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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Rules and Regulations
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extraordinary processing allowance than it did historically. ONRR did not consider this possibility or the effect on royalty payments that might result if additional extraordinary processing allowance requests are submitted and approved.
Public Comment: Some commenters stated that ONRR will not be impacted if it reinstates its authority to approve extraordinary processing allowances because ONRR maintains control of the approval process and is not required to grant all requests.
ONRR Response: While the comments regarding the broad discretion of the approval process are generally valid, the comments are not sufficiently specific for ONRR to act on. Moreover, reinstatement of ONRRs authority to permit extraordinary processing allowances may create the unintended and unanticipated consequences discussed above. ONRR must analyze those circumstances before it could permit the extraordinary processing allowance to go into effect.
4. Procedural Defects Specific to the Extraordinary Processing Allowances The Proposed 2020 Rule failed to provide a reasoned explanation, or adequate justification for the change, as required under the APA to provide sufficient notice to the public of the reasons for the reinstatement of the extraordinary processing allowance. See Sections II.C and II.D.
First, ONRR published the Proposed 2020 Rule on October 1, 2020. At that time, the 2016 Valuation Rule was reinstated for only eighteen months, but lessees had not yet been required to comply with the rule. Thus, ONRR had, at most, a limited opportunity to assess the impact of the withdrawal of its authority to permit extraordinary processing allowances.
Second, in the Proposed 2020 Rule, the amendment was premised on the notion of incentivizing production. See 85 FR 62058. However, the 2020 Rule contained inconsistent positions on incentivization. In response to public comments, the 2020 Rule stated that it was not premised on increasing production of oil, gas or coal by some measured amount and instead was meant to incentivize both the conservation of natural resources . . .
and domestic energy production over foreign energy production. 86 FR 4616.
The 2020 Rule also stated that the anticipated impact of the rules amendments on production would be negligible. 86 FR 4626. The 2020 Rule similarly stated that, in most cases, allowing a lessee to exceed the processing allowance cap would not be
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sufficient to incentivize production. See 86 FR 46264629 noting a lessees greater royalty share of production negates any incentive to continue producing from a Federal lease under suboptimal circumstances. Further, neither the Proposed 2020 Rule nor the 2020 Rule explained the purported connection between the extraordinary processing allowance and increased production.
Finally, the public was not provided a meaningful opportunity to comment on the rationale that ultimately formed the basis for the reinstatement of the extraordinary processing allowance because it was not set forth in the Proposed 2020 Rule. Apart from an unpersuasive argument about incentivizing production, ONRR relied entirely on reasons submitted in response to the Proposed 2020 Rule to support its reinstatement of the extraordinary processing allowance. See 86 FR 31204 identifying five additional justifications in the 2020 Rule for reinstatement of the extraordinary processing allowance, each of which was based on comments submitted in response to the Proposed 2020 Rule.
Therefore, the public did not have an opportunity to comment on most of the reasons contained in the 2020 Rule to justify the reinstatement of the extraordinary processing allowance.
D. Index Prices 1. Unwarranted Change From Highest Bidweek Price to Average Bidweek Price For the first time, the 2016 Valuation Rule allowed a lessee to calculate the royalty value of its production by using an index-based valuation formula for its non-arms-length sales of Federal gas, instead of actual sales prices, transportation costs, and processing costs. 30 CFR 1206.141c and 1206.142d. This index-based valuation method is required if there is an index pricing point and the lessee has no written contract for the sale of the gas or there is no sale of the gas, which is the case for approximately 0.3 percent of all Federal gas. 30 CFR 1206.141e and 1206.142f. The index-based valuation formula is otherwise optional.
30 CFR 1206.141c and 1206.142d.
Under the 2016 Valuation Rule, a lessee electing to use the index-based valuation formula must report and pay royalties based on the highest bidweek price for the index pricing points to which the gas could flow, reduced by an amount intended to account for average transportation costs. 30 CFR
1206.141c1 and 1206.142d1. The 2016 Valuation Rule considered and rejected comments that using the
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highest bidweek price results in an inflated value for royalty purposes, which is neither reasonable nor justified. 81 FR 43347. ONRR disagreed with those comments, stating that the provision protects the interests of the Federal lessor, while also simplifying the royalty reporting process for industry. Id.
The 2020 Rule amended the indexbased valuation formula by substituting the average bidweek price for the highest bidweek price. 86 FR 4619. The 2020 Rule posited that while the bidweek average price is lower than the bidweek high price, the bidweek average more closely reflects the gross proceeds that a lessee would typically receive in an arms-length transaction, and therefore is more likely to actually be used by lessees. 86 FR 46194620.
Using an average, however, means that there are transactions where a lessee receives a higher price. And because index-based pricing is optional for all but 0.3 percent of Federal gas, a lessee who generally receives more than the average bidweek price could choose to report and pay based on the average bidweek price in order to reduce its royalty obligations, as could a lessee with lower than average transportation costs.
Conversely, a lessee who generally receives less than the average bidweek price or pays higher than average transportation costs could continue to report and pay royalties based on its actual sales and transaction data specific to the gas at issue rather than the index-based valuation formula.
Thus, a lessee could avoid higher royalties by not using the index-based valuation option. 30 CFR 1206.141c, 1206.142d. In other words, a lessee would have an increased opportunity to pay royalties on the lower of two values.
As a result, changing the formula to reduce the bidweek price used from highest to average is expected to reduce total Federal gas royalties due the United States by $5,062,000 per year, as detailed in the Economic Analysis, below.
In adopting the 2020 Rule, ONRR was required to explain why it was rejecting the position it adopted in the 2016
Valuation Rule that the use of the highest bidweek price is necessary to protect the interests of the Federal lessor. See California, 381 F. Supp. 3d at 117374. Use of the highest bidweek price helps ensure that the United States receives a fair market value, while allowing a lessee the option of a formula if the lessee is motivated to save on administrative costs incident to reporting, payment, and potential audit of actual sales prices, transportation
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