[Federal Register Volume 61, Number 27 (Thursday, February 8, 1996)]
[Rules and Regulations]
[Pages 4748-4752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2433]



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DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Part 3100

[WO-310-00-1310-2411]
RIN 1004-AC26


Promotion of Development, Reduction of Royalty on Heavy Oil

AGENCY: Bureau of Land Management, Interior.

ACTION: Final rule.

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SUMMARY: The Bureau of Land Management is issuing this final rule to 
amend the regulations relating to the waiver, suspension, or reduction 
of rental, royalty, or minimum royalty. This action is being taken to 
promote the production of heavy oil. The amendment establishes 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. The amendment should 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.

DATES: This rule will be effective March 11, 1996.

ADDRESSES: Inquiries should be sent to: Director (140), Bureau of Land 
Management, Room 5558, Main Interior Building, 1849 C Street, N.W., 
Washington, D.C. 20240.

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

SUPPLEMENTARY INFORMATION:

I. Introduction
II. Summary of Rule Adopted
III. Responses to Public Comments
IV. Procedural Matters
V. Regulatory Text

I. Introduction

    A proposed rule to provide royalty relief for producers of heavy 
oil was published in the Federal Register notice of April 10, 1995 (60 
FR 18081) with the comment period ending June 9, 1995. The comment 
period was reopened June 16, 1995 (60 FR 31663) and closed July 17, 
1995.
    On March 30, 1995, an outdated version of this proposed rule was 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proposed rule publication was withdrawn, and the Federal Register 
notice of April 10, 1995 (60 FR 18081) was published in its place as 
the proposed rule.
    The following are questions and answers designed to provide an 
introduction to this rule.
    When does the Department of the Interior (Department) consider 
granting royalty relief?
    In order to encourage the greatest ultimate recovery of oil and in 
the interest of conservation, the Secretary, upon a determination that 
it is necessary to promote development, may reduce the royalty on an 
entire leasehold or any portion thereof (Section 39 of the Mineral 
Leasing Act, 30 U.S.C. 209).
    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. 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) believes that royalty relief 
for producers of heavy crude oil is needed to promote the development 
of heavy oil.
    Why is heavy oil royalty relief needed?
    Above all, this royalty relief is needed to promote the development 
of heavy oil. Eliminating all royalties would be the most effective way 
to promote development, but that would jeopardize the Department's 
efforts in securing a fair return for public land resources. Royalty 
relief has to be considered in light of all the Department's 
responsibilities and objectives. The balance this rule strikes is to 
have a royalty rate that promotes development while ensuring the public 
receives reasonable compensation.
    Cyclical swings in the price for crude oil are common. BLM believes 
that future price decreases are possible, or even likely. The effect of 
this rule will provide a buffer against these decreases for heavy oil 
produced from Federal land. As many as two-thirds of all marginal 
properties (including non-heavy oil properties) could be lost during a 
period of sustained low oil prices (Marginal Wells, A Report of the 
National Petroleum Council, 1994, p. 3). The danger in losing the 
marginal wells is that, although production from individual wells may 
be small, their collective production is significant, accounting for 
one-third of lower-48 State onshore domestic production. Heavy oil 
production, from both Federal and non-Federal lands, makes up almost 
one-half of this third (Marginal Wells, A Report of the National 
Petroleum Council, 1994, p. 50). Heavy oil wells typically incur higher 
production costs, thus increasing their vulnerability. Were these heavy 
oil wells abandoned, the United States would lose this significant 
portion of domestic production.
    What will happen as a result of this rule?
    This rule should 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.
    According to a Department of Energy (DOE) analysis of its TORIS 
(Tertiary Oil Recovery Information System) data, the size of 
economically recoverable reserves from Federal lands will be 
significantly enhanced by this amendment. For instance, at a West Texas 
Intermediate (WTI) crude oil price of $16 a barrel, DOE projects that 
this rule will increase recoverable reserves of about 54 million 
barrels to about 87 million barrels for the State of California. At $18 
a barrel, DOE projects that this rule will increase recoverable 
reserves of about 103 million barrels to about 130 million barrels for 
the State of California. At $20 a barrel, DOE projects that this rule 
will increase recoverable reserves of about 133 million barrels to 
about 229 million barrels for the State of California. A 
proportionately larger increase in recoverable reserves is anticipated 
when oil prices range toward $20 a barrel because major recovery 
projects may 

[[Page 4749]]
become economically feasible. Were this rule not promulgated, DOE 
projects these increases in recoverable reserves would most likely not 
occur.
    Since the State of California produces almost 91 percent of lower-
48 State onshore heavy oil production, the vast majority of recoverable 
reserve increases stemming from this royalty relief will most likely 
come from this State. Significant recoverable reserve increases are not 
anticipated in the other States since fewer properties will qualify for 
the relief.
    When will this rule apply?
    The rule will take effect March 11, 1996. However, the BLM may 
suspend or terminate all royalty reductions granted under this rule and 
terminate the availability of further relief under this rule--
    (1) upon 6 month's notice in the Federal Register when BLM 
determines that the average WTI oil price has remained above $24 per 
barrel over a period of 6 consecutive months or
    (2) after September 10, 1999, if the royalty rate reductions 
authorized by this rule have not been effective in reducing the loss of 
otherwise recoverable reserves.
    How will this royalty relief affect royalties and revenues?
    According to the DOE TORIS analysis, although oil royalties may 
decline in some instances, the effects to overall Federal and State 
revenues should be largely neutral except in the State of California. 
(Revenues include all forms of income including royalties.) Slight 
decreases in overall revenue could be possible at some oil prices for 
States with moderate levels of heavy oil production. In California, the 
DOE analysis projects small decreases or sizable increases in State 
revenues depending on the price of oil (Letter Report from Department 
of Energy dated July 29, 1994).

II. Summary of Rule Adopted

    The final 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 reported 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 rule also provides for royalty rate 
reductions for stripper oil wells. Some provisions of this final rule 
are similar to the provisions of the existing regulations that pertain 
to stripper wells.
    The final rule was modified in response to comments and for 
clarification. Section 3103.4 was redesigned to aid the reader in 
distinguishing the various forms of royalty reduction and accompanying 
provisions. Separate sections were established for the stripper oil and 
heavy oil royalty reduction provisions. The discussion of royalty rate 
determinations in Sec. 3103.4-3(b)(5) was modified by adding two 
examples and clarifying the text. Section 3103.4-3(b)(6) was modified 
to extend the review period until 1999. Cross references were modified 
where appropriate throughout Part 3100 to reflect the redesign of 
Sec. 3103.4.

III. Responses to Public Comments

    A total of 209 comments were received on the proposed rule. An 
overwhelming majority supported the proposed rule. A few commenters 
recommended changes.
    Comments suggested that the review period be extended for a period 
of 4 or 5 years rather than the 2 years stated in the proposed rule. It 
was always the BLM's intention that the rule be in place at least 4 
years before it was evaluated. Unanticipated delays in the rulemaking 
process, however, have rendered the original 1997 deadline unreasonably 
short. Therefore, the BLM concurs with this suggestion and the rule has 
been modified to extend the review period until 1999.
    A comment stated that the $24 trigger for rule suspension was too 
high while another comment stated that $24 was too low. Based on data 
developed from DOE's TORIS database, the BLM believes that $24 is an 
appropriate trigger to suspend the rule. The data indicate that State 
and Federal Royalty reductions are offset by increased recoverable 
reserves up until the point that WTI crude oil prices reach 
approximately $24/bbl. Past that point, recoverable reserve increases 
appear to taper off. In addition, the TORIS data show that when WTI 
prices climb above $24/bbl the royalty reduction is no longer a 
determining factor for decisions regarding investments in enhanced oil 
recovery techniques.
    Comments suggested that the CFR 3103.4-1 regulations be revised for 
clarity and simplicity. The BLM agrees and has revised the section for 
clarity.
    A comment suggested that the qualifying period for a heavy oil 
royalty rate reduction coincide with the one established for a stripper 
oil property royalty reduction. While the BLM agrees that there is 
value in making the stripper and heavy oil royalty rate reduction 
processes as similar as possible, this is not always practicable. The 
heavy oil rule qualifying period was made flexible in order to 
acknowledge the fact that many qualifying, low-production properties 
may not remove or sell oil every month even if their production is 
continuous. Thus, many properties may require even more than a calendar 
year (the stripper property qualifying period) to accumulate 3 months 
of sales or oil removal.
    One comment requested that the notification period for requesting a 
reduced royalty rate be extended beyond the proposed 60 days. The BLM 
believes that 60 days is sufficient time for an operator to notify the 
BLM of a new royalty rate. The stripper property royalty reduction 
program has a similar notification period which appears to be working 
well.
    Some comments stated that a greater royalty rate reduction was 
necessary. They suggested that this be accomplished by using a power 
curve rather than a straight line to calculate royalty rates. The BLM 
considered calculating royalty rates by both power curves and straight-
line methods. The DOE's TORIS data, however, indicated that neither 
method was clearly advantageous over the other in terms of increasing 
recoverable reserves except within a narrow range of WTI crude oil 
prices. Because it is not possible to predict future oil prices, the 
BLM has chosen to remain with a straight-line royalty reduction for 
purposes of simplicity as well as to parallel the stripper property 
royalty reduction rule.
    Some comments stated that the rule should use 25 degrees as a 
``heavy oil'' cutoff (rather than the 20 degrees proposed) in order to 
maximize the rule's effects and to provide the rule's benefits to as 
many operators as possible. Although there is no single accepted 
definition for ``heavy oil,'' 

[[Page 4750]]
standard academic and industry practice is to reserve the term for 
crude oils of less than 20 degrees API. The U.S. tax code also uses a 
20 degree definition.
    One comment stated that BLM should evaluate the stripper oil 
royalty reduction before granting heavy oil royalty relief. The BLM is 
in the process of evaluating the stripper well provisions. The stripper 
well provisions have not been in place long enough to make a 
substantive assessment.
    One comment strongly opposed heavy oil royalty relief, stating that 
the BLM has no data which demonstrate that the leases eligible for the 
relief cannot be operated successfully under the lease terms or that 
the continued operation of each heavy crude lease is in serious, 
unavoidable jeopardy. Although this is an important consideration, this 
is not the criterion for relief that is serving as the basis of this 
determination. The Secretary, acting through the Assistant Secretary--
Land and Minerals Management, concludes, based on the DOE analysis 
cited in the introduction, that this rule is necessary to promote the 
development of heavy oil. Recoverable reserves are projected to be 
significantly less in the absence of the royalty relief provided by 
this rule.
    One comment stated that this rule will provide insufficient relief 
on leases in true jeopardy and windfalls for those without need. The 
BLM believes that there are enough similarities in terms of the 
economic pressures on producers of heavy oil that any such relative 
disparities in levels of relief should be inconsequential. Furthermore, 
the rule is sensitive to the particular gravity of the heavy oil being 
produced, so that producers of less valuable heavy oil receive a higher 
proportion of royalty relief.
    One comment stated that even if State revenues increase, royalty 
reductions will hurt State services. (Revenues include all forms of 
income including royalties.) According to the DOE analysis, the effects 
to Federal and State revenues should be largely neutral. Slight royalty 
decreases could be possible at some oil prices for States with moderate 
levels of heavy oil production.
    In California, where almost 91 percent of the heavy oil production 
takes place, the DOE analysis generally projects small to moderate 
decreases in royalties. For instance, at $16 a barrel (WTI), DOE 
projects that this rule will decrease California royalties by about 
$3.5 million, while increasing California public sector revenue by 
about $15 million. At $18 a barrel (WTI), DOE projects that this rule 
will decrease California royalties by about $24 million, while 
decreasing California public sector revenue by about $1 million. At $20 
a barrel (WTI), DOE projects that this rule will increase California 
royalties by about $1 million, while increasing California public 
sector revenue by about $104 million. The wide variations in 
sensitivity to the price of oil are due to numerous variables, 
including the propensity for oil companies to invest in major recovery 
projects at certain oil prices. (Letter Report from Department of 
Energy dated July 29, 1994.)

IV. Procedural Matters

    This rule is not 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 final rule will not have a 
significant economic impact on a substantial number of small entities 
under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The BLM 
has prepared a regulatory flexibility analysis. It is available upon 
request from the address listed at the beginning of this rule. 
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.
    The principal author of this final rule is Dr. John W. Bebout, 
Senior Technical Specialist, Fluids Group, assisted by Charles Hunt of 
the Regulatory Management Team, Bureau of Land Management.

List of Subjects for 43 CFR Part 3100

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

    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 amended as set forth below:

V. Regulatory Text

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


Sec. 3103.2-2  [Amended]

    2.-3. Section Sec. 3103.2-2 is amended by removing the cross 
reference ``Sec. 3103.4-2(d)'' in the introductory text and adding in 
its place the cross reference ``Sec. 3103.4-4(d).''
    4. Sec. 3103.4 is amended by revising the heading to read as 
follows:


Sec. 3103.4  Production incentives.


Sec. 3103.4-2  [Redesignated as Sec. 3103.4-4]

    5. Section 3103.4-2 is redesignated as Sec. 3103.4-4.
    6. Section 3103.4-1 is amended by redesignating paragraphs (c) and 
(d) as paragraphs (a) and (b) of a new Sec. 3103.4-2, ``Stripper well 
royalty reductions.'' Section 3103.4-1 is further amended by 
redesignating paragraph (e) as (c), and revising the section heading 
and paragraph (b)(1) to read as follows:


Sec. 3103.4-1  Royalty reductions.

* * * * *
    (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. (Royalty 
reductions specifically for stripper oil well leases or heavy oil 
properties are discussed in Sec. 3103.4-2 and Sec. 3103.4-3 
respectively.) The application 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.
    7. Newly designated Sec. 3103.4-2, paragraph (b)(3)(iii)(A) is 
amended by removing the cross reference ``(d)(3)(ii)'' and adding in 
its place the cross reference ``(b)(3)(ii).''
    8. A new Sec. 3103.4-3 is added to read as follows:


Sec. 3103.4-3  Heavy oil royalty reductions.

    (a)(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. 

[[Page 4751]]

    (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.
    (b) 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 (b)(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 1996, the operator must submit 
Purchaser's Statements for July, August, and September of 1996;
    (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 1996, the operator must submit Purchaser's Statements for 
the months of September 1995, and March and September 1996; 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 OMMITTED] TR08FE96.000

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 OMMITTED] TR08FE96.001

    (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 (b)(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 additional royalty reductions will be granted 
until the property has a sales history of at least 3 production 
months (see paragraph (b)(2) 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 next 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                  
------------------------------------------------------------------------
                                                           Royalty Rate 
         Weighted average API gravity (degrees)              (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 (plus the 2 
calendar month grace period during which the next 12 months' royalty 
rate is determined in the next year). If the API oil gravity is 20 
degrees or greater, the royalty rate will be the rate in the lease 
terms.

    Example: BLM receives notification from an operator on June 8, 
1996. There is a two month period before new royalty rate is 

[[Page 4752]]
effective--July and August. New royalty rate is effective September 1, 
1996.

    (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 
(b)(5)(ii) of this section.
    (B) The operator/payor must notify BLM of its determinations under 
this paragraph and paragraph (b)(5)(iv)(A) of this section. The new 
royalty rate (effective for the next 12 month period) will become 
effective the first day of the third month after the prior 12 month 
period comes to a close, and will remain effective for 12 calendar 
months (plus the 2 calendar month grace period during which the next 12 
months' royalty rate is determined in the next year). 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.

    Example: On September 30, 1997, at the end of a 12-month royalty 
reduction period, the operator/payor determines what the weighted 
average API oil gravity for the property for that period has been. 
The operator/payor then determines the new royalty rate for the next 
12 month using the table in paragraph (b)(5)(ii) of this section. 
Given that there is a 2-month delay period for the operator/payor to 
calculate the new royalty rate, the new royalty rate would be 
effective December 1, 1997 through November 30, 1998 (plus the 2 
calendar month grace period during which the next 12 months' royalty 
rate is determined--December 1, 1998 through January 31, 1999).

    (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 (b).
    (vi) Certification. The operator/payor must use the applicable 
royalty rate when submitting the required royalty reports/payments to 
the Minerals Management Service (MMS). In submitting royalty reports/
payments using a royalty rate reduction authorized by this paragraph 
(b), 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 (b).
    (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 
to MMS immediately upon receipt of this notice. Late payment or 
underpayment charges will be assessed 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 late payment or 
underpayment charges will assessed in accordance with 30 CFR 218.102.
    (6) The BLM may suspend or terminate all royalty reductions granted 
under this paragraph (b) and terminate the availability of further 
heavy oil royalty relief under this section--
    (i) Upon 6 month's notice in the Federal Register when BLM 
determines that the average oil price has remained above $24 per barrel 
over a period of 6 consecutive months (based on the WTI 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, 1999, if the Secretary determines the 
royalty rate reductions authorized by this paragraph (b) 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 in heavy oil production 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) 
from oil completions using the lease royalty rate.
    (11) The minimum royalty provisions of Sec. 3103.3-2 will continue 
to apply.


Sec. 3140.1-4  [Amended]

    9. Section Sec. 3140.1-4(c)(3) is amended by removing the cross 
reference ``Sec. 3103.4-1'' and adding in its place the cross reference 
``Sec. 3103.4.''


Sec. 3165.1  [Amended]

    10. Section Sec. 3165.1(b) is amended by removing the cross 
reference ``Sec. 3103.4-2'' and adding in its place the cross reference 
``Sec. 3103.4-4.''

    Dated: November 8, 1995.
Bob Armstrong,
Assistant Secretary of the Interior.
[FR Doc. 96-2433 Filed 2-7-96; 8:45 am]
BILLING CODE 4310-84-P