[Federal Register Volume 61, Number 23 (Friday, February 2, 1996)]
[Rules and Regulations]
[Pages 3800-3805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2200]



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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 206 and 260

RIN 1010-AB93


Bidding Systems for Leases in the Outer Continental Shelf

AGENCY: Minerals Management Service, Interior.

ACTION: Final rule.

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[[Page 3801]]


SUMMARY: This rule amends the regulations of the Minerals Management 
Service (MMS) to modify the bidding systems available for use on tracts 
offered for lease under the Outer Continental Shelf Lands Act (OCSLA). 
The change gives the Secretary of the Interior more flexibility in 
setting the terms of a lease sale. This rule provides four methods of 
modifying the existing alternative bidding systems: (1) setting the 
minimum prescribed royalty rate charged on Federal offshore leases 
below 12\1/2\ per centum but greater than zero per centum; (2) 
permitting operating allowances when computing payment obligations 
under the lease; (3) suspending or deferring royalty for a specific 
time period, volume, or value of production; and (4) expanding the 
methods for calculating royalty rates under variable royalty systems to 
include product prices, as well as value and amount of production, with 
the ability to use different formulas across time periods. The rule 
does not affect existing leases.

EFFECTIVE DATE: This rule is effective March 4, 1996.

FOR FURTHER INFORMATION CONTACT:
Dr. Marshall Rose, Chief, Economic Evaluation Branch, telephone (703) 
787-1536.

SUPPLEMENTARY INFORMATION: The OCSLA provides authority to modify any 
bidding system currently authorized by the Act if the Secretary 
determines the modification to be useful to accomplish the purposes and 
policies of the Act (section 8(a)(1)).
    This final rule is the result of a review of alternative leasing 
policies conducted within MMS with input from constituents. The final 
rule, like the proposed rule, enables MMS to set royalty terms at the 
time of sale for new offshore leases that will adjust automatically to 
changing market conditions in the oil and gas industry as lease 
exploration, development, and production proceed. Implementation is 
expected to increase competition for new Federal offshore leases, 
ensure receipt of fair market value, and increase the likelihood that 
new leases will be explored and developed.
    The new royalty terms will be considered for use in the leasing of 
specific types of tracts, such as tracts that can be identified before 
a sale containing potential oil and gas resources in reservoirs located 
below tabular salt formations. Other categories of tracts that we might 
choose to offer under the new terms include tracts with qualifying 
wells which have uneconomic reserves or tracts which previously 
received high bonus bids but were not explored.
    When we choose to use the new bidding terms, MMS may set the 
minimum royalty rate at less than 12\1/2\ per centum for all or a part 
of the lease's productive life as described in the lease terms portion 
of a final notice of sale. The MMS may designate a royalty rate that is 
either a fixed constant or varied over the life of the lease or a 
royalty rate that emerges or fluctuates as specified conditions are met 
(e.g., royalties would not accrue until a designated time period 
expires or a specified production level or value is reached, or a 
predetermined capital cost allowance is recovered, or royalties would 
be reduced during periods of declining average product prices).
    Concurrently, with MMS development of this rule, Congress enacted 
the Outer Continental Shelf Deep Water Royalty Relief Act (Pub. L. 104-
58, November 28, 1995) which amended the OCSLA to add a new section 
8(a)(1)(H) which defines a new bidding system. The new bidding system 
prescribes a cash bonus bid with a royalty of no less than 12\1/2\ per 
centum and provides for a suspension of royalties for a period, volume, 
or value of production determined by the Secretary. Such suspensions 
may vary based on the price of production from the lease. Any lease 
sale held before November 28, 2000, must use the new bidding system for 
all tracts located in water depths of 200 meters or more in the Western 
and Central Gulf of Mexico Planning Areas, including that portion of 
the Eastern Gulf of Mexico Planning Area west of 87 degrees, 30 minutes 
west longitude.
    This rule allows MMS to implement this new bidding system. The 
proposed rule had included the substance of the required provisions. 
Thus, MMS is able to include implementing provisions in this final 
rule. We are preparing another rule to implement further details of the 
Outer Continental Shelf Deep Water Royalty Relief Act.
    Twelve respondents submitted comments during the public comment 
period and MMS reviewed and analyzed the comments. The following is a 
discussion of the comments received and our response. Each time MMS 
announces use of this new bidding rule in a preliminary lease sale 
notice, interested parties may submit comments.

Narrative Response to Comments

    Comment: Several commenters had specific questions regarding 
uncertainty over aspects or terms used in the proposed rule.
    Question 1: What would a ``simple price-royalty rate formula'' look 
like?
    Response: One example of such a formula is a royalty rate of one-
sixth applies if the average oil price is above $18 (per barrel) and 
one-eighth if the average price is below $18. Or, the royalty rate 
could vary in several discrete increments, or even continuously, as a 
function of oil (and perhaps gas) prices prevailing during the life of 
the lease.
    Question 2a: What does the MMS mean when it suggests it would be 
able to ``set royalty terms at time of sale for new leases that will 
adjust dynamically to changing market conditions?''
    Response: An example of a royalty term that responds automatically 
to market conditions would be a royalty rate that depended on gross 
lease revenues. As prices declined or production from the lease 
decreased, the royalty rate would decline according to conditions 
specified in the sale notice, reflecting a lower profit potential on 
the lease. Such a system could include a predetermined cost allowance 
that would be deducted from gross revenues for the purpose of computing 
the net revenue amount, to which the royalty rate would be applied.
    Question 2b: How frequently would royalty terms change?
    Response: The frequency of change will be specified in the sale 
notice and lease. It will depend on both the form of the system and the 
variables defined in the sale notice and lease. For example, if MMS 
uses an inflation adjustment, the terms could change annually or 
monthly according to the specified adjustment factor. If MMS uses a 
fixed volume suspension, the change would occur only at the time the 
prescribed production volume is achieved. Once the lease is executed, 
any change in royalty will be triggered solely by satisfying the 
objectively determined economic and geologic factors specified in the 
lease.
    Question 2c: Are there limits on the changes?
    Response: Yes. The MMS will specify the range of values over which 
the royalty rate will change in the final notice of sale and the lease.
    Question 2d: Is the 12\1/2\ per centum royalty the ceiling?
    Response: No. When there is a ceiling we will specify it in the 
notice of sale.
    Question 2e: How will MMS and industry administer these leases 
(e.g., audits)?
    Response: We will continue to administer leases in the same manner. 
However, estimates of future prices could, under some systems, 
necessitate a recalculation not only in the receipts 

[[Page 3802]]
subject to royalty, but also in the size of the royalty rate as well.
    Question 2f: How would MMS administer these new leases when 
unitized with leases with different or fixed royalties?
    Response: The MMS will be careful to ensure that lessees properly 
allocate production to each unitized lease. Normally unitized 
production from a common reservoir is based on the proportion of 
recoverable resources present on each lease.
    Question 3a: How does the ``operating allowances'' concept relate 
to the amendments to the bidding systems regulations?
    Response: Under existing royalty regulations, transportation costs 
and gas processing costs are permissible deductions in computing 
royalty due. The notion of a predetermined operating allowance is 
proposed partly to expand the set of tract-specific costs that MMS may 
consider in calculating payment obligations, without complicating the 
accounting. Or alternatively, MMS may simply offer some tracts under a 
bidding system with a specified transportation and processing allowance 
instead of actual costs incurred.
    Question 3b: How do operating allowances relate to existing 
transportation and processing allowances in terms of substance and 
reporting requirements?
    Response: Because the allowance concept is based on the specified 
standard, there will be some difference between actual costs incurred 
and those used to compute payment obligations. However, if set 
properly, we expect that the allowance will be about right on average. 
Moreover, this could alleviate some of the administrative and auditing 
burdens, since actual costs may not affect the amount of payments owed 
under some of these systems.
    Question 3c: What is the effect of the introduction of the new 
concept of ``operating allowances'' into the valuation regulations?
    Response: Operating allowances could be used in conjunction with 
valuation regulations in one of two ways. First, predetermined 
operating allowances, defined at the time of sale, could replace 
valuation regulations for the purpose of calculating net receipts 
subject to payment obligations.
    Second, a predetermined operating allowance could be subtracted 
from net receipts after the valuation regulations are applied, to 
determine the final amount of receipts subject to payment obligations. 
In either case, the approach used would be designated in the proposed 
and final sale notices.
    Question 4: Can phrases such as ``any amounts creditable against 
future royalties'' and ``inflation factor'' for purposes of determining 
value ``or amount'' of production be explained?
    Response: Should the governing statutes change, MMS might consider 
allowing the lessee to credit other payments made to the Government 
(e.g., rentals) against future payments due the Government (e.g., 
royalties). Existing statutes do not allow MMS to encourage lessee 
behavior (e.g., starting exploration or production earlier in the 
primary term) by reimbursing the lessee in cash. In developing the 
original sliding-scale bidding system, MMS made the royalty rate 
dependent upon the gross value of production generated during a period. 
The MMS used an index or ``inflation factor'' to make adjustments in 
production value in future production periods to reflect the prevailing 
level of aggregate prices in the economy.
    For simplicity, MMS will provide the details of any required 
modifications of this type in the official sale and lease documents, 
rather than in the regulations.
    Question 5: Why would industry have to wait for publication of 
lease sale packages to examine royalty rate formulas?
    Response: In the April 20, 1995, Federal Register Notice asking for 
comments on the proposal (60 FR 19767), MMS described the general 
nature of the equations and formulas, along with the applicable 
variables, and this notice continues the discussion. In many instances, 
the specific parameters that we will use in specific lease sales may 
depend on the characteristics of the tracts to which they apply as well 
as prevailing price and cost conditions at time of sale. The rule 
itself does not include values for the parameters. Whenever possible we 
will announce the formulas to be used, along with proposed values for 
the parameters, in the preliminary notice of sale. This will permit 
industry to comment on the details of the bidding system before MMS 
publishes the final notice of sale.
    Question 6: What does ``suspension or deferral magnitudes or 
formulas'' mean?
    Response: During the productive life of a lease, the existing 
royalty could be suspended (i.e., reduced or eliminated) or deferred 
(i.e., paid at a later time under some circumstances). Typically, such 
provisions will apply at the start of production. We may express the 
suspension or deferral variable as a specified number of barrels of oil 
equivalent produced, gross revenues collected from oil and gas sales, 
or length of time over which royalties would be collected at a reduced 
rate.
    Question 7: What index will MMS use for pricing?
    Response: We will specify the index to be used in the final sale 
notice. We expect that such indices will reflect the rate of inflation 
in either the energy sector or the economy as a whole. Indices of this 
nature typically appear in a variety of Federal documents published 
among others by the Department of Commerce and the Department of 
Energy.
    Question 8: For a particular lease sale, can a bidder choose 
between a reduced (variable) rate or fixed rate? If so, how would the 
MMS award competitive bids?
    Response: No. The MMS did not envision allowing the bidders to 
choose between different leasing systems on the same tract. The concept 
does have some appeal, however, since it would allow bidders with 
different capacities to bear risk to choose the system that best suits 
them. With this added flexibility, the ceiling royalty rate associated 
with the variable royalty rate option will have to be above the fixed 
rate. Otherwise, bidders presumably would be better off always choosing 
the reduced (variable) royalty rate. However, unless MMS develops a way 
to show that the anticipated value of the tract was the same under 
either system, there will be no simple way to choose among competitive 
cash bonus bids submitted under each of the systems. Thus, MMS has not 
chosen to pursue this option.
    Question 9: How much lead time can companies expect to have between 
promulgation of final regulations and the first lease sale where they 
would apply?
    Response: Before using some of the innovative new concepts covered 
by this rule, MMS will both take time to determine how the new system 
will be used in the specific lease sale and will solicit industry 
comments in a preliminary notice of sale. This will provide industry 
with an opportunity to understand the new system.
    Question 10: Would a potential bidder have any flexibility in the 
bidding process with regard to the royalty rate? For example, could a 
potential bidder offer a traditional one-eighth royalty?
    Response: These changes in bidding systems relate to the manner in 
which MMS will determine the applicable royalty rate during a give 
production period. We are not introducing these changes to facilitate 
various forms of actual bidding on the royalty rate to be paid by the 
lessee. Thus, we intend to set the form of the royalty rate, and the 
lessee will bid a cash bonus. Under this 

[[Page 3803]]
format, the lessee cannot affect the royalty rate during the bidding 
process. Only if the royalty is the bid variable, would a potential 
bidder be free to offer a traditional one-eighth royalty.
    Question 11: Would there be any changes to the basis upon which the 
MMS awards competitive bids?
    Response: No. Under the proposed systems, the high cash bonus 
bidder will be awarded the lease subject to satisfying the MMS bid 
adequacy criteria.
    Comment: One commenter mentioned that although the proposed rule 
does not specifically indicate MMS is contemplating such a system, they 
are against one which might call for bidding of both a royalty variable 
and bonus.
    Response: The term ``variable royalty rate'' is meant to convey the 
notion that the royalty rate, as described in the sale notice, may vary 
over the life of the lease. This does not mean that MMS is making the 
royalty rate a bidding variable. This rule does not affect the MMS 
authority to use the royalty rate as a bidding term, either in place of 
or in conjunction with a cash bonus. While the OCSLA does not authorize 
MMS to use more than one bidding variable simultaneously, we may be 
able to design some systems that operate sequentially.
    For example, in the unlikely event that bidding for some tracts 
involved both the cash bonus and the royalty rate, MMS needs a means to 
objectively determine the winning bidder. One way to do that would be 
to require bidding on the two terms in sequence rather than in 
parallel. Subject to a fixed minimum required cash bonus, bidding could 
be allowed on the royalty rate up to a predetermined and known maximum. 
If a bidder chooses to bid above the maximum royalty rate, it would do 
so by offering to add to the minimum required bonus bid.
    Comment: One commenter stated that it would be unjust for a lessee 
to relinquish a lease after conducting exploratory drilling, with the 
possible public release of data, and then for the Government to reoffer 
the tract under more favorable terms to competitors.
    Response: The original lessee purchased the contract for a cash 
bonus bid. If it then voluntarily relinquishes the lease after 
conducting exploratory drilling, the Government is free to reoffer the 
tract in the market at any terms it deems appropriate. The original 
lessee can compete on equal terms with others through the auction 
process used to reoffer the tract.
    Comment: Two commenters suggested that royalty relief and flexible 
royalty terms would benefit production if MMS applies them to existing 
OCS leases that are approaching the economic limits of production.
    Response: This rule does not affect the authority of MMS, under 
Sec. 8(a)(3)(A) of OCSLA, to reduce or eliminate any royalty or net 
profit share on an active tract.
    Response: One commenter strongly recommended that MMS consider 
providing an appropriate allowance for poor quality and/or low gravity 
crude in order to foster development of such resources.
    Response: Lower quality crude sells for less. Since royalty paid is 
directly propositional to price, the current fixed royalty arrangement 
reflects differences in product quality. To the extent that an 
additional adjustment is needed for low quality crude, to account for 
higher costs of extraction, then a properly set cost allowance under 
the new bidding rule would be one way to handle the situation for 
tracts being offered for lease.
    Comment: One commenter stated that it does not believe that royalty 
relief by itself, in the absence of other financial incentives such as 
a production tax credit, is sufficient to generate additional 
substantial deepwater activity.
    Response: The MMS does not have taxing authority, so production tax 
credits are not part of the policies affected by this rule. The final 
rule differs from the proposed rule in that portions have been reworded 
for clarity. The final rule also contains a new system, 
Sec. 260.110(a)(7), designed specifically to address the Outer 
Continental Shelf Deep Water Royalty Relief Act. This new system 
includes a cash bonus bid, a fixed royalty rate of not less than 12\1/
2\ per centum, and an option for MMS to defer or suspend royalties. 
Although a lease sale of this type would have been possible under 
paragraph Sec. 260.110(a)(5), MMS added the new paragraph specifically 
addressing the provisions in the statute. This will clearly indicate 
when MMS is conducting a lease sale under the provisions of the Outer 
Continental Shelf Deep Water Royalty Relief Act.

Author

    This document was prepared by Marshall Rose, Mary Vavrina, and 
Keith Meekins, Offshore Resource Evaluation Division, MMS.

Executive Order (E.O.) 12866

    MMS reviewed this rule and determined that the rule is not 
significant.

Regulatory Flexibility Act

    The Department of the Interior (DOI) has determined that this rule 
will not have a significant economic effect on a substantial number of 
small entities. Any direct effects of this rulemaking will primarily 
affect lessees and operators-entities that are not, in general, small 
due to the technical complexities and financial resources necessary to 
conduct OCS activities. MMS also determined that the indirect effect of 
this rulemaking on small entities that provide support for offshore 
activities is small.

Paperwork Reduction Act

    The information collection requirements contained in those parts of 
MMS's regulatory program affected by this rule have been approved by 
OMB under (44 U.S.C. 3501 et seq.). The forms, filing date, and 
approved OMB clearance numbers are identified in 30 CFR 210.10 and 30 
CFR 216.10.

Takings Implication Assessment

    The DOI certifies that this rule does not represent a governmental 
action capable of interference with constitutionally protected property 
rights. A Takings Implication Assessment prepared pursuant to E.O. 
12630, Government Action and Interference with Constitutionally 
Protected Property Rights, is not required.

E.O. 12778

    The DOI has certified to OMB that this rule meets the applicable 
civil justice reform standards provided in Sections 2(a) and 2(b)(2) of 
E.O. 12778.

National Environmental Policy Act

    The National Environmental Policy Act (NEPA) compliance for the 
rule is covered by DOI procedures for implementing NEPA (516 DM2, 
Appendix 1.10). In accordance with those procedures, MMS will examine 
the potential environmental effects of the rule during NEPA review for 
each lease sale. This is appropriate because the potential 
environmental effects of the rule depend largely on how it is applied, 
and decisions on application will be made on a sale-by-sale basis.

List of Subjects

30 CFR Part 206

    Coal, Continental shelf, Geothermal energy, Government contracts, 
Indian lands, Mineral royalties, Natural gas, Petroleum, Public lands--
mineral resources, Reporting and recordkeeping requirements.

[[Page 3804]]


30 CFR Part 260

    Continental shelf, Government contracts, Mineral royalties, Oil and 
gas exploration, Public lands--mineral resources.

    Dated: January 26, 1996.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.

    For the reasons set forth in the preamble, the Minerals Management 
Service amends 30 CFR parts 206 and 260 as follows:

PART 206--PRODUCT VALUATION

    1. The authority citation for part 206 is revised to read as 
follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et 
seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et 
seq., 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq., 1331 et 
seq., and 1801 et seq.

    2. Section 206.106 of subpart C is added to read as follows:


Sec. 206.106  Operating allowances.

    Notwithstanding any other provisions in these regulations, an 
operating allowance may be used for the purpose of computing payment 
obligations when specified in the notice of sale and the lease. The 
allowance amount or formula shall be specified in the notice of sale 
and in the lease agreement.
    3. Section 206.160 of subpart D is added to read as follows:


Sec. 206.160  Operating allowances.

    Notwithstanding any other provisions in these regulations, an 
operating allowance may be used for the purpose of computing payment 
obligations when specified in the notice of sale and the lease. The 
allowance amount or formula shall be specified in the notice of sale 
and in the lease agreement.

PART 260--OUTER CONTINENTAL SHELF OIL AND GAS LEASING

    1. The authority citation for part 260 is revised to read as 
follows:

    Authority: 43 U.S.C. 1331 and 1337.

    2. Section 260.001 of subpart A is revised to read as follows:


Sec. 260.001  Purpose and scope.

    The purpose of this part 260 is to implement OCSLA, 43 U.S.C. 1331 
et seq., as amended, by providing regulations to foster competition 
including, but not limited to, regulations to prohibit joint bidding 
for development rights by certain types of joint ventures; the 
implementation of alternative bidding systems (including suspension of 
royalties for a period, volume, or value of production); and the 
establishment of diligence requirements for Federal OCS leases issued 
under the OCSLA.
    3. Section 260.002 of subpart A is amended by revising the 
definition of ``OCSLA'' to read as follows:


Sec. 260.002  Definitions.

* * * * *
    OCSLA means the Outer Continental Shelf Lands Act, (43 U.S.C. 1331 
et seq.), as amended.
* * * * *
    2. Section 260.110 of subpart B is amended by revising paragraphs 
(a)(1)(iii), (a)(2)(iii), (a)(3)(i)(C)(4) and (a)(3)(iii) and by adding 
new paragraphs (a)(5), (a)(6), and (a)(7) to read as follows:


Sec. 260.110  Bidding systems.

    (a) * * *
    (1) * * *
    (iii) The annual rental to be paid by the highest responsible 
qualified bidder and any amounts creditable against future royalties 
shall be specified in the notice of sale published in the Federal 
Register.
* * * * *
    (2) * * *
    (iii) Rental payment amounts must be as specified in paragraph 
(a)(1)(iii) of this section.
* * * * *
    (3) * * *
    (i) * * *
    (C) * * *
    (4) The production period, inflation factor and procedures for 
making the inflation adjustment and for determining the value or amount 
of production shall be stated in the notice of sale published in the 
Federal Register.
* * * * *
    (iii) Rental payment amounts must be as specified in paragraph 
(a)(1)(iii) of this section.
* * * * *
    (5) Cash bonus bid with a variable royalty rate or rates during one 
or more production periods in amount or value of the production saved, 
removed or sold, and an annual rental. MMS may suspend or defer the 
royalty due for a period, volume, or value of production. Such 
suspensions or deferrals may vary based on changes in the prices of oil 
and/or gas as specified in the notice of sale published in the Federal 
Register.
    (i) The royalty rate due on production may be less than 12\1/2\ per 
centum, but greater than zero per centum, at any designated time during 
the lease period based on the amount or value of production saved, 
removed, or sold. Royalty may be suspended or deferred for a period, 
volume, or value of production. The applicable royalty rate(s) and 
suspension or deferral magnitudes or formulas shall be specified in the 
notice of sale published in the Federal Register.
    (ii) The amount and the procedure for payment of a cash bonus must 
be as specified in paragraph (a)(1)(ii) of this section.
    (iii) Rental payment amounts must be as specified in paragraph 
(a)(1)(iii) of this section.
    (6) Cash bonus bid with a royalty rate or rates based on formula(s) 
or schedule(s) during one or more production periods in amount or value 
of the production saved, removed or sold, and an annual rental. Royalty 
may be suspended or deferred for a period, volume, or value of 
production. Such a suspension or deferral may vary based on changes in 
the prices of oil and/or gas as specified in the notice of sale 
published in the Federal Register.
    (i) The royalty due on production shall be specified as a 
percentage of the amount or value of the production saved, removed, or 
sold. When the value of production is used, by unit or in aggregate, 
the royalty rate will be determined based on prices for oil and/or gas 
as specified in the notice of sale published in the Federal Register.
    (A) The lessee must calculate the royalty due using the formula or 
schedule specified in the lease based on the adjusted amount or indexed 
value of the oil and gas produced. The formula or schedule will 
describe the relationship between the adjusted or actual amount of 
production, indexed value, or indexed price, and the royalty rate. It 
will stipulate the lowest and highest royalty rates.
    (B) The royalty rate formula or schedule and the suspension or 
deferral magnitudes or formulas shall be specified in the notice of 
sale published in the Federal Register.
    (C) Royalty payment calculation.
    (1) The royalty rate used to calculate the royalty due on 
production is based on an adjusted or actual amount of production, 
indexed value, or indexed price and is set through application of the 
specified formula or schedule to the designated production period.
    (2) The lessee will determine the adjusted amount or indexed value, 
or indexed price by applying an index or inflation factor specified in 
the lease to the actual amount or value of production, or to the 
adjusted price.
    (3) The lessee must apply the royalty rate to the actual value of 
production. The result is the amount in dollars that the lessee must 
pay to the United States, 

[[Page 3805]]
or the amount of royalty oil and/or gas that the United States will 
take in kind.
    (4) The production period, inflation factor and procedures for 
making the inflation adjustment and for determining the value or amount 
of production shall be stated in the notice of sale published in the 
Federal Register.
    (ii) The amount and the procedure for payment of a cash bonus must 
be as specified in paragraph (a)(1)(ii) of this section.
    (iii) Rental payment amounts must be as specified in paragraph 
(a)(1)(iii) of this section.
    (7) Cash bonus bid with a royalty rate of not less than 12\1/2\ per 
centum fixed in amount or value of the production saved, removed or 
sold, and with suspension of royalties for a period, volume, or value 
of production, and an annual rental. Royalty may be suspended for a 
period, volume, or value of production. Such a suspension may vary 
based on changes in the prices of oil and/or gas as specified in the 
notice of sale published in the Federal Register.
    (i) Except for a period of suspension, the royalty rate due on 
production will be specified as a percentage of the amount or value of 
the production saved, removed, or sold. The applicable royalty rate 
shall be specified in the notice of the lease sale published in the 
Federal Register. When the royalty rate is applied to the value of 
production, by unit or in aggregate, the royalty rate will be 
determined based on the prices for oil and/or gas as specified in the 
notice of sale published in the Federal Register.
    (A) The lessee must calculate the royalty due using the formula or 
schedule specified in the lease agreement based on the adjusted amount 
or indexed value of the oil and gas produced. The formula or schedule 
will describe the relationship between adjusted or actual amount of 
production, indexed value, or indexed price, and the royalty rate. It 
will stipulate the lowest and highest royalty rates that may apply.
    (B) The formula or schedule for royalty due on production and the 
suspension magnitudes or formulas shall be specified in the notice of 
sale published in the Federal Register.
    (ii) The amount and the procedure for payment of a cash bonus must 
be as specified in paragraph (a)(1)(ii) of this section.
    (iii) Rental payment amounts must be as specified in paragraph 
(a)(1)(iii) of this section.

[FR Doc. 96-2200 Filed 2-1-96; 8:45 am]
BILLING CODE 4310-MR-M