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LOTTER on DSK11XQN23PROD with RULES1

Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations sub nom., Devon Energy Corp. v.
Kempthorne, 551 F.3d 1030 D.C. Cir.
2008, cert. denied, 558 U.S. 819 2009;
Nexen, 2004 WL 722435, at 1, 45, 9
12; Marathon Oil Co., MMS000063
OCS FE, 2005 WL 6733988 Oct. 20, 2005; Kerr-McGee Corp., 147 IBLA 277
1999; CNG Producing Co. v. Royalty Valuation & Standards Div., MMS96
03700CS, 1997 WL 34843496 Oct. 16, 1997; see also DCOR, LLC, ONRR17
0074OCS FE, 2019 WL 6127405, at 715 Aug. 26, 2019.
Public Comment: Some commenters stated that the deepwater gathering allowance is needed to incentivize deepwater offshore oil and gas production, with one asserting that the deepwater gathering allowance should not be withdrawn because it benefits the United States to receive royalties and share in the costs of subsea transportation rather than forego development altogether. This commenter asserted that the development of offshore resources promotes one of ONRRs primary functions, i.e., to ensure fair return for the public.
ONRR Response: These commenters provided no information demonstrating that the deepwater gathering allowance would result in additional deepwater development or increased production and ONRR has no such information in its possession. If appropriate, BSEE
could grant targeted royalty relief for individual leases and lease areas to promote increased development and production when necessary and supported by economic analysis.
Public Comment: While agreeing that gathering is not deductible, some commenters opposed withdrawing the deepwater gathering allowance because they view all subsea movement of oil and gas to a facility not located on a lease or unit adjacent to the lease on which the production originates to be transportation even if the production has not been separated, treated, or measured for royalty purposes. These commenters asserted that ONRR has considered such movement to always be transportation since the Deepwater Policy was issued in 1999. Consistent with this position, one of these commenters objected to referring to the allowance as a deepwater gathering allowance because that commenter considers such movement to always be transportation.
ONRR Response: The commenters view that subsea movement of bulk oil and gas production to a facility off the lease or an adjacent lease is always transportation does not comport with ONRRs view that gathering is part of placing oil and gas into marketable
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condition; oil and gas that has not been separated, treated, and measured for royalty purposes has not been fully gathered and thus is not in marketable condition. Moreover, the commenters position fails to recognize that the Deepwater Policy was an exception to the then-existing rules. Thus, even the Deepwater Policy acknowledged the movement would traditionally be considered gathering but allowed a lessee to claim such movement as part of its transportation allowance. Notably, the Deepwater Policy was never codified or otherwise made part of ONRRs regulations. It was properly set aside by the 2016 Valuation Rule because it was not a published rule and because it was inconsistent with published rules. As a result, the 2016
Valuation Rule clearly established, consistent with the language of the preexisting regulations, that gathering does not end until oil and gas is separated, treated, and measured for royalty purposes.
Public Comment: A commenter supported the deepwater gathering allowance and claimed that industry relied on the Deepwater Policy between 1999 and 2016 when making financial investments and leasing and development decisions. This commenter suggested that retroactively eliminating the allowance would present legal vulnerabilities stating that it was unlawful for ONRR to eliminate the deepwater gathering allowance considering that a lessee relied on it to make leasing and development decisions and may disincentivize future investment and development on the OCS.
ONRR Response: The United States District Court for the District of Wyoming recently upheld ONRRs decision to rescind the deepwater gathering policy in litigation filed to challenge the 2016 Valuation Rule. See Cloud Peak Energy, Inc. v. Dept of the Interior, Case No. 2:19cv00120SWS, Order Upholding In Part And Reversing In Part 2016 Valuation Rule D. Wyo.
Sept. 8, 2021. Noting that ONRR
acknowledged and considered reliance interests, the District Court stated that ONRR considered the relevant information and articulated a rational basis based on the relevant information for its decision to vacate the Deep Water Policy. Id. at 15. The District Court concluded that Petitioners have not established that ONRR acted arbitrarily or capriciously, abused its discretion, or exceeded its lawful authority by rescinding the Deep Water Policy. Id.
Notably, the referenced reliance comment was general and not supported
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by discussion of specific leases or evidentiary materials. The commenter presented no evidence and did not explain how any specific investment was, in fact, premised on the future receipt of a relatively small allowance for gathering. Such general, unsubstantiated, and unquantified reliance interests do not outweigh the other interests and policy considerations that support withdrawal of the deepwater gathering allowance.
81 FR 43340.
An agency must comply with the APA
to either promulgate new legally binding regulations or to substantively amend or modify existing regulations.
The reasonableness of a lessees reliance on an informal memorandum that directly contradicted the language of properly adopted rules is questionable.
See, e.g., Glycine & More, Inc., v. United States, 880 F.3d 1335 Fed. Cir. 2018.
Even if the Deepwater Policy were found to qualify as a legally binding rule, standard OCS lease language illustrates that the reasonableness of expecting it to exist in perpetuity is also questionable. See Form BOEM2005, 1
Feb. 2017 It is expressly understood that amendments to existing statutes and regulations . . . as well as the enactment of new statutes and promulgation of new regulations, which do not explicitly conflict with an express provision of this lease may be made and that the Lessee bears the risk that such may increase or decrease the Lessees obligations under the lease..
Moreover, to the extent any OCS lease contains terms consistent with the Deepwater Policy, those leases will continue to control regardless of any conflict with the valuation regulations.
See 30 CFR 1206.100d and 1206.140c; Form BOEM2005, 1
Feb. 2017.
Public Comment: A commenter supporting the 2020 Rules deepwater gathering allowance asserted that ONRRs elimination of the Deepwater Policy in the 2016 Valuation Rule violated both contract law and the APA.
The commenter pointed to a term in Section 6c of the Form BOEM2005
Feb. 2017 OCS lease template. The commenter also cited Kerr-McGee Corp., 22 IBLA 124 1975 to suggest that royalties to the Federal government should be the same regardless of whether it is paid in volume or value.
ONRR Response: Section 6c of the Form BOEM2005 Feb. 2017 OCS
lease template is expressly limited to royalties paid in amount i.e., in kind, not in value: When paid in amount, such royalties shall be delivered at pipeline connections or in tanks provided by the Lessee. Such deliveries
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