30 CFR Part 220, OCS Net Profit Share Payment Reporting

[Code of Federal Regulations]
[Title 30, Volume 2]
[Revised as of July 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 30CFR220]
[Page 206-219]
TITLE 30--MINERAL RESOURCES
CHAPTER II--MINERALS MANAGEMENT SERVICE, DEPARTMENT OF THE INTERIOR
PART 220_ACCOUNTING PROCEDURES FOR DETERMINING NET PROFIT SHARE PAYMENT
FOR OUTER CONTINENTAL SHELF OIL AND GAS LEASES
Sec.
220.001
220.002
220.003
220.010
220.011
220.012
220.013
220.014
220.015
220.020
220.021
220.022
220.030
220.031
220.032
220.033
220.034

Purpose and scope.
Definitions.
Information collection.
NPSL capital account.
Schedule of allowable direct and allocable joint costs and
credits.
Overhead allowance.
Unallowable costs.
Allocation of joint costs and credits.
Pricing of materiel purchases, transfers, and dispositions.
Calculation of the allowance for capital recovery.
Determination of net profit share base.
Calculation of net profit share payment.
Maintenance of records.
Reporting and payment requirements.
Inventories.
Audits.
Redetermination and appeals.

Authority: Sec. 205, Pub. L. 95-372, 92 Stat. 643 (43 U.S.C. 1337).
Source: 45 FR 36800, May 30, 1980, unless otherwise noted.
Redesignated at 48 FR 1182, Jan. 11, 1983, and at 48 FR 35642, Aug. 5,
1983.
Sec. 220.001

Purpose and scope.

(a) This part 220 establishes accounting procedures for determining
the net profit share base and calculating net profit share payments due
the United States for the production of oil and gas from OCS leases.
(b) The procedures established by this part 220 apply to any OCS
lease issued by the Department of the Interior under any bidding system
established by Sec. 260.110(a) of this chapter which has a net profit
share component.
[45 FR 36800, May 30, 1980, as amended at 46 FR 29689, June 2, 1981.
Redesignated at 48 FR 1182, Jan. 11, 1983, and at 48 FR 35642, Aug. 5,
1983]
Sec. 220.002

Definitions.

For purposes of this part 220:
Allowance for capital recovery means the amount calculated according
to procedures specified in Sec. 220.020. This amount allows a premium
for risk initially undertaken by the lessee and a return on investment
made during the capital recovery period. It is provided in lieu of
interest on equipment and materiel charged to the NPSL capital account.

Capital recovery period means the period of time that begins on the
date of issuance of the NPSL and ends on the last day of the month
during which the sooner of the following occurs:
(1) The lessee completes the last well on the first platform
specified in the development and production plan originally approved by
the MMS, with any approved amendments thereto, and installation of
wellhead equipment. In
[[Page 207]]
the event the last well is dry, then the capital recovery period shall
be deemed to have ended with the determination that the last well is
non-productive;
(2) The balance in the NPSL capital account changes from a debit
balance to a credit balance; or
(3) The lessee, at his election, chooses to terminate the capital
recovery period. A decision to terminate the capital recovery period
prior to the events specified in paragraphs (a) (1) and (2) of this
definition shall be communicated in writing to the Director and shall be
irrevocable.
Controllable materiel means materiel which at the time is so
classified in the Materiel Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies of North
America.
Cost means an expenditure or an accrual incurred by a lessee in
conducting NPSL operations.
Cost pool means a grouping of costs identified with more than one
OCS lease, whether the leases are NPSLs or other types of leases.
Credit means a payment, rebate, reimbursement to a lessee, or other
reduction in cost or increase in revenue attributable to NPSL
operations.
Direct cost means any cost listed in Sec. 220.011 that benefits
only NPSL operations.
Director means the Director of MMS, Washington, DC, or his delegate.
Field employee means an employee below a first level supervisor who
is directly employed in the NPSL project area.
First level supervisor means an employee whose primary function in
NPSL operations is the direct supervision of other employees and/or
contract labor directly employed on the NPSL project area in a field
operating capacity.
G & G means geological, geophysical, geochemical and other similar
investigations carried out on the NPSL tract.
Joint cost means any cost listed in Sec. 220.011 that benefits NPSL
operations and one or more other operations of the lessee or an outside
party.
Lessee means a person authorized by an OCS lease, or an approved
assignment thereof, to develop and produce oil and gas, including all
parties holding such authority by or through the lessee, and the person
designated to conduct NPSL operations.
Lessee's cost of allowed employee absence means the lessee's cost of
holiday, vacation, sickness, disability benefits, jury duty and other
customary excused allowances.
Materiel means equipment, apparatus, and supplies.
Net profit share base means the end of the month credit balance in
the NPSL capital account determined pursuant to Sec. 220.021. The net
profit share base is the production revenue remaining after subtracting
all allowable costs and adding all allowable credits (including
production revenue) in accordance with the procedures established by
this part 220.
Net profit share payment means the portion of the net profit share
base payable to the United States.
Net profit share rate means the percentage share of the net profit
share base payable to the United States. The percentage share may be

fixed in the notice of OCS lease sale or be the bid variable, depending
upon the bidding system used, as established by Sec. 260.110(a) of this
chapter.
NPSL means a net profit share lease, which is an OCS lease that
provides for payment to the United States of a percentage share of the
net profits for production of oil and gas from the tract. This
percentage share may be fixed in the notice of OCS lease sale or be the
bid variable, depending on the bidding system used, as established by
Sec. 260.110(a) of this chapter.
NPSL operations means all activities subsequent to issuance of the
NPSL necessary and proper for the exploration, development, operation,
maintenance, and final abandonment of the NPSL property.
NPSL project area means the NPSL tract, offshore facilities, and
shore base facilities.
NPSL property means the NPSL tract, and materiel and offshore
facilities acquired for use in NPSL operations and that are installed
and/or used on the NPSL tract.
NPSL tract means a tract subject to an NPSL.
[[Page 208]]
OCS lease means a Federal lease for oil and gas issued under the
OCSLA.
OCS lease sale means the DOI proceeding by which leases for certain
OCS tracts are offered for sale by competitive bidding and during which
bids are received, announced, and recorded.
Offshore facilities means platform and support systems located
offshore that are necessary to conduct NPSL operations, e.g., oil and
gas handling facilities, living quarters, offices, shops, cranes,
electrical supply equipment and systems, fuel and water storage and
piping, heliport, marine docking installations, communication
facilities, and navigation aids.
Outside party means any person who is not a lessee.
Person means person as defined in part 260 of this chapter.
Personal expenses means travel and other reasonable reimbursable
expenses of lessee's employees.
Production means all oil, gas, or other hydrocarbon products
produced, removed, saved, or sold from the NPSL property. Gas and
liquids of all kinds are included in production. Production includes the
allocated share of production from a unit of which the NPSL is a part.
Production revenue means the value of all production attributable to
an NPSL property, which value is determined in accordance with Sec.
260.110(b) of this chapter.
Railway receiving point or recognized barge terminal means the
location that a vendor would use in determining the sale price to the
lessee of new materiel to be delivered to the NPSL project area.
Reliable supply store means a recognized source or common stock
point for the particular materiel involved.
Shore base facilities means onshore facilities necessary for NPSL
operations, including:
(1) Shore base support facilities, e.g., a receiving and transshipment point for materiel, staging area for shuttling personnel to and
from the NPSL tract, a communication, scheduling, and dispatching
center; and
(2) Shore base production facilities, e.g., pumps, separating
facilities, gas plants, and tankage for production from the NPSL tract.
Technical employees means those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in NPSL operations is the handling and resolution of
specific operating conditions and problems for the benefit of NPSL
operations.
Tract means land located on the OCS that is offered for lease
through an OCS lease sale and that is identified by a leasing map or an

official protraction diagram prepared by DOI.
[45 FR 36800, May 30, 1980, as amended at 46 FR 29689, June 2, 1981.
Redesignated and amended at 48 FR 1182, Jan. 11, 1983. Redesignated at
48 FR 35642, Aug. 5, 1983]
Sec. 220.003

Information collection.

(a) The information collection requirements of this part have been
approved by OMB under 44 U.S.C. 3501 et seq. and assigned OMB Clearance
Number 1010-0073. The information will be used to determine all
allowable direct and allocable joint costs incurred during the term of
the lease, appropriate overhead allowances permitted on these costs
pursuant to Sec. 220.012, and allowances for capital recovery
calculated pursuant to Sec. 220.020. The information collection is
mandatory in accordance with the Federal Oil and Gas Royalty Management
Act of 1982, 30 U.S.C. 1701 et seq.
(b) Public reporting burden is estimated to average 16 hours for
each annual and monthly lease report, including time spent reviewing
instructions, searching existing data sources, gathering and maintaining
the data needed, and completing and reviewing the collection of
information. Send comments regarding the burden estimate or any other
aspect of this collection of information, including suggestions for
reducing burden, to the Information Collection Clearance Officer,
Minerals Management Service, 281 Elden Street, Herndon, Virginia 22070;
and to the Office of Information and Regulatory Affairs, Office of
Management and Budget, Paperwork Reduction Project 1010-0073,
Washington, DC 20503.
[57 FR 41868, Sept. 14, 1992, as amended at 58 FR 64903, Dec. 10, 1993]
[[Page 209]]
Sec. 220.010

NPSL capital account.

(a) For each NPSL tract, an NPSL capital account shall be
established and maintained by the lessee for NPSL operations. The NPSL
capital account shall include debit entries for all allowable direct and
allocable joint costs incurred during the term of the lease, appropriate
overhead allowances permitted on these costs pursuant to Sec. 220.012,
and allowances for capital recovery calculated pursuant to Sec.
220.020. The NPSL capital account shall be credited with production
revenues attributable to the NPSL and any other credits arising from
NPSL activities.
(b) The NPSL capital account shall be kept on an accrual basis.
Sec. 220.011 Schedule of allowable direct and allocable joint costs
and credits.
The costs and credits specified in paragraphs (a) through (p) of
this section may be charged direct, or allocated to NPSL operations, as
appropriate, in accordance with Sec. 220.014.
(a) Lease rental. The rent paid by the lessee for the NPSL tract is
allowable.
(b) Labor. (1)(i) Salaries and wages of lessee's field employees,
first level supervisors and technical employees employed in the NPSL
project area in NPSL operations are allowable if such costs are not
charged under paragraph (g) of this section.
(ii) Salaries and wages of technical employees within technical
branches of the lessee's organization who are either temporarily or
permanently assigned to, and directly employed in NPSL operations are
allowable provided that such employees work ``full time'' on some
particular aspect of NPSL operations or some specific technical problem.

Excluded from this category are employees assigned a role in NPSL
operations as a duty collateral with other duties that do not directly
benefit NPSL operations.
(iii) Salaries and wages of technical employees within technical
branches of the lessee's organization who are assigned technical tasks
directly related to NPSL operations may be allowable. Costs may be
charged to the NPSL if supported by adequate time records showing the
nature of the task and the hours spent on that task.
(2) Lessee's cost of allowed employee absence paid to employees
whose salaries and wages are chargeable to NPSL operations under
paragraphs (b)(1) (i) and (ii) of this section are allowable.
(3) Expenditures or contributions made pursuant to assessments
imposed by governmental authority that are applicable to lessee's costs
chargeable to NPSL operations under paragraphs (b)(1) (i) and (ii) and
(b)(2) of this section are allowable.
(4) Reasonable personal expenses, including allowable relocation
costs of employees whose salaries and wages are chargeable to NPSL
operations under paragraphs (b)(1) (i) and (ii) of this section and that
are paid by the lessee or for which the employees are reimbursed under
the lessee's normal practice are allowable except as limited by Sec.
220.013(g).
(i) Allowable relocation costs include:
(A) Travel expenses, including transportation, lodging, subsistence,
and reasonable incidental expenses of the employee and members of his
immediate family and transportation of his household and personal
effects to the new location.
(B) Other necessary and reasonable expenses normally incident to
relocation, such as costs of cancelling an unexpired lease,
disconnecting and reinstalling household applicances, and purchases of
insurance against damages to or loss of personal property are allowable.
Costs of cancelling an unexpired lease shall not exceed three times the
monthly rental.
(C) Closing costs (i.e. brokerage fees, legal fees, appraisal fees,
etc.) for the sale of the employee's actual residence when notified of
the transfer are allowable; and
(D) Continuing costs of ownership of the vacant former actual
residence being sold, such as continuing mortgage principal and interest
payments, maintenance of building and grounds (exclusive of fixing-up
expenses), utilities, taxes, property insurance, etc., after settlement
date of lease or date of new permanent residence are allowable.
(ii) The combined total of costs listed in paragraphs (b)(4)(i) (C)
through (D)
[[Page 210]]
of this section shall not exceed 8 percent of the sales price of the
property sold.
(iii) Section 220.013(g) specifies employee relocation expenses that
are not allowable as a charge to NPSL operations.
(5) Lessee's current costs of established plans for employee's group
life insurance, hospitalization, pension, retirement, stock purchase,
thrift, bonds, and other benefit plans of a like nature that are made
available to all of lessee's employees on an equitable basis, applicable
to lessee's labor cost chargeable to NPSL operations under paragraphs
(b)(1) (i) and (ii) and (b)(2) of this section, are allowable. The
amount of these charges shall be lessee's actual cost not to exceed 23
percent of the total charges under paragraphs (b)(1) (i) and (ii) and
(b)(2) except that the Director may from time to time establish a
different maximum percentage.
(6) Charges for expenses incurred under paragraphs (b)(2) through
(b)(5) of this section may be made to NPSL accounts on a ``when and as
paid'' basis or by a percentage assessment method. If the percentage
assessment method is used, it shall be based upon the lessee's actual

cost experience expressed as a percentage of costs chargeable under
paragraphs (b)(1) (i) and (ii) and (b)(2) of this section. Under either
method the lessee's own cost of administering the plans and paying the
salaries and benefits defined in this paragraph shall be excluded. In
determining actual cost experience of an employee benefit plan, any
dividend or refunds received that are applicable to insurance or annuity
policies shall be used to reduce the cost of such policies.
(c) Materiel. (1) Materiel purchased or furnished by a lessee as
NPSL property shall be charged or credited at amounts specified in Sec.
220.015. The purchase and inventorying of materiel is subject to the
conditions and provisions in Sec. 220.032.
(2) Charges to an NPSL account shall be made only for such materiel
purchased or furnished as NPSL property as is reasonably practical and
consistent with efficient and economical operations. The accumulation of
surplus stocks shall be avoided.
(3) Credit for salvaged or returned materiel shall be made to the
NPSL capital account. When the amount originally charged qualifies for
the allowance for capital recovery in Sec. 220.020, the credit shall be
calculated pursuant to Sec. 220.021(a)(3).
(d) Transportation. Transportation of employees and materiel
necessary for NPSL operations to, from, and within the NPSL project
area, are allowable, but subject to the following limitations:
(1) If materiel is moved to the NPSL project area, no charge shall
be made to NPSL operations for a distance greater than the distance from
the nearest reliable supply store, recognized barge terminal, or railway
receiving point where like materiel is normally available, unless agreed
to by the Director.
(2) If surplus materiel is moved from the NPSL project area, no
charge shall be made to NPSL operations for a distance greater than the
distance to the nearest reliable supply store, recognized barge
terminal, or railway receiving point unless agreed to by the Director.
No charge shall be made to NPSL operations for moving materiel to other
properties owned by or under the control of a lessee, unless agreed to
by the Director.
(3) In the application of paragraphs (d)(1) and (d)(2) of this
section, there shall be no equalization of actual gross trucking costs
of $200 or less, excluding accessorial charges.
(e) Contract services. Except when excluded by paragraph (f) of this
section and/or Sec. 220.013(c), the cost of services and utilities
provided under contract by outside parties to the lessee and which
constitute proper and necessary NPSL operations or support for NPSL
operations, and rental charges paid to outside parties for the use of
equipment used in the NPSL project area in support of NPSL operations,
may be charged to NPSL operations subject to the following conditions
and limitations:
(1) Contract services (including professional consulting services
and contract services of technical personnel) that are entirely
performed in the NPSL project area and benefit exclusively NPSL
operations may be
[[Page 211]]
charged at the rates specified in the contract.
(2) Contract services (including professional consulting services
and contract services of technical personnel) that are entirely
performed in the NPSL project area and benefit the NPSL operations and
operations on other tracts must be allocated among all tracts benefited
and only that portion representing services benefiting the NPSL tract
charged to NPSL operations.
(3) Contract services (including professional consulting services
and contract services of technical personnel) that are performed at
sites outside the NPSL project area may be charged to NPSL operations
only if:

(i) The contracted services charged to the NPSL operations benefit
only the NPSL tract or support NPSL operations;
(ii) The contract under which such services are provided deals
exclusively with services benefiting the NPSL tract or NPSL operations,
or the costs of the contract services which are applicable to the NPSL
tract or NPSL operations are separately and specifically identified in
the contract; and
(iii) Services specified in the contract relate to the resolution of
specific technical problems confronting NPSL operations, or specific
engineering design problems related to equipment or facilities required
for NPSL operations.
(4) The cost of any contract service related to research and
development is specifically excluded, as are contract services calling
for feasibility studies not directly related to specific engineering
design problems or alternatives for equipment and facilities required by
NPSL operations.
(f) Legal expenses. Expense of handling, investigating and settling
litigation or claims, discharging of liens, payments of judgments and
amounts paid for settlement of claims incurred in or resulting from NPSL
operations, or necessary to protect or recover the NPSL property are
allowable, except those costs listed in Sec. 220.013(f) as unallowable.
This includes the salaries and wages of lessee's legal staff and the
expense of outside attorneys who are assigned to matters described in
this paragraph if supported by adequate time records showing the nature
of the matter, its direct relationship to NPSL operations, and the hours
spent on the matter.
(g) Rental of equipment and facilities furnished by lessee. (1)(i)
The NPSL capital account shall be charged for the use of equipment and
facilities owned by a lessee that are proper and necessary for NPSL
operations, including shore base and offshore facilities and pipelines
from the tract to shore base production facilities, and that are not
NPSL property. Rental charges shall be made at rates based upon actual
costs of acquisition, construction, and operation. Such rates may
include labor, the cost of setting up and dismantling equipment,
maintenance, repairs, other operating expenses, insurance, taxes,
depreciation (calculated using a method consistent with generally
accepted accounting principles, consistently applied) and a return on
the remaining undepreciated basis not to exceed 8 percent per year,
except that the Director may from time to time establish a different
maximum percentage. Any cost of acquiring real property in excess of
that reasonably required to support the facilities furnished for NPSL
operations shall not be included in the costs used to establish these
rates. Rates charged shall not exceed average commercial rates for
equipment and facilities of similar nature and capability currently
prevailing in the vicinity of the NPSL project area.
(ii) The term ``equipment and facilities'' is used in the broad
sense to include equipment that may be mobile or semimobile and also
installations that may be semipermanent or permanent in nature. Such
equipment and facilities listed below shall be charged on the basis
indicated.
-----------------------------------------------------------------------Equipment/facilities
Basis of charge
-----------------------------------------------------------------------A. Mobile equipment:
Aircraft................................ Hour.
Automobiles............................. Mile or hour.
Trucks.................................. Mile or hour.
Tractors................................ Hour.
Bulldozers.............................. Hour.
Mobile cranes........................... Hour.
Trailer-mounted test separators......... Hour.
Truck-mounted cement mixers............. Hour.

Boats...................................
House trailers..........................

Day or hour.
Day.

[[Page 212]]
B. Semimobile equipment:
Drill rigs.............................. Foot or day.
Workover rigs........................... Hour.
Pulling units........................... Hour.
Derricks................................ Day.
Drilling tender......................... Day.
Barges.................................. Day.
C. Semipermanent installations:
Skid-mounted separators................. Day or volume.
Skid-mounted compressors................ Day or volume.
D. Permanent installations:
Compressor stations..................... Volume.
Saltwater disposal wells................ Volume or wells.
Source water wells and supply systems... Volume.
Roads................................... Wells.
Production/drilling platform............ Volume or wells.
Canals.................................. Wells.
Dock.................................... Wells.
Oil storage and loading facilities...... Volume.
Gathering systems and pipeline.......... Volume.
ACT systems............................. Volume.
Laboratory services (excluding research
Hour or unit.
work).
Shore base production facilities........ Volume.
Shore base support facilities........... Wells.
E. Miscellaneous:
Drill pipe.............................. Foot or day.
Casing setting tools.................... Day.
Well testing equipment.................. Day.
-----------------------------------------------------------------------Equipment and facilities that are not listed shall be charged on a basis
consistent with the nature of the use.
(2) In lieu of charges in paragraph (g)(1) of this section, the
lessee may elect to use average commercial rates prevailing in the
vicinity of the NPSL project area less 20 percent. For automotive
equipment, the lessee may elect to use rates established by the
Director. For other equipment for which no commercial rate exists, the
lessee shall submit the basis for determining such costs to the Director
for approval.
(h) Damages and losses to NPSL property. All costs necessary for the
repair or replacement of NPSL property made necessary because of damages
or losses incurred by fire, flood, storm, theft, accident, or other
causes not covered by insurance, except those resulting from lessee's
negligence or willful misconduct may be charged to the NPSL capital
account. Any settlement received from an insurance carrier should be
credited to NPSL operations when received.
(i) Taxes. All taxes, except income taxes, profit share payments,
and taxes based upon income, that are assessed or levied upon or in
connection with NPSL operations and which have been paid by the lessee
are allowable. Allowed taxes shall include, but not be limited to,
production, severance, excise, ad valorem, and mineral taxes.
(j) Insurance. (1) Net premiums paid for insurance required to be
carried for NPSL operations are allowable. For NPSL operations in which
the lessee may act as self-insurer for Workmen's Compensation and
Employer's Liability, the lessee may include the risk under its self-

insurance program in providing coverage under State and Federal laws and
charge NPSL operations at lessee's cost not to exceed manual rates.
(2) NPSL operations shall be credited for all reimbursements for
costs of damage to NPSL property or personal injury. Reimbursements for
damaged NPSL property shall be credited as follows:
(i) If the damaged NPSL property is replaced or repaired, to the
NPSL capital account charged for the cost of replacement or repair; or
(ii) If the damaged NPSL property is not replaced or repaired, to
the NPSL capital account except that if the cost of the property
originally qualified for the allowance for capital recovery in Sec.
220.020, the credit shall be calculated pursuant to Sec. 220.021(a)(3).
(k) Communications. Costs of leasing, acquiring, installing,
operating, repairing and maintaining communication systems, including
radio, microwave facilities, and computer production controls for the
NPSL operations are allowable. If communication facilities systems
serving the NPSL tract serve operations and/or facilities outside the
NPSL project area, charges to NPSL operations shall be made as provided
in paragraph (g) of this section or shall be allocated to NPSL
operations in accordance with Sec. 220.014.
(l) Ecological and environmental. Costs incurred in the NPSL project
area as a result of statutory regulations for archeological and
geophysical surveys relative to identification and protection of
cultural resources and other environmental or ecological surveys
required by the Bureau of Land Management or other regulatory authority,
may be charged to the NPSL capital account. Also, the costs to provide
or have available pollution containment
[[Page 213]]
and removal equipment, including payments to organizations and/or funds
which provide equipment and/or assistance in the event of oil spills or
other environmental damage are allowable. The costs of actual control
and cleanup of oil spills and resulting responsibilities required by
applicable laws and regulations are allowable, except that a charge
shall not be allowed for any such costs attributable to the lessee's
negligence or willful misconduct.
(m) Dry or bottom hole contributions. The costs of dry or bottom
hole contributions made to obtain information about the structure or
other characteristics of the geology underlying the NPSL tract are
allowable.
(n) Abandonment costs. Actual costs incurred in the plugging of
wells, dismantling of platforms and other facilities and in the
restoration of the NPSL project area shall be charged to the NPSL
capital account only when incurred (i.e., not on an accrual basis),
except that costs incurred after the cessation of production shall not
be charged to the NPSL capital account. Abandonment costs in excess of
offsetting revenues shall not form the basis of any claim against the
United States.
(o) Other costs. Any other costs not covered in paragraphs (a)-(n)
of this section and not disallowed by Sec. 220.013 that are incurred by
the lessee in the necessary and proper conduct of NPSL operation and are
approved by the Director, are allowable. Approval of a plan of
development and production for the NPSL tract by the Director shall be
considered sufficient approval for these other costs provided they are
separately identified in said plan of development and production. Such
separate identification shall note the nature of these other costs and
may include an estimate of their magnitude. Any cost approvals under
this paragraph for which the specific amounts have not been itemized are
presumed to be approved provided they fall within the limits for a
prudent operator. Approval of costs under this paragraph shall be
approval solely for the purposes of determining allowable costs and
shall not preclude a subsequent adjustment at audit of the amount of
such costs.

(p) Other credits. Credit shall be given to the NPSL capital
account, depending on when it is incurred, for NPSL property leased or
used in non-NPSL operations, for the sale of information derived from
test wells and G & G, and for any and all amounts earned or otherwise
due lessee as a result of NPSL operations.
[45 FR 36800, May 30, 1980. Redesignated at 48 FR 1182, Jan. 11, 1983,
and at 48 FR 35642, Aug. 5, 1983, as amended at 67 FR 19112, Apr. 18,
2002]
Sec. 220.012

Overhead allowance.

(a) During the capital recovery period the overhead allowance shall
be calculated on a percentage basis at the rate of 4 percent of
allowable direct and allocable joint costs charged to the NPSL capital
account, exclusive of costs specified in paragraph (c) of this section.
This overhead allowance shall be debited to the NPSL capital account in
accordance with Sec. 220.021(b)(2).
(b) For each month after the end of the capital recovery period, an
overhead allowance shall be calculated on a percentage basis at the rate
of 10 percent of allowable direct and allocable joint costs charged to
the NPSL capital account, exclusive of costs specified in paragraph (c)
of this section. This overhead allowance shall be debited to the NPSL
capital account in accordance with Sec. 220.021(c)(2).
(c) Overhead shall not be charged on the value of:
(1) Lease rental (Sec. 220.011(a));
(2) Contract services (Sec. 220.011(e));
(3) Taxes (Sec. 220.011(i));
(4) Re-injected hydrocarbons, originally produced from the NPSL
tract, that are charged under Sec. 220.011(c); and
(5) Credits for materiel charged under Sec. 220.011(c) that are
salvaged, returned, or used for the benefit of non-NPSL operations.
Sec. 220.013

Unallowable costs.

The following costs shall not be charged as direct or joint costs to
NPSL operations:
(a) Bonus payments to the United States;
(b) Interest (except as permitted under Sec. 220.011(g));
(c) Depreciation, depletion, amortization, or any other charge for
capital recovery for materiel charged to the NPSL capital account under
Sec. 220.011(c),
[[Page 214]]
except as explicitly provided by the allowance for capital recovery
calculated according to Sec. 220.020;
(d) The cost of taking inventory;
(e) Research and development costs;
(f) The following legal expenses:
(1) The costs of litigation against the Federal government;
(2) Fines or penalties levied by any Federal agency;
(3) Settlement of claims or other litigation resulting from the
lessee's violation of regulatory requirements or negligence; and
(4) The cost of the lessee's legal staff or expense of outside
attorneys, except as explicitly allowed under Sec. 220.011(f);
(g) The following employee relocation costs (whether incurred by the
employee or the lessee):
(1) Loss on the sale of a home;
(2) Purchase price of a home in the new location;
(3) Payments for employee income taxes incident to reimbursed
relocation costs; and
(4) Any relocation cost in connection with an employee move that is

for the primary benefit of the lessee's non-NPSL operations;
(h) The lessee's own cost of administering employee benefit plans;
(i) The cost of acquiring or constructing shore base facilities and
real property improvements that are charged to NPSL operations on a
rental basis under Sec. 220.011(g);
(j) Rentals on any facilities, the investment costs of which have
been charged either directly or as allocable joint costs, to the NPSL
capital account; and
(k) Pre-NPSL expenditures.
Sec. 220.014

Allocation of joint costs and credits.

(a) Joint costs shall be grouped in cost pools for allocation to
NPSL and non-NPSL operations in reasonable proportion to the beneficial
or causal relationships which exist between a specific cost pool and the
operations. That portion of a joint cost pool that may be allocated to
NPSL operations is called an allocable joint cost.
(b) The following allocation principles apply in allocating joint
costs:
(1) G & G. G & G shall be allocated on a line mile per tract basis.
(2) Wages and salaries. Wages and salaries that are not charged as
direct on the basis of time spent on a particular job shall be allocated
on a reasonable and equitable basis.
(3) Compensated personal absence, payroll taxes and personal
expenses. These items shall be allocated on the same basis as wages and
salaries.
(4) Transportation costs. Transportation costs for employees that
are not charged direct shall be allocated on the same basis as their
wages and salaries.
(c) Joint credits shall be allocated in the same manner as joint
costs.
(d) When the NPSL is made a part of a unit, the allowed costs shall
be charged to the NPSL capital account on the basis specified in the
unit operating agreement as approved by the Director. Revenues and other
credits shall be made to the NPSL accounts on the same basis as
specified in the approved operating agreement. Joint costs of an NPSL
and a non-NPSL tract that are adjacent to one another and are on the
same structure shall be allocated on a basis approved by the Director.
Sec. 220.015 Pricing of materiel purchases, transfers, and
dispositions.
(a)(1) Purchased materiel. Except as provided in paragraph (a)(2)(i)
of this section, materiel purchased for use in NPSL operations shall be
charged to NPSL operations at the price paid, after deduction of any
discounts received. Should any purchased materiel be defective or
returned to a vendor for other reasons, the credit shall be allocated to
NPSL operations when received by the lessee in accordance with Sec.
220.011(c)(3).
(2) Transferred and disposal materiel. An item of materiel, which is
acquired by the lessee for use in NPSL operations by means other than
purchase or disposed of by any means, shall be priced according to this
subparagraph:
(i) Condition A (new) materiel. (A) Tubular goods, except line pipe,
shall be priced at the current market price in effect on date of
movement on a minimum carload or barge load weight basis, regardless of
quantity transferred, equalized to the lowest published price ``free on
board'' (f.o.b.) railway receiving point or recognized
[[Page 215]]
barge terminal nearest the NPSL tract where such materiel is normally
available.

(B) Line pipe. (1) Movement of less than 30,000 pounds shall be
priced at the current price in effect at date of movement, as listed by
a reliable supply store nearest the NPSL tract where such materiel is
normally available.
(2) Movement of 30,000 pounds or more shall be priced under the
provisions for tubular goods pricing in paragraph (a)(2)(i)(A) of this
section.
(C) Other materiel shall be priced at the current price in effect at
date of movement, as listed by a reliable supply store or f.o.b. railway
receiving point nearest the NPSL tract where such materiel is normally
available.
(ii) Condition B (good used) materiel. Materiel in sound and
serviceable condition and suitable for reuse without reconditioning:
(A) Materiel transferred to the NPSL project area shall be priced at
75 percent of current Condition A price.
(B) Materiel transferred from the NPSL project area shall be priced:
(1) At 75 percent of current Condition A price, if the materiel was
originally charged to NPSL operations as Condition A materiel, or
(2) At 65 percent of current Condition A price, if the materiel was
originally charged to NPSL operations as Condition B materiel at 75
percent of current Condition A price.
(iii) Conditions C and D (other used) materiel--(A) Condition C.
Materiel that is not in sound and serviceable condition and not suitable
for its original function until after reconditioning shall be priced at
50 percent of current Condition A price.
(B) Condition D. Materiel no longer suitable for its original
purposes but suitable for some other purpose shall be priced on a basis
commensurate with its use and comparable with that of materiel normally
used for such other purpose. If the materiel has no alternative use it
should be priced at prevailing prices as scrap.
(iv) Obsolete materiel. Materiel that is serviceable and usable for
its original function and has a value less than Condition A, B, or C
materiel may be valued at a price agreed to by the Director. Such price
should be the equivalent of the value of the service rendered by such
materiel.
(b) Pricing conditions. (1) Loading and unloading costs shall be
charged at a rate of 15 cents per hundred weight, or such other rate as
may be set by the Director, on all tubular goods movements, in lieu of
loading/unloading costs sustained, when the actual hauling costs of such
tubular goods is equalized under provisions of Sec. 220.011(d).
(2) Materiel involving erection costs shall be charged at the
applicable percentage of the current knocked-down price of new materiel.
(c) When materiel subject to paragraphs (a)(2) (ii) and (iii) of
this section is transferred, the cost of reconditioning shall be borne
by the receiving party.
Sec. 220.020

Calculation of the allowance for capital recovery.

(a) For purposes of this section, the cost base for the allowance
for capital recovery in a particular month shall consist of the sum of:
(1) All allowable direct and allocable joint costs chargeable to the
NPSL capital account during the month less any costs specified in Sec.
220.012(c); plus
(2) The value of contract services chargeable to the NPSL capital
account during the month pursuant to Sec. 220.011(e); plus
(3) The capital recovery period overhead allowance, calculated in
accordance with Sec. 220.012(a), that is chargeable to the NPSL capital
account for the month; less
(4) Production revenues and other credits received during the month.
(b) If the cost base for a month is greater than zero (that is, if
the sum of the charges specified in paragraphs (a) (1) through (3) of
this section exceeds the value of production revenues and other
credits), the allowance for capital recovery shall be calculated by

multiplying the cost base by the capital recovery factor, and shall be
debited to the NPSL capital account as specified in Sec. 220.021(b).
(c) If the cost base for a month is less than zero, the allowance
for capital recovery for the NPSL capital account shall be calculated by
multiplying the
[[Page 216]]
resulting negative cost base by the capital recovery factor. The
negative product of this calculation shall be debited to the NPSL
capital account as specified in Sec. 220.021(b).
(d) No allowance for capital recovery shall be calculated on the
charges or credits related to any time period after the end of the
capital recovery period.
Sec. 220.021

Determination of net profit share base.

(a) During each month of the lease term, the NPSL capital account
shall be:
(1) Debited with allowable direct and allocable joint costs;
(2) Credited with an amount reflecting the production revenues for
the month, calculated in accordance with Sec. 260.110(b) of this
chapter.
(3) Credited with amounts properly credited back to the NPSL capital
account as specified in Sec. 220.011(p). Credits associated with
charges to the NPSL capital account during the capital recovery period,
however, shall first be increased by the value of the credit multiplied
by the recovery factor, before crediting that sum to the NPSL capital
account.
(b) At the end of each month of the lease term during the capital
recovery period:
(1) The transactions specified in paragraph (a) of this section
shall be made to the NPSL capital account.
(2) The capital recovery period overhead allowance shall be
calculated in accordance with Sec. 220.012(a) and debited to the NPSL
capital account.
(3) The allowance for capital recovery shall be calculated in
accordance with Sec. 220.020 and the allowance debited (or the negative
allowance debited, as appropriate) to the NPSL capital account. (A debit
entry of a negative allowance for capital recovery shall have the same
effect as a credit entry of the absolute value of the allowance for
capital recovery.)
(4) The balance in the NPSL capital account shall be calculated. If,
as a result of the accounting transactions described in paragraphs (b)
(1) through (3) of this section, there is a credit balance in the NPSL
capital account, the capital recovery period will be considered
terminated as of this month. The credit balance will be forwarded to the
next month, which will be the first month for which a profit share
payment is due.
(c) At the end of each month of the lease term following the end of
the capital recovery period:
(1) The transaction specified in paragraph (a) of this section shall
be made to the NPSL capital account.
(2) An overhead allowance shall be calculated in accordance with
Sec. 220.012(b) and debited to the NPSL capital account.
(3) The balance in the NPSL capital account shall be calculated.
(d) If, as a result of the accounting transactions described in
paragraph (c) of this section, there is a credit balance in the NPSL
capital account, this credit balance is the net profit share base for
that month. The opening debit and credit balances in the NPSL capital
account for any month following a month in which there is a credit
balance in the NPSL capital account (except as provided in paragraph
(b)(4)) of this section shall be zero.

(e) If, as a result of the accounting transactions described in
paragraph (b) or (c) of this section, there is a debit balance in the
NPSL capital account, this debit balance shall be the opening debit
balance in the NPSL capital account for the following month.
(f) Any credit balance in the NPSL capital account shall become the
net profit share base as described in this section. Any debit balance in
the NPSL capital account shall be maintained only insofar as necessary
for the determination of profit share payments. Such debit balance shall
not represent a claim against the United States.
[45 FR 36800, May 30, 1980. Redesignated at 48 FR 1182, Jan. 11, 1983,
and at 48 FR 35642, Aug. 5, 1983, and amended at 55 FR 1210, Jan. 12,
1990]
Sec. 220.022

Calculation of net profit share payment.

The net profit share payment shall be calculated by multiplying the
net profit share base calculated in accordance with Sec. 220.021 by the
net profit share rate. The net profit share payment shall be paid to the
United States in accordance with Sec. 220.031.
[[Page 217]]
Sec. 220.030

Maintenance of records.

(a) Each lessee subject to this part 220 shall establish and
maintain such records as are necessary to determine for each NPSL:
(1) The volume and disposition of all oil and gas production saved,
removed or sold for each month;
(2) The value of all oil and gas production saved, removed or sold
for each month;
(3) The amount and description of costs and credits to the NPSL
capital account;
(4) The amount and description of all costs of acquisition,
construction, and operation of equipment and facilities furnished by the
lessee and charged to the NPSL capital account under Sec. 220.011(g).
Such records shall include worksheets or other documents that indicate
the method used to calculate the amount of each charge made under Sec.
220.011(g);
(5) The cumulative balance of costs and credits to the NPSL capital
account; and
(6) The inventory of materiel.
(b) The ledger cards showing the charges and credits to the NPSL
capital account shall be maintained until thirty-six months after the
cessation of NPSL operations by the lessee. All other documents,
journals and records shall be maintained for thirty-six months from the
due date or date of mailing of the statement of account on an NPSL,
whichever comes later, except that nothing in these regulations shall
limit the time of investigation or the need to produce records when
prima facie evidence of fraud or willful misconduct is obtained with
respect to the government's interest in the NPSL.
Sec. 220.031

Reporting and payment requirements.

(a) Each lessee subject to this part shall file an annual report
during the period from issuance of the NPSL until the first month in
which production revenues are credited to the NPSL capital account. Such
report shall list the costs incurred, including allowances applied,
credits received, and the balance of the NPSL capital account. Not later
than 60 days after the end of the first month in which production
revenues are credited to the NPSL capital account, a final report
relating to the period shall be filed.
(b) Beginning with the first month in which production revenues are

credited to the NPSL capital account, each lessee subject to this part
220 shall file a report for each NPSL, not later than 60 days following
the end of each month, containing the following information for the
month for which the report is filed:
(1) The volume and disposition of all oil and gas production saved,
removed or sold;
(2) The production revenue;
(3) The amount and description of all costs and credits to the NPSL
capital account;
(4) The balance of the NPSL capital account; and
(5) The net profit share base and net profit share payment due the
United States and the monthly profit share of the lessee.
(c) Each lessee subject to this part 220 shall submit, together with
the report required by paragraph (b) of this section, any net profit
share payment due the United States for the period covered by the
report.
(d) Each lessee subject to this part 220 shall file a report not
later than 90 days after each inventory is taken, reporting the
controllable materiel on hand, acquired, transferred or used.
(e) Each lessee subject to this part 220 shall file a final report,
not later than 60 days following the cessation of production, together
with the appropriate net profit share payment, indicating the remaining
balance and costs and credits to the NPSL capital account for the
period.
(f) Reports required by this section shall be filed with the
Director, either separately or as part of the reports that are currently
filed.
(g) Interest shall be calculated at the prevailing rate or rates as
published in the Bulletin to the Department of the Treasury Fiscal
Requirement Manual, in effect for the period or periods over which the
net profit share payment is owed, compounded monthly, on the amount of a
net profit share payment, from the due date (60 days following the end
of each month for which the payment was due) of a net profit share
[[Page 218]]
payment until such payment is received by the United States.
Sec. 220.032

Inventories.

(a) The lessee is responsible for NPSL materiel and shall make
proper and timely cost and credit notations for all materiel movements
affecting NPSL property. The lessee shall provide only such materiel as
may be required for immediate use or is consistent with practical,
efficient, and economical operations. The accumulation of surplus stocks
shall be avoided by proper materiel control, inventory and purchasing.
The lessee shall make timely disposition of idle and surplus materiel
through sale.
(b) At reasonable intervals, but at least once every three years,
inventories of controllable materiel shall be taken by the lessee.
Written notice of intention to take inventory shall be given by the
lessee at least 30 days before any inventory is to be taken so that the
Director may be represented at the taking of inventory. Failure of the
Director to be represented at an inventory shall bind the Director to
accept the inventory taken by the lessee, except in the case of willful
misrepresentation or fraud.
(c) Inventory shall be valued with any generally accepted accounting
method used by the lessee to value the same materiel for financial or
income tax reporting purposes, provided that the method is consistently
applied throughout the life of the materiel.
(d) Reconciliation shall be made of a physical inventory with the
NPSL capital account by the lessee, and a list of overages and shortages
shall be available to the Director for audit as provided in Sec.

220.033. Inventory adjustments of controllable materiel shall be made by
the lessee to the NPSL capital account for overages and shortages.
Controllable materiel removed from physical inventory that has not been
credited to NPSL operations under Sec. 220.015(a)(2) shall be credited
to NPSL operations at its original value, except that when the cost of
the materiel originally qualified for the allowance for capital recovery
in Sec. 220.020, the credit shall be calculated pursuant to Sec.
220.021(a)(3).
Sec. 220.033

Audits.

(a) The accounts of an NPSL lessee or of a contractor of the lessee
which are related to NPSL operations shall be subject to audit by DOI or
its appointed agent. Where possible, the auditor for DOI shall
coordinate audit efforts with other nonoperators, if any. DOI shall have
the right to initiate an audit any time within thirty-six months of the
due date of the monthly statement that is to be audited or the date that
the statement was mailed, whichever is later, provided, however, that
audits may not be conducted any more frequently than once every year
except upon a showing of fraud or willful misrepresentation.
(b)(1) When nonoperators of an NPSL lease call an audit in
accordance with the terms of their operating agreement, the Director
shall be notified of the audit call in the same manner as the operator
is notified. DOI may elect to send an auditor with the audit team
specified by the nonoperators in lieu of calling for a separate audit by
DOI.
(2) If DOI determines to call for an audit, DOI shall notify the
lessee of its audit call and set a time and place for the audit. Such a
notice shall be sent at least thirty days before the suggested time for
the audit to allow the nonoperators to join in DOI's audit in lieu of
calling for their own audit. The place for the audit will normally be
the place where the lessee maintains its records pertaining to the NPSL
lease. The lessee shall send copies of the notice to the nonoperators on
the lease. The lessee shall use reasonable effort to notify all
nonoperators, but failure to include one or more nonoperators in the
notification shall not void the notice.
(3) When DOI calls for an audit, DOI may suggest the date and time
when the audit may commence. The estimated duration of the audit may be
mentioned to the lessee as well as to the other nonoperators who may
elect to supply and auditor for their own audit purposes. The lessee's
office where the audit will be held may be named or, if not known,
inquired about. If a visit to a field plant or field office is
contemplated by the government auditor, such a field trip may be
mentioned. If DOI expresses a desire to
[[Page 219]]
review a period on which the thirty-six month time limitation has
expired, it is the lessee's prerogative to allow the review or to
request that DOI adhere to the time limitation specified in these
regulations.
(c)(1) Exceptions to the accounting by the lessee, whether in favor
of the government or the lessee, shall be noted in a report to the
lessee. The lessee shall have 60 days from the mailing of a notice of
exceptions to agree to the adjustments proposed by the DOI auditor or to
object to the proposed adjustments. If the lessee accepts the proposed
adjustments, the adjustment shall be booked in the month in which the
lessee agrees to the adjustment, except where such adjustment would have
resulted in a change in any net profit share payment due the United
States. In such a case, there shall be a redetermination of the NPSL
capital account pursuant to Sec. 220.034.
(2) If the lessee disagrees with the adjustment, the lessee shall
have the right to appeal the adjustment to the Director.

(d) Upon receipt of an agreement by the government auditor that
there are no required audit adjustments, upon final determination with
respect to any audit adjustment proposed by the government auditor, or
upon the lapse of thirty-six months from the due date or date of mailing
of the statement of account on an NPSL lease, whichever comes later, the
books shall be closed for audit adjustment purposes, except upon a
showing of fraud or willful misrepresentation.
(e) Records required to be kept under Sec. 220.030(a) shall be made
available for inspection by any authorized agent of DOI at any time
during normal business hours upon the request of the Director or other
authorized official.
Sec. 220.034

Redetermination and appeals.

(a) If, as a result of an inspection of records or an audit under
Sec. 220.033, the Director determines that there is an error in the
NPSL capital account or an error in calculating the net profit share
payment, whether in favor of the government or the lessee, the Director
shall redetermine the net profit share base and recalculate the net
profit share payment due the United States and notify the lessee of the
recalculation.
(b) The lessee shall pay any additional amount of net profit share
payment owed plus interest, compounded monthly, from the date that the
payment was due until the date it is actually paid. Interest shall be
calculated at the prevailing rate or rates as published in the Bulletin
to the Department of the Treasury Fiscal Requirements Manual, in effect
for the period or periods over which the payment is owed.
(c) If the recalculated profit share payment is less than the amount
paid the United States, the lessee shall apply such overpayment to the
next profit share payment.
(d) Within 30 days after receiving notice of the recalculation as
provided in paragraph (a) of this section, the lessee may appeal the
decision of the Director in accordance with the appeals provision of 30
CFR part 290.