The Office of Natural Resources Revenue (ONRR) is publishing this proposed rule to amend portions of its regulations for (1) valuing oil and gas produced from Federal leases for royalty purposes, (2) valuing coal produced from Federal and Indian leases, and (3) assessing civil penalties for violations of certain statutes, regulations, leases, and orders associated with mineral leases.

On October 1, 2020, ONRR’s proposed rule published in the Federal Register, at 85 Fed. Reg. 62054. Through this proposed rule, ONRR is seeking public comment for a 60-day period. Per the instructions in the proposed rule, all comments must be submitted to the ONRR on or before November 30, 2020.

For more information, please visit https://www.regulations.gov/ (or https://www.beta.regulations.gov/) and search ONRR-2020-0001 or click the following links:

• To view the proposed rule: https://www.regulations.gov/document?D=ONRR-2020-0001-0001

The following is an excerpt from the Executive Summary of the NOPR:

“ONRR is proposing, for multiple reasons, targeted amendments to 30 CFR part 1206 (most recently amended by the 2016 Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule (“2016 Valuation Rule”)).

First, the 2016 Valuation Rule added certain provisions that are inconsistent with multiple executive orders that have been issued after the 2016 Valuation Rule’s effective date, including Executive Order on Promoting Energy Independence and Economic Growth (Executive Order 13783), which directs agencies to “identify existing regulations that potentially burden the development or use of domestically produced energy resources and appropriately suspend, revise, or rescind those that unduly burden the development of domestic energy resources beyond the degree necessary to protect the public interest or otherwise comply with the law.”

Second, ONRR, after defending its amendments to the Federal and Indian coal valuation rules in 2016 Valuation Rule litigation, and upon consideration of the parties’ briefs and receiving the Court’s ruling, has determined that it should propose a revision to the most controversial coal valuation rules. Third, the proposed amendments would update ONRR’s regulations to simplify certain processes, provide early clarity regarding royalties owed, and better explain ONRR’s civil penalty practices. Finally, this proposed rule would return the relationship between the Federal government, States, Tribes, and regulated parties to the longstanding and familiar valuation framework that existed under FOGRMA for many years prior to the 2016 Valuation Rule. The agency finds that these reasons, collectively and individually, warrant amending ONRR’s valuation and civil penalty regulations.

In addition, ONRR proposes to amend 30 CFR part 1241 (most recently amended by the 2016 Amendments to Civil Penalty Regulations (“2016 Civil Penalty Rule”)) to conform that part with a decision recently issued by a federal district court and to clarify that the 2016 Civil Penalty Rule conforms with ONRR’s long-standing practice.

ONRR believes that regulatory certainty will be best served by amending targeted portions of 30 CFR part 1206 that the 2016 Valuation Rule also addressed, including recodifying certain pre-2017 regulations to achieve a more rational balance between the government’s interest in effective regulation of royalties and the burden on the regulated entities. Though ONRR recognizes that the regulations in place prior to the 2016 Valuation Rule pose certain implementation challenges, the agency finds that restoring those prior regulations is preferable to maintaining ONRR’s rules, as modified by 2016 Valuation Rule, because returning to some of the prior regulations would reinstate a longstanding, nationwide regulatory framework that is better understood by the parties interpreting and applying the regulations (ONRR and the regulated entities). The proposed rule would also meet policy objectives stated in certain Executive Orders, including Executive Order 13783, “Promoting Energy Independence and Economic Growth,” Executive Order 13795, “Implementing an America-First Offshore Energy Strategy,” and would support Secretarial Order 3350, which promotes the America-First Offshore Energy Strategy.

In July 2016, ONRR published the 2016 Valuation Rule, amending, in a number of significant respects, the valuation regulations applicable to Federal oil and gas and Federal and Indian coal. 81 FR 43338, July 1, 2016 (https://www.onrr.gov/Laws_R_D/FRNotices/AA13.htm). The effective date of the 2016 Valuation Rule was January 1, 2017. ONRR is reissuing the 2016 Valuation Rule in the Rule and Regulations section of this issue of the Federal Register.

With respect to Federal oil and gas, this proposed rule would alter or reverse some of the changes brought about by the 2016 Valuation Rule in order to return to the definitions and practices that had been in place since the 1980s. The proposed changes to return to historical practices include: (1) Reinstating the ability of a lessee to request to exceed the 50-percent regulatory limit for transportation costs; (2) reinstating the ability of a lessee to request to exceed the 66 2/3-percent regulatory limit for processing costs; (3) allowing a lessee producing offshore to claim, without requesting case-by-case approval, certain gathering costs as a transportation allowance in waters 200 meters and deeper; (4) allowing a lessee producing offshore to request ONRR’s approval to claim certain gathering costs as a transportation allowance in waters shallower than 200 meters where “deepwater-like” subsea movement occurs; (5) removing the misconduct definition (also applies to Federal and Indian coal); (6) removing the default provision and all references thereto (also applies to Federal and Indian coal); (7) eliminating the requirement that written contracts be signed by all parties (also applies to Federal and Indian coal); and (8) eliminating the requirement that companies cite legal precedent when seeking a valuation determination (also applies to Federal and Indian coal). In addition, this proposed rule would expand concepts first adopted in the 2016 Valuation Rule. The proposed expansion to those 2016 Valuation Rule concepts includes extending the index-based valuation option to all Federal gas dispositions. Finally, this proposed rule would change a few index-based valuation concepts in the 2016 Valuation Rule, including changing the index-based option for unprocessed and residue gas from the highest bidweek price to an average bidweek price; updating the index-based transportation deductions based on more current data; expressly stating that a lessee cannot report royalty values of zero or less; and, expressing that ONRR can request production of a variety of records from lessees who report under an index-based option.

By reverting to certain pre-2016 Valuation Rule practices, this rule would reintroduce one ONRR-quantified administrative cost that the 2016 Valuation Rule eliminated—accounting for deepwater gathering costs that may be claimed as part of a transportation allowance. Described further in Section E, ONRR estimates that Federal lessees would incur an additional $3.136 million in administrative costs in order to increase reported transportation allowances by $30.5 to $41.3 million per year related to deepwater gathering.

With respect to Federal and Indian coal, this proposed rule would eliminate some of the changes brought about by the 2016 Valuation Rule in order to address deficiencies in the 2016 Valuation Rule identified by the United States District Court for the District of Wyoming in Cloud Peak Energy, Inc., v. U.S. Dep’t of the Interior, 415 F. Supp. 3d 1034 (D. Wy. 2019). Specifically, this proposed rule would remove the requirement that coal be valued based on sales of electricity and eliminate the definition of coal cooperative.

In August 2016, ONRR published the 2016 Civil Penalty Rule. 81 FR 50306, August 1, 2016 (https://www.onrr.gov/Laws_R_D/FRNotices/AA05.htm). This proposed rule would change the regulations to conform to the decision issued in American Petroleum Institute (“API”) v. U.S. Dep’t of the Interior, 366 F. Supp. 3d 1292, 1309-10 (D. Wyo. 2018), by eliminating the Department’s administrative law judges’ ability to reverse a stay of the accrual of civil penalties upon a showing that the lessee’s defense to a civil penalty notice was “frivolous.” In addition, this proposed rule would clarify ONRR’s long-standing practice with respect to aggravating and mitigating circumstances, and the information that ONRR considers in assessing the amount of a civil penalty to issue in a case involving violations of a lessee’s obligation to pay money to the United States (a “payment violation”).”

Should you have further questions about the 2016 Rule or these proposed changes, please contact Creel & Associates Inc.  

Disclaimer: The purpose of this article is to make you aware of certain, proposed ONRR rule changes. Laws are subject to change and ONRR interpretation. Please see official ONRR correspondence for official guidance.