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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations
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alone development and are unlikely to be developed absent subsea completions with tiebacks to existing platforms; that companies will consider not only the oil and gas potential of an area, but also the expected costs of development, as compared to alternative investments;
and that the expected profitability of specific projects will be affected by a companys determinations of geologic and economic risk. 86 FR 4623.
However, the 2020 Rule cited no economic studies or research supporting this new rationale. It also did not explain why these facts, if true, justify a deepwater gathering allowance on all deepwater leases. Where gathering ends and transportation begins should not, for example, depend on whether a hydrocarbon reserve is mature. The maturity of a hydrocarbon reserve may be a factor that BLM, BSEE, or BOEM
takes into consideration in setting royalty rates or granting royalty relief, but it is not a factor relevant to the determination as to where gathering ends. Finally, regardless of whether this new rationale might have been a legitimate basis for the deepwater gathering allowance, the public did not have a meaningful opportunity to comment on it because it was not stated in the 2020 Proposed Rule.
C. Extraordinary Processing Allowance ONRRs valuation regulations allow a lessee to deduct the reasonable and actual costs incurred in processing gas.
30 CFR 1206.159a1. A lessee cannot claim the processing allowance against the value of the residue gas. 30 CFR
1206.159c1. Instead, it must allocate its processing costs among the other gas plant products, with NGLs being a single product. 30 CFR 1206.159b.
Additionally, the allowance cannot exceed 6623 percent of the value of the gas plant product against which the allowance is taken. 30 CFR
1206.159c2.
Prior to the 2016 Valuation Rule, ONRR could, upon request of a lessee, authorize a lessee to exceed the 6623
percent cap. 53 FR 1281. Upon request of a lessee, ONRR could also authorize a lessee to claim an allowance for extraordinary processing costs actually incurred. Id. To qualify for an extraordinary processing allowance, a lessees request had to demonstrate that the costs were, by reference to standard industry conditions and practice, extraordinary, unusual, or unconventional. Id.
The 2016 Valuation Rule eliminated ONRRs authority to allow a lessee to exceed the 6623 percent cap and to take an extraordinary processing allowance.
81 FR 43353. The 2016 Valuation Rule
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also terminated any extraordinary processing allowances that ONRR
previously approved. Id. At the time, there were two extraordinary processing allowances approved by ONRR for gas processed at two facilities in Wyoming.
Id.
The 2020 Rule reinstated a lessees ability to request to claim an extraordinary processing allowance but not its ability to request to exceed the 6623 percent cap. 86 FR 46254626. The reinstatement of extraordinary processing allowances was justified as a way for ONRR to incentivize production or remove a disincentive to production having such costs. Id.
ONRR is withdrawing the extraordinary processing allowance amendment for the reasons stated in Sections II and III.A., and for the additional reasons below.
1. Unwarranted, Overbroad, and Unsupported Incentivization of Production As discussed in Section III.A, ONRRs attempt to incentivize production through the adoption of the 2020 Rule, including through its reinstatement of a lessees ability to apply for and receive an extraordinary processing allowance, is unwarranted. ONRR notes that no supporter of the 2020 Rule submitted a report or study demonstrating that the reinstatement of the extraordinary processing allowance would increase development or production. Moreover, this amendment is overbroad because it could potentially apply in areas where production is already profitable. Other DOI bureaus have programs in place to incentivize development or production where necessary. See Section III.A and 86 FR 3120131202.
Public Comment: Some commenters asserted that the extraordinary processing allowance encourages continued and future production of unique hydrocarbon streams and the production of gas in atypical areas.
Commenters also suggested that a few lessees may have relied on the historical extraordinary processing allowance approvals relating to the two processing facilities in Wyoming, and made investment decisions based on those then-existing approvals. These commenters opined that, absent the extraordinary processing allowances, the viability of lease operations associated with the two Wyoming facilities is questionable. Finally, some commenters stated that the extraordinary processing allowances are necessary to maximize hydrocarbon recovery, prevent waste due to premature lease abandonment, and
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provide a mechanism to reduce royalty payments when costs exceed profits.
ONRR Response: Although commenters assert that extraordinary processing allowances are needed to incentivize future production and ensure the viability of certain lease operations, no commenter provided support to show that, without the extraordinary processing allowances, a lessee would curtail production, or that ONRRs reinstatement of extraordinary processing allowances would increase gas production, including from leases serviced at the two Wyoming facilities.
Notably, the preamble to the 2020 Rule recognized that the production impact of the rules amendments, including the extraordinary processing amendment, is negligible or marginal. 86 FR 4616.
Further, the historical rarity of submissions and approvals of applications for extraordinary processing allowances suggests that extraordinary processing allowances do not incentivize production to the degree commenters assert. In the almost 30
years an extraordinary processing allowance could have been sought, fewer than ten applications were submitted and only two were approved, neither of which was approved after 1996. To the extent that potential waste, premature lease abandonment, or production profitability are legitimate concerns, other bureaus within the DOI
may have programs designed to address those issues.
Public Comment: A commenter asserted that the extraordinary processing allowance is needed to increase helium production because helium is critical for national security.
ONRR Response: ONRRs gas valuation regulations do not apply to helium. See Exxon Corp., 118 IBLA 221, 229 n.9 1991 noting that MMS does not consider helium in valuing a gas stream for royalty purposes because it is not a leasable mineral. Rather, helium production from Federal lands is administered by BLM and governed by the Helium Stewardship Act of 2013, codified at 50 U.S.C. 167167q, and BLM regulations, 43 CFR part 16. See also https www.blm.gov/programs/
energy-and-minerals/helium/divisionof-helium-resources noting that BLMs Division of Helium Resources adjudicates, collects, and audits monies for helium extracted from Federal lands. Thus, any responsibility to incentivize helium production lies with BLM, not ONRR.
The 2020 Rule stated that allowing a lessee to apply for an extraordinary processing allowance approval for the natural gas portion of its production stream, may lower natural gas
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