[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Notices]
[Pages 37070-37072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17673]



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DEPARTMENT OF THE INTERIOR
Minerals Management Service


Announcement of Minerals Management Service Workshops on Expanded 
Use of Royalty-In-Kind Procedures

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of workshops.

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SUMMARY: The Minerals Management Service (MMS) will hold a series of 
one-day workshops to discuss ways to expand the ongoing pilot program 
for collecting Federal royalties-in-kind rather than in value. The 
workshops will be held as follows:

Houston, TX: August 22, 1995
Denver, CO: August 24, 1995
New Orleans, LA: September 15, 1995.

    The workshops will commence at 9:30 a.m. on these respective dates 
and should end by 2:30 p.m. Information on locations is given at the 
end of this notice.

FOR FURTHER INFORMATION CONTACT:Mr. Hugh Hilliard, Minerals Management 
Service, Mail Stop 4013, 1849 C St. NW., Washington, DC 20240, 
telephone number (202) 208-3398, facsimile number (202) 208-4891; or, 
contact Mr. John Bratland at the same address, telephone number (202) 
208-3979, facsimile number (202) 208-3118.

SUPPLEMENTARY INFORMATION: On January 1, 1995, MMS initiated a Royalty 
Gas Marketing Pilot in the Gulf of Mexico. In the pilot, gas royalties 
are collected on an in-kind basis and sold directly to gas marketing 
companies. This gas is taken at or near the lease and sold to 
competitively chosen gas marketing companies with whom MMS has 
contracts.
    The MMS has two objectives in conducting this pilot: (1) To find 
processes for streamlining royalty collections in a manner that 
reflects changes that have occurred in the gas market, and (2) to test 
a process of royalty collection which promises increased efficiency and 
greater certainty in valuation. The MMS plans to evaluate the pilot 
results and issue an interim report in September 1995 and a final 
report by June 30, 1996.
    Preliminary assessment of the pilot indicates that it will be a 
successful effort and suggests that MMS should undertake additional 
pilots employing similar in-kind collection procedures. As a first step 
in pursuing this expansion, MMS will conduct a series of workshops in 
an effort to explore new ideas and to constructively address issues 
which have arisen in the current pilot.

Issues

    Some of the issues that MMS would like to discuss at the workshops 
are presented below. The listing of issues is not necessarily complete 
nor do the comments necessarily reflect an established policy on the 
part of the Federal government.

1. Prospects for In-Kind Collection of Oil Royalties

    The MMS has been exploring the feasibility and possible benefits of 
collecting in-kind oil royalties in a manner similar to that employed 
in the pilot program for gas royalties. This approach would be 
significantly different from the long-standing program of collecting 
oil royalties-in-kind for sale to small refiners. In the case of oil, 
the net benefits of in-kind royalties are much less certain than in the 
case of natural gas, particularly because MMS and industry encounter 
fewer administrative problems in the payment of oil royalties. MMS is 
especially interested in exploring differences between the oil and gas 

[[Page 37071]]
markets which may suggest the need for differences in the design of a 
royalty-in-kind program.

2. Selection of Areas for Future Royalty-In-Kind Pilot(s)

    Since the current pilot program is limited to offshore leases in 
the Gulf of Mexico, MMS is interested in exploring the possibility of 
conducting a future pilot program in an area with onshore Federal 
leases. Any implementation of an on-shore pilot will require close 
cooperation with the Bureau of Land Management and the affected states. 
The MMS is seeking views on what areas should be considered in future 
royalty-in-kind projects. Relevant considerations would include the 
availability of price indices, the volumes of oil or gas available, the 
level of market competition, special valuation issues, transportation 
market structure, and the views of the respective states in which the 
leases are located.

3. Non-Jurisdictional Pipelines in Taking Royalty Gas

    Gas marketing companies taking Federal royalty gas will, in some 
cases, be charged for the services of non-jurisdictional pipelines. 
Non-jurisdictional pipelines are not regulated by the Federal Energy 
Regulatory Commission (FERC), which means that the owner is able to 
charge what the market will bear. The services of these pipelines are 
critical in transporting the gas from the lease or gathering point to a 
main pipeline inlet. The problem which arises for MMS is that, in many 
cases, there appears to be no effective competition in the provision of 
these services. In the absence of any realistic prospect that competing 
pipelines would be built, there is no competitive pressure imposed on 
the owners in pricing the services of these pipelines. This lack of 
competition can be reflected in a lower bid price for the in-kind 
royalty gas.
    This issue will be examined by MMS in planning future pilots. 
Alternative courses of action are open to MMS in dealing with the issue 
of non-jurisdictional pipelines. These could include the following:
    a. Eliminate from future pilots any leases in which non-
jurisdictional pipeline fees will be imposed on gas marketers;
    b. Employ bid evaluation criteria to determine whether the 
transportation adjustment to the bid reflects unusually high pipeline 
costs and reject bids if the costs are ``too high;'' and
    c. Require lessees to deliver gas to the inlet of the 
jurisdictional pipeline and provide an allowance for the reasonable 
costs of transportation.
    These alternatives are not ideal solutions. First, eliminating 
leases from future pilots because of non-jurisdictional pipelines 
essentially avoids an issue which must be addressed if in-kind royalty 
collection is to be applied more broadly in the future. Also, such a 
procedure may unnecessarily exclude leases prior to any evidence that a 
``pricing problem'' exists for pipeline services. Second, bid 
evaluation criteria are effective in imputing value for pipeline 
services when competition exists or when transportation tariffs are 
regulated and clearly promulgated. However, the task of establishing 
reasonable cost for the services of non-jurisdictional pipelines could 
involve considerable conjecture on the part of the MMS. Third, a 
requirement that the lessee deliver gas to the inlet of the major 
pipeline would raise administrative costs since MMS would need to grant 
an allowance to cover the expenses of additional transportation.

4. Aggregation of Leases and the Use of Alternate Bid Procedures

    In the current gas marketing pilot, leases were aggregated into 
groups of various sizes. These groupings were based on location and 
pipeline proximity. However, a view has been expressed that MMS should 
have used larger aggregations of leases which would mean a smaller 
total number of groups. One possible rationale for larger aggregations 
is that the sale price of gas received by marketers is sensitive to 
volumes; that is, larger volumes can be sold at a higher price per 
MMBtu.
    The current pilot included a bidding feature designed to 
accommodate marketers desiring to market larger volumes of gas. The 
alternate bid procedure allowed bids on an aggregation of groups. Such 
bids would win the gas in the aggregation if the alternate bid were to 
exceed the total value of the next highest bids for the groups in the 
aggregation. The MMS was surprised by the apparent lack of interest in 
the alternate bid procedure. One possible explanation is that the 
preparation of alternate bids is more complex and time-consuming. 
Prospective bidders were given a relatively brief period in which to 
prepare bids after the issuance of the Invitation for Bids (IFB).

5. Lessee Responsibilities in Providing Federal In-Kind Gas Royalties

    A long-standing and sometimes controversial element of the Federal 
royalty collection process has been the requirement that the lessee 
place the product in ``marketable condition'' at no cost to the lessor. 
The current pilot largely conforms to these traditional procedures by 
specifying that the lessee is required to place the royalty gas in 
marketable condition (pipeline condition, i.e., after any necessary 
dehydration, sweetening, and compression) before it is taken by the 
purchaser of MMS royalty gas. Lessees have often argued that the 
marketable condition rule imposes a royalty on value added by the 
lessee, rather than simply on the value of the produced mineral. It has 
also been argued that this policy can negatively affect the efficient 
management and ultimate recovery of the resource.
    In the current pilot, MMS indirectly shares in the costs of 
marketing, to the extent that marketers pass those costs on through the 
bid price. In evaluating the pilot, MMS will be looking at the effect 
that different procedures may have on Federal revenues. The MMS would 
welcome views at the workshop on how responsibilities can best be 
shared between the lessor and the lessee in order to ensure efficient 
management of the resource, a market-based royalty collection system 
that is less costly to administer, and receipt of fair market value by 
the Government for its royalty share of production.

6. Appropriate Index Prices in Gas Royalty In-Kind

    In the current pilot, a single price index (Inside FERC) was used 
as the basis for the bidding and subsequent royalty payment. The use of 
the Inside FERC indices was a convenient and familiar alternative 
during a period in which the MMS was trying to quickly design and 
implement the pilot for the 1994-95 winter season. However, the view 
has been expressed that MMS should employ several published indices in 
future pilots or expansions of in-kind royalty collection. Possible 
approaches could involve the use of a composite index based on all of 
the published prices for gas in a particular area or allowing the 
bidder to choose which index to use.
    The MMS also is open to alternative bidding procedures which are 
not necessarily tied to published index prices. Conceivably some other 
price could serve as the basis upon which bids could be formulated. 
Also, in exploring alternative bidding procedures, MMS is examining the 
feasibility of including transportation rates in the bids.

[[Page 37072]]


7. Alternative Contract Terms

    In the current pilot, the contract with the gas marketer is for one 
year. However, the one year contract may not be ideal for all marketing 
firms. There may be a net advantage to be gained from contracts of 
either longer or shorter duration. None the less, there are trade-offs 
associated with different contract lengths. Since the bid price 
(expressed in terms of monthly index price, plus or minus adjustment) 
is binding for the entire term of the contract, prospective contractors 
may perceive greater risk in being committed for a longer term. 
Possible changes in transportation tariffs during the contract term 
have been noted as one source of uncertainty. But one trade-off arises 
in the possibility that a contractor may derive some benefit from a 
longer term sales commitment and thus be able to market in-kind royalty 
gas for a higher price. This trade-off may affect different marketers 
in different ways. The workshops will provide an opportunity to discuss 
issues surrounding contracts of different durations.
    In addition, MMS would be interested in views on whether to explore 
contracts other than simply selling wet gas at the lease. For example, 
certain types of processing contracts (e.g., keep-whole contracts) 
could be considered.

8. Audit Rights in Contracts With Gas Marketers, Agreements With 
Lessees

    In the current pilot, MMS retained the right to audit gas 
marketers' records and imposed various data reporting and record 
retention requirements on the marketers. Since the only elements 
required for calculating the payments due by the marketers are the bid 
price and the quantity and quality of gas sold, it is anticipated that 
MMS' audit needs will be substantially less than those required for 
ensuring that lessees paying royalties in value have paid the proper 
amount. The MMS is interested in additional views on the proper amount 
of data reporting, record retention, and audit rights to incorporate in 
future royalty-in-kind pilot programs.
    With regard to the lessees, MMS will verify that the volumes 
delivered satisfy the royalty obligation. In addition, the lessees in 
the pilot agreed to provide raw data on the sales of their shares of 
production. The MMS requested this information to use in the evaluation 
of the pilot.

9. Gas Sales Contract and Volunteer Agreement (VA) as the Basis for RIK 
Regulations

    If MMS is to move ahead with more extensive application of in-kind 
collection procedures, regulations may need to be drafted. In the 
current pilot, the two documents which define procedural compliance for 
gas marketers and volunteer lessees are the gas sales contract and the 
VA. These documents would need to be the basis for the drafting of 
regulatory language. Clearly some changes would need to be made as some 
of the above issues are addressed and as the current pilot is 
evaluated. However, some of these considerations can be addressed now 
in the context of a workshop. Participants in the workshops can suggest 
which requirements should or should not be codified in regulations. 
They also can provide input on any requirements that they found either 
helpful or overly restrictive.

10. Conditions on Auction Participation and Structure

    Some type of procedure must be used in future pilots to establish 
or determine bidder qualification. The IFB issued for the current pilot 
employed a self-certification for bidders. This self-certification was 
a signed statement that the prospective bidder had marketed a certain 
volume of gas over a specified period of time. Another procedure which 
MMS will consider is the use of performance bonds. The respective 
merits and disadvantages of these approaches should be addressed in one 
of the workshop sessions.
    Also, in designing future pilots, MMS must consider the needs of 
firms which may encounter some competitive disadvantage in the 
marketing of gas. A future pilot could address means for encouraging 
participation of such firms while at the same time ensuring that the 
Government receives fair market value for the royalty oil or gas. A 
workshop can address these needs.

Information on Participation and Panels

    The workshops are open to the public. The one-day workshops will 
include an introduction followed by four panel presentations and 
discussions. Each of the panels will be composed of representatives 
from industry and MMS. A draft agenda follows:
     Introduction, overview of the current pilot, goals and 
format for workshops;
     Requirements placed on lessees (e.g., marketable 
condition, data submitted to MMS, coordination with purchasers, 
possible requirement to deliver gas at a point away from the lease);
     Requirements placed on purchasers (e.g., transportation of 
product away from the lease, data required by MMS, coordination with 
lessees, balancing, contract provisions concerning breach, payment 
terms, flexibility);
     Auction procedures and other contract terms (e.g., 
aggregation of leases, use of price indices, contract length, 
participation by small and disadvantaged firms); and
     Suggestions for future pilots (e.g., location, products, 
format, timing).

Addresses

    The workshops will be held at the following locations:

Minerals Management Service, Gulf of Mexico Regional Office, Elmwood 
Towers Building, Conference Rooms 111-115, 1201 Elmwood Park Boulevard, 
Jefferson, Louisiana 70123
Minerals Management Service, Houston Area Audit Office, 4141 N. Sam 
Houston Parkway, Houston, TX 77032-3843
Denver Federal Center, 6th & Kipling, U.S.G.S., Building 25, Lecture 
Halls A and B, (Rooms 1252 and 1254), Lakewood, Colorado 80215

Registration

    Since seating will be limited, those wishing to attend any of the 
workshops should register in advance, no later than August 4, 1995. 
Registration should be made by phone (202) 208-3398, (202) 208-3822, 
facsimile (202) 208-3118 or mail to Ms. Ruby Minor or Ms. LaVerne 
Gailliard, Minerals Management Service, Mail Stop 4013, 1849 C St. NW., 
Washington, DC 20240. Copies of the Invitation for Bids and the 
Volunteer Agreement will be available to registrants on request.

Comments

    Written comments on the workshops or the panels should be addressed 
to Mr. Hugh Hilliard at the address given above or sent by facsimile c/
o Mr. Hilliard to the number given.

    Dated: July 13, 1995.
Lucy Querques,
Associate Director, Policy and Management Improvement.
[FR Doc. 95-17673 Filed 7-18-95; 8:45 am]
BILLING CODE 4310-MR-M