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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations Change in Royalties 3: Using the Average Index Price Versus the Highest Published Index Price To Value NonArms-Length Federal Unprocessed Gas, Residue Gas, Coalbed Methane, and NGLs In the 2020 Rule, ONRR amended the index-based valuation method to use the average bidweek price, rather than the highest bidweek price, for the appropriate index-pricing point. ONRR
accounted for the impacts to royalty collections attributable to arms-length natural gas transactions in the earlier section. This section will focus on the impact to royalty collections only attributable to non-arms-length natural gas transactions.
The method for calculation in this final rule is similar to the method used in the 2020 Rule, with adjustments made related to the universe of leases that would elect the index-based valuation method. ONRR compared the monthly prices reported to it in the first year of the data period, inclusive of transportation allowances, to the index prices for the appropriate producing areas, inclusive of transportation deductions. ONRR then identified the leases with reported prices higher than the index price in seven or more months
of the year. For these leases with prices higher than index for more than half of the year, ONRR assumes the lessee would elect to use the index-based valuation method. For non-arms-length natural gas sales, this equates to 56.4
percent of the entire list of leases and represents a percentage that is higher than the 50 percent assumption made by ONRR in the 2020 Rules estimated impacts on royalty collections of this same provision. This new percentage incorporates a more logical identification of the leases taking into account a lessees potential financial benefit.
ONRR used reported royalty data for non-arms-length NARM sales and ten percent of the POOL sales type codes based on the assumption above in the same ten major geographic areas with active index-pricing points, also listed above.
To calculate the estimated impact, ONRR:
1 Identified the Platts Inside FERC
published monthly midpoint and high prices for the index applicable to each area Northwest Pipeline Rockies for Green River, Piceance and Uinta basins;
El Paso San Juan for San Juan basin;
Colorado Interstate Gas for Big Horn,
54063

Powder River, Williston, and Wind River basins; El Paso Permian for Permian basin; and Henry Hub for the Gulf of Mexico;
2 multiplied the royalty volume by the published index prices identified for each region;
3 totaled the estimated royalties using the published index prices calculated in step 2;
4 calculated the annual average index-based royalties for both the high and volume-weighted-average prices calculated in step 3 by dividing by five number of years in this analysis; and 5 subtracted the difference between the totals calculated in step 4.
Because ONRR identified that 56.4
percent of leases fall in the universe of leases that would elect the index-based valuation method, ONRR reduced the total estimate by 43.6 percent in the following table. ONRR estimated that the result of this change is that the 2020
Rule, if it went into effect, would result in a decrease in annual royalty payments of approximately $5 million, and a withdrawal of that rule would result in an increase in annual royalty payments by a like amount, as reflected in the table below.

ESTIMATED IMPACT TO ROYALTY COLLECTIONS DUE TO WITHDRAWAL OF 2020 RULES HIGH TO MIDPOINT MODIFICATION
FOR NON-ARMS-LENGTH SALES OF NATURAL GAS USING INDEX-BASED VALUATION METHOD

Royalties Estimated Using High Index Price
Royalties Estimated Using Published Average Bidweek Price
Annual Change in Royalties Paid due to High to Midpoint Change
56.4% of applicable leases

Change in Royalties 4: Modifying the Index-Based Valuation Method To Account for Transportation in Valuing Non-Arms-Length Federal Unprocessed Gas, Residue Gas, and Coalbed Methane The 2020 Rule increased the reductions to index price to account for transportation of production valued under the non-arms-length index-based valuation method first adopted in the 2016 Valuation Rule. ONRR used the new method described previously in
Gulf of Mexico
Onshore basins
$107,736,000
107,448,000
288,000

$198,170,000
189,483,000
8,687,000

this Economic Analysis to identify the likely lease universe of non-arms-length natural gas sales. ONRR identified the same 56.4 percent of non-arms-length natural gas leases as the universe that would elect the method.
To estimate the royalty impact of the change in amount intended to account for transportation, ONRR used reported royalty data using NARM and ten percent of the POOL sales type codes from the same ten major geographic
Total $305,907,000
296,931,000
8,975,000
5,062,000

areas with active index-pricing points listed above.
To calculate the estimated impact, ONRR:
1 Identified appropriate areas using Platts Inside FERC index prices see list above;
2 calculated the transportationrelated adjustment as published in the current regulations and the adjustment outlined in the table below for each area identified in step 1;

TRANSPORTATION DEDUCTION OF INDEX-BASED VALUATION METHOD FOR NON-ARMS-LENGTH GAS

LOTTER on DSK11XQN23PROD with RULES1

$/MMBtu 2016 Valuation rule
Element Gulf of Mexico %
Gulf of Mexico Low Limit
Gulf of Mexico High Limit
Other Areas %
Other Areas Low Limit
Other Areas High Limit

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5%
$0.10
0.30
10%
0.10
0.30

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2020 rule 10%
$0.10
0.40
15%
0.10
0.50