ONRR 2020 Valuation Reform and Civil Penalty Rule: Delay of Effective Date, 20032-20035 [2021-07886]

Agencies

• DEPARTMENT OF THE INTERIOR
• Office of Natural Resources Revenue

[Federal Register Volume 86, Number 72 (Friday, April 16, 2021)]
[Rules and Regulations]
[Pages 20032-20035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07886]


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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1206 and 1241

[Docket No. ONRR-2020-0001; DS63644000 DRT000000.CH7000 212D1113RT]
RIN 1012-AA27


ONRR 2020 Valuation Reform and Civil Penalty Rule: Delay of 
Effective Date

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

ACTION: Final rule; delay of effective date.

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SUMMARY: ONRR is delaying the effective date of the final rule entitled 
``ONRR 2020 Valuation Reform and Civil Penalty Rule'' (``2020 Rule'') 
from April 16, 2021 to November 1, 2021. The purpose of this second 
delay is to avoid placing undue regulatory burdens on lessees caused by 
allowing the 2020 Rule to go into effect while ONRR considers whether 
it will revise or withdraw some or all of that rule due to apparent 
defects in that rule.

DATES: As of April 16, 2021, the effective date of the rule published 
on at 86 FR 4612 on January 15, 2021, which was initially delayed at 86 
FR 9286 on February 12, 2021, is further delayed until November 1, 
2021.
    Compliance date: With respect to the amendments to 30 CFR part 
1206, published at 86 FR 4612 on January 15, 2021, the May 1, 2021, 
compliance date is delayed indefinitely at this time, and will be 
addressed in a future rulemaking issued prior to the 2020 Rule's 
effective date.

FOR FURTHER INFORMATION CONTACT: For questions on procedural issues, 
contact Dane Templin, Regulations Supervisor, at (303) 231-3149 or 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

    On January 15, 2021, ONRR published the 2020 Rule in the Federal 
Register, amending certain regulations that inform the manner in which 
ONRR values oil and gas produced from Federal leases for royalty 
purposes; values coal produced from Federal and Indian leases for 
royalty purposes; and assesses civil penalties for violations of 
certain statutes, regulations, lease terms, and orders associated with 
Federal and Indian energy and mineral leases. See 86 FR 4612. In 
addition, the 2020 Rule made minor, non-substantive corrections to 
ONRR's regulations. As published, the 2020 Rule had an effective date 
of February 16, 2021, and, for amendments to 30 CFR part 1206 only, a 
compliance date of May 1, 2021.
    On January 20, 2021, the Assistant to the President and Chief of 
Staff issued a memorandum entitled ``Regulatory Freeze Pending Review'' 
(``Regulatory Freeze Memorandum'') which, coupled with the guidance on 
implementation of the memorandum issued by the Office of Management and 
Budget (``OMB'') in Memorandum M-21-14 dated January 20, 2021, directed 
agencies to consider delaying the effective date of rules published in 
the Federal Register that had not yet become effective. See 86 FR 7424.
    Accordingly, on February 12, 2021, ONRR published a final rule in 
the Federal Register to delay the 2020 Rule's effective date until 
April 16, 2021 (``First Delay Rule,'' 86 FR 9286). The First Delay Rule 
opened a 30-day comment period, inviting public comment on the facts, 
law, and policy underlying the 2020 Rule, the effect of the 60-day 
delay, impacts of a potential further delay, and the criteria listed in 
OMB Memorandum M-21-14. Of the ten questions posed in the First Delay 
Rule, eight of the questions pertained to the 2020 Rule and two 
pertained to the effect of the delay. See 86 FR 9287-9288.
    In response, ONRR received 1,339 pages of comment material from 
commenters representing industry members, trade associations, 
environmental groups, non-governmental organizations, States, and 
members of the public. Many commenters raised significant concerns 
pertaining to different aspects of the 2020 Rule, while a few expressed 
support for the 2020 Rule. Among those concerns, commenters identified 
potential procedural flaws in the 2020 Rule and expressed that ONRR 
failed to adequately consider relevant facts or otherwise address 
objections that had been raised prior to the publication of the 2020 
Rule. Some commenters stated that ONRR did not provide certain 
information in the proposed rule (see 85 FR 62054) and, therefore, 
failed to provide an opportunity for meaningful public comment in the 
rulemaking process that preceded the 2020 Rule.
    ONRR received comments (in response to the First Delay Rule) that 
identified potential defects in the 2020 Rule--both substantively and 
procedurally. In addition, since the publication of the 2020 Rule, 
ONRR's 2021 reexamination has identified potential shortcomings of the 
2020 Rule. Potential defects and shortcomings of the 2020 Rule include:
    1. The 2020 Rule relied on executive orders that were withdrawn 
within days after the 2020 Rule's publication and before its effective 
date. Thus, when the 2020 Rule was to become effective, part of 
justification for the 2020 Rule no longer existed. Moreover, prior to 
the current effective date, additional executive orders have been 
issued which reflect different policy considerations which should be 
evaluated.
    2. The 2020 Rule contained significantly expanded and new 
justifications for its amendments that were not included in the 
proposed 2020 Rule, potentially without the full benefit of public 
comment.
    3. The 2020 Rule contained inconsistent language on whether it was 
intended to incentivize production that would not occur in the absence 
of the 2020 Rule. And, where the 2020 Rule suggested an amendment was 
meant in part to incentivize production, the rule lacked an analysis 
that showed how or to what extent production would increase.
    4. ONRR, as the agency charged with collecting and distributing 
royalties, may lack the authority to propose regulations in an attempt 
to incentivize production.
    5. The reason given for the 2020 Rule's reinstitution of deepwater 
gathering allowances and extraordinary processing allowance was to 
incentivize production, but the rule failed to provide adequate factual 
evidence that the deepwater gathering allowance would, in fact, do so.
    6. The proposed 2020 Rule failed to include proposed regulation 
text to reinstitute a deepwater gathering allowance for Federal gas, 
and also failed to include much of the proposed regulation text to 
reinstitute a deepwater gathering allowance for Federal oil. As a 
result, the public may not have been given adequate opportunity to 
comment on the proposed changes.

[[Page 20033]]

    7. The economic analyses supporting the amendments to the index-
based valuation option included in the 2020 Rule assumed that 50% of 
eligible lessees would elect the option and 50% would not without 
regard to their individual financial interests, rather than assuming 
that lessees would elect the option--or not--based on their own 
financial interests. As a result, the proposed and final rules may have 
understated or misstated the royalty consequences of the option.
    8. ONRR did not consider alternatives when it proposed and 
finalized a change to the index-based options (from the highest to an 
average).
    9. ONRR decided, in the 2020 Rule, to eliminate the requirement of 
signed contracts. ONRR never considered alternatives such as amending 
the definition of contract to eliminate ``oral contracts'' or to 
require the lessee to contemporaneously memorialize the terms of oral 
contracts for its records.
    10. ONRR eliminated the definition of ``misconduct'' rather than 
considering clarifying amendments.
    11. ONRR eliminated the default provision rather than considering 
clarifying the circumstances under which it would apply (or other 
amendments).
    12. ONRR eliminated the ``coal as electricity'' valuation option 
but did not discuss potential clarifying amendments or alternatives.
    13. ONRR eliminated the definition of ``coal cooperative'' but did 
not discuss potential clarifying amendments.
    14. Whether the Tenth Circuit Court of Appeals decision in API v. 
U.S. Dep't. of the Interior, 823 Fed. App'x 583 (10th Cir. 2020) 
renders ONRR's reliance on Judge Frudenthal's decision in API v. U.S. 
Dep't. of the Interior, 366 F. Supp. 3d 1292, 1309-10 (D. Wyo. 2018) 
improper. Specifically, whether the dismissal of API's petition makes 
reliance on Judge Frudenthal's decision on 30 CFR 1241.11(b)(5) 
questionable.

II. Purpose of This Action

    The First Delay Rule's comment period closed on March 15, 2021. 
Upon preliminary review of the comments received, ONRR finds it needs 
additional time to review the comments on the 2020 Rule (received in 
response to the First Delay Rule), identifying both procedural and 
substantive defects in the 2020 Rule. These comments raise new issues 
and, in part, suggest legitimate bases for a litigation challenge to 
the 2020 Rule. During this second period of delay, ONRR will review and 
analyze the comments as well as conduct factual and legal research. 
ONRR will address and respond to the substantive comments specific to 
those issues in a subsequent Federal Register publication. In the event 
ONRR finds it appropriate to withdraw or modify the 2020 Rule, it will 
publish a proposed rule and seek public comment. For this rule, ONRR 
has summarized and responded to the substantive comments that 
specifically related to the delay of the 2020 Rule's effective date.
    Public Comment: A few commenters urged ONRR to begin implementing 
the 2020 Rule without further delay. Some commenters disagreed with 
ONRR's decision to publish the First Delay Rule. These commenters 
generally advocated against any further delays and urged that the 2020 
Rule be allowed to become immediately effective. According to one 
commenter, ONRR's First Delay Rule failed to sufficiently explain how 
the change in Executive orders and protracted litigation satisfy the 
OMB Memorandum's criteria to justify the delay. The commenter 
additionally noted that ONRR failed to identify any specific defects in 
the 2020 Rule when it published the First Delay Rule.
    ONRR Response: ONRR appreciates that commenters who generally 
supported or opposed the 2020 Rule at the proposed rule stage continue 
to support it becoming effective or further delayed, respectively. At 
this time, one of ONRR's primary concerns is with a fair and 
transparent rulemaking process that provides adequate time to 
thoughtfully consider the comments received and to research and develop 
a response thereto. ONRR disagrees that it failed to justify the first 
delay in a manner required by the OMB Memorandum. In addition, ONRR 
finds that it is appropriate, and in the interest of all parties, to 
delay the 2020 Rule a second time, while it considers any defects in 
the facts, law, or policy underpinning the 2020 Rule and researches and 
develops a response to the comments on the 2020 Rule received in 
response to the First Delay Rule.
    Public Comment: One commenter claimed that ONRR's statement 
relating to the extensive IT system (computer programming), accounting, 
and other business process modifications ignored the 2020 Rule's 
conclusion that the minor administrative burden imposed by that rule 
would be offset by much larger royalty impacts. Another commenter 
stated that clarity on when the 2020 Rule and its changes will go into 
effect allows companies to make the appropriate system changes in order 
to comply with the new requirements. Multiple commenters stated that 
continually delaying the effective date would create uncertainty, place 
an undue burden on the regulated entities, and exacerbate the 
challenges created by ONRR's 2016 Consolidated Federal Oil & Gas and 
Federal & Indian Coal Valuation Reform Rule (``2016 Valuation Rule''). 
See 81 FR 43337 (July 1, 2017).
    ONRR Response: ONRR agrees that most lessees would pay less 
royalties under the 2020 Rule. However, further examination of the 
facts, law, and policy underpinning the 2020 Rule may not support the 
2020 Rule's reduction in royalties.
    ONRR acknowledges that changes to its valuation rules often require 
changes to the business and system processes lessees use to report and 
pay royalties to ONRR. Historically, ONRR has worked to avoid 
situations where lessees are required to comply with reporting and 
payment requirements before lessees have had adequate time to adapt 
processes to make compliance possible. Production accounting and 
commodity valuation are technical and complex subjects. As such, before 
and after the dates on which a rule becomes effective and compliance is 
required, ONRR works extensively with industry to train, provide 
guidance, and otherwise assist industry in its efforts to report and 
pay in compliance with new or amended ONRR regulations. When ONRR 
published the 2016 Valuation Rule, it provided 6 months between the 
date of publication and the effective date to allow ONRR and the 
regulated public time to make system and programming changes. Both 
following publication of the 2016 Valuation Rule and vacatur of its 
repeal on March 29, 2019, ONRR provided numerous training sessions and 
responses to guidance requests from lessees on how to comply with that 
rule. Even with those outreach efforts, based on the continued concerns 
lessees raised about their ability to come into compliance with the 
2016 Valuation Rule by the deadlines set, ONRR issued three reporter 
letters (June 13, and November 20, 2019 and June 30, 2020) to provide 
lessees a total of 18 months of additional time to comply with the 2016 
Valuation Rule prior to ONRR's commencement of compliance activities:
    1. The first reporter letter gave lessees until January 1, 2020 to 
come into compliance with the 2016 Valuation Rule, stating ``lessees 
may need time to modify their royalty reporting systems and submit 
amended royalty reports.''
    2. The second reporter letter further extended the reporting and 
payment deadline to July 1, 2020. It stated that ``the Department of 
the Interior received feedback from industry stating that because this 
reinstatement [of the 2016

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Valuation Rule] requires system changes and re-reporting for the period 
January 1, 2017 through the present, that additional time was necessary 
for industry to comply.''
    3. The third reporter letter, further extended the reporting and 
payment deadline to October 1, 2020 for reasons similar to the first 
two reporter letters.
    Delaying the 2020 Rule requires no system changes and is necessary 
to ensure that ONRR has the opportunity to fully review and analyze 
public comments and to research and develop a response thereto. In that 
response, ONRR may address substantive issues, if any, underlying the 
2020 Rule and take appropriate action, which could include revision or 
withdrawal of some or all of the 2020 Rule. If ONRR were to determine 
that substantive issues exist with the 2020 Rule after the 2020 Rule's 
effective date, it would necessitate another rulemaking that would 
force industry to undertake and, in many instances, pay for another 
system change, with the prior system change only being applicable for a 
brief period between the effective date of the 2020 Rule and ONRR's 
revision or withdrawal of that rule. As one commenter pointed out, this 
situation is especially burdensome to small producers with limited 
staff and resources. In sum, ONRR finds that this delay, which 
preserves the currently effective regulatory requirements, will 
contribute to an increase in long-term certainty for lessees and avoid 
the possibility of administrative costs necessitated by multiple system 
changes.
    Public Comment: One commenter stated that a delay of the 2020 
Rule's effective date would result in higher royalty revenue, which in 
turn impacts the Federal Government, State governments, and taxpayers. 
The commenter's assumption was based on the analysis in the 2020 Rule 
that estimated a net decrease in annual royalty revenues of $28.9 
million. The commenter asserted that ONRR neither adequately measured 
the resulting impacts nor explained why the 2020 Rule's benefits 
justified the costs. The commenter concluded that an additional delay 
would allow ONRR the opportunity to correctly evaluate the 2020 Rule's 
impacts.
    Other commenters supported further delaying the 2020 Rule's 
effective date to the extent necessary to accomplish a withdrawal or 
repeal of the 2020 Rule, which the commenters believe is in the 
interests of regulatory certainty and the public, and would avoid 
unnecessary administrative costs.
    ONRR Response: ONRR appreciates the concerns from all commenters on 
the changes to royalty and administrative costs associated with this 
rule. While ONRR understands the general concerns expressed by some of 
the commenters, none of the comments received provided tangible 
evidence showing that a second delay will significantly harm or affect 
the operational decision-making of lessees prior to the 2020 Rule's 
effective date as extended by the First Delay Rule or a second delay. 
The second delay provided by this rule leaves in place the requirements 
that have been applicable since January 1, 2017, which, as the 
commenter and 2020 Rule's economic analysis conclude, result in higher 
royalties overall than the 2020 Rule. The delay will allow time for 
additional research into the validity of the issues raised by the 
comments, as well as time for compliance with the requirements of the 
2020 Rule.
    Throughout the period of this second delay, ONRR will continue to 
fulfill its statutory responsibility to ensure prompt and proper 
collection and disbursement of royalties in accordance with the 
regulations that are currently in effect. Given that ONRR received no 
evidence demonstrating a delay is harmful to the public, States, or 
industry, ONRR finds that a second delay of the effective date will 
have no impact on its ability to perform its statutory duties. 
Moreover, a second delay of the 2020 Rule's effective date will ensure 
a fair, transparent, and procedurally-sound final decision.
    Public Comment: One commenter requested clarification on whether a 
delay in the 2020 Rule's effective date would also postpone the 
compliance date for the 30 CFR part 1206 amendments, or if the 
compliance date continues to be May 1, 2021.
    ONRR Response: This rule delays the 2020 Rule's effective date to 
November 1, 2021. ONRR could not require compliance on May 1, 2021 
because that date now falls before the 2020 Rule's effective date. ONRR 
did not receive comments discussing the appropriate time period between 
the effective date and the compliance date. If ONRR determines it is 
appropriate to allow the 2020 Rule to go into effect, ONRR will provide 
a reasonable time period for lessees to come into compliance with the 
amendments, if any, to 30 CFR part 1206 included in the 2020 Rule.

III. Good Cause

    This rule will become effective immediately upon its publication in 
the Federal Register and is based on the good cause exception in 5 
U.S.C. 553(d)(3). This delay avoids burdens to lessees associated with 
a rule change by postponing any rule change while ONRR reviews the 
potential substantive and procedural concerns with 2020 Rule--including 
those identified in this rule. Lessees will continue to comply with the 
requirements that have been applicable since January 1, 2017 and remain 
effective today. Also, it provides additional time for regulated 
entities to plan for implementation of system modifications required 
for compliance with the 2020 Valuation Rule. Furthermore, ONRR seeks to 
review new information submitted through public comment that identifies 
fundamental deficiencies in the 2020 Valuation Rule and may result in 
different conclusions regarding the impact of certain provisions. (See, 
for example, the potential shortcomings in the 2020 Rule identified in 
the numbered paragraphs in Background section, above). ONRR will also 
review the 2020 Rule in light of public comments suggesting the 
potential for litigation, which would generate further uncertainty for 
regulated entities. Further, since this rule effects only a 
continuation of the delay of the effective date, there is no 
substantive change to which parties would need time to adjust their 
business practices or procedures on account of the delay.
    ONRR finds that it is in the public interest to not allow the 2020 
Rule to go into effect on April 16, 2021. As explained in the comment 
responses above, lessees incur significant costs to adapt their 
computer and accounting systems and reporting activities to changes in 
ONRR's valuation regulations. Also explained above, ONRR provided an 
initial 6 months between publication and effective dates of the 2016 
Valuation Rule, and then after the 2019 vacatur of the 2017 repeal of 
the 2016 Valuation Rule, industry sought, and ONRR provided, an 
additional 18 months for industry to come into compliance with the 2016 
Valuation Rule before beginning compliance activities. The 2020 Rule 
covers a number of the same subjects that were covered in the 2016 
Valuation Rule. If the 2020 Rule were allowed to go into effect on 
April 16, and ONRR, following its on-going review, concluded it is 
appropriate to withdraw or revise, in whole or in part, the 2020 Rule, 
it would cause lessees to incur significant administrative costs to 
first adapt to the 2020 Rule, and then incur a similar amount to adapt 
to the 2020 Rule's withdrawal or revision. Thus, ONRR believes it is in 
the public interest to pursue a course that results

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in no more than one effort by lessees to adapt their systems and 
practices, and which allows adequate time for computer and accounting 
system changes.
    This delay preserves the currently effective requirements while 
ONRR's review of comments is ongoing and final decisions are being made 
consistent with (1) the withdrawal of the Executive orders on which the 
2020 Rule was, in part, based and (2) the issuance of new Executive 
orders, including, but not limited to, Executive Order 13990, 
``Protecting Public Health and the Environment and Restoring Science to 
Tackle the Climate Crisis,'' Executive Order 13992, ``Revocation of 
Certain Executive Orders Concerning Federal Regulation,'' and Executive 
Order 14008, ``Tackling the Climate Crisis at Home and Abroad.'' See 86 
FR 7037 (Jan. 25, 2021), 86 FR 7049 (Jan. 25, 2021), and 86 FR 7619 
(Feb. 1, 2021), respectively.
    The Administrative Procedure Act's (APA) legislative history 
indicates that the purpose of the notice requirement at 5 U.S.C. 
553(d)(3) is to ``afford persons affected a reasonable time to prepare 
for the effective date of a rule or rules or to take any other action 
which the issuance of rules may prompt.'' S. Rep. No. 752, 79th Cong., 
1st Sess. 201 (1946) and H.R. Rep. No. 1980, 79th Cong., 2nd Sess. 259 
(1946). Delaying the effective date provides certainty for the 
regulated industry during the delay period while ONRR continues to 
review the 2020 Rule, and eliminates circumstances which would 
otherwise require regulated entities to update their reporting 
processes in anticipation of compliance with a rule that may be subject 
to further revision or withdrawal. ONRR is committed to ensuring 
transparency and providing certainty in the adequacy and finality of 
the 2020 Rule. Thus, it would be contrary to the public interest for 
the 2020 Rule to go into effect, with its accompanying changes in 
reporting and payment requirements, while the 2020 Rule remains under 
review. To do otherwise would lead to uncertainty and confusion 
regarding reporting and payment requirements, duplication of effort, a 
potential and unnecessary increase in administrative costs, and a 
strain on lessees and recipient States while the interpretation and 
application of valuation and payment rules change.
    In the First Delay Rule, ONRR anticipated that a second delay might 
be necessary. See 86 FR 9288. For the reasons stated above, and 
specifically those related to the identified potential shortcomings in 
the 2020 Rule as well as undue burdens on regulated entities, ONRR 
believes this second delay, until November 1, is appropriate. Thus, 
ONRR finds that there is good cause for this action under 5 U.S.C. 
553(d)(3) for this rule to become effective immediately upon 
publication. This action is taken pursuant to delegated authority.

List of Subjects

30 CFR Part 1206

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

30 CFR Part 1241

    Administrative practice and procedure, Coal, Geothermal energy, 
Indians-lands, Mineral royalties, Natural gas, Oil and gas exploration, 
Penalties, Public lands-mineral resources.

Rachael S. Taylor,
Principal Deputy Assistant Secretary--Policy, Management and Budget.
[FR Doc. 2021-07886 Filed 4-14-21; 4:15 pm]
BILLING CODE 4335-30-P