[Federal Register Volume 60, Number 68 (Monday, April 10, 1995)]
[Proposed Rules]
[Pages 18081-18084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8702]



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DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Part 3100

[WO-610-00-4110-2411]
RIN 1004-AC26


Promotion of Development, Reduction of Royalty on Heavy Oil

AGENCY: Bureau of Land Management, Interior.

ACTION: Proposed rule.

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SUMMARY: The Bureau of Land Management (BLM) is issuing this proposed 
rule to amend the regulations relating to the waiver, suspension, or 
reduction of rental, royalty, or minimum royalty. This amendment would 
establish the conditions under which the operators of properties that 
produce ``heavy oil'' (crude oil with a gravity of less than 20 
degrees) can obtain a reduction in the royalty rate. This action is 
being taken to encourage the operators of Federal heavy oil leases to 
place marginal or uneconomical shut-in oil wells back in production, 
provide an economic incentive to implement enhanced oil recovery 
projects, and delay the plugging of these wells until the maximum 
amount of economically recoverable oil can be obtained from the 
reservoir or field. The BLM believes that this amendment will result in 
substantial additional revenue for the States and Federal Government, 
increase the cumulative amount of domestic oil production from existing 
wells, increase the percentage of oil recovery from presently developed 
reservoirs, minimize the necessity of drilling new wells with their 
additional environmental impacts, assist in reducing the national 
balance of trade deficit, and help promote stability in the jobs and 
services related to the domestic oil industry.

DATES: Comments should be submitted by June 9, 1995. Comments 
postmarked after this date may not be considered as part of the 
decisionmaking process in issuance of a final rule.

ADDRESSES: Comments should be sent to: Director (140), Bureau of Land 
Management, Room 5555, Main Interior Building, 1849 C Street, N.W., 
Washington, D.C. 20240. Comments will be available for public review in 
Room 5555 at the above address during regular business hours (7:45 a.m. 
to 4:15 p.m.), Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Dr. John W. Bebout, Bureau of Land 
Management, (202) 452-0340.

SUPPLEMENTARY INFORMATION: Existing section 3103.4-1 of Title 43, Code 
of Federal Regulations, provides two forms of Federal oil and gas 
royalty reduction: on a case-by-case basis upon application, and for 
stripper wells. In order to encourage the greatest ultimate recovery of 
oil or gas and in the interest of conservation, the Secretary, upon a 
determination that it is necessary to promote development, or that a 
lease cannot be successfully operated under the terms provided therein, 
may reduce the royalty on an entire leasehold or any portion thereof. 
The provision concerning stripper well properties allows royalty 
reduction for properties that produce an average of less than 15 
barrels of oil per eligible well per well-day.
    The Bureau of Land Management (BLM) has reason to believe that 
additional royalty relief for producers of heavy crude oil may be 
necessary to maintain current levels of development, promote investment 
in enhanced recovery efforts, and encourage maximum recovery of the 
resource, thus warranting royalty reduction under Section 39 of the 
Mineral Leasing Act (30 U.S.C. 209).
    Fluctuating oil prices, combined with high production costs, have 
resulted in an uncertain economic future for producers of low gravity 
crude oil. As recently as last January, California producers of heavy 
crude were spending between $9 and $10 to produce a barrel of crude oil 
that was typically selling for between $8.50 and $9 per barrel (from 
data provided by the Conservation Commission of California Oil and Gas 
Producers). When depreciation, depletion, and amortization costs were 
considered, nearly 69% of the state's production was uneconomic and 
more than 13,000 industry and industry-related jobs were at risk 
(California Independent Petroleum Association).
    Heavy crude oil prices have recently risen to the point that the 
immediate crisis in California has passed. Many of the heavy oil 
properties remain only marginally economic, however, and are vulnerable 
to future down-turns in oil prices. As many as two-thirds of the 
marginal properties could be lost during a period of sustained low oil 
prices (National Petroleum Council Committee on Marginal Wells/
Executive Summary--Draft). The danger in losing these wells is that, 
although production from individual wells may be small, their 
collective loss would be significant. The United States would lose the 
opportunity to take advantage of new technologies being developed by 
the Department of Energy (DOE) and industry, and the remaining 
recoverable reserves would be lost.
    This proposed rule would preserve the contribution of marginal 
producers of heavy crude oil to the national reserve base. As a result 
of this relief, more wells should stay on line (even in periods of 
depressed oil prices), fewer recoverable reserves should be lost, and 
there will be less adverse economic impact on States and local 
communities.
    The DOE has modeled the BLM's proposed royalty rate reduction for 
heavy crude oil. It is DOE's conclusion that the proposal will benefit 
all producers of heavy oil while remaining revenue neutral to all oil 
producing States except California (California contains the majority of 
the nation's heavy oil reserves). Assuming a West Texas Intermediate 
Crude oil price of $20 per barrel--a price consistent with recent oil 
markets--the proposal can be expected to increase recoverable reserves 
in California by around 72 percent, from 132.8 million barrels to 228.5 
million barrels.
    A provision of the proposed rule provides for the termination of 
individual royalty reductions should the average price of West Texas 
Intermediate Crude oil rise to a level greater than $24 per barrel for 
a period of at least 6 consecutive months. This provision is intended 
to ensure that [[Page 18082]] royalty relief is only provided during 
periods of low market prices.
    The proposed rule establishes a sliding scale royalty rate for 
qualifying heavy-oil-producing properties. The sliding scale is 
intended to somewhat offset the reduced prices paid for oil as oil 
gravity decreases. The reduced royalty rate applies to qualifying heavy 
oil properties rather than individual wells, because production is 
normally not measured for individual oil wells, and is based on the 
average gravity of the oil weighted by the production of heavy oil from 
each well within the property. A weighted average gravity is used to 
prevent gravity manipulation by selectively producing wells on a 
property with heavier gravity crude. Using a weighted average of oil 
gravity encourages maximum recovery from all wells within a property by 
removing the economic advantage of selective production.
    The rule provides that either the operator (as defined at 43 CFR 
3100.0-5) or the payor (as defined at 30 CFR 208.2) must calculate the 
weighted average gravity of the oil--measured on the American Petroleum 
Institute (API) scale--produced from a property every 12 months to 
determine the appropriate royalty rate. In no case, however, would the 
royalty rate exceed the rate established by the terms of the lease.
    The section amended by this proposed rule also provides for royalty 
rate reductions for stripper oil wells. Many provisions of this 
proposed rule are essentially the same as the provisions of the 
existing regulations that pertain to stripper wells, except that 
references to ``stripper well'' have been replaced with ``heavy oil 
well.'' The similarity between the existing provisions pertaining to 
stripper wells and the provisions of this proposed rule could allow for 
some restructuring of section 43 CFR 3103.4-1 to reduce the overall 
regulatory text and to increase clarity. The public is invited to 
comment on whether reorganizing 43 CFR 3103.4-1 should be considered in 
preparing the final heavy oil royalty reduction rule.
    The principal author of this proposed rule is Dr. John W. Bebout, 
Senior Technical Specialist, Fluids Group, assisted by the Regulatory 
Management Team, Bureau of Land Management.
    It is hereby determined that this rule does not constitute a major 
Federal action significantly affecting the quality of the human 
environment and that no detailed statement pursuant to Section 
102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 
4332(2)(C)) is required.
    This rule has been reviewed under Executive Order 12866.
    The BLM has determined that this rule will not have a significant 
economic effect on a substantial number of small entities under the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This is because the 
proposed royalty rate reduction is voluntary, requires no additional 
paperwork, and applies to all operators regardless of size. 
Additionally the BLM has determined, under Executive Order 12630, that 
the rulemaking will not cause a taking of private property.
    The BLM has certified that these regulations meet the applicable 
standards provided in sections 2(a) and 2(b)(2) of Executive Order 
12778.
    The information collection requirements of this rule have been 
approved by the Office of Management and Budget under 44 U.S.C. 3501 et 
seq. and assigned clearance numbers 1010-0090 and 1004-0145.

List of Subjects for 43 CFR Part 3100

    Land Management Bureau, Public Lands--mineral resources, Oil and 
gas production, Mineral royalties.

    On March 30, 1995, an outdated version of this proposed rule was 
published in the Federal Register (60 FR 16424) by mistake. That 
proposed rule publication is hereby withdrawn, and this version is 
published in its place.
    For the reasons stated in the preamble, and under the authorities 
cited below, Part 3100, Group 3100, Subchapter C, Chapter II of Title 
43 of the Code of Federal Regulations is proposed to be amended as set 
forth below:

PART 3100--OIL AND GAS LEASING

    1. The authority citation for part 3100 continues to read as 
follows:

    Authority: 30 U.S.C. 181, et seq., 30 U.S.C. 351-359.

Subpart 3103--Fees, Rentals and Royalty

    2. Section 3103.4-1 is amended by revising paragraph (b)(1), 
redesignating paragraph (e) as paragraph (g), and adding new paragraphs 
(e) and (f) to read as follows:


Sec. 3103.4-1  Waiver, suspension, or reduction of rental, royalty or 
minimum royalty.

* * * * *
    (b)(1) An application for the benefits under paragraph (a) of this 
section on other than stripper oil well leases or heavy oil properties 
must be filed by the operator/payor in the proper BLM office. It must 
contain the serial number of the leases, the names of the record title 
holders, operating rights owners (sublessees), and operators for each 
lease, the description of lands by legal subdivision and a description 
of the relief requested.
* * * * *
    (e)(1) A heavy oil well property is any Federal lease or portion 
thereof segregated for royalty purposes, a communitization area, or a 
unit participating area, operated by the same operator, that produces 
crude oil with a weighted average gravity of less than 20 degrees as 
measured on the American Petroleum Institute (API) scale.
    (2) An oil completion is a completion from which the energy 
equivalent of the oil produced exceeds the energy equivalent of the gas 
produced (including the entrained liquefiable hydrocarbons) or any 
completion producing oil and less than 60 MCF of gas per day.
    (f) Heavy oil well property royalty rate reductions will be 
administered according to the following requirements and procedures.
    (1) The Bureau of Land Management requires no specific application 
form for the benefits under paragraph (a) of this section for heavy oil 
well properties. However, the operator/payor must notify, in writing, 
the proper BLM office that it is seeking a heavy oil royalty rate 
reduction. The letter must contain the serial number of the affected 
leases (or, as appropriate, the communitization agreement number or the 
unit agreement name); the names of the operators for each lease; the 
calculated new royalty rate as determined under paragraph (f)(2) of 
this section; and copies of the Purchaser's Statements (sales receipts) 
to document the weighted average API gravity for a property.
    (2) The operator must determine the weighted average API gravity 
for a property by averaging (adjusted to rate of production) the API 
gravities reported on the operator's Purchaser's Statement for the last 
3 calendar months preceding the operator's written notice of intent to 
seek a royalty rate reduction, during each of which at least one sale 
was held. This is shown in the following 3 illustrations:
    (i) If a property has oil sales every month prior to requesting the 
royalty rate reduction in October of 1994, the operator must submit 
Purchaser's Statements for July, August, and September of 1994;
    (ii) If a property has sales only every 6 months, during the months 
of March and September, prior to requesting the rate reduction in 
October of 1994, the [[Page 18083]] operator must submit Purchaser's 
Statements for the months of September 1993, and March and September 
1994; and
    (iii) If a property has multiple sales each month, the operator 
must submit Purchaser's Statements for every sale for the 3 entire 
calendar months immediately preceding the request for a rate reduction.
    (3) The following equation must be used by the operator/payor for 
calculating the weighted average API gravity for a heavy oil well 
property:
[GRAPHIC][TIFF OMITTED]TP10AP95.005


Where:

V1 = Average Production (bbls) of Well #1 over the last 3 calendar 
months of sales
V2 = Average Production (bbls) of Well #2 over the last 3 calendar 
months of sales
Vn = Average Production (bbls) of each additional well (V3, 
V4, etc.) over the last 3 calendar months of sales
G1 = Average Gravity (degrees) of oil produced from Well #1 over 
the last 3 calendar months of sales
G2 = Average Gravity (degrees) of oil produced from Well #2 over 
the last 3 calendar months of sales
Gn = Average Gravity (degrees) of each additional well (G3, 
G4, etc.) over the last 3 calendar months of sales

    Example: Lease ``A'' has 3 wells producing at the following average 
rates over 3 sales months with the following associated average 
gravities: Well #1, 4,000 bbls, 13 deg. API; Well #2, 6000 bbls, 
21 deg. API; Well #3, 2,000 bbls, 14 deg. API. Using the equation 
above--
[GRAPHIC][TIFF OMITTED]TP10AP95.004


    (4) For those properties subject to a communitization agreement or 
a unit participating area, the weighted average API oil gravity for the 
lands dedicated to that specific communitization agreement or unit 
participating area must be determined in the manner prescribed in 
paragraph (f)(3) of this section and assigned to all property subject 
to Federal royalties in the communitization agreement or unit 
participating area.
    (5) The operator/payor must use the following procedures in order 
to obtain a royalty rate reduction under this section:
    (i) Qualifying royalty rate determination.
    (A) The operator/payor must calculate the weighted average API 
gravity for the property proposed for the royalty rate reduction in 
order to verify that the property qualifies as a heavy oil well 
property.
    (B) Properties that have removed or sold oil less than 3 times in 
their productive life may still qualify for this royalty rate 
reduction. However, no further reductions will be granted until the 
property has a sales history of at least 3 production months (see 
paragraph (f)(5)(iii) of this section).
    (ii) Calculating the qualifying royalty rate. If the Federal leases 
or portions thereof (e.g., communitization or unit agreements) qualify 
as heavy oil property, the operator/payor must use the weighted average 
API gravity rounded down to the nearest whole degree (e.g., 11.7 
degrees API becomes 11 degrees), and determine the appropriate royalty 
rate from the following table:

                  Royalty Rate Reduction for Heavy Oil                  
------------------------------------------------------------------------
    Weighted average API gravity                                        
             (degrees)                      Royalty rate (percent)      
------------------------------------------------------------------------
6..................................                      0.5            
7..................................                      1.4            
8..................................                      2.2            
9..................................                      3.1            
10.................................                      3.9            
11.................................                      4.8            
12.................................                      5.6            
13.................................                      6.5            
14.................................                      7.4            
15.................................                      8.2            
16.................................                      9.1            
17.................................                      9.9            
18.................................                     10.8            
19.................................                     11.6            
20.................................                     12.5            
------------------------------------------------------------------------

    (iii) New royalty rate effective date. The new royalty rate will be 
effective on the first day of production 2 months after BLM receives 
notification by the operator/payor. The rate will apply to all oil 
production from the property for the next 12 months. If the API oil 
gravity is 20 degrees or greater, the royalty rate will be the rate in 
the lease terms.
    (iv) Royalty rate determinations in subsequent years. (A) At the 
end of each 12-month period, beginning on the first day of the calendar 
month the royalty rate reduction went into effect, the operator/payor 
must determine the weighted average API oil gravity for the property 
for that period. The operator/payor must then determine the royalty 
rate for the following year using the table in paragraph (f)(5)(ii) of 
this section.
    (B) The operator/payor must compare the newly determined royalty 
rate to the initial qualifying royalty rate. The operator/payor must 
notify BLM of its determinations under this paragraph and paragraph (A) 
of this Sec. 3103.1-4(f)(5)(iv). The new royalty rate will not become 
effective until the first day of the second month after BLM receives 
notification, and will remain effective for 12 calendar months. 
Notification must include copies of the Purchaser's Statements (sales 
receipts) and be mailed to the proper BLM office. If the operator does 
not notify the BLM of the new royalty rate within 60 days after the end 
of the subject 12-month period, the royalty rate for the heavy oil well 
property will return to the rate in the lease terms.
    (v) Prohibition. Any heavy oil property reporting an API average 
oil gravity determined by BLM to have resulted from any manipulation of 
normal production or adulteration of oil sold from the property will 
not receive the benefit of a royalty rate reduction under this 
paragraph (f).
    (vi) Certification. The operator/payor must use the applicable 
royalty rate when submitting the required royalty 
[[Page 18084]] reports/payments to the Minerals Management Service 
(MMS). In submitting royalty reports/payments using a royalty rate 
reduction authorized by this paragraph (f), the operator/payor must 
certify that the API oil gravity for the initial and subsequent 12-
month periods was not subject to manipulation or adulteration and the 
royalty rate was determined in accordance with the requirements and 
procedures of this paragraph (f).
    (vii) Agency action. If an operator/payor incorrectly calculates 
the royalty rate, the BLM will determine the correct rate and notify 
the operator/payor in writing. Any additional royalties due are payable 
immediately upon receipt of this notice. The BLM will assess late 
payment or underpayment charges in accordance with 30 CFR 218.102. The 
BLM will terminate a royalty rate reduction for a property if BLM 
determines that the API oil gravity was manipulated or adulterated by 
the operator/payor. Terminations of royalty rate reductions for 
individual properties will be effective on the effective date of the 
royalty rate reduction resulting from a manipulated or adulterated API 
oil gravity so that the termination will be retroactive to the 
effective date of the improper reduction. The operator/payor must pay 
the difference in royalty resulting from the retroactive application of 
the non-manipulated rate. The BLM will assess late payment or 
underpayment charges in accordance with 30 CFR 218.102.
    (6) The BLM may suspend or terminate all royalty reductions granted 
under this paragraph (f) upon 6 month's notice in the Federal Register 
when BLM determines that--
    (i) The average oil price remains above $24 per barrel over a 
period of 6 consecutive months (based on the West Texas Intermediate 
Crude average posted prices and adjusted for inflation using the 
implicit price deflator for gross national product with 1991 as the 
base year), or
    (ii) After September 10, 1997, the royalty rate reductions 
authorized by this paragraph (f) have not been effective in reducing 
the loss of otherwise recoverable reserves. This will be determined by 
evaluating the expected versus the actual abandonment rate, the number 
of enhanced recovery projects, and the amount of operator reinvestment 
that can be attributed to this rule.
    (7) The heavy oil well property royalty rate reduction applies to 
all Federal oil produced from a heavy oil property.
    (8) If the lease royalty rate is lower than the benefits provided 
in this heavy oil well property royalty rate reduction program, the 
lease rate prevails.
    (9) If the property qualifies for a stripper well property royalty 
rate reduction, as well as a heavy oil well property reduction, the 
lower of the two rates applies.
    (10) The operator/payor must separately calculate the royalty for 
gas production (including condensate produced in association with gas) 
for oil completions using the lease royalty rate.
    (11) The minimum royalty provisions of Sec. 3103.3-2 will continue 
to apply.
* * * * *
    Dated: April 4, 1995.
Bob Armstrong,
Assistant Secretary of the Interior.
[FR Doc. 95-8702 Filed 4-7-95; 8:45 am]
BILLING CODE 4310-84-P