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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations
is not provided; and increase the number of unbundling-related compliance reviews and audits, as well as the administrative and legal costs to respond to such compliance reviews and audits.
ONRR Response: ONRR acknowledges that a lessee would realize an administrative cost savings if the indexbased valuation option were available for arms-length sales. In the Economic Analysis below, ONRR has estimated the administrative cost savings to lessees to be $1,077,000 per year.
Further, ONRR has estimated that the 2020 Rules extension of the option to arms-length sales would reduce lessees royalty payments by $7,460,000 per year otherwise due the United States $6,800,000 for gas plus $660,000 for natural gas liquids NGLs. A lessees cost savings, as outlined in the Economic Analysis, also does not change the fact that actual arms-length sales, transportation, and processing data specific to the gas being valued are most often better measures of its value than a formula derived from reported data relating to indices compiled from data relevant to other arms-length transactions.
Among the obligations that Congress placed on the Secretary is the responsibility to audit lessees royalties and reporting. 30 U.S.C. 1711c. A
lessee, operator, or other person directly involved in developing, producing, transporting, purchasing, or selling oil or gas must establish and maintain any records that the Secretary may require.
30 U.S.C. 1713a and 30 CFR 1212.50
1212.52. ONRR and its predecessor agencies, as the Secretarys designees, have historically performed audits based on the records the commenters find burdensome to maintain or acquire and produce. Further, ONRRs methods have been upheld by Federal Courts.
Devon Energy Corp. v. Kempthorne, 551
F.3d 1030 D.C. Cir. 2008, affg Devon Valuation Determination; Amoco Prod.
Co. v. Watson, 410 F.3d 722 D.C. Cir.
2005, affd sub nom. BP Am. Prod. Co.
v. Burton, 549 U.S. 84 2006;
Burlington Res. Oil & Gas Co., 183 IBLA
333 Apr. 23, 2013, affd 2014 WL
3721210 N.D. Okla. July 24, 2014.
When a lessee produces Federal oil and gas, it is foreseeable that it may be subject to ONRR compliance activities, including audit, and will incur associated administrative costs.
The commenters also ignore the fact that Federal oil and gas lessees have long been subject to the marketable condition rule, which is the source of the obligation to unbundle. Lessees are aware of the information and accounting that is required to comply with the
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marketable condition rule. Federal oil and gas lessees have long been required to calculate their gross proceeds, deduct transportation costs and processing costs, and segregate out or unbundle any marketable condition expenses if they seek to report the lowest allowable royalty value for gas. Further, in addition to entering into Federal oil and gas leases, lessees voluntarily enter into contracts with third-party and affiliate buyers, transporters, and processors.
Nothing prevents each lessee from requiring its counterpart, by contract or otherwise, to provide the information necessary to accurately report royalty value, including the costs justifying the lessees allowances. The Federal Government and its State beneficiaries are not obligated to save lessees the administrative costs of doing so.
Finally, even assuming arguendo that E.O.s 13783 and 13795 and S.O.s 3350
and 3360 policy objectives can still be relied upon, the 2020 Rule did not sufficiently support how the indexbased option promotes its stated objective. The 2020 Rule states that it was not premised on increasing the production of oil, gas, or coal by some measured amount, but rather to generally incentivize both the conservation of natural resources by extending the life of current operations and domestic energy production over foreign energy production. 86 FR 4616.
Because this conclusory statement is made without any supporting data, ONRR cannot determine, at this time, whether the 2020 Rules extension of the index-based valuation provision to arms-length sales would result in additional production. Thus, it was unsupported and must be withdrawn.
Public Comment: Some commenters opposed the withdrawal of this provision of the 2020 Rule because doing so reintroduces uncertainty in valuing Federal gas sold under armslength contracts.
ONRR Response: A lessee knows the amount at which it contracts to sell, transport, and process its gas. To ensure its compliance with its royalty reporting and payment obligations, the lessee can contract with the transporter or processor to require sharing of the information needed to accurately report royalty value. As long as a lessee negotiates contracts in a manner that allows it to meet its royalty obligations, its own actions minimize uncertainty.
ONRR is not required to adopt an indexbased valuation option for arms-length sales simply because some lessees failed to secure rights to the data necessary to support the lessees reported allowances.

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Public Comment: One commenter stated that ONRRs revised economic analysis is an insufficient justification for a withdrawal of the index amendments because the difference between the 2020 Rule estimates as compared to the revised index analysis is nominal. According to the commenter, ONRR has collected $9
billion in royalties, rents and bonuses from oil and gas production per year over the past decade, and the 2020 Rule results in a $20.6 million decrease of in royalty collections per year, which equates to only a 0.2 percent decrease in average annual revenue collected. The commenter concluded that this achieves ONRRs objective of promulgating revenue neutral regulations.
ONRR Response: The 2020 Rules economic analysis estimated that extending the index-based valuation option to arms-length sales would increase royalties paid to the United States by $26,741,000 per year, but that the rule as a whole would decrease royalties paid by $28,879,000 per year.
86 FR 4641. The Proposed Withdrawal Rule and this final rule have improved on the methodology used to estimate economic impacts and now quantify the 2020 Rules effect on royalties as follows: Extending the index-based valuation option to arms-length sales would decrease royalties paid to the United States by $7,460,000 per year, and the 2020 Rule as a whole would decrease royalties paid by $64,600,000
per year. Cf. 86 FR 31208 with Economic Analysis, below.
ONRR does not consider these impacts revenue neutral. Further, judging the impact of an optional change in valuation available for some but not all Federal gas to the entirety of revenues from Federal oil, gas, coal, and other minerals distorts its significance.
Finally, ONRR is not basing its withdrawal of any one of the five provisions discussed in this Section III
on whether it incentivizes production or impacts revenue alone, but on the entirety of considerations discussed in this final rule. ONRR is withdrawing the five provisions for the additional reasons set forth in Section II above, and the defects set forth in this Section III
further support withdrawal of the 2020
Rule.
IV. Other Public Comments Received in Response to the Proposed Withdrawal Rule The following addresses additional comments received in response to the Proposed Withdrawal Rule.

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