Accounting and Auditing Relief for Marginal Properties

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[Federal Register: September 13, 2004 (Volume 69, Number 176)]
[Rules and Regulations]
[Page 55076-55092]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se04-4]

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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 204
RIN 1010-AC30

AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Final rule.

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SUMMARY: MMS is promulgating new regulations to implement certain
provisions in the Federal Oil and Gas Royalty Simplification and
Fairness Act of 1996. These regulations explain how lessees and their
designees can obtain accounting and auditing relief for production from
Federal oil and gas leases and units and communitization agreements
that qualify as marginal properties.

DATES: Effective September 13, 2004.

FOR FURTHER INFORMATION CONTACT: Sharron L. Gebhardt, Lead Regulatory
Specialist, Chief of Staff Office, Minerals Revenue Management, MMS,
telephone (303) 231-3211, fax (303) 231-3781, or e-mail
sharron.gebhardt@mms.gov.

The principal authors of this rule are Sarah L. Inderbitzin of the
Office of the Solicitor and Mary A. Williams of Minerals Revenue
Management, MMS, Department of the Interior (Department).

SUPPLEMENTARY INFORMATION:

I. Background

On August 13, 1996, the President signed into law the Federal Oil
and Gas Royalty Simplification and Fairness Act (RSFA).\1\ RSFA amends
the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA).\2\
Section 7 of RSFA allows MMS and the State concerned (defined under
RSFA as ``a State which receives a portion of royalties or other
payments under the mineral leasing laws from [a Federal onshore or OCS
oil and gas lease]'') \3\ to provide royalty prepayment and regulatory
relief for production from marginal properties for Federal onshore and
Outer Continental Shelf (OCS) oil and gas leases.\4\ The stated purpose
of granting relief to production from marginal properties under RSFA is
to promote production, reduce administrative costs, and increase net
receipts to the United States and the States.\5\ Specifically,
paragraph (c) of the new 30 U.S.C. 1726 enacted by RSFA section 7
directed the Secretary of the Interior (and States that had received a
delegation of audit authority) to ``provide accounting, reporting, and
auditing relief that will encourage lessees to continue to produce and
develop'' marginal properties, ``[p]rovided that such relief will only
be available to lessees in a State that concurs.'' If royalty payments
from a lease are not shared with a State under applicable law, then the
Secretary alone determines whether to provide relief.
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\1\ Pub. L. 104-185, as corrected by Pub. L. 104-200.
\2\ 30 U.S.C. 1701 et seq.
\3\ 30 U.S.C. 1702(31).
\4\ 30 U.S.C. 1726.
\5\ 30 U.S.C. 1726(a).
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In response to the RSFA section 7 amendments, MMS conducted three
workshops to receive input from a wide variety of constituent groups to
develop a proposed rule. The workshops were held at MMS offices in
Denver, Colorado, on October 31, 1996; January 23, 1997; and November
5, 1997. Representatives from several Federal and State government
organizations participated along with industry organizations
representing both small and large Federal oil and gas lessees. The
input received during these workshops was instrumental in developing
the proposed rule that was published in the Federal Register on January
21, 1999 (64 FR 3360). The proposed rule addressed only accounting and
auditing relief. It did not propose prepayment relief. The final rule
also does not include any provisions authorizing prepayment relief.
That subpart is reserved for possible later rulemaking.
Public comments received in response to the proposed rule were
sharply contradictory. The comments fell into two general categories:
1. The States believed that MMS was offering too much relief to
industry; and
2. Industry believed that the rule was too complicated and did not
offer enough relief.
Because of the contradictory opinions, the Associate Director for
Minerals Revenue Management asked the Department's Royalty Policy
Committee (RPC) to form a subcommittee to review the marginal property
issue and make recommendations to the Department on how MMS should
proceed. The RPC appointed a subcommittee with members from several
industry associations and the major States affected by the relief
provisions. MMS employees and a representative of the Office of the
Solicitor served as technical advisors to the subcommittee.
The RPC subcommittee prepared a report and submitted it to the RPC
on

[[Page 55077]]

March 27, 2001. The RPC accepted the subcommittee's recommendations. On
August 2, 2001, the Acting MMS Director--on behalf of the Secretary--
approved the report and advised MMS to proceed with a supplementary
proposed rule incorporating the subcommittee's recommendations. The MMS
published a supplementary proposed rule on March 31, 2003 (68 FR
15390), that included the RPC subcommittee's recommendations with one
exception described in the response to comments in the next two
sections.

II. Comments on the 1999 Proposed Rule

MMS received comments on the initial proposed rule published on
January 21, 1999 (64 FR 3360), from the following nine entities:
? 3 States;
? 1 State and Indian audit organization;
? 2 oil and gas producers;
? 2 industry associations; and
? 1 law firm [hereinafter the ``law firm'']
representing 1
industry association and 11 oil and gas companies.
These comments are analyzed and discussed below:

Definition of Base Period

1999 Proposed Rule. In Sec. 204.2, MMS proposed to define the base
period as the 12-month period from October 1 through September 30
immediately preceding the calendar year in which the lessee takes or
requests marginal property relief.
Public Comments. One State commented that the base period should
track as closely as possible to the beginning of the applicable
calendar year in which the lessee takes marginal property relief. One
producer requested that the base period be moved from October 1 through
September 30 to September 1 through August 31 because the proposed
period did not allow sufficient time for producers to report. One
industry association also requested that the base period be moved back
to give industry more time for calculations.
RPC Subcommittee Recommendation. The subcommittee members discussed
the need to change the proposed base period. Producer groups indicated
that the base period needed to be moved back at least 1 or 2 months.
However, one State representative said that the base period needed to
be as close to the calendar year as possible, but the State could
accept moving it back to September 1 through August 31. The
subcommittee ultimately recommended changing the base period to July 1
through June 30. The subcommittee agreed that it was necessary to move
the base period back in order for MMS to publish a Federal Register
notice before the first of the calendar year listing which States were
participating in the marginal property relief options. The subcommittee
decided that the following schedule should meet the needs of all
parties (industry, States, and MMS):

August 15 Operators submit production reports for June production.
October 1 MMS furnishes States a report of marginal properties for
July-June base period.
November 1 States notify MMS if they wish to opt in or out of marginal
property accounting and auditing relief (if a State fails to notify
MMS, it is deemed to have opted out).
December 1 MMS publishes a Federal Register notice listing which States
are opting in or out.
January 31 Payor notifications are due on the marginal properties that
they will begin reporting annually.
February 28 Payor's annual royalty report and payment are due on
marginal properties for which relief was taken for the previous
calendar year (unless an estimated payment is on file, in which case
the royalty report and payment are due on March 31).

MMS Response. We agree with the RPC subcommittee recommendation to
change the period to July 1 through June 30.

Definition of ``Producing Wells''

1999 Proposed Rule. In Sec. 204.2, MMS proposed to define
producing wells as only those producing oil or gas that contribute to
the sum of the barrels of oil equivalent (BOE) used in the calculation
of a marginal property under Sec. 204.4. The definition excludes
injection or water wells.
MMS Response. MMS is clarifying the definition of ``producing
wells'' in the final rule to further specify which wells will be
included in calculating a marginal property. We are adding a sentence
to clarify that wells with multiple zones commingled downhole are
considered as a single well. Counting each commingled zone as a
separate completion overstates the number of producing well days in
determining the average daily well production for a property.

Definition of ``Property''

Although the proposed rule did not contain a definition of
``property,'' we added a definition to the final rule for
clarification. The rule uses the term ``property,'' and not all
properties will qualify as marginal properties. Therefore, we are
defining property as a lease, a portion of a lease, or an agreement
that may be a marginal property if it meets the qualifications of this
subpart. Section 204.4 explains what criteria a property must meet to
qualify as a marginal property.

Definition of ``Marginal Property''

1999 Proposed Rule. In Sec. 204.4, MMS proposed to define a
``marginal property'' as a property having average daily well
production of less than 15 BOE per well per day during the base period.
Public Comments. The law firm and the two industry associations
suggested that MMS establish separate production levels for different
situations, particularly offshore and onshore properties. One State was
concerned that using all producing wells in the calculation could
result in classifying properties with high-producing wells as marginal.
The same State also objected to MMS delegating to itself the
determination of what marginal production is because RSFA stated that
MMS and the States should determine the definition jointly.
RPC Subcommittee Recommendation. The subcommittee members discussed
the comment that separate qualification rates should be established for
offshore and onshore properties. MMS representatives advised the
subcommittee that industry had previously formed an operational group
to establish a rate for offshore, but the group could not agree and the
idea was dropped. Subcommittee members also discussed whether the
States could set their own individual qualification rates. The
subcommittee members decided this was not acceptable because of the
administrative burden associated with tracking and auditing different
rates for different States. One State representative was concerned that
some States might want to offer some relief but not at an average daily
production of less than 15 BOE. The RPC subcommittee did not recommend
any changes in the definition of ``marginal property.''
MMS Response. In the final rule MMS retains the definition of
``marginal property'' contained in the 1999 proposed rule with minor
modifications to clarify how a lease qualifies as marginal. We moved
the information regarding Indian leases not being eligible for relief
to Sec. 204.1, and added to the first sentence of Sec. 204.200 that
you may obtain accounting and auditing relief for ``Federal onshore or
OCS

[[Page 55078]]

lease'' production from a marginal property.
Also, as explained in the proposed rule, under Sec. 204.4(a)(1),
if your lease is not in an agreement, then your entire lease is a
property that must qualify as a marginal property under paragraph (b)
of this section. In other words, these are stand-alone Federal leases,
and the entire lease would have to qualify under Sec. 204.4.
Under Sec. 204.4(a)(2), if all or a portion of your lease is in
one agreement, then the entire agreement must qualify as a marginal
property under paragraph (b) of this section. For example, even if
other leases in the agreement are not Federal leases, you must use the
production attributable to those leases, as well as your lease, in
order to make the calculation under paragraphs (b) and (c) of this
section to determine whether the agreement meets the production level
limits under paragraph (b). If the agreement does qualify, then the
production attributable to your lease is eligible for relief under this
part. If there are other Federal leases in the agreement, then
production attributable to those leases also could qualify for relief,
but the lessees or designees of those leases will need to apply
individually.
Under Sec. 204.4(a)(3), if all or a portion of your lease is in
more than one agreement, then each agreement must qualify separately as
a marginal property under paragraph (b) of this section. In addition,
for each agreement that qualifies, only the production attributable to
your lease or to the part of your lease in that agreement would be
eligible for relief under this part. For example, if 50 percent of your
lease is included in agreement ``A,'' and 50 percent of your lease is
included in agreement ``B,'' then agreement ``A'' must qualify as
marginal in order for the production attributable to your lease
included in agreement ``A'' to be eligible for relief. Likewise, in
order for the production attributable to the 50 percent of your lease
included in agreement ``B'' to be eligible for relief, agreement ``B''
must qualify as marginal. Any production from your lease that is not
committed to an agreement also may be eligible for separate relief
under paragraph (4) of this section.
Under Sec. 204.4(a)(4), if only a portion of your lease is in an
agreement and you have production from the stand-alone portion of the
Federal lease that is not in the agreement, then the stand-alone
portion must qualify separately as a marginal property under paragraph
(b) of this section. For example, if 50 percent of your lease is
included in an agreement and 50 percent is not, the 50 percent that is
not included in the agreement must qualify separately as marginal
property under paragraph (b) of this section. This would be the case
even if the 50 percent that is included in the agreement did not
qualify as a marginal property.
In this final rule, we deleted the word ``entire'' from paragraph
(a)(1) because it is unnecessary since there is only one lease. In
addition, in paragraph (a)(3), we revised the rule to add language like
paragraph (a)(2) making it clear that any production from your lease
that is not in the agreement may be separately eligible for relief
under section (a)(4).
We also modified paragraph (c) by removing ``on or attributable
to'' in the first sentence to clarify that the entire property (whether
a stand-alone lease, or agreement) must qualify as marginal, not just
the production attributable to your lease, or portion of your lease. We
also added language in the first sentence to state that you must divide
the sum of all BOE for all producing wells on the property ``during the
base period'' to clarify the calculation. In addition, to clarify that
the ``property'' (whether a stand-alone lease, or agreement) must
qualify as marginal, not just the production attributable to your lease
which may be only a part of the relevant property (e.g., an agreement),
we replaced ``your property'' with ``the property.'' Also, throughout
the final rule, we have replaced ``marginal property'' with ``marginal
property production'' when required to distinguish between the
``marginal property'' that the calculation in this section applies to
and your ``marginal property production'' for which you are seeking
relief.
MMS agrees with the subcommittee's conclusion that using different
State production levels to define ``marginal property'' would be too
administratively onerous for use. Such an approach also would result in
a Federal law having different meanings in different States, which
would raise serious legal concerns.
Although using all producing wells in the calculation to determine
whether a property is marginal may result in some leases or units with
high-producing wells being classified as marginal properties, we
believe it would be too administratively burdensome to allow relief for
individual wells, rather than by lease or unit or communitization
agreement (hereinafter referred to as ``agreement'' in this context) as
the rule provides. Moreover, MMS believes that, because a State may opt
out on providing relief if it does not concur with the definition of
``marginal property,'' the final rule allows the Secretary (acting
through MMS) and the State to ``jointly determine, on a case-by-case
basis, the amount of what marginal production from a lease or leases or
well or wells, or parts thereof'' may obtain royalty accounting and
auditing relief, as the statute provides (30 U.S.C. 1726(a)). Several
State representatives on the subcommittee ultimately recommended using
the production level in the proposed rule.

Statutory Requirements for Relief

1999 Proposed Rule. In Sec. 204.5, MMS reiterated the RSFA
statutory requirements that any relief granted for marginal properties
must promote production, reduce administrative costs, and increase net
receipts to the Federal Government and the States.
Public Comments. One State asserted that the proposed rule was
contrary to law because it was unlikely to promote production or
increase net receipts and there is no way to determine whether or not
the relief will increase net receipts. The State also expressed concern
about the loss of the time value of royalty receipts if we allow
delayed reporting.
RPC Subcommittee Recommendation. The subcommittee discussed
numerous times the difficulty in finding possible relief options that
would meet all three RSFA objectives. The subcommittee recommended that
two relief options be retained--cumulative reporting and ``other''
relief.
MMS Response. We understand the State's concerns but do not agree
that the relief offered will not promote production or increase net
receipts. Because use of the annual reporting option is limited in
Sec. 204.202 to properties producing 1,000 BOE or less annually, we
believe there will be little loss, if any, of time value of the
royalties. Moreover, we believe the administrative savings to the
lessee will promote production, and the administrative savings to MMS
and the States will more than offset any possible loss of interest. A
member of MMS's reengineering team informed the subcommittee that each
different relief option would require modifications to MMS's compliance
programs and thus add cost. In the final rule, we limit our relief
options to those recommended by the subcommittee to avoid being cost
prohibitive.
However, in order to partially address the State's concerns and to
be consistent with RSFA's language, we modified Sec. 204.5(b) to make
it clear that MMS, with a State s concurrence, may decide to
discontinue any relief granted, at any time. In addition, we made it
clear that MMS s decision to discontinue relief is not appealable
within the Department.

[[Page 55079]]

Thus, MMS will consult with the States about whether to discontinue
relief, but MMS will issue the decision to discontinue relief.
Section 204.5(b)(1) also explains that, if MMS terminates your
cumulative reports and payments relief under this section, your relief
continues until the end of the calendar year in which you received the
notice. For other types of relief, MMS's notice will tell you when your
relief terminates.

State Liability for Denials of Requests for Relief

1999 Proposed Rule. In Sec. 204.6, MMS proposed that, if MMS
denied a request for relief based on a State's denial, then the
decision was final for the Department and could not be appealed
administratively.
Public Comments. One State expressed the opinion that MMS's
interpretation of RSFA was incorrect and left the States open to
litigation in Federal court. Another State indicated that the proposed
rule did not clearly acknowledge that nothing in RSFA serves to waive a
State's immunity from suit.
RPC Subcommittee Recommendation. All of the State representatives
on the subcommittee expressed concern over the language in the proposed
rule that said if a decision not to grant relief is based on a State's
denial, the decision would not be subject to administrative appeal.
This would put any challenge to a decision not to grant relief directly
into Federal District Court. The States were not willing to accept that
risk. Based on this discussion, the subcommittee sent a request to
seven State agencies asking their opinion on the comments raised by
State representatives on the subcommittee. Only one agency responded,
stating that it agreed with the other States' concerns. Consequently,
the subcommittee recommended that each State be given the ability to
determine, before each calendar year, whether it will allow either the
notification-based relief option or the request-based relief option, or
both. If a State decides to allow the request-based relief option, the
State would thereby agree to let MMS make the final decision on the
relief request. That decision could then be appealed administratively
within the Department.
MMS Response. We agree with the subcommittee's recommendation. We
also think that modifying Sec. 204.207(b) in the final rule to read as
follows will eliminate the States' concerns:

If there is a State concerned for your marginal property that
has determined in advance under Sec. 204.208 that it will allow
either or both of the relief options under this subpart, MMS will
decide whether to approve, deny, or modify your relief request after
consulting with the State concerned.

In addition, in Sec. 204.206(a), we codified the RPC
subcommittee's recommendation that the State be consulted. Thus, the
approval process under the final rule is like the current process for
issuance of orders where the State has performed the audit. Although
the State would be consulted regarding whether to grant, deny, or
modify relief, MMS would ultimately issue the decision and the State
would not be subject to suit in Federal District Court. Moreover, any
State that does not wish to allow accounting and reporting relief may
opt out.

Who May Request Relief?

1999 Proposed Rule. In Sec. 204.201, MMS proposed that a lessee or
the lessee's designee for a Federal property could obtain relief if the
property qualifies as marginal. Further, the lessee or lessee's
designee could request relief only for the lessee's fractional interest
in the property.
Public Comments. One industry association liked the fact that not
all lessees in a property have to seek relief in order for an
individual lessee to take relief on the lessee's portion. One State
commented that RSFA did not allow designees to apply for relief in
place of the lessee.
RPC Subcommittee Recommendation. The subcommittee suggested
retaining the original proposed language concerning designees.
MMS Response. We agree with the State that RSFA does not
specifically state that designees may seek relief on behalf of lessees.
However, it also does not specifically preclude such action. Indeed, 30
U.S.C. 1726(c) merely authorizes the Secretary and delegated States to
provide relief ``to encourage lessees to continue to produce and
develop properties'' and that relief will only be ``available to
lessees in a State that concurs'' with granting that relief. The
statute is silent about who may request relief. Therefore, because the
statute is silent and designees are acting as the lessee's agent, we
believe it is reasonable and consistent with RSFA to authorize
designees to request relief under this rulemaking.
The RPC subcommittee also recommended that we not require all
lessees or designees for a property to apply for relief. Therefore, in
the final rule, we added language in Sec. 204.201(a)(3) to
specifically state that you may obtain relief even if the other lessees
and designees for your property do not request relief.

Cumulative Reporting and Payment Relief

1999 Proposed Rule. In Sec. 204.203, MMS proposed to allow lessees
to report quarterly, semiannually, or annually depending upon the
volume of royalty BOE produced on the property.
Public Comments. One State objected to allowing payments less often
than monthly because that is what is required by lease terms. The law
firm commented that cumulative reporting should not be less often than
annually. One industry association suggested that the thresholds for
the lessee to be allowed to submit cumulative reports should be higher.
The other industry association was concerned that lessees could not
perform the complicated calculations to determine the level of relief
and suggested MMS establish a consistent production level for
eligibility for relief. The industry association also stated that the
calculations to determine cumulative royalty reporting relief were too
narrow and too burdensome, and all marginal properties should get the
same relief. The association also suggested that MMS eliminate the
requirement to report allowances separately on marginal properties and
explain how estimates would work with reporting less often than
monthly. One State was concerned that MMS would have to develop a
separate database to track reporting dates and royalty rates by lessee.
RPC Subcommittee Recommendation. A representative of the MMS
financial reengineering team was invited to a subcommittee meeting on
cumulative reporting. The reengineering team representative stated that
MMS would have to make some modifications to its financial system in
order to process reporting on a periodic, cumulative basis. The
representative explained that each reporting frequency would require
funding for system modifications; thus, we would probably have to limit
the available relief options to avoid being cost prohibitive.
Consequently, the subcommittee recommended that only annual cumulative
reporting be retained as a notification-based relief option and that
this option be limited to marginal properties producing 1,000 BOE or
less annually.
MMS Response: We agree with the subcommittee's recommendations.
Moreover, with respect to one State's concern regarding the lease
instrument's requirement that lessees pay monthly, the Government may,
by rule, modify an obligation under the lease terms if doing so does
not change the lessee's position to its detriment.

[[Page 55080]]

In addition, to clarify the requirements of this section
(redesignated from Sec. 204.203 to Sec. 204.202 in this final rule),
without changing the substance of the proposed rule, we reorganized
this section of the final rule and added language to make clear when
you must submit reports and payments, and how you must fill out your
Report of Sales and Royalty Remittance, Form MMS-2014.
Further, as originally proposed Sec. 204.202(g) addressed
situations where * * * you dispose of a marginal property for which you
have taken relief * * * (emphasis added). However, as discussed above,
the lease for which you took relief may or may not be the entire
marginal property. For example, your lease may be in an agreement, and
the agreement is the ``marginal property.'' If the agreement does
qualify and you take relief for your lease production, but later
dispose of your lease, you have not disposed of the ``marginal
property,'' only your ``ownership interest'' in the marginal property.
Therefore, we have revised the rule in Sec. 204.202(e) to state ``[I]f
you dispose of your ownership interest in a marginal property for which
you have taken relief. * * *''
Finally, in Sec. 204.202(e)(2) (proposed 204.202(g)(2)), we added
language to codify the existing principle that late payment interest is
owed if you do not report and pay timely after disposing of your
ownership interest in a marginal property as required under this
paragraph.

Complex Calculations

1999 Proposed Rule. In Sec. Sec. 204.203, 204.204, and 204.205,
the level of relief in each reporting option was based on various
levels of marginal production. The calculations required lessees to
multiply the BOE attributable to a marginal property by the applicable
lease royalty rate.
Public Comments. One State commented that it believed MMS did not
provide any rationale for the volume cut-offs for relief. Another State
commented that it was unclear how MMS derived production levels for the
levels of relief.
RPC Subcommittee Recommendation. Discussion in the subcommittee
centered on the complexity of the calculations required to determine
whether a marginal property qualified for a particular form of
accounting relief. The proposed rule included five different production
levels for the five different forms or levels of accounting relief. The
subcommittee ultimately decided to recommend volume limits based on
total BOE rather than royalty BOE. The subcommittee also reduced the
number of volume levels from five to one. This simplified the
calculations significantly.
MMS Response. We agree with the subcommittee's recommendations.

Net Adjustment Reporting

1999 Proposed Rule. In Sec. 204.204, MMS proposed to allow net
adjustment reporting as one of the notification-based relief options.
In this reporting scenario, lessees could adjust a previously reported
royalty line in a one-line net entry on the Form MMS-2014, rather than
using MMS's traditional two-line adjustment process.
Public Comments. One State objected to allowing net adjustments.
One industry association stated that net adjustment reporting should be
allowed for all leases under MMS's reengineered system. The law firm,
however, commented that net adjustments would not be ``relief'' for
marginal properties if it is allowed for all reporters in the
reengineered system.
RPC Subcommittee Recommendation. The subcommittee members discussed
the problems MMS's financial reengineering team had encountered in
trying to implement net adjustment reporting. Because of very specific
requirements in FOGRMA for certain data elements to be displayed on the
Explanation of Payments (EOP) sent to States and tribes, the
reengineering team and MMS's industry partners found net adjustment
reporting unworkable. However, MMS continues to look for acceptable net
adjustment reporting options for reengineering purposes. Based on MMS's
continuing efforts to offer net adjustment reporting for all reporters,
the subcommittee recommended that the net adjustment reporting relief
option be dropped.
MMS Response. We agree with the subcommittee's recommendation.

``Rolled-Up'' Reporting Relief Option

1999 Proposed Rule. In Sec. 204.205, MMS proposed to allow
``rolled-up'' reporting as one of the notification-based relief
options. In this reporting scenario, lessees could report all selling
arrangements for a revenue source under a single selling arrangement on
the Form MMS-2014.
Public Comments. The law firm stated that ``rolled-up'' reporting
was not significant relief. One of the industry associations agreed
that, if all product codes could not be rolled up, this was not
significant relief.
RPC Subcommittee Recommendation. The subcommittee recommended that
the ``rolled-up'' reporting relief option be dropped. This
recommendation was, again, associated with the problem of accommodating
required EOP information and the fact that selling arrangements were
dropped from the revised Form MMS-2014 effective October 1, 2001.
MMS Response. We agree with the subcommittee's recommendation.

Alternative Valuation Relief Option

1999 Proposed Rule. In Sec. 204.206, MMS proposed to allow lessees
to request approval to report and pay royalties using a valuation
method other than that required under 30 CFR part 206.
Public Comments. In comments to the 1999 proposed rule and the 2003
supplementary proposed rule, one State and one industry association did
not think alternative valuation relief was necessary because lessees
already have that option under current valuation regulations. The law
firm was troubled by the provision that the proposed valuation method
should ``approximate 30 CFR part 206.'' The law firm stated that, with
all the litigation currently in progress, it would be difficult for
someone to determine what that value should be. Another State commented
that the proposed rule invited litigation because there was no way for
a State or MMS to determine whether an alternative valuation method
would ``approximate'' royalties in the future. The State further added
that alternative valuation relief was not accounting, reporting, or
auditing relief but really royalty relief.
RPC Subcommittee Recommendation. The subcommittee recommended
dropping this option.
MMS Response. We agree with removal of this option because
alternative valuation is still an option a lessee may request under
``other relief'' in Sec. 204.203 of this final rule.
However, MMS believes the comments to the 1999 proposed rule and
the 2003 supplementary proposed rule merit further response. First, the
current rules under 30 CFR part 206.107(a)(6) do offer ``alternative
valuation relief.'' However, the fact that lessees may request
alternative valuation relief under Sec. 206.107(a)(6) does not
preclude MMS from offering valuation relief as an option under this
subpart. Second, there does not seem to be any real difficulty to
ensure that royalties due under an alternative method approximate
royalties due under 30 CFR part 206. Either the requested alternative
method comes up with nearly the same royalties that would be due under
30 CFR part 206, or it does not. To that end, the 1999 proposed rule
required that ``any

[[Page 55081]]

alternative valuation method * * * [m]ust be readily determinable and
certain. * * *'' If MMS and the State concerned cannot determine that
royalties due under the requested method approximate royalties due
under 30 CFR part 206, then MMS can deny the request. In fact, in the
1999 proposed rule, MMS assumed that any request ``would propose a
simplified valuation method because it would reduce administrative
costs.''
Finally, ``alternative valuation relief'' does not equal ``royalty
relief.'' As MMS explained in the 1999 proposed rule and the 2003
supplementary proposed rule, the ``alternate valuation relief option''
would allow lessees and designees to ``request and report and pay
royalties using a valuation method other than that required under 30
CFR part 206.'' The ``royalty relief'' the Department offers under
different rules is not an alternative valuation method, but rather a
``royalty rate reduction.'' Accordingly, alternative valuation does not
equal royalty relief--the savings under alternative valuation relief
are administrative, whereas the savings under royalty relief are
decreased royalties paid.
1999 Proposed Rule. In Sec. 204.211, MMS proposed how it would
review requests for alternative relief. MMS did not propose timeframes
within which it would review requests.
RPC Subcommittee Recommendation. The subcommittee recommended that
MMS have 120 days to review alternative relief requests. The
subcommittee recommended that, if MMS did not complete the review
within the prescribed 120 days, requests would be deemed ``approved.''
MMS Response. In the March 31, 2003, supplementary proposed rule,
MMS described its concerns about deeming a request ``approved'' based
solely on the length of time elapsed after receipt of the request
without any Department review. We explained that one alternative was to
deem the request denied if MMS does not approve or disapprove a
lessee's request within 120 days after MMS receives the request.
Because denial of a request may be appealed, this alternative would
give the Department the opportunity to review the request and make an
informed decision. The other option was to have no timing requirements
by not including any provision at all.
Because of these concerns, we specifically requested comments on:
? Whether there should be a time limit on MMS approval after
it receives a request for reporting, accounting, and auditing relief;
? Whether the request should be deemed approved or denied
after some time period, and what that period should be; and
? Any other alternative approaches.
MMS did not receive any comments in response to these questions. In
this final rule, MMS decided to have no time requirement for reviewing
requests for alternative relief under Sec. 204.206.

Audit Relief Option

1999 Proposed Rule. In Sec. 204.207, MMS proposed to allow audit
relief such as audits of limited scope, audits coordinated with other
State or Federal agencies, or audits by independent public accountants.
Public Comments. One State objected to any limit on the scope of
audits. The State further added that independent auditors do not review
whether royalties are paid correctly. Another State asserted that it
did not think audit relief was warranted and would not participate in
it. The third State wanted to remove the audit relief option related to
``coordinated royalty and severance tax audits'' because it compromised
the State's right to audit.
The law firm stated that audit relief was inconsequential because
under the current strategy, marginal properties are seldom audited. One
industry association agreed that audit relief was not of significant
benefit because the States and MMS already practice coordinated audits.
The other industry association, however, strongly supported audit
relief.
RPC Subcommittee Recommendation. The subcommittee recommended
dropping this option.
MMS Response. We agree with removal of this option because audit
relief is still an option a lessee may request under ``other'' relief
in Sec. 204.203 of the final rule.
However, the comments to the 1999 proposed rule merit further
response. First, in the 1999 proposed rule MMS gave three examples of
potential audit relief: (1) audits of limited scope, (2) coordinated
royalty and severance tax audits, and (3) reliance by MMS on
independent certified audits. Interestingly, both Wyoming and South
Dakota allow voluntary environmental audits where the lessees perform
self-evaluations and are then immune from prosecution under certain
conditions if they report violations. MMS's example in the 1999
proposed rule of possibly accepting a company's ``affirmative statement
in the audit report of the company's independent certified auditors
that they have reviewed the company's royalty accounting practices with
respect to marginal properties and found them to be in compliance with
Federal lease terms, laws, and regulations'' is similar. Although MMS
did not propose to allow immunity to lessees who perform their own
audits, there is no question that such audit relief would provide
relief to lessees who would not have to spend the time and money to
respond to MMS or State audit requests. It would also meet RSFA's goals
to ``reduce administrative costs, and increase net receipts to the
United States and the States * * *'' by saving MMS and States audit
time on properties that produce nominal royalties.
With respect to comments that audit relief could interfere with
MMS's or States' right to audit, we believe that Sec. 204.204(a)
negates this concern. This section explicitly states that MMS would not
approve a request for accounting and auditing relief if the request
``(a) Prohibits MMS or the State from conducting any form of audit.''
As MMS explained in the 1999 proposed rule, MMS developed an audit
strategy to assure compliance with laws, regulations, and lease terms.
To administer this strategy, MMS and the States must audit a sample of
leases consisting of a wide range of conditions. Therefore, MMS
proposed to deny any relief requested under this subpart that prevents
it or a State from conducting an audit of a marginal property. Thus,
fears of diminished capacity to audit due to audit relief granted seem
largely unwarranted.

Other Relief Option

1999 Proposed Rule. In Sec. 204.208, MMS proposed to allow a
lessee to request any type of accounting and auditing relief that was
appropriate for a specific marginal property provided that it was not
specifically prohibited.
Public Comments. One State opposed the other relief option because
the burden to evaluate the request was too great for a meaningless
level of cost savings.
RPC Subcommittee Recommendation. The subcommittee members discussed
all three approval-based relief options contained in the 1999 proposed
rule. Because of sensitive issues in the original proposal, the
subcommittee decided to recommend an approval-based relief option
called ``other'' relief.
Other relief would apply to all marginal properties and could be
anything within MMS authority that the lessee or his/her designee
thinks would be marginal property relief. The lessee or designee would
need to submit a proposal to MMS for approval. After consultation with
the State or States concerned, MMS would decide whether

[[Page 55082]]

to grant the requested relief. Examples of what might be considered are
audit relief or an alternative valuation method as discussed above
under ``Alternative Valuation Relief Option''.
MMS Response. We agree with the subcommittee's recommendation.
Further, we disagree with one State's comment that such an option is
too great a burden relative to any savings. Any relief requested must
meet the statutory requirements in RSFA to promote production, increase
net receipts, and reduce administrative costs. The other relief option
is now addressed in Sec. 204.203 of this final rule.

Disallowed Relief Options

1999 Proposed Rule. In Sec. 204.209, MMS listed relief items that
MMS would not approve if requested by lessees.
Public Comments. One State wanted to add three items to the types
of relief that MMS would not approve. The items were any relief request
that (1) decreases royalty income below true market value, (2)
increases allowances, or (3) reduces royalty-bearing volumes.
RPC Subcommittee Recommendation. The subcommittee recommended
retaining the list of disallowed items with no changes.
MMS Response. We agree with the subcommittee. The relief options
not allowed are now addressed in Sec. 204.204 of this final rule. We
believe Sec. 204.203(a)(1) in the final rule, which provides that any
alternative valuation methodology must approximate royalties payable
under 30 CFR part 206, addresses the State's concern.

Notification-Based Relief

1999 Proposed Rule. In Sec. 204.210(a), MMS described the
information a lessee must submit to MMS before taking any notification-
based relief.
Public Comment. One industry association supported notification-
based relief rather than request-based relief. The other industry
association did not want any required notification for taking relief in
Sec. Sec. 204.203, 204.204, and 204.205.
Two States opposed the automatic relief options. One of those
States indicated that all relief should be gained through an approval
process. One industry association liked the provision that would allow
lessees to file a single notification for multiple marginal properties.
RPC Subcommittee Recommendation. The subcommittee recommended only
one type of notification-based relief--cumulative annual reporting.
MMS Response. We agree with the subcommittee recommendation to
allow only notification-based relief for annual reporting. The
notification-based relief option is now at Sec. 204.202 of this final
rule.

Approval Process

1999 Proposed Rule. In Sec. Sec. 204.212 and 204.213, MMS
described the approval process for request-based relief.
Public Comments. All three States thought that the approval process
placed too much administrative burden on the States. One State objected
to MMS telling the States what the scope, timing, or process should be
for its review of a request. The same State noted that MMS cannot tell
a State who in the State will make determinations on relief or how long
they have to make the determinations. One industry association
suggested that authority to approve alternative valuation should be
delegated to someone below the Assistant Secretary for Land and
Minerals Management (AS/LM). The other industry association wanted
approval authority for all properties to be with the AS/LM. The law
firm, one State, and one industry association commented that they did
not agree with the fact that the regulation required States to do
things within specified time periods, but not MMS. One State did not
agree with the provision that, if the State did not notify MMS of its
decision within 30 days, then the State is deemed to agree with MMS's
determination. One industry association was concerned that States might
be given more than 30 days to review and decide relief options. The
same industry association supported publication of States' decisions to
allow or disallow certain types of relief and wanted MMS and the States
to develop criteria for analyzing relief requests.
RPC Subcommittee Recommendation. The subcommittee recommended that
MMS consult with the State concerned about a request for relief rather
than requiring a decision from the State in a specific period of time.
MMS Response. The State's concerns regarding timing are no longer
an issue because the final rule requires consultation with the State
concerned, rather than specific timing requirements. See discussion on
Sec. 204.207(b) under the topic ``State Liability'' above for denials
of requests for relief.

Length of Relief

1999 Proposed Rule. In Sec. 204.217, MMS proposed that any
approved relief would remain in effect for as long as the property
qualified as marginal.
Public Comments. One State opposed continuous relief throughout the
life of a lease and thought the marginal properties should be monitored
periodically. One industry association supported relief for the life of
the lease.
RPC Subcommittee Recommendation. The subcommittee did not recommend
any changes in Sec. 204.217.
MMS Response. We agree that properties should have relief for the
life of the lease only if they continue to qualify as marginal.
Moreover, nothing in the final rule precludes MMS from monitoring and
auditing leases for compliance with other MMS regulations and lease
terms. Section 204.217 is redesignated as Sec. 204.209 in this final
rule.

Relationship to Other Incentive Programs

1999 Proposed Rule. In Sec. 204.218, MMS proposed that a lessee
could obtain accounting and auditing relief for a marginal property
even if the property benefited from other Federal or State production
incentive programs.
Public Comments. One State commented that lessees should be
required to disclose other types of relief they are receiving. One
industry association supported the provision allowing lessees to get
marginal property relief even if they benefit from other incentive
programs.
RPC Subcommittee Recommendation. The subcommittee did not recommend
any changes in this provision.
MMS Response. We agree that lessees should get marginal property
accounting and auditing relief even if they benefit from other relief
programs. Nothing in RSFA precludes obtaining marginal property relief
if a lessee obtains other relief. Section 204.218 is now redesignated
as Sec. 204.213 in this final rule.

Fees

1999 Proposed Rule. In Sec. 204.210(b), MMS listed the information
that lessees must submit in their requests for accounting and auditing
relief and the requirement to submit a $50 fee with each request.
Public Comments. One State indicated that the items to be included
in the written request for relief were inadequate. Two States said the
$50 fee is too low compared to the cost incurred by States and MMS to
process requests. The commenters suggested the fees should be shared
with the States. Both industry associations opposed the fee. One
commented that small independent producers could not afford the fee and
objected to the fee because MMS would not refund it for any reason.
RPC Subcommittee Recommendation. The subcommittee recommended

[[Page 55083]]

elimination of the fee for request-based relief.
MMS Response. Information lessees must submit in their requests for
accounting and auditing relief is now addressed in Sec. 204.205 of
this final rule. After further legal review, we have decided that it is
reasonable not to recover a processing fee for requests or notices
under the final rule. MMS recovers its costs under the Independent
Offices Appropriations Act of 1952 (IOAA),\6\ for Federal offshore
leases, and the Federal Land Policy and Management Act of 1976
(FLPMA),\7\ for Federal onshore leases. Thus, as part of the March 31,
2003, supplementary proposed rulemaking, we analyzed the proposed
marginal property relief's cost recovery fees for reasonableness
according to the factors in FLPMA Sec. 304(b).\8\ In that
supplementary proposed rulemaking, we examined the ``reasonableness
factors'' which FLPMA requires to be considered: (a) Actual costs
(exclusive of management overhead); (b) the monetary value of the
rights or privileges sought by the applicant; (c) the efficiency to the
Government processing involved; (d) that portion of the cost incurred
for the benefit of the general public interest rather than for the
exclusive benefit of the applicant; (e) the public service provided;
and (f) other factors relevant to determining the reasonableness of the
costs.
---------------------------------------------------------------------------

\6\ 31 U.S.C. 9701 et seq.
\7\ 43 U.S.C. 1701.
\8\ 64 FR 3366-69.
---------------------------------------------------------------------------

For marginal property relief taken or requested under Sec. Sec.
204.202 and 204.203, the method used to evaluate the factors under the
March 31, 2003, supplementary proposed rulemaking was twofold. First,
we estimated actual costs and evaluated each of the remaining FLPMA
reasonableness factors (b) through (f) individually to decide whether
the factor might reasonably lead to an adjustment in actual costs. If
so, that factor was then weighed against the remaining factors to
determine whether another factor might reasonably increase, decrease,
or eliminate any contemplated reduction. On the basis of that twofold
analysis, although MMS's total estimated actual costs were $2,370 to
process an average request, MMS determined that a fee of $50 to process
relief requests was reasonable.
MMS determined a reduced fee was reasonable primarily based on its
evaluation of FLPMA factor (f) ``other factors.'' MMS's primary
consideration under this factor was RSFA's purpose with respect to
marginal properties. Congress enacted RSFA to ``promote production,''
\9\ by ``encourag[ing]
lessees to continue to produce and develop
marginal properties.'' \10\ Congress stated that ``certain regulatory *
* * obligations should be waived if it can be demonstrated such a
waiver could aid in maintaining production that might otherwise be
abandoned.'' \11\ However, RSFA also mandated that any relief should
``reduce administrative costs, and increase net receipts to the United
States and the States.'' \12\ Congress stated that granting relief for
marginal properties should ``result in additional receipts from oil and
gas production that would otherwise be abandoned, and would * * *
increase oil and gas production on Federal lands by creating economic
efficiencies to make Federal leases more competitive with private
leases.'' \13\ Thus, as part of its FLPMA reasonableness analysis, MMS
considered (1) whether the benefit from the increase in royalties to be
gained from continued production from marginal properties and the
decreased administrative burden to MMS from granting such relief
merited a reduction in fee charges; and (2) whether recovering the fee
would defeat the Congressional intent to provide relief by discouraging
companies from requesting relief.
---------------------------------------------------------------------------

\9\ RSFA section 7(a).
\10\ S. Rep. 260, 104th Cong., 2d Sess. 20 (1996); H.R. 667,
104th Cong., 2d Sess. 20 (1996).
\11\ H.R. 667, 104th Cong., 2d Sess. 20 (1996).
\12\ RSFA section 7(a).
\13\ Id. at 20-21.
---------------------------------------------------------------------------

MMS has reexamined the analysis under factor (f) in the March 31,
2003, supplementary proposed rule to determine whether those factors
warrant elimination of the proposed fee. We think they do. We agree
that the administrative savings to industry if they are granted relief
will not be significant enough for them to pay a fee to request relief.
Moreover, we agree that the companies that most need the relief are
small independents who would be discouraged from applying for relief by
even the previously proposed nominal fee of $50. Because the purpose of
RSFA is to grant relief to producers so they will continue to produce,
we think it is counterproductive to include a fee that will discourage
many of the smaller marginal producers from requesting relief. Thus, in
the final rule we do not require payment of a processing fee for relief
requests.

Properties Approved as Part of a Nonqualifying Agreement

Section 204.210 explains that if the Bureau of Land Management
(BLM) or MMS's Offshore Minerals Management (OMM) retroactively
approves the inclusion of a marginal property that qualified for relief
as part of an agreement that does not qualify for relief under this
subpart, the property qualification ceases as of December 31 of the
calendar year that the BLM or OMM approval became effective. In that
case, MMS will not retroactively rescind your relief. Since production
is allocated to your property under the nonqualifying agreement, you
must report and pay based on that allocation. In the proposed rule, we
stated in paragraph (c) that if this occurs, you must adjust your
royalty payments. To clarify what we meant by paragraph (c) we changed
it in the final rule to read that:

(c) For the calendar year in which you receive the BLM or OMM
approval, and for any previous period affected by the approval, the
volumes on which you report and pay royalty for your lease must be
amended to reflect all volumes produced on or allocated to your
lease under the nonqualifying agreement as modified by BLM or OMM.
Report and pay royalties for your production using the procedures in
Sec. 204.202(b).

For example, assume that you have a stand-alone lease for which you
are taking cumulative reports and payments relief beginning January
2005, and your lease retroactively becomes part of a nonqualifying
agreement in June 2005 retroactive to January 2005. In that case, your
marginal property relief will terminate as of December 31, 2005, with
your annual report for calendar year 2005. On your calendar year 2005
annual report, you must report and pay royalties for January 2005
through December 2005 based on the volumes produced on or allocated to
your lease under the agreement.

Minimum Royalty

MMS added Sec. 204.214 to clarify that minimum royalty is still
due on marginal properties by the date prescribed in your lease and in
the amount prescribed therein. Since the annual report and payment
under marginal property relief may occur after minimum royalty is due,
if the amount of minimum royalty you paid is less than your production
royalty obligation, then you would owe additional royalties for the
difference. If the minimum royalty you paid exceeds your production
royalty obligation, then you would not be entitled to a credit because
you must pay at least the minimum royalty amount on your lease each
year.

[[Page 55084]]

III. Comments on the 2003 Supplementary Proposed Rule

MMS received one comment on the supplementary proposed rule
published on March 31, 2003 (68 FR 15390), from a law firm on behalf of
one State. This comment is analyzed and discussed below:
Public Comment. The commenter asserted that subsidies and relief
have not promoted oil and gas production, increased royalty receipts,
or reduced administrative costs. The commenter does not believe reduced
administrative costs will be offset by increased royalties. Moreover,
the commenter indicated that the State will exercise its option to opt
out of marginal property relief. The commenter also expressed concern
about several underlying assumptions of the rule and the State's
ability to protect school funds from other Federal efforts to reduce
lessee obligations.
MMS Response. We have considered the commenter's concerns but do
not agree that the relief offered will not promote production, increase
royalty receipts, and reduce administrative costs. And, as indicated by
the commenter, the State may exercise its option to opt out of marginal
property relief.

IV. Procedural Matters

1. Summary Cost Data

We have summarized below the estimated costs and royalty impacts of
this rule to all potentially affected groups: industry, State and local
governments, and the Federal Government. Indian tribes and individual
Indian mineral owners are not affected by this rule. The cost and
royalty impact information in Item 1 of this section, Procedural
Matters, is used as the basis for Department certifications in Items 2
through 14 below.
A. Industry
(1) Notification-based relief--Costs of submitting notifications.
Approximately 3,000 Federal oil and gas properties produce 1,000 or
less BOE annually. In the first year after this rule becomes effective,
we estimate that lessees of 1,000 of these properties will submit
notifications that they will take cumulative reporting and payment
relief. We do not anticipate that all lessees of qualifying properties
will submit notifications because not all States will allow reporting
and payment relief, and large corporations may find that modifying
their computer systems to report and pay on a few leases annually
rather than monthly will not be cost effective.
We further estimate that a lessee will require 2 hours to determine
if a property qualifies for cumulative reporting and payment relief and
then to prepare and submit the notification to MMS. Consequently, the
total estimated burden for all notifications in the first year is 2,000
hours (1,000 properties x 2 hours). Using an estimated $50 per hour
cost, the total cost for all lessees to submit these notifications is
$100,000 (2,000 burden hours x $50).
Because the reporting and payment relief for a qualified property
is for the life of the property as long as the property produces less
than 1,000 BOE per year, a notification need be filed only one time.
However, we estimate that MMS will receive notifications for
approximately 100 newly qualifying properties in each subsequent year.
The total estimated burden for each subsequent year is 200 hours (100
properties x 2 hours) for a total cost of $10,000 (200 burden hours x
$50).
(2) Notification-based relief--Cost savings of reporting fewer
lines. We estimate that an average of 1,000 properties (500 leases and
500 agreements) will involve cumulative reporting and payment relief
annually. This means that royalties on these properties will be
reported and paid annually rather than monthly. We further estimate
that lessees will submit 5,500 fewer lines for leases (1 line per month
x 11 months x 500 leases) and 16,500 fewer lines for agreements (3
lines per month x 11 months x 500 agreements) on Form MMS-2014 each
year for a total of 22,000 fewer lines per year. Because the time to
submit the Form MMS-2014 averages 3 minutes per line, we estimate that
lessees will save 1,100 burden hours (22,000 lines x 3 minutes / 60
minutes) or a total of $55,000 (1,100 burden hours x $50) in the first
year this rule is effective and for each year thereafter.
(3) Request-based relief--Cost of requesting approval for other
accounting and auditing relief. MMS expects approximately 10 requests
per year for other accounting and auditing relief. We estimate each
request will require 4 hours for a lessee to prepare and submit. This
estimate also includes providing information originally omitted from
the request and lessee approval of MMS modifications, if any. The total
estimated burden is 40 hours (10 requests x 4 hours). The estimated
cost to lessees to request other relief is approximately $2,000 per
year (40 burden hours x $50).
(4) Request-based relief--Costs or royalty impacts of taking
request-based relief. We are unable to quantify the costs or royalty
impacts of the request-based relief category at this time because we do
not know what types of relief industry will request or how many MMS
will approve.
(5) Both types of relief--Cost of notifying MMS that relief has
ceased. When a property ceases to qualify for previously granted
relief, the lessee or designee is required to notify MMS. MMS expects
that 24 properties will cease to qualify for relief each year and that
each notification will require 0.25 hours to prepare and submit. The
total estimated burden is 6 hours (24 properties x 0.25). The estimated
cost to lessees for these notifications is approximately $300 (6 burden
hours x $50).
Small Business Issues. Approximately 2,500 companies report and pay
royalties to MMS. We estimate that over 97 percent of these companies
are small businesses as defined by the U.S. Small Business
Administration because they have 500 or fewer employees. We anticipate
that most of the relief granted under this rule will benefit small
companies. Typically, as properties near the end of their productive
life, larger companies with higher overhead, sell their marginal
properties to small companies who can operate them more profitably. We
expect most small companies will avail themselves of the cumulative
reporting and payment relief option. Generally, larger companies may
not use this option because of the expense of modifying their large,
complex computer systems to report a few leases on an annual rather
than a monthly basis. However, we expect that most request-based relief
will be sought by larger companies having more sophisticated and
complex accounting considerations. If any company, large or small,
chooses not to take the accounting and auditing relief offered in this
rule, it will incur no additional expense or burden.

B. State and Local Governments

This rule will not impose any additional burden on local
governments. MMS estimates that States impacted by this rule would
incur costs and royalty impacts as calculated below:
(1) Notification-based relief--Costs of determining State
participation. Burden hours for review and development of a blanket
State policy on accounting and auditing relief are estimated to be 40
hours at the beginning of each year. Only four States have sufficient
numbers of marginal properties to require an in-depth analysis of the
economic impact of offering accounting and auditing relief.
Consequently, we

[[Page 55085]]

estimate the total annual burden to establish blanket policies for all
States to be approximately 160 hours (4 primary States x 40 hours) or a
total cost of $8,000 (160 burden hours x $50).
(2) Request-based relief--Costs of consulting with MMS on other
accounting and auditing relief. Consultation with MMS on individual
requests for other accounting and auditing relief is estimated to be 4
hours per property. As noted previously, MMS expects approximately 10
requests for individual accounting and auditing relief each year for a
total burden of 40 hours for all States (10 requests x 4 hours per
request) or a total cost of $2,000 (40 burden hours x $50).
(3) Notification-based relief--Royalty impacts of prolonging the
life of marginal wells. As discussed in Item A, we estimate that after
the first year, cumulative reporting will save industry approximately
$45,000 annually ($55,000-$10,000). We expect the reduced cost of
operations will prolong the life of marginal wells. If the reporting
relief encourages industry to continue to produce oil and gas from
marginal properties, States will benefit in the additional receipts.
The States generally would receive 50 percent of the royalties
collected on additional production. The States also would benefit from
continued employment and economic activity resulting from production
that would otherwise be abandoned. We cannot determine the length and
dollar impact of this additional well life at this time. However, if a
State chooses to participate in this reporting relief, we expect the
net royalty impact to the State will be positive.
(4) Notification-based relief--Royalty impact of lost time value of
money. Because payments would be made annually rather than monthly,
States will lose the time value of money on sales made in the 11 months
before the royalty payment is due. Generally, States receive 50 percent
of the royalties collected for onshore leases.
For example, New Mexico has the largest number of properties
qualifying for cumulative reporting and payment relief--approximately
1,280. Using a value of $30 per barrel of oil and $5 per Mcf of gas and
a 7 percent interest rate, we estimate that, if all 1,280 qualifying
properties take cumulative reporting and payment relief, New Mexico
would lose a maximum of $27,000 annually in the time value of money.
The calculation for New Mexico marginal properties producing 1,000 BOE
per year or less is as follows:

----------------------------------------------------------------------------------------------------------------
Action Gas (Mcf) Oil (bbl) Total
----------------------------------------------------------------------------------------------------------------
Total qualifying volume........................................... 1,741,829 154,101 ................
Multiplied by estimated unit value................................ x $5.00 x $30.00 ................
Total estimated value............................................. $8,709,145 $4,623,030 $13,332,175
Multiplied by royalty rate \1\.................................... ............ ............ x .125
Total royalty due for year........................................ ............ ............ $1,666,521.88
Divided by 12 months \2\.......................................... ............ ............ /12
Average royalty due per month..................................... ............ ............ $138,876.82
Multiplied by estimated interest rate............................. ............ ............ x .07
Interest on 1 mo. royalty for 1 yr................................ ............ ............ $9,721.38
Multiplied by 66/12 \3\........................................... ............ ............ x 66/12
Interest (time value) lost for yr.\4\............................. ............ ............ $53,467.58
----------------------------------------------------------------------------------------------------------------
\1\ The royalty rate for Federal onshore leases is most often 12\1/2\ percent. However, many of these marginal
properties may also qualify for lower royalty rates under the stripper oil royalty rate reduction program (30
CFR 216.57). Consequently, the royalty value in this calculation could be less.
\2\ To simplify this calculation, we divided the total royalty due for the year by 12 months on the assumption
that the royalties would be evenly produced throughout the year.
\3\ This factor reflects that different amounts of interest would accrue for each production month, beginning
with \11/12\ of 7 percent for the first month; \10/12\ of 7 percent for the second month; \9/12\ of 7 percent
for the third month, etc. for a total of \66/12\.
\4\ The New Mexico State share is 50 percent; the Federal share is 50 percent. We rounded each share to $27,000.

As noted above, we calculated the time value of money lost for
qualifying properties in New Mexico to be approximately $53,500
annually (the New Mexico share is $27,000 and the Federal Government's
share is $27,000). Because New Mexico has 43 percent of all marginal
properties producing 1,000 BOE or less per year, we extrapolated the
total loss for qualifying properties in all States to be $124,419
annually ($53,500 / 0.43 = $124,419). The share of the lost time value
of money for all States would be $62,209 and the Federal Government's
share would be $62,209.

C. Federal Government

(1) Notification-based relief--Cost savings of processing fewer
lines. As noted in Item A(2) above, lessees will report--and MMS will
process--approximately 22,000 fewer lines under the cumulative
reporting and payment relief option. We estimate that MMS will save
approximately $10,340 per year (22,000 lines x $0.47 processing cost
per line). We determined the cost per line using cost data from OMB
Control Number 1010-0140 ($1,167,900 to MMS to process lines received
from industry on the Form MMS-2014 divided by 2,484,000 expected lines
per year).
(2) Notification-based relief--Costs to process notifications. In
the first year, MMS expects to receive 1,000 notifications from lessees
who wish to report annually on their marginal properties. We estimate
that recording each notification in MMS's automated records will
require 5 minutes per notice. Total time to record the notifications is
approximately 83 hours (1,000 notices x 5 minutes / 60 minutes). Using
an average cost of $50 per hour, the total cost to the Government is
estimated to be $4,150 (83 hours x $50).
In the second year and each year thereafter, MMS expects to receive
only 100 notifications. Total time to record the notifications is
approximately 8 hours (100 notices x 5 minutes / 60 minutes) or a total
cost of $400 (8 hours x $50).
(3) Request-based relief--Costs to evaluate requests for other
relief. As noted in Item A(3) above, MMS expects to receive 10
individual accounting and auditing relief requests from lessees
annually. We estimate that each request will require 40 hours to
analyze. The total estimated cost is 400 hours. The total cost is
$20,000 (400 hours x $50).
(4) Notification-based relief--Royalty impact of prolonging the
life of marginal wells. As discussed in Item A above, we estimate that
after the first year, cumulative reporting will save industry
approximately $45,000 annually ($55,000-$10,000). We believe this
reduced cost of operations will prolong

[[Page 55086]]

the life of marginal wells. We cannot determine the length and dollar
impact of this additional well life at this time. The Federal
Government would generally receive 50 percent of the royalties
collected on additional production. We expect the net royalty impact to
the Federal Government will be positive.
(5) Notification-based relief--Royalty impact of lost time value of
money. The Federal Government will lose the time value of money on
sales made in the 11 months before the royalty payment is due.
Generally, the Federal Government receives 50 percent of the royalties
collected for onshore leases. We think the royalty interest lost to the
Federal Government for the time value of money would be the same as for
all States or $62,209 annually (see Item B(4) above for the
calculation).

D. Summary of Costs and Royalty Impacts

------------------------------------------------------------------------
Cost +/-
-------------------------
Description Subsequent
First year years
------------------------------------------------------------------------
A. Industry:
(1) Notification-based relief--Costs of $-100,000 $-10,000
submitting notifications.................
(2) Notification-based relief--Cost 55,000 55,000
savings of reporting fewer lines.........
(3) Request-based relief--Cost of -2,000 -2,000
requesting approval for other accounting
and auditing relief......................
(4) Request-based relief--Costs or royalty \1\ \1\
impacts of taking request-based relief...
(5) Both types of relief--Cost of -300 -300
notifying MMS that relief has ceased.....
Net impact to Industry.................... -47,300 42,700
B. State and Local Governments:
(1) Notification-based relief--Costs of -8,000 -8,000
determining State participation..........
(2) Request-based relief--Costs of -2,000 -2,000
consulting with MMS on other accounting
and auditing relief......................
(3) Notification-based relief--Royalty \1\ \1\
impacts of prolonging the life of
marginal wells...........................
(4) Notification-based relief--Royalty -62,209 -62,209
impact of lost time value of money.......
Net impact to State and Local Governments. -72,209 -72,209
C. Federal Government:
(1) Notification-based relief--Cost 10,340 10,340
savings of processing fewer lines........
(2) Notification-based relief--Costs to -4,150 -400
process notifications....................
(3) Request-based relief--Costs to -20,000 -20,000
evaluate requests........................
(4) Notification-based relief--Royalty \1\ \1\
impact of prolonging the life of marginal
wells....................................
(5) Notification-based relief--Royalty -62,209 62,209
impact of lost time value of money.......
Net impact to Federal Government.............. -76,019 -72,269
------------------------------------------------------------------------
\1\ Unknown.

2. Regulatory Planning and Review (Executive Order 12866)
This document is not a significant rule and is not subject to
formal review by the Office of Management and Budget (OMB) under
Executive Order 12866.
a. This rule will not have an effect of $100 million or more on the
economy. It will not adversely affect in a material way the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local, or tribal governments, or communities.
b. This rule will not create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency.
c. This rule will not materially alter the budgetary impact of
entitlements, grants, user fees, or loan programs or the rights and
obligations of the recipients.
d. This rule does not raise novel legal or policy issues.
3. Administrative Procedure Act (APA)
The MMS has determined that it will waive the 30-day delay of
effectiveness provisions of the APA 5 U.S.C. 553(d), in this
rulemaking. Section 553(d) of the APA permits waiver of the 30 day
delayed effective date requirement for final rules for, inter alia,
good cause or where a rule relieves a restriction. MMS finds that good
cause exists because the 30-day delay will result in postponement of
the relief for industry until 2006. Alternative Accounting and Auditing
Requirements are mandated by Sec. 7(c) of RSFA. The final rule
establishes schedules and timeframes for annual reporting relief. If
the rule is not effective prior to October 1, 2004, the first deadline,
the relief as outlined in the rule will not begin until calendar year
2006. The October 1, 2004, deadline is when MMS would furnish the
States a report of marginal properties for the July 2003-June 2004 base
period so that the States can decide whether to allow marginal property
relief in 2005.
Accordingly the rule must be effective before October 1, 2004, or
relief for industry will be postponed until February 2006. Therefore,
MMS finds that there is good cause to make the final rule effective
immediately upon publication in the Federal Register.
4. Regulatory Flexibility Act
The Department certifies that this rule will 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.). Approximately 2,500
companies report and pay royalties to MMS. We estimate that over 97
percent of these companies are small businesses as defined by the U.S.
Small Business Administration because they have 500 or fewer employees.
We anticipate that most of the relief granted under this rule will
benefit small companies. Typically, as properties near the end of their
productive life, larger companies with higher overhead sell their
marginal properties to small companies who can operate them more
profitably.
We expect most small companies will avail themselves of the
notification-based cumulative reporting and payment relief option.
Generally, larger companies may not use this option because of the
expense of modifying their large, complex computer systems to report a
few leases on an annual rather than a monthly basis. However, we expect
that most larger companies, having more sophisticated and complex
accounting considerations, will choose the request-based relief option.
If any company, large or small, chooses not to take the accounting and
auditing relief offered in this rule, it will incur no additional
expense or burden.
Your comments are important. The Small Business and Agricultural

[[Page 55087]]

Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were
established to receive comments from small businesses about Federal
agency enforcement actions. The Ombudsman will annually evaluate the
enforcement activities and rate each agency's responsiveness to small
business. If you wish to comment on the enforcement actions in this
rule, call 1-888-734-3247. You may comment to the Small Business
Administration without fear of retaliation. Disciplinary action for
retaliation by an MMS employee may include suspension or termination
from employment with the Department.
5. Small Business Regulatory Enforcement Fairness Act (SBREFA)
This rule is not a major rule under 5 U.S.C. 804(2), the Small
Business Regulatory Enforcement Fairness Act. This rule:
a. Will not have an annual effect on the economy of $100 million or
more.
b. Will not cause a major increase in costs or prices for
consumers, individual industries, Federal, State, or local government
agencies, or geographic regions.
c. Will not have significant adverse effects on competition,
employment, investment, productivity, innovation, or the ability of
United States-based enterprises to compete with foreign-based
enterprises.
6. Unfunded Mandates Reform Act
This rule will not impose an unfunded mandate on State, local, or
tribal governments or the private sector of more than $100 million per
year. The rule will not have a significant or unique effect on State,
local, or tribal governments or the private sector. A statement
containing the information required by the Unfunded Mandates Reform Act
(2 U.S.C. 1531 et seq.) is not required.
7. Governmental Actions and Interference With Constitutionally
Protected Property Rights (Takings), Executive Order 12630
In accordance with Executive Order 12630, this rule does not have
significant takings implications. This rule does not impose conditions
or limitations on the use of any private property; consequently, a
takings implication assessment is not required.
8. Federalism, Executive Order 13132
In accordance with Executive Order 13132, this rule does not have
any significant Federalism implications. This rule does not
substantially or directly affect the relationship between Federal and
State governments. This rule does not impose any additional burden on
local governments. MMS will consult with the State concerned on any
notification or request-based relief. Only four States have sufficient
numbers of marginal properties that will require a yearly analysis of
the economic impact of offering accounting and auditing relief. Any
consultation with a concerned State on request-based relief is expected
to be minimal as MMS anticipates receiving only about 10 requests
annually. Although consultation with the State concerned on whether to
allow relief on Federal marginal properties in their State does impose
some costs, the amount is not significant and States can opt out of
allowing any relief, eliminating the cost.
9. Civil Justice Reform, Executive Order 12988
In accordance with Executive Order 12988, the Office of the
Solicitor has determined that this rule will not unduly burden the
judicial system and does meet the requirements of sections 3(a) and
3(b)(2) of the Order.
10. Paperwork Reduction Act of 1995
The OMB has approved a new collection of information contained in
this rule, entitled ``30 CFR Part 204, Alternatives for Marginal
Properties,'' under 44 U.S.C. 3501 et seq. The OMB-assigned control
number is 1010-0155, and OMB approval of this collection expires May
31, 2006. When we renew the ICR in 2006, we will change the title to
``30 CFR 204, Subpart A--General Provisions and Subpart C--Auditing and
Accounting Relief'' to clarify the regulatory language we are covering
under 30 CFR 204, Subparts A and C.
The estimated total burden hours currently approved under ICR 1010-
0155 is 2,206. The information collection applies only to Sec. Sec.
204.202(b), 204.203(b), 204.205(a) and (b), 204.206(a) and (b),
204.208(c) and (d), and 204.209(b) of this rule. OMB Control number
1010-0140 covers the burden hours for Sec. Sec. 204.202(b), (d), and
(e), 204.210(c) and (d), and 204.214(b). We received comments from
industry, but there were no changes in the burden hours from the
proposed rule to the final rule. We will use this information to
determine and monitor the eligibility of the lessee or designee for
accounting and auditing relief for Federal marginal properties. A
response is required to obtain a benefit.
This information collection does not contain confidential
information. However, trade secrets and proprietary information are
protected if submitted. Storage of such information and access to it
are controlled by strict security measures. None of the information
requested is considered sensitive.
Submit your comments on the accuracy of this burden estimate or
suggestions on reducing the burden to Sharron L. Gebhardt, Lead
Regulatory Specialist, Chief of Staff Office, Minerals Revenue
Management, MMS, P.O. Box 25165, MS 302B2, Denver, Colorado 80225. If
you use an overnight courier service, the MMS courier address is
Building 85, Room A-614, Denver Federal Center, Denver, Colorado 80225.
You may also e-mail your comments to us at mrm.comments@mms.gov.
Include the title of the information collection and the OMB Control
number in the Attention line of your comment. Also, include your name
and return address. Submit electronic comments as an ASCII file
avoiding the use of special characters and any form of encryption. If
you do not receive a confirmation that we have received your e-mail,
contact Ms. Gebhardt at (303) 231-3211. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
11. National Environmental Policy Act (NEPA)
This rule deals with financial matters and has no direct effect on
MMS's decisions on environmental activities. Pursuant to the
Departmental Manual (DM), 516 DM 2.3A(2), Sec. 1.10 of 516 DM 2,
Appendix 1 excludes from documentation in an environmental assessment
or impact statement ``policies, directives, regulations and guidelines
of an administrative, financial, legal, technical or procedural nature;
or the environmental effects of which are too broad, speculative or
conjectural to lend themselves to meaningful analysis and will be
subject later to the NEPA process, either collectively or case-by-
case.'' Section 1.3 of the same appendix clarifies that royalties and
audits are considered to be routine financial transactions that are
subject to categorical exclusion from the NEPA process.
12. Government-to-Government Relationship With Tribes
In accordance with the President's memorandum of April 29, 1994,
``Government-to-Government Relations with Native American Tribal
Governments'' (59 FR 22951) and DOI DM 512 DM 2, we have evaluated
potential effects on federally recognized Indian tribes. This rule does
not apply to Indian leases.

[[Page 55088]]

13. Effects on the Nation's Energy Supply, Executive Order 13211
This rule is not a significant rule and is not subject to formal
review by the OMB under Executive Order 12866. The primary purpose of
this rule is to provide accounting and auditing relief to certain
lessees of Federal oil and gas properties, largely in the form of
reduced records submittal requirements. This rule does not have a
significant effect on energy supply, distribution, or use because,
although it should promote some additional production on a subset of
Federal oil and gas leases, the additional production would not be
significant in comparison to total production from Federal oil and gas
leases.
14. Consultation and Coordination With Indian Tribal Governments,
Executive Order 13175
In accordance with Executive Order 13175, this rule does not have
tribal implications that impose substantial direct compliance costs on
Indian tribal governments.

List of Subjects in 30 CFR Part 204

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

Dated: August 26, 2004.
Rebecca W. Watson,
Assistant Secretary for Land and Minerals Management.

? For reasons set out in the preamble, 30 CFR part 204 is added as
follows:

PART 204--ALTERNATIVES FOR MARGINAL PROPERTIES

Subpart A--General Provisions
Sec.
204.1 What is the purpose of this part?
204.2 What definitions apply to this part?
204.3 What alternatives are available for marginal properties?
204.4 What is a marginal property under this part?
204.5 What statutory requirements must I meet to obtain royalty
prepayment or accounting and auditing relief?
204.6 May I appeal if MMS denies my request for prepayment or other
relief?
Subpart B--Prepayment of Royalty [Reserved]
Subpart C--Accounting and Auditing Relief
204.200 What is the purpose of this subpart?
204.201 Who may obtain accounting and auditing relief?
204.202 What is the cumulative royalty reports and payments relief
option?
204.203 What is the other relief option?
204.204 What accounting and auditing relief will MMS not allow?
204.205 How do I obtain accounting and auditing relief?
204.206 What will MMS do when it receives my request for other
relief?
204.207 Who will approve, deny, or modify my request for accounting
and auditing relief?
204.208 May a State decide that it will or will not allow one or
both of the relief options under this subpart?
204.209 What if a property ceases to qualify for relief obtained
under this subpart?
204.210 What if a property is approved as part of a nonqualifying
agreement?
204.211 When may MMS rescind relief for a property?
204.212 What if I took relief for which I was ineligible?
204.213 May I obtain relief for a property that benefits from other
Federal or State incentive programs?
204.214 Is minimum royalty due on a property for which I took
relief?
204.215 Are the information collection requirements in this subpart
approved by the Office of Management and Budget (OMB)?

Authority: 30 U.S.C. 1701 et seq.

Subpart A--General Provisions

Sec. 204.1 What is the purpose of this part?

This part explains how you as a lessee or designee of a Federal
onshore or Outer Continental Shelf (OCS) oil and gas lease may obtain
prepayment or accounting and auditing relief for production from
certain marginal properties. This part does not apply to production
from Indian leases, even if the Indian lease is within an agreement
that qualifies as a marginal property.

Sec. 204.2 What definitions apply to this part?

Agreement means a federally approved communitization agreement or
unit participating area.
Barrels of oil equivalent (BOE) means the combined equivalent
production of oil and gas stated in barrels of oil. Each barrel of oil
production is equal to one BOE. Also, each 6,000 cubic feet of gas
production is equal to one BOE.
Base period means the 12-month period from July 1 through June 30
immediately preceding the calendar year for which you take or request
marginal property relief. For example, if you request relief for
calendar year 2006, your base period is July 1, 2004, through June 30,
2005.
Combined equivalent production means the total of all oil and gas
production for the marginal property, stated in BOE.
Designee means the person designated by a lessee under 30 CFR
218.52 to make all or part of the royalty or other payments due on a
lease on the lessee's behalf.
Producing wells means only those producing oil or gas wells that
contribute to the sum of BOE used in the calculation under Sec.
204.4(c). Producing wells do not include injection or water wells.
Wells with multiple zones commingled downhole are considered as a
single well.
Property means a lease, a portion of a lease, or an agreement that
may be a marginal property if it meets the qualification requirements
of Sec. 204.4.
State concerned (State) means the State that receives a statutorily
prescribed portion of the royalties from a Federal onshore or OCS
lease.

Sec. 204.3 What alternatives are available for marginal properties?

If you have production from a marginal property, MMS and the State
may allow you the following options:
(a) Prepay royalty. MMS and the State may allow you to make a lump-
sum advance payment of royalties instead of monthly royalty payments
for the remainder of the lease term. See Subpart B for prepayment of
royalty requirements.
(b) Take accounting and auditing relief. MMS and the State may
allow various accounting and auditing relief options to encourage you
to continue to produce and develop your marginal property. See Subpart
C for accounting and auditing relief requirements.

Sec. 204.4 What is a marginal property under this part?

(a) To qualify as a marginal property eligible for royalty
prepayment or accounting and auditing relief under this part, the
property must meet the following requirements:

------------------------------------------------------------------------
If your lease is . . . Then . . . And . . .
------------------------------------------------------------------------
(1) Not in an agreement......... The lease must ..................
qualify as a
marginal property
under paragraph
(b) of this
section.

[[Page 55089]]

(2) Entirely or partly committed The entire Agreement
to one agreement. agreement must production
qualify as a allocable to your
marginal property lease may be
under paragraph eligible for
(b) of this relief under this
section. part. Any
production from
your lease that
is not committed
to the agreement
also may be
eligible for
separate relief
under paragraph
(a)(4) of this
table.
(3) Entirely or partly committed Each agreement For any agreement
to more than one agreement. must qualify that does
separately as a qualify, that
marginal property agreement's
under paragraph production
(b) of this allocable to your
section. lease may be
eligible for
relief under this
part. Any
production from
your lease that
is not committed
to an agreement
also may be
eligible for
separate relief
under paragraph
(a)(4) of this
table.
(4) Partly committed to an The part of the
agreement and you have lease that is not
production from the part of the committed to the
lease that is not committed to agreement must
the agreement. qualify
separately as a
marginal property
under paragraph
(b) of this
section.
------------------------------------------------------------------------

(b) To qualify as a marginal property for a calendar year, the
combined equivalent production of the property during the base period
must equal an average daily well production of less than 15 barrels of
oil equivalent (BOE) per well per day calculated under paragraph (c) of
this section.
(c) To determine the average daily well production for a property,
divide the sum of the BOE for all producing wells on the property
during the base period by the sum of the number of days that each of
those wells actually produced during the base period. If the property
is an agreement, your calculation under this paragraph must include all
wells included in the agreement, even if they are not on a Federal
onshore or OCS lease.

Sec. 204.5 What statutory requirements must I meet to obtain royalty
prepayment or accounting and auditing relief?

(a) MMS and the State may allow royalty prepayment or accounting
and auditing relief for your marginal property production if MMS and
the State jointly determine that the prepayment or accounting and
auditing relief is in the best interests of the Federal Government and
the State to:
(1) Promote production;
(2) Reduce the administrative costs of MMS and the State; and
(3) Increase net receipts to the Federal Government and the State.
(b) At any time, if MMS and the State determine that either
prepayment or accounting and auditing relief no longer meets the
criteria in paragraph (a) of this section, MMS, with the State's
concurrence, may discontinue any prepayment or accounting and auditing
relief options granted for production from any marginal property.
(1) MMS will provide you written notice of the decision to
discontinue relief.
(i) If you took the cumulative reports and payments relief option
under Sec. 204.202, your relief will terminate at the end of the
calendar year in which you received the notice.
(ii) If you were approved for prepayment relief under subpart B of
this part or other relief under Sec. 204.203, MMS's notice will tell
you when your relief terminates.
(2) MMS's decision to discontinue relief is not subject to
administrative appeal.

Sec. 204.6 May I appeal if MMS denies my request for prepayment or
other relief?

If MMS denies your request for prepayment relief under Subpart B of
this part or other relief under Sec. 204.203, you may appeal under 30
CFR part 290.

Subpart B--Prepayment of Royalty [Reserved]

Subpart C--Accounting and Auditing Relief

Sec. 204.200 What is the purpose of this subpart?

This subpart explains how you as a lessee or designee may obtain
accounting and auditing relief for your Federal onshore or OCS lease
production from a marginal property. The two types of accounting and
auditing relief that you can receive under this subpart are cumulative
reports and payment relief (explained in Sec. 204.202) and other
accounting and auditing relief appropriate for your property (explained
in Sec. 204.203).

Sec. 204.201 Who may obtain accounting and auditing relief?

(a) You may obtain accounting and auditing relief under this
subpart:
(1) If you are a lessee or a designee for a Federal lease with
production from a property that qualifies as a marginal property under
Sec. 204.4;
(2) If you meet any additional requirements for specific types of
relief under this subpart; and
(3) Only for the fractional interest in production from the
marginal property for which you report and pay royalty. You may obtain
relief even if the other lessees or designees for your lease or
agreement do not request relief.
(b) You may not obtain one or both of the relief options specified
in this subpart on any portion of production from a marginal property
if:
(1) The marginal property covers multiple States; and
(2) One of the States determines under Sec. 204.208 that it will
not allow the relief option you seek.

Sec. 204.202 What is the cumulative royalty reports and payments
relief option?

(a) The cumulative royalty reports and payments relief option
allows you to submit one royalty report and payment annually for
production during a calendar year. You are eligible for this option
only if the total volume produced from the marginal property (not just
your share of the production) is 1,000 BOE or less during the base
period.
(b) To use the cumulative royalty reports and payments relief
option, you must do all of the following:
(1) Notify MMS in writing by January 31 of the calendar year for
which you begin taking your relief. See Sec. 204.205(a) for what your
notification must contain;
(2) Submit your royalty report and payment in accordance with 30
CFR 218.51(g) by the end of February of the year following the calendar
year for which you reported annually, unless you have an estimated
payment on file. If you have an estimated payment on file, you must
submit your royalty report and payment by the end of March of the year
following the calendar year for which you reported annually;

[[Page 55090]]

(3) Use the sales month prior to the month that you submit your
annual report and payment under paragraph (b)(2) of this section on
your Report of Sales and Royalty Remittance, Form MMS-2014, for the
entire previous calendar year's production for which you are paying
annually. (For example, for a report in February use January as your
sales month, and for a report in March use February as your sales
month, to report production for the entire previous calendar year for
which you are paying annually);
(4) Report one line of cumulative royalty information on Form MMS-
2014 for the calendar year, the same as if it were a monthly report;
and
(5) Report allowances on Form MMS-2014 on the same annual basis as
the royalties for your marginal property production.
(c) If you do not pay your royalty by the date due in paragraph (b)
of this section, you will owe late payment interest determined under 30
CFR 218.54 from the date your payment was due under this section until
the date MMS receives it.
(d) If you take relief you are not qualified for, you may be liable
for civil penalties. Also you must:
(1) Pay MMS late payment interest determined under 30 CFR 218.54
from the date your payment was due until the date MMS receives it; and
(2) Amend your Form MMS-2014 to reflect the required monthly
reporting.
(e) If you dispose of your ownership interest in a marginal
property for which you have taken relief under this section (or if you
are a designee who reports and pays royalty for a lessee who has
disposed of its ownership interest), you must:
(1) Report and pay royalties for the portion of the calendar year
for which you had an ownership interest; and
(2) Make the report and payment by the end of the month after you
dispose of the ownership interest in the marginal property. If you do
not report and pay timely, you will owe interest determined under 30
CFR 218.54 from the date the payment was due under this section.

Sec. 204.203 What is the other relief option?

(a) Under this relief option, you may request any type of
accounting and auditing relief that is appropriate for production from
your marginal property, provided it is not prohibited under Sec.
204.204 and meets the statutory requirements of Sec. 204.5. Examples
of relief options you could request are:
(1) To report and pay royalties using a valuation method other than
that required under 30 CFR part 206 that approximates royalties payable
under that part 206; and
(2) To reduce your royalty audit burden. However, MMS will not
consider any request that eliminates MMS's or the States' right to
audit.
(b) You must request approval from MMS under Sec. 204.205(b), and
receive approval under Sec. 204.206 before taking relief under this
option.

Sec. 204.204 What accounting and auditing relief will MMS not allow?

MMS will not approve your request for accounting and auditing
relief under this subpart if your request:
(a) Prohibits MMS or the State from conducting any form of audit;
(b) Permanently relieves you from making future royalty reports or
payments;
(c) Provides for less frequent royalty reports and payments than
annually;
(d) Provides for you to submit royalty reports and payments at
separate times;
(e) Impairs MMS's ability to properly or efficiently account for or
distribute royalties;
(f) Requests relief for a lease under which the Federal Government
takes its royalties in kind;
(g) Alters production reporting requirements;
(h) Alters lease operation or safety requirements;
(i) Conflicts with rent, minimum royalty, or lease requirements; or
(j) Requests relief for production from a marginal property located
in whole or in part in a State that has determined that it will not
allow such relief under Sec. 204.208.

Sec. 204.205 How do I obtain accounting and auditing relief?

(a) To take cumulative reports and payments relief under Sec.
204.202, you must notify MMS in writing by January 31 of the calendar
year for which you begin taking your relief.
(1) Your notification must contain:
(i) Your company name, MMS-assigned payor code, address, phone
number, and contact name; and
(ii) The specific MMS lease number and agreement number, if
applicable.
(2) You may file a single notification for multiple marginal
properties.
(b) To obtain other relief under Sec. 204.203, you must file a
written request for relief with MMS.
(1) Your request must contain:
(i) Your company name, MMS-assigned payor code, address, phone
number, and contact name;
(ii) The MMS lease number and agreement number, if applicable; and
(iii) A complete and detailed description of the specific
accounting or auditing relief you seek.
(2) You may file a single request for multiple marginal properties
if you are requesting the same relief for all properties.

Sec. 204.206 What will MMS do when it receives my request for other
relief?

When MMS receives your request for other relief under Sec.
204.205(b), it will notify you in writing as follows:
(a) If your request for relief is complete, MMS may either approve,
deny, or modify your request in writing after consultation with any
State required under Sec. 204.207(b).
(1) If MMS approves your request for relief, MMS will notify you of
the effective date of your accounting or auditing relief and other
specifics of the relief approved.
(2) If MMS denies your relief request, MMS will notify you of the
reasons for denial and your appeal rights under Sec. 204.6.
(3) If MMS modifies your relief request, MMS will notify you of the
modifications.
(i) You have 60 days from your receipt of MMS's notice to either
accept or reject any modification(s) in writing.
(ii) If you reject the modification(s) or fail to respond to MMS's
notice, MMS will deny your relief request. MMS will notify you in
writing of the reasons for denial and your appeal rights under Sec.
204.6.
(b) If your request for relief is not complete, MMS will notify you
in writing that your request is incomplete and identify any missing
information.
(1) You must submit the missing information within 60 days of your
receipt of MMS's notice that your request is incomplete.
(2) After you submit all required information, MMS may approve,
deny, or modify your request for relief under paragraph (a) of this
section.
(3) If you do not submit all required information within 60 days of
your receipt of MMS's notice that your request is incomplete, MMS will
deny your relief request. MMS will notify you in writing of the reasons
for denial and your appeal rights under Sec. 204.6.
(4) You may submit a new request for relief under this subpart at
any time after MMS returns your incomplete request.

Sec. 204.207 Who will approve, deny, or modify my request for
accounting and auditing relief?

(a) If there is not a State concerned for your marginal property,
only MMS will decide whether to approve, deny, or modify your relief
request.
(b) If there is a State concerned for your marginal property that
has

[[Page 55091]]

determined in advance under Sec. 204.208 that it will allow either or
both of the relief options under this subpart, MMS will decide whether
to approve, deny, or modify your relief request after consulting with
the State concerned.

Sec. 204.208 May a State decide that it will or will not allow one or
both of the relief options under this subpart?

(a) A State may decide in advance that it will or will not allow
one or both of the relief options specified in this subpart for a
particular calendar year. If a State decides that it will not consent
to one or both of the relief options, MMS will not grant that type of
marginal property relief.
(b) To help States decide whether to allow one or both of the
relief options specified in this subpart, for each calendar year MMS
will send States a Report of Marginal Properties by October 1 preceding
the calendar year.
(c) If a State decides under paragraph (a) of this section that it
will or will not allow one or both of the relief options in this
subpart during the next calendar year, within 30 days of the State's
receipt of the Report of Marginal Properties under paragraph (b) of
this section, the State must:
(1) Notify the Associate Director for Minerals Revenue Management,
MMS, in writing, of its intent to allow or not allow one or both of the
relief options under this subpart; and
(2) Specify in its notice of intent to MMS which relief option(s)
it will allow or not allow.
(d) If a State decides in advance under paragraph (a) of this
section that it will not allow one or both of the relief options
specified in this subpart, it may decide for subsequent calendar years
that it will allow one or both of the relief options in this subpart.
If it so decides, within 30 days of the State's receipt of the Report
of Marginal Properties under paragraph (b) of this section, the State
must:
(1) Notify the Associate Director for Minerals Revenue Management,
MMS, in writing, of its intent to allow one or both of the relief
options allowed under this subpart during the next calendar year; and
(2) Specify in its notice of intent to MMS which relief option(s)
it will allow.
(e) If a State does not notify MMS under paragraph (c) or (d) of
this section, the State will be deemed to have decided not to allow
either of the relief options under this subpart for the next calendar
year.
(f) MMS will publish a notice of the State s intent to allow or not
allow certain relief options under this section in the Federal Register
no later than 30 days before the beginning of the applicable calendar
year.

Sec. 204.209 What if a property ceases to qualify for relief obtained
under this subpart?

(a) A marginal property must qualify for relief under this subpart
for each calendar year based on production during the base period for
that calendar year. The notice or request you provided to MMS under
Sec. 204.205 for the first calendar year that the property qualified
for relief remains effective for successive calendar years if the
property continues to qualify.
(b) If a property is no longer eligible for relief for any reason
during a calendar year other than the reason under Sec. 204.210 or
paragraph (c) of this section, the relief for the property terminates
as of December 31 of that calendar year. You must notify MMS in writing
by December 31 that the relief for the property has terminated.
(c) If you dispose of your interest in a marginal property during
the calendar year, your relief terminates as of the end of the sales
month in which you disposed of the property. Report and pay royalties
for your production using the procedures in Sec. 204.202(e).

Sec. 204.210 What if a property is approved as part of a
nonqualifying agreement?

If the Bureau of Land Management (BLM) or MMS's Offshore Minerals
Management (OMM) retroactively approves a marginal property that
qualified for relief for inclusion as part of an agreement that does
not qualify for relief under this subpart, the property no longer
qualifies for relief under this subpart then:
(a) MMS will not retroactively rescind the marginal property relief
for production from your property under Sec. 204.211;
(b) Your marginal property relief terminates as of December 31 of
the calendar year that you receive the BLM or OMM approval of your
marginal property as part of a nonqualifying agreement; and
(c) For the calendar year in which you receive the BLM or OMM
approval, and for any previous period affected by the approval, the
volumes on which you report and pay royalty for your lease must be
amended to reflect all volumes produced on or allocated to your lease
under the nonqualifying agreement as modified by BLM or OMM. Report and
pay royalties for your production using the procedures in Sec.
204.202(b).
(d) If you owe additional royalties based on the retroactive
agreement approval and do not pay your royalty by the date due in Sec.
204.202(b), you will owe late payment interest determined under 30 CFR
218.54 from the date your payment was due under Sec. 204.202 (b)(2)
until the date MMS receives it.

Sec. 204.211 When may MMS rescind relief for a property?

(a) MMS may retroactively rescind the relief for your property if
MMS determines that your property was not eligible for the relief
obtained under this subpart because:
(1) You did not submit a notice or request for relief under Sec.
204.205;
(2) You submitted erroneous information in the notice or request
for relief you provided to MMS under Sec. 204.205 or in your royalty
or production reports; or
(3) Your property is no longer eligible for relief because
production increased, but you failed to provide the notice required
under Sec. 204.209(b).
(b) MMS may rescind relief for your property if MMS decides to take
royalty in kind.

Sec. 204.212 What if I took relief for which I was ineligible?

If you took relief under this subpart for a period for which you
were not eligible, you:
(a) May owe additional royalties and late payment interest
determined under 30 CFR 218.54 from the date your additional payments
were due until the date MMS receives them; and
(b) May be subject to civil penalties.

Sec. 204.213 May I obtain relief for a property that benefits from
other Federal or State incentive programs?

You may obtain accounting and auditing relief for production from a
marginal property under this subpart even if the property benefits from
other Federal or State production incentive programs.

Sec. 204.214 Is minimum royalty due on a property for which I took
relief?

(a) If you took cumulative royalty reports and payment relief on a
property under this subpart, minimum royalty is still due for that
property by the date prescribed in your lease and in the amount
prescribed therein.
(b) If you pay minimum royalty on production from a marginal
property during a calendar year for which you are taking cumulative
royalty reports and payment relief, and:
(1) The annual payment you owe under this subpart is greater than
the minimum royalty you paid, you must pay the difference between the
minimum royalty you paid and your annual payment due under this
subpart; or

[[Page 55092]]

(2) The annual payment you owe under this subpart is less than the
minimum royalty you paid, you are not entitled to a credit because you
must pay at least the minimum royalty amount on your lease each year.

Sec. 204.215 Are the information collection requirements in this
subpart approved by the Office of Management and Budget?

OMB has approved the information collection requirements contained
in this subpart under 44 U.S.C. 3501 et seq., and assigned OMB control
number 1010-0155. See 30 CFR part 210 for details concerning your
estimated reporting burden and how you may comment on the accuracy of
the burden estimate.

[FR Doc. 04-20560 Filed 9-10-04; 8:45 am]

Notices For
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Accounting and Auditing Relief for Marginal Properties

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