangements, 
you must base your initial deduction on estimates of allowable washing 
costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the wash plant as your estimate, if available. If 
such data is not available, you must use estimates based on data for 
similar wash plants.
    (3) Section 1206.273 applies when you amend your report based on 
the actual costs.
    (c) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.


Sec.  1206.272  What interest and penalties apply if I improperly 
report a washing allowance?

    (a)(1) If ONRR determines that you took an unauthorized washing 
allowance, then you must pay any additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter.
    (2) If you understated your washing allowance, you may be entitled 
to a credit without interest.
    (b) If you improperly net a washing allowance against the sales 
value of the coal instead of reporting the allowance as a separate 
entry on form ONRR-4430, ONRR may assess a civil penalty under 30 CFR 
part 1241.


Sec.  1206.273  What reporting adjustments must I make for washing 
allowances?

    (a) If your actual washing allowance is less than the amount that 
you claimed on form ONRR-4430 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter from 
the date when you took the deduction to the date when you repay the 
difference.
    (b) If the actual washing allowance is greater than the amount that 
you claimed on form ONRR-4430 for any month during the period reported 
on the allowance form, you are entitled to a credit without interest.

0
9. Revise subpart J to read as follows:
Subpart J--Indian Coal
1206.450 What is the purpose and scope of this subpart?
1206.451 How do I determine royalty quantity and quality?
1206.452 How do I calculate royalty value for coal that I or my 
affiliate sell(s) under an arm's-length or non-arm's-length 
contract?
1206.453 How will ONRR determine if my royalty payments are correct?
1206.454 How will ONRR determine the value of my coal for royalty 
purposes?
1206.455 What records must I keep in order to support my 
calculations of royalty under this subpart?
1206.456 What are my responsibilities to place production into 
marketable condition and to market production?
1206.457 When is an ONRR audit, review, reconciliation, monitoring, 
or other like process considered final?
1206.458 How do I request a valuation determination?
1206.459 Does ONRR protect information that I provide?
1206.460 What general transportation allowance requirements apply to 
me?
1206.461 How do I determine a transportation allowance if I have an

[[Page 62046]]

arm's-length transportation contract or no written arm's-length 
contract?
1206.462 How do I determine a transportation allowance if I do not 
have an arm's-length transportation contract?
1206.463 What are my reporting requirements under an arm's-length 
transportation contract?
1206.464 What are my reporting requirements under a non-arm's-length 
transportation contract or no written arm's-length contract?
1206.465 What interest and penalties apply if I improperly report a 
transportation allowance?
1206.466 What reporting adjustments must I make for transportation 
allowances?
1206.467 What general washing allowance requirements apply to me?
1206.468 How do I determine washing allowances if I have an arm's-
length washing contract or no written arm's-length contract?
1206.469 How do I determine washing allowances if I do not have an 
arm's-length washing contract?
1206.470 What are my reporting requirements under an arm's-length 
washing contract?
1206.471 What are my reporting requirements under a non-arm's-length 
washing contract or no written arm's-length contract?
1206.472 What interest and penalties apply if I improperly report a 
washing allowance?
1206.473 What reporting adjustments must I make for washing 
allowances?

Subpart J--Indian Coal


Sec.  1206.450  What is the purpose and scope of this subpart?

    (a) This subpart applies to all coal produced from Indian Tribal 
coal leases and coal leases on land held by individual Indian mineral 
owners. It explains how you, as the lessee, must calculate the value of 
production for royalty purposes consistent with the mineral leasing 
laws, other applicable laws, and lease terms (except leases on the 
Osage Indian Reservation, Osage County, Oklahoma).
    (b) The terms ``you'' and ``your'' in this subpart refer to the 
lessee.
    (c) If the regulations in this subpart are inconsistent with a(an): 
Federal statute; settlement agreement between the United States and a 
lessee resulting from administrative or judicial litigation; written 
agreement between the lessee and ONRR's Director establishing a method 
to determine the value of production from any lease that ONRR expects, 
at least, would approximate the value established under this subpart; 
or express provision of a coal lease subject to this subpart, then the 
statute, settlement agreement, written agreement, or lease provision 
will govern to the extent of the inconsistency.
    (d) ONRR may audit and order you to adjust all royalty payments.
    (e) The regulations in this subpart, intended to ensure that the 
trust responsibilities of the United States with respect to the 
administration of Indian coal leases, are discharged under the 
requirements of the governing mineral leasing laws, treaties, and lease 
terms.


Sec.  1206.451  How do I determine royalty quantity and quality?

    (a) You must calculate royalties based on the quantity and quality 
of coal at the royalty measurement point that ONRR and BLM jointly 
determine.
    (b) You must measure coal in short tons using the methods that BLM 
prescribes for Indian coal leases. You must report coal quantity on 
appropriate forms required in 30 CFR part 1210.
    (c)(1) You are not required to pay royalties on coal that you 
produce and add to stockpiles or inventory until you use, sell, or 
otherwise finally dispose of such coal.
    (2) ONRR may request that BLM require you to increase your lease 
bond if BLM determines that stockpiles or inventory are excessive such 
that they increase the risk of resource degradation.
    (d) You must pay royalty at the rate specified in your lease at the 
time when you use, sell, or otherwise finally dispose of the coal.
    (e) You must allocate washed coal by attributing the washed coal to 
the leases from which it was extracted.
    (1) If the wash plant washes coal from only one lease, the quantity 
of washed coal allocable to the lease is the total output of washed 
coal from the plant.
    (2) If the wash plant washes coal from more than one lease, you 
must determine the tonnage of washed coal attributable to each lease 
by:
    (i) First, calculating the input ratio of washed coal allocable to 
each lease by dividing the tonnage of coal input to the wash plant from 
each lease by the total tonnage of coal input to the wash plant from 
all leases.
    (ii) Second, multiplying the input ratio derived under paragraph 
(e)(2)(i) of this section by the tonnage of total output of washed coal 
from the plant.


Sec.  1206.452  How do I calculate royalty value for coal that I or my 
affiliate sell(s) under an arm's-length or non-arm's-length contract?

    (a) The value of coal under this section for royalty purposes is 
the gross proceeds accruing to you or your affiliate under the first 
arm's-length contract less an applicable transportation allowance 
determined under Sec. Sec.  1206.460 through 1206.462 and washing 
allowance under Sec. Sec.  1206.467 through 1206.469. You must use this 
paragraph (a) to value coal when:
    (1) You sell under an arm's-length contract; or
    (2) You sell or transfer to your affiliate or another person under 
a non-arm's-length contract, and that affiliate or person, or another 
affiliate of either of them, then sells the coal under an arm's-length 
contract.
    (b) If you have no contract for the sale of coal subject to this 
section because you or your affiliate used the coal in a power plant 
that you or your affiliate own(s) for the generation and sale of 
electricity, one of the following applies:
    (1) You or your affiliate sell(s) the electricity, then the value 
of the coal subject to this section, for royalty purposes, is the gross 
proceeds accruing to you for the power plant's arm's-length sales of 
the electricity less applicable transportation and washing deductions 
determined under Sec. Sec.  1206.460 through 1206.462 and Sec. Sec.  
1206.467 through 1206.469 of this subpart and, if applicable, 
transmission and generation deductions determined under Sec. Sec.  
1206.353 and 1206.352 of subpart H.
    (2) You or your affiliate do(es) not sell the electricity at arm's-
length (for example you or your affiliate deliver(s) the electricity 
directly to the grid), then ONRR will determine the value of the coal 
under Sec.  1206.454.
    (i) You must propose to ONRR a method to determine the value using 
the procedures in Sec.  1206.458(a).
    (ii) You may use that method to determine value, for royalty 
purposes, until ONRR issues a determination.
    (iii) After ONRR issues a determination, you must make the 
adjustments under Sec.  1206.453(a)(2).
    (c) If you are a coal cooperative, or a member of a coal 
cooperative, one of the following applies:
    (1) You sell or transfer coal to another member of the coal 
cooperative, and that member of the coal cooperative then sells the 
coal under an arm's-length contract, then you must value the coal under 
paragraph (a) of this section.
    (2) You sell or transfer coal to another member of the coal 
cooperative, and you, the coal cooperative, or another member of the 
coal cooperative use the coal in a power plant for the generation and 
sale of electricity, then you must value the coal under paragraph (b) 
of this section.
    (d) If you are entitled to take a washing allowance and 
transportation allowance for royalty purposes under this section, under 
no circumstances

[[Page 62047]]

may the washing allowance plus the transportation allowance reduce the 
royalty value of the coal to zero.
    (e) The values in this section do not apply if ONRR decides to 
value your coal under Sec.  1206.454.


Sec.  1206.453  How will ONRR determine if my royalty payments are 
correct?

    (a)(1) ONRR may monitor, review, and audit the royalties that you 
report. If ONRR determines that your reported value is inconsistent 
with the requirements of this subpart, ONRR will direct you to use a 
different measure of royalty value, or decide your value, under Sec.  
1206.454.
    (2) If ONRR directs you to use a different royalty value, you must 
either pay any underpaid royalties plus late payment interest 
calculated under Sec.  1218.202 of this chapter or report a credit for, 
or request a refund of, any overpaid royalties.
    (b) When the provisions in this subpart refer to gross proceeds, in 
conducting reviews and audits, ONRR will examine if your or your 
affiliate's contract reflects the total consideration actually 
transferred, either directly or indirectly, from the buyer to you or 
your affiliate for the coal. If ONRR determines that a contract does 
not reflect the total consideration, ONRR may decide your value under 
Sec.  1206.454.
    (c) ONRR may decide to value your coal under Sec.  1206.454, if 
ONRR determines that the gross proceeds accruing to you or your 
affiliate under a contract do not reflect reasonable consideration 
because:
    (1) There is misconduct by or between the contracting parties;
    (2) You breached your duty to market the coal for the mutual 
benefit of yourself and the lessor by selling your coal at a value that 
is unreasonably low. ONRR may consider a sales price unreasonably low, 
if it is 10 percent less than the lowest other reasonable measures of 
market price, including, but not limited to, prices reported to ONRR 
for like-quality coal; or
    (3) ONRR cannot determine if you properly valued your coal under 
Sec.  1206.452 for any reason, including, but not limited to, your or 
your affiliate's failure to provide documents to ONRR under 30 CFR part 
1212, subpart E.
    (d) You have the burden of demonstrating that your or your 
affiliate's contract is arm's-length.
    (e) ONRR may require you to certify that the provisions in your or 
your affiliate's contract include(s) all of the consideration that the 
buyer paid to you or your affiliate, either directly or indirectly, for 
the coal.
    (f)(1) Absent contract revision or amendment, if you or your 
affiliate fail(s) to take proper or timely action to receive prices or 
benefits to which you or your affiliate are entitled, you must pay 
royalty based upon that obtainable price or benefit.
    (2) If you or your affiliate apply in a timely manner for a price 
increase or benefit allowed under your or your affiliate's contract, 
but the purchaser refuses, and you or your affiliate take reasonable, 
documented measures to force purchaser compliance, you will not owe 
additional royalties unless or until you or your affiliate receive 
additional monies or consideration resulting from the price increase. 
You may not construe this paragraph to permit you to avoid your royalty 
payment obligation in situations where a purchaser fails to pay, in 
whole or in part, or in a timely manner, for a quantity of coal.
    (g)(1) You or your affiliate must make all contracts, contract 
revisions, or amendments in writing, and all parties to the contract 
must sign the contract, contract revisions, or amendments.
    (2) If you or your affiliate fail(s) to comply with paragraph 
(g)(1) of this section, ONRR may decide to value your coal under Sec.  
1206.454.
    (3) This provision applies notwithstanding any other provisions in 
this title 30 to the contrary.


Sec.  1206.454  How will ONRR determine the value of my coal for 
royalty purposes?

    If ONRR decides to value your coal for royalty purposes under Sec.  
1206.454, or any other provision in this subpart, then ONRR will 
determine value by considering any information that we deem relevant, 
which may include, but is not limited to:
    (a) The value of like-quality coal from the same mine, nearby 
mines, same region, other regions, or washed in the same or nearby wash 
plant.
    (b) Public sources of price or market information that ONRR deems 
reliable, including, but not limited to, the price of electricity.
    (c) Information available to ONRR and information reported to us, 
including but not limited to, on form ONRR-4430.
    (d) Costs of transportation or washing, if ONRR determines they are 
applicable.
    (e) Any other information that ONRR deems to be relevant regarding 
the particular lease operation or the salability of the coal.


Sec.  1206.455  What records must I keep in order to support my 
calculations of royalty under this subpart?

    If you value your coal under this subpart, you must retain all data 
relevant to the determination of the royalty that you paid. You can 
find recordkeeping requirements in parts 1207 and 1212 of this chapter.
    (a) You must show:
    (1) How you calculated the royalty value, including all allowable 
deductions; and
    (2) How you complied with this subpart.
    (b) Upon request, you must submit all data to ONRR, the 
representative of the Indian lessor, the Inspector General of the 
Department of the Interior, or other persons authorized to receive such 
information. Such data may include arm's-length sales and sales 
quantity data for like-quality coal that you or your affiliate sold, 
purchased, or otherwise obtained from the same mine, nearby mines, same 
region, or other regions. You must comply with any such requirement 
within the time that ONRR specifies.


Sec.  1206.456  What are my responsibilities to place production into 
marketable condition and to market production?

    (a) You must place coal in marketable condition and market the coal 
for the mutual benefit of the lessee and the lessor at no cost to the 
Indian lessor.
    (b) If you use gross proceeds under an arm's-length contract to 
determine royalty, you must increase those gross proceeds to the extent 
that the purchaser, or any other person, provides certain services that 
you normally are responsible to perform in order to place the coal in 
marketable condition or to market the coal.


Sec.  1206.457  When is an ONRR audit, review, reconciliation, 
monitoring, or other like process considered final?

    Notwithstanding any provision in these regulations to the contrary, 
ONRR will not consider any audit, review, reconciliation, monitoring, 
or other like process that results in ONRR re-determining royalty due, 
under this subpart, final or binding as against the Federal government 
or its beneficiaries unless ONRR chooses to, in writing, formally close 
the audit period.


Sec.  1206.458  How do I request a valuation determination?

    (a) You may request a valuation determination from ONRR regarding 
any coal produced. Your request must:
    (1) Be in writing;
    (2) Identify specifically all leases involved, all interest owners 
of those

[[Page 62048]]

leases, and the operator(s) for those leases;
    (3) Completely explain all relevant facts. You must inform ONRR of 
any changes to relevant facts that occur before we respond to your 
request;
    (4) Include copies of all relevant documents;
    (5) Provide your analysis of the issue(s), including citations to 
all relevant precedents (including adverse precedents); and
    (6) Suggest a proposed valuation method.
    (b) In response to your request, ONRR may:
    (1) Request that the Assistant Secretary for Policy, Management and 
Budget issue a determination;
    (2) Decide that ONRR will issue guidance; or
    (3) Inform you in writing that ONRR will not provide a 
determination or guidance. Situations in which ONRR typically will not 
provide any determination or guidance include, but are not limited to:
    (i) Requests for guidance on hypothetical situations; or
    (ii) Matters that are the subject of pending litigation or 
administrative appeals.
    (c)(1) A determination that the Assistant Secretary for Policy, 
Management and Budget signs is binding on both you and ONRR until the 
Assistant Secretary modifies or rescinds it.
    (2) After the Assistant Secretary issues a determination, you must 
make any adjustments in royalty payments that follow from the 
determination and, if you owe additional royalties, you must pay any 
additional royalties due, plus late payment interest calculated under 
Sec.  1218.202 of this chapter.
    (3) A determination that the Assistant Secretary signs is the final 
action of the Department and is subject to judicial review under 5 
U.S.C. 701-706.
    (d) Guidance that ONRR issues is not binding on ONRR, Tribes, 
individual Indian mineral owners, or you with respect to the specific 
situation addressed in the guidance.
    (1) Guidance and ONRR's decision whether or not to issue guidance 
or to request an Assistant Secretary determination, or neither, under 
paragraph (b) of this section, are not appealable decisions or orders 
under 30 CFR part 1290.
    (2) If you receive an order requiring you to pay royalty on the 
same basis as the guidance, you may appeal that order under 30 CFR part 
1290.
    (e) ONRR or the Assistant Secretary may use any of the applicable 
criteria in this subpart to provide guidance or to make a 
determination.
    (f) A change in an applicable statute or regulation on which ONRR 
based any guidance, or the Assistant Secretary based any determination, 
takes precedence over the determination or guidance after the effective 
date of the statute or regulation, regardless of whether ONRR or the 
Assistant Secretary modifies or rescinds the guidance or determination.
    (g) ONRR may make requests and replies under this section available 
to the public, subject to the confidentiality requirements under Sec.  
1206.459.


Sec.  1206.459  Does ONRR protect information that I provide?

    (a) Certain information that you or your affiliate submit(s) to 
ONRR regarding royalties on coal, including deductions and allowances, 
may be exempt from disclosure.
    (b) To the extent that applicable laws and regulations permit, ONRR 
will keep confidential any data that you or your affiliate submit(s) 
that is privileged, confidential, or otherwise exempt from disclosure.
    (c) You and others must submit all requests for information under 
the Freedom of Information Act regulations of the Department of the 
Interior at 43 CFR part 2.


Sec.  1206.460  What general transportation allowance requirements 
apply to me?

    (a)(1) ONRR will allow a deduction for the reasonable, actual costs 
to transport coal from the lease to the point off of the lease or mine 
as determined under Sec.  1206.461 or Sec.  1206.462, as applicable.
    (2) Before you may take any transportation allowance, you must 
submit a completed page 1 of the Coal Transportation Allowance Report 
(Form ONRR-4293), under Sec. Sec.  1206.463 and 1206.464 of this 
subpart. You may claim a transportation allowance retroactively for a 
period of not more than three months prior to the first day of the 
month when ONRR receives your form ONRR-4293.
    (3) You may not use a transportation allowance that was in effect 
before January 1, 2017. You must use the provisions of this subpart to 
determine your transportation allowance.
    (b) You may take a transportation allowance when:
    (1) You value coal under Sec.  1206.452 of this part;
    (2) You transport the coal from an Indian lease to a sales point 
that is remote from both the lease and mine; or
    (3) You transport the coal from an Indian lease to a wash plant 
when that plant is remote from both the lease and mine and, if 
applicable, from the wash plant to a remote sales point.
    (c) You may not take an allowance for:
    (1) Transporting lease production that is not royalty-bearing;
    (2) In-mine movement of your coal; or
    (3) Costs to move a particular tonnage of production for which you 
did not incur those costs.
    (d) You may only claim a transportation allowance when you sell the 
coal and pay royalties.
    (e) You must allocate transportation allowances to the coal 
attributed to the lease from which it was extracted.
    (1) If you commingle coal produced from Indian and non-Indian 
leases, you may not disproportionately allocate transportation costs to 
Indian lease production. Your allocation must use the same proportion 
as the ratio of the tonnage from the Indian lease production to the 
tonnage from all production.
    (2) If you commingle coal produced from more than one Indian lease, 
you must allocate transportation costs to each Indian lease, as 
appropriate. Your allocation must use the same proportion as the ratio 
of the tonnage of each Indian lease's production to the tonnage of all 
production.
    (3) For washed coal, you must allocate the total transportation 
allowance only to washed products.
    (4) For unwashed coal, you may take a transportation allowance for 
the total coal transported.
    (5)(i) You must report your transportation costs on form ONRR-4430 
as clean coal short tons sold during the reporting period multiplied by 
the sum of the per short-ton cost of transporting the raw tonnage to 
the wash plant and, if applicable, the per short-ton cost of 
transporting the clean coal tons from the wash plant to a remote sales 
point.
    (ii) You must determine the cost per short ton of clean coal 
transported by dividing the total applicable transportation cost by the 
number of clean coal tons resulting from washing the raw coal 
transported.
    (f) You must express transportation allowances for coal as a 
dollar-value equivalent per short ton of coal transported. If you do 
not base your or your affiliate's payments for transportation under a 
transportation contract on a dollar-per-unit basis, you must convert 
whatever consideration that you or your affiliate paid into a dollar-
value equivalent.
    (g) ONRR may determine your transportation allowance under Sec.  
1206.454 because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate

[[Page 62049]]

paid under an arm's-length transportation contract does not reflect the 
reasonable cost of the transportation because you breached your duty to 
market the coal for the mutual benefit of yourself and the lessor by 
transporting your coal at a cost that is unreasonably high. We may 
consider a transportation allowance unreasonably high if it is 10 
percent higher than the highest reasonable measures of transportation 
costs, including, but not limited to, transportation allowances 
reported to ONRR and the cost to transport coal through the same 
transportation system; or
    (3) ONRR cannot determine if you properly calculated a 
transportation allowance under Sec.  1206.461 or Sec.  1206.462 for any 
reason, including, but not limited to, your or your affiliate's failure 
to provide documents that ONRR requests under 30 CFR part 1212, subpart 
E.


Sec.  1206.461  How do I determine a transportation allowance if I have 
an arm's-length transportation contract or no written arm's-length 
contract?

    (a) If you or your affiliate incur(s) transportation costs under an 
arm's-length transportation contract, you may claim a transportation 
allowance for the reasonable, actual costs incurred for transporting 
the coal under that contract.
    (b) You must be able to demonstrate that your or your affiliate's 
contract is at arm's-length.
    (c) If you have no written contract for the arm's-length 
transportation of coal, then ONRR will determine your transportation 
allowance under Sec.  1206.454. You may not use this paragraph (c) if 
you or your affiliate perform(s) your own transportation.
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.458(a).
    (2) You may use that method to determine your allowance until ONRR 
issues a determination.


Sec.  1206.462  How do I determine a transportation allowance if I do 
not have an arm's-length transportation contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length transportation contract, including situations where you 
or your affiliate provide your own transportation services. Calculate 
your transportation allowance based on your or your affiliate's 
reasonable, actual costs for transportation during the reporting period 
using the procedures prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (d), (e), and (f) of this section.
    (2) Overhead under paragraph (g) of this section.
    (3) Depreciation under paragraph (h) of this section and a return 
on undepreciated capital investment under paragraph (i) of this 
section, or you may elect to use a cost equal to a return on the 
initial depreciable capital investment in the transportation system 
under paragraph (j) of this section. After you have elected to use 
either method for a transportation system, you may not later elect to 
change to the other alternative without ONRR's approval. If ONRR 
accepts your request to change methods, you may use your changed method 
beginning with the production month following the month when ONRR 
received your change request.
    (c) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (d) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment), which are an integral part of the transportation 
system.
    (e) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expense 
that you can document

    (f) Allowable maintenance expenses include the following:

(1) Maintenance of the transportation system
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (g) Overhead, directly attributable and allocable to the operation 
and maintenance of the transportation system, is an allowable expense. 
State and Federal income taxes and Indian Tribal severance taxes and 
other fees, including royalties, are not allowable expenses.
    (h)(1) To calculate depreciation, you may elect to use either a 
straight-line depreciation method based on the life of the 
transportation system or the life of the reserves that the 
transportation system services, or you may elect to use a unit-of-
production method. After you make an election, you may not change 
methods without ONRR's approval. If ONRR accepts your request to change 
methods, you may use your changed method beginning with the production 
month following the month when ONRR received your change request.
    (2) A change in ownership of a transportation system will not alter 
the depreciation schedule that the original transporter/lessee 
established for the purposes of the allowance calculation.
    (3) You may depreciate a transportation system only once with or 
without a change in ownership.
    (i) To calculate a return on undepreciated capital investment, 
multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the 
transportation allowance by the rate of return provided in paragraph 
(k) of this section.
    (j) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the transportation system multiplied by 
the rate of return determined under paragraph (k) of this section. You 
may not include depreciation in your allowance.
    (k) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (1) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (2) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.463  What are my reporting requirements under an arm's-
length transportation contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on transportation costs you or your affiliate 
incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
transportation contracts, production agreements, operating agreements, 
and related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.
    (d)(1) You must submit page 1 of the initial form ONRR-4293 prior 
to, or at the same time as, you report the transportation allowance 
determined under an arm's-length contract on form ONRR-4430.
    (2) The initial form ONRR-4293 is effective beginning with the 
production

[[Page 62050]]

month when you are first authorized to deduct a transportation 
allowance and continues until the end of the calendar year, or until 
the termination, modification, or amendment of the applicable contract 
or rate, whichever is earlier.
    (3) After the initial period when ONRR first authorized you to 
deduct a transportation allowance and for succeeding periods, you must 
submit the entire form ONRR-4293 by the earlier of the following:
    (i) Within three months after the end of the calendar year
    (ii) After the termination, modification, or amendment of the 
applicable contract or rate
    (4) You may request to use an allowance for a longer period than 
that required under paragraph (d)(2) of this section.
    (i) You may use that allowance beginning with the production month 
following the month when ONRR received your request to use the 
allowance for a longer period until ONRR decides whether to approve the 
longer period.
    (ii) ONRR's decision whether or not to approve a longer period is 
not appealable under 30 CFR part 1290.
    (iii) If ONRR does not approve the longer period, you must adjust 
your transportation allowance under Sec.  1206.466.


Sec.  1206.464  What are my reporting requirements under a non-arm's-
length transportation contract or no written arm's-length contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on non-arm's-length transportation costs that you 
or your affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.
    (c)(1) You must submit an initial form ONRR-4293 prior to, or at 
the same time as, the transportation allowance determined under a non-
arm's-length contract or no written arm's-length contract situation 
that you report on form ONRR-4430. If ONRR receives a form ONRR-4293 by 
the end of the month when the form ONRR-4430 is due, ONRR will consider 
the form to be received in a timely manner. You may base the initial 
form on estimated costs.
    (2) The initial form ONRR-4293 is effective beginning with the 
production month when you are first authorized to deduct a 
transportation allowance and continues until the end of the calendar 
year or termination, modification, or amendment of the applicable 
contract or rate, whichever is earlier.
    (3)(i) At the end of the calendar year for which you submitted a 
form ONRR-4293 based on estimates, you must submit another, completed 
form ONRR-4293 containing the actual costs for that calendar year.
    (ii) If the transportation continues, you must include on form 
ONRR-4293 your estimated costs for the next calendar year.
    (A) You must base the estimated transportation allowance on the 
actual costs for the previous reporting period plus or minus any 
adjustments based on your knowledge of decreases or increases that will 
affect the allowance.
    (B) ONRR must receive form ONRR-4293 within three months after the 
end of the previous calendar year.
    (d)(1) For new non-arm's-length transportation facilities or 
arrangements, on your initial ONRR-4293 form, you must include 
estimates of the allowable transportation costs for the applicable 
period.
    (2) You must use your or your affiliate's most recently available 
operations data for the transportation system as your estimate, if 
available. If such data is not available, you must use estimates based 
on data for similar transportation systems.
    (e) Upon ONRR's request, you must submit all data used to prepare 
your ONRR-4293 form. You must provide the data within a reasonable 
period of time, as ONRR determines.
    (f) Section 1206.466 applies when you amend your form ONRR-4293 
based on the actual costs.


Sec.  1206.465  What interest and penalties apply if I improperly 
report a transportation allowance?

    (a)(1) If ONRR determines that you took an unauthorized 
transportation allowance, then you must pay any additional royalties 
due, plus late payment interest calculated under Sec.  1218.202 of this 
chapter.
    (2) If you understated your transportation allowance, you may be 
entitled to a credit without interest.
    (b) If you improperly net a transportation allowance against the 
sales value of the coal instead of reporting the allowance as a 
separate entry on form ONRR-4430, ONRR may assess a civil penalty under 
30 CFR part 1241.


Sec.  1206.466  What reporting adjustments must I make for 
transportation allowances?

    (a) If your actual transportation allowance is less than the amount 
that you claimed on form ONRR-4430 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter from 
the date when you took the deduction to the date when you repay the 
difference.
    (b) If the actual transportation allowance is greater than the 
amount that you claimed on form ONRR-4430 for any month during the 
period reported on the allowance form, you are entitled to a credit 
without interest.


Sec.  1206.467  What general washing allowance requirements apply to 
me?

    (a)(1) If you determine the value of your coal under Sec.  1206.452 
of this subpart, you may take a washing allowance for the reasonable, 
actual costs to wash coal. The allowance is a deduction when 
determining coal royalty value for the costs that you incur to wash 
coal.
    (2) Before you may take any deduction, you must submit a completed 
page 1 of the Coal Washing Allowance Report (Form ONRR-4292), under 
Sec. Sec.  1206.470 and 1206.471 of this subpart. You may claim a 
washing allowance retroactively for a period of not more than three 
months prior to the first day of the month when you have filed form 
ONRR-4292 with ONRR.
    (3) You may not use a washing allowance that was in effect before 
January 1, 2017. You must use the provisions of this subpart to 
determine your washing allowance.
    (b) You may not:
    (1) Take an allowance for the costs of washing lease production 
that is not royalty bearing.
    (2) Disproportionately allocate washing costs to Indian leases. You 
must allocate washing costs to washed coal attributable to each Indian 
lease by multiplying the input ratio determined under Sec.  
1206.451(e)(2)(i) by the total allowable costs.
    (c)(1) You must express washing allowances for coal as a dollar-
value equivalent per short ton of coal washed.
    (2) If you do not base your or your affiliate's payments for 
washing under an arm's-length contract on a dollar-per-unit basis, you 
must convert whatever consideration that you or your affiliate paid 
into a dollar-value equivalent.
    (d) ONRR may determine your washing allowance under Sec.  1206.454 
because:
    (1) There is misconduct by or between the contracting parties;
    (2) ONRR determines that the consideration that you or your 
affiliate paid under an arm's-length washing contract does not reflect 
the reasonable cost of the washing because you breached your duty to 
market the coal

[[Page 62051]]

for the mutual benefit of yourself and the lessor by washing your coal 
at a cost that is unreasonably high. We may consider a washing 
allowance to be unreasonably high if it is 10 percent higher than the 
highest other reasonable measures of washing, including, but not 
limited to, washing allowances reported to ONRR and costs for coal 
washed in the same plant or other plants in the region; or
    (3) ONRR cannot determine if you properly calculated a washing 
allowance under Sec. Sec.  1206.467 through 1206.469 for any reason, 
including, but not limited to, your or your affiliate's failure to 
provide documents that ONRR requests under 30 CFR part 1212, subpart E.
    (e) You may only claim a washing allowance if you sell the washed 
coal and report and pay royalties.


Sec.  1206.468  How do I determine washing allowances if I have an 
arm's-length washing contract or no written arm's-length contract?

    (a) If you or your affiliate incur(s) washing costs under an arm's-
length washing contract, you may claim a washing allowance for the 
reasonable, actual costs incurred.
    (b) You must be able to demonstrate that your or your affiliate's 
contract is arm's-length.
    (c) If you have no contract for the washing of coal, then ONRR will 
determine your transportation allowance under Sec.  1206.454. You may 
not use this paragraph (c), if you or your affiliate perform(s) your 
own washing. If you or your affiliate perform(s) the washing, then:
    (1) You must propose to ONRR a method to determine the allowance 
using the procedures in Sec.  1206.458(a).
    (2) You may use that method to determine your allowance until ONRR 
issues a determination.


Sec.  1206.469  How do I determine washing allowances if I do not have 
an non-arm's-length washing contract?

    (a) This section applies if you or your affiliate do(es) not have 
an arm's-length washing contract, including situations where you or 
your affiliate provides your own washing services. Calculate your 
washing allowance based on your or your affiliate's reasonable, actual 
costs for washing during the reporting period using the procedures 
prescribed in this section.
    (b) Your or your affiliate's actual costs may include:
    (1) Capital costs and operating and maintenance expenses under 
paragraphs (d), (e), and (f) of this section.
    (2) Overhead under paragraph (g) of this section.
    (3) Depreciation under paragraph (h) of this section and a return 
on undepreciated capital investment under paragraph (i) of this 
section, or a cost equal to a return on the initial depreciable capital 
investment in the wash plant under paragraph (j) of this section. After 
you have elected to use either method for a wash plant, you may not 
later elect to change to the other alternative without ONRR's approval. 
If ONRR accepts your request to change methods, you may use your 
changed method beginning with the production month following the month 
when ONRR received your change request.
    (c) You may not use any cost as a deduction that duplicates all or 
part of any other cost that you use under this section.
    (d) Allowable capital investment costs are generally those for 
depreciable fixed assets (including costs of delivery and installation 
of capital equipment), which are an integral part of the wash plant.
    (e) Allowable operating expenses include the following:

(1) Operations supervision and engineering
(2) Operations labor
(3) Fuel
(4) Utilities
(5) Materials
(6) Ad valorem property taxes
(7) Rent
(8) Supplies
(9) Any other directly allocable and attributable operating expenses 
that you can document

    (f) Allowable maintenance expenses include the following:

(1) Maintenance of the wash plant
(2) Maintenance of equipment
(3) Maintenance labor
(4) Other directly allocable and attributable maintenance expenses that 
you can document

    (g) Overhead, directly attributable and allocable to the operation 
and maintenance of the wash plant is an allowable expense. State and 
Federal income taxes and Indian Tribal severance taxes and other fees, 
including royalties, are not allowable expenses.
    (h)(1) To calculate depreciation, you may elect to use either (i) a 
straight-line depreciation method based on the life of the wash plant 
or the life of the reserves that the wash plant services, or you may 
elect to use (ii) a unit-of-production method. After you make an 
election, you may not change methods without ONRR's approval. If ONRR 
accepts your request to change methods, you may use your changed method 
beginning with the production month following the month when ONRR 
received your change request.
    (2) A change in ownership of a wash plant will not alter the 
depreciation schedule that the original washer/lessee established for 
the purposes of the allowance calculation.
    (3) With or without a change in ownership, you may depreciate a 
wash plant only once.
    (i) To calculate a return on undepreciated capital investment, 
multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the washing 
allowance by the rate of return provided in paragraph (k) of this 
section.
    (j) As an alternative to using depreciation and a return on 
undepreciated capital investment, as provided under paragraph (b)(3) of 
this section, you may use as a cost an amount equal to the allowable 
initial capital investment in the wash plant multiplied by the rate of 
return as determined under paragraph (k) of this section. You may not 
include depreciation in your allowance.
    (k) The rate of return is the industrial rate associated with 
Standard & Poor's BBB rating.
    (1) You must use the monthly average BBB rate that Standard & 
Poor's publishes for the first month for which the allowance is 
applicable.
    (2) You must re-determine the rate at the beginning of each 
subsequent calendar year.


Sec.  1206.470  What are my reporting requirements under an arm's-
length washing contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on washing costs that you or your affiliate 
incur(s).
    (b) ONRR may require you or your affiliate to submit arm's-length 
washing contracts, production agreements, operating agreements, and 
related documents.
    (c) You can find recordkeeping requirements in parts 1207 and 1212 
of this chapter.
    (d)(1) You must file an initial form ONRR-4292 prior to, or at the 
same time as, the washing allowance determined under an arm's-length 
contract or no written arm's-length contract situation that you report 
on form ONRR-4430. If ONRR receives a form ONRR-4292 by the end of the 
month when the form ONRR-4430 is due, ONRR will consider the form to be 
received in a timely manner.
    (2) The initial form ONRR-4292 is effective beginning with the 
production month when you are first authorized to

[[Page 62052]]

deduct a washing allowance and continues until the end of the calendar 
year, or until the termination, modification, or amendment of the 
applicable contract or rate, whichever is earlier.
    (3) After the initial period that ONRR first authorized you to 
deduct a washing allowance, and for succeeding periods, you must submit 
the entire form ONRR-4292 by the earlier of the following:
    (i) Within three months after the end of the calendar year.
    (ii) After the termination, modification, or amendment of the 
applicable contract or rate.
    (4) You may request to use an allowance for a longer period than 
that required under paragraph (d)(2) of this section.
    (i) You may use that allowance beginning with the production month 
following the month when ONRR received your request to use the 
allowance for a longer period until ONRR decides whether to approve the 
longer period.
    (ii) ONRR's decision whether or not to approve a longer period is 
not appealable under 30 CFR part 1290.
    (iii) If ONRR does not approve the longer period, you must adjust 
your transportation allowance under Sec.  1206.466.


Sec.  1206.471  What are my reporting requirements under a non-arm's-
length washing contract or no written arm's-length contract?

    (a) You must use a separate entry on form ONRR-4430 to notify ONRR 
of an allowance based on non-arm's-length washing costs that you or 
your affiliate incur(s).
    (b) ONRR may require you or your affiliate to submit all data used 
to calculate the allowance deduction. You can find recordkeeping 
requirements in parts 1207 and 1212 of this chapter.
    (c)(1) You must submit an initial form ONRR-4292 prior to, or at 
the same time as, the washing allowance determined under a non-arm's-
length contract or no written arm's-length contract situation that you 
report on form ONRR-4430. If ONRR receives a form ONRR-4292 by the end 
of the month when the form ONRR-4430 is due, ONRR will consider the 
form to be received in a timely manner. You may base the initial 
reporting on estimated costs.
    (2) The initial form ONRR-4292 is effective beginning with the 
production month when you are first authorized to deduct a washing 
allowance and continues until the end of the calendar year or 
termination, modification, or amendment of the applicable contract or 
rate, whichever is earlier.
    (3)(i) At the end of the calendar year for which you submitted a 
form ONRR-4292, you must submit another, completed form ONRR-4292 
containing the actual costs for that calendar year.
    (ii) If coal washing continues, you must include on form ONRR-4292 
your estimated costs for the next calendar year.
    (A) You must base the estimated coal washing allowance on the 
actual costs for the previous period plus or minus any adjustments 
based on your knowledge of decreases or increases that will affect the 
allowance.
    (B) ONRR must receive form ONRR-4292 within three months after the 
end of the previous calendar year.
    (d)(1) For new non-arm's-length washing facilities or arrangements 
on your initial form ONRR-4292, you must include estimates of allowable 
washing costs for the applicable period.
    (2) You must use your or your affiliate's most recently available 
operations data for the wash plant as your estimate, if available. If 
such data is not available, you must use estimates based on data for 
similar wash plants.
    (e) Upon ONRR's request, you must submit all data that you used to 
prepare your forms ONRR-4293. You must provide the data within a 
reasonable period of time, as ONRR determines.
    (f) Section 1206.472 applies when you amend your form ONRR-4292 
based on the actual costs.


Sec.  1206.472  What interest and penalties apply if I improperly 
report a washing allowance?

    (a)(1) If ONRR determines that you took an unauthorized washing 
allowance, then you must pay any additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter.
    (2) If you understated your washing allowance, you may be entitled 
to a credit without interest.
    (b) If you improperly net a washing allowance against the sales 
value of the coal instead of reporting the allowance as a separate 
entry on form ONRR-4430, ONRR may assess a civil penalty under 30 CFR 
part 1241.


Sec.  1206.473  What reporting adjustments must I make for washing 
allowances?

    (a) If your actual washing allowance is less than the amount that 
you claimed on form ONRR-4430 for each month during the allowance 
reporting period, you must pay additional royalties due, plus late 
payment interest calculated under Sec.  1218.202 of this chapter from 
the date when you took the deduction to the date when you repay the 
difference.
    (b) If the actual washing allowance is greater than the amount that 
you claimed on form ONRR-4430 for any month during the period reported 
on the allowance form, you are entitled to a credit without interest.

[FR Doc. 2020-20560 Filed 9-30-20; 8:45 am]
 BILLING CODE 4335-30-P