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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations
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fails to reduce the charges of an affiliated or third-party pipeline service provider to eliminate non-allowable costs such as gathering costs and other expenses of placing gas in marketable condition. While ONRR audits a lessees reports to determine if excessive transportation allowances have been claimed, ONRR has seven years within which to do so. 30 U.S.C. 1724b1.
Thus, reported costs for recent time periods are potentially unreliable.
Finally, ONRR does not have sufficient resources to audit or conduct other compliance activities on every reported transportation allowance. As a result, some overstated allowances will be missed. For all these reasons, reportedand particularly recentlyreportedtransportation costs may be higher than the reduction to index ONRR authorizes to account for transportation in any index-based valuation method.
Further, for the reasons discussed above in evaluating whether to use high or average bidweek prices, ONRR
should err, if at all, by allowing lower rather than higher reductions to index prices to account for the lessees transportation costs in any index-based valuation option.
ONRR is withdrawing the 2020 Rule for the reasons set forth in Section II.
Nonetheless, the over-time increase in reported transportation costs relative to index is notable. Absent the other flaws in the 2020 Rule discussed in Sections II and III.A of this final rule, ONRR
might conclude in a future rulemaking following notice and comment that it is appropriate to increase the reduction to index to account for transportation in much the same way as it did in the 2020
Rule. But any such action will take place in a separate rulemaking action, and this provision of the 2020 Rule is withdrawn at this time due to the deficiencies of the 2020 Rule.
3. Unwarranted Expansion of IndexBased Valuation Option to ArmsLength Gas Sales The 2016 Valuation Rule introduced the index-based valuation option for Federal gas disposed of in non-armslength transactions, which most often take the form of sales by a lessee to its affiliate. 30 CFR 1206.141c and 1206.142d. The 2016 Valuation Rule considered and rejected comments strongly urging that the index-based valuation option also be available for arms-length transactions, stating that gross proceeds under valid armslength transactions are the best measure of value. 81 FR 43347.
The 2020 Rule expanded the indexbased valuation option to Federal gas
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sold at arms-length. 86 FR 4613. For the reasons described in Sections II and III.A, and the additional reasons set forth below, ONRR is withdrawing its expansion of the index-based valuation option to arms-length sales, subject to the possibility of revisiting the topic in future rulemaking.
ONRR generally considers a lessees arms-length sale of gas to be the best indicator of value. 86 FR 4618. This position was reiterated in the 2020 Rule.
Id. This indicator of value, however, is not always available when a lessee sells gas to its affiliate or otherwise disposes of gas in non-arms-length transactions.
Index prices can be a more reliable indicator of value than affiliate and other non-arms-length sales prices because they are based on reported arms-length sales. But an index-based valuation formula generally is not as reliable a measure of royalty value as is the use of actual sales prices, transportation costs, and processing costs obtained or incurred in armslength transactions. This is because, at a minimum, the implicit transportation deduction included in the index-based valuation formula is based on an average of all reported transportation costs for either the Gulf of Mexico or all other areas of the nation, and therefore is most often higher or lower than the transportation costs actually incurred for the gas being valued.
The 2016 Valuation Rule recognized this, reasoning that index prices are published prices derived from reported arms-length transactions. ONRR
considered the index-based valuation formula included in the 2016 Valuation Rule a simpler, acceptable, and potentially preferrable method to value gas disposed of in non-arms-length or affiliate transactions. 81 FR 43338, 4334643348. In short, under the 2016
Valuation Rule, the index-based valuation option allowed a lessee to, in effect, use a compilation of arms-length transaction data to value gas not sold at arms-length.
ONRR should have offered justification for why the 2020 Rule was adopting a provision expressly rejected by the 2016 Valuation Ruledeclining to extend index-based valuation to armslength transactionsbut it did not. See Section II.D. Using an index-based valuation formula to value arms-length sales of Federal gas is problematic. For arms-length transactions, the generally best indicator of value is typically available, and it is based on actual arms-length transaction data specific to the gas at issue. 30 CFR 1206.141b and 1206.142c. Nonetheless, the 2020 Rule extended the index-based option to gas sold at arms-length. 86 FR 4618. The
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decision to do so was unsupported and premature, though ONRR may reexamine the issue in the future, after it has sufficient time to review, audit, and compare royalties received for index-based valuation of Federal gas sold at non-arms-length and actual transaction data for Federal gas sold at arms-length received after the reinstatement of the 2016 Valuation Rule. At this time, ONRR cannot determine whether the index-based valuation option adequately protects Federal and State royalty interests in Federal gas sold at arms-length.
Therefore, ONRR withdraws this portion of the 2020 Rule.
Public Comment: A few commenters, including multiple States, supported the withdrawal of the extension of the index-based option, asserting that ONRR
should gain experience in administering an index-option for non-arms-length sales before expanding index-based reporting into other areas. Similarly, commenters also stated but did not explain that extension of the indexbased option is premature in light of pending Federal court litigation in Cloud Peak Energy Inc. v. U.S. Dept of the Interior, No. 19cv120SWS D.
Wyo..
ONRR Response: ONRR agrees that the extension of the index-based option to arms-length gas sales is premature at this time.
Public Comment: One commenter supported the withdrawal of this provision of the 2020 Rule because index prices and the index-based valuation option are not sufficiently transparent to the public.
ONRR Response: ONRR is withdrawing this provision of the 2020
Rule for reasons discussed in this final rule. ONRR monitors published index points to verify they meet specific liquidity requirements defined on onrr.gov. Additionally, index price publication companies have many checks in place to ensure the prices reported are transparent and representative of the market. They analyze transactions reported to the publication and validate any prices outside of a predetermined threshold.
They also monitor and publish the number of reported trades and the total volumes associated with those trades.
Public Comment: Some commenters asserted that withdrawal of this portion of the 2020 Rule will increase administrative burdens; require lessees to maintain cross-departmental unbundling teams to analyze and continuously update unbundling cost methodologies; require lessees to obtain proprietary information from processors or make their best guess when the data
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