[Federal Register Volume 61, Number 37 (Friday, February 23, 1996)]
[Proposed Rules]
[Pages 6958-6961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4106]



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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 203, 256, and 260

RIN 1010-AC13


Royalty Relief for Outer Continental Shelf Leases in the Gulf of 
Mexico

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Outer Continental Shelf Deep Water Royalty Relief Act 
(Act) authorizes the Secretary of the Interior (Secretary) to modify 
the terms of certain existing leases and to establish new terms for 
leases in water depths of 200 meters or greater in parts of the Central 
and Western Gulf of Mexico. This document solicits recommendations and 
comments on rules that would implement the new authority under the Act.

DATES: MMS will consider all comments we receive by April 8, 1996. We 
will begin reviewing comments at that time and may not fully consider 
comments we receive after April 8, 1996. Please note, we expect that 
the 180-day time limit the Act imposes to issue regulations will 
preclude granting extensions of the 45-calendar-day comment period.

ADDRESSES: Mail or hand-carry comments to the Department of the 
Interior; Minerals Management Service; Mail Stop 4700; 381 Elden 
Street; Herndon, Virginia 22070-4817; Attention: Chief, Engineering and 
Standards Branch.

FOR FURTHER INFORMATION CONTACT:
To obtain a copy of the Act or for other information regarding this 
notice, contact Walter Cruickshank, Chief, Offshore Minerals, Analysis 
Division, Minerals Management Service, at either Mail Stop 4013, 1849 C 
Street, NW; Washington, DC 20240, or telephone: (202) 208-3822. You may 
also access the text of the Act from the MMS homepage on the World Wide 
Web at http://www.mms.gov/whatsnew.html. Because of the Act's 
complexity, readers should have a copy of the Act available when 
reviewing this notice.

SUPPLEMENTARY INFORMATION:

Summary of Legislative Provisions

    On November 28, 1995, the President signed the Act (Pub. L. 104-
58). The Act authorizes the Secretary to modify the royalty or net 
profit share terms of certain existing leases and to offer new leases 
subject to the Act's provisions for royalty suspension volumes in water 
depths of 200 meters or greater in parts of the Central and Western 
Gulf of Mexico. The Act directs the Secretary to promulgate 
implementing regulations within 180 days of enactment. MMS and the 
Secretary are making every effort to meet this deadline. Given the 
complexities of the Act and the time constraints for implementation, 
how should MMS best address the issues the Act raises in a timely 
fashion?
    The purpose of this notification is to solicit recommendations and 
comments from the oil and natural gas industries, Federal agencies, 
State and local governments, environmental groups, academia, and the 
public on the general administrative and regulatory framework for 
fulfilling the Secretary's responsibilities under the Act.

(Special Note: Oil and natural gas industry trade associations are 
encouraged to act as coordinators for information responses from 
member companies pertaining to this notice.)

    Recommendations and detailed comments are also solicited on certain 
issues or technical questions that are necessary to establish workable 
rules and regulations to implement the Act.

[[Page 6959]]

    This notification focuses on those new responsibilities related to 
granting royalty relief for leases located in water depths of 200 
meters or greater. Rules resulting from this rulemaking process may 
also include provisions clarifying existing authorities and policies 
for reducing royalty rates on existing leases in water depths of less 
than 200 meters. In addition to this written notice, MMS will conduct a 
2-day public meeting in March 1996 to solicit additional written and 
oral comments pertaining to this topic. The meeting is tentatively 
scheduled to be held in New Orleans, Louisiana. MMS officials from the 
Gulf of Mexico Regional and Herndon, Virginia, Headquarters offices 
will conduct it. Further details will be made available in the near 
future in a Federal Register Notice as well as through the MMS Gulf of 
Mexico Regional Information Office at 1201 Elmwood Park Boulevard, New 
Orleans, Louisiana 70123-2394 telephone (504) 736-2595.
    The MMS has scheduled a lease sale for April 24, 1996 for the 
Central Gulf of Mexico which includes tracts that are subject to the 
provisions of this Act. The MMS will publish an interim rule to 
implement the legislative requirements prior to the sale. Please send 
us your comments and recommendations on how we should implement the 
provisions of section 304 of the Act as soon as possible so that they 
may be considered as we develop the interim rule.
    This advance notice of proposed rulemaking solicits comments, 
recommendations, and specific remarks on issues and topics. We will 
carefully evaluate all timely received responses as we develop a rule 
to implement the Act. The Act contains three major provisions with 
respect to new and existing leases. New leases include tracts leased as 
the result of a sale held after the legislation's enactment on November 
28, 1995. Existing leases are defined as all other leases.
    (1) Section 302 clarifies the Secretary's pre-existing authority to 
reduce royalty rates on existing leases to promote development, 
increase production, and encourage production of marginal resources on 
producing and non-producing leases. This provision applies only to 
leases in the Gulf of Mexico, west of 87 degrees, 30 minutes West 
longitude.
    (2) Also, Section 302 provides that ``new production'' from 
existing leases in water depths of 200 meters or greater qualifies for 
royalty suspensions if the Secretary determines that the new production 
would not be economic in the absence of royalty relief. The Secretary 
must then determine the appropriate royalty suspension volume on a 
case-by-case basis, subject to specified minimums for non-producing 
leases. This provision applies only to leases in the Gulf of Mexico, 
west of 87 degrees, 30 minutes West longitude.
    (3) Section 303 establishes a new bidding system that allows the 
Secretary to offer tracts with royalty suspensions for a period, volume 
or value determined by the Secretary. All tracts offered within 5 years 
of the date of enactment in water depths of 200 meters or greater in 
the Gulf of Mexico, west of 87 degrees, 30 minutes West longitude, must 
be offered under the new bidding system (Section 304).

Regulatory Objectives

    In implementing the Act's provisions related to existing and new 
oil and natural gas leases in water depths of 200 meters or greater in 
certain areas of the Gulf of Mexico, MMS seeks to establish a 
regulatory program that:
    (1) promotes development or increased production, including 
marginal resources, on producing or non-producing leases;
    (2) fulfills the purposes of the Outer Continental Shelf Lands Act, 
as amended, including its requirement to insure the public a fair and 
equitable return on the resources of the Outer Continental Shelf (OCS);
    (3) establishes a set of objective criteria to render fair and 
forthright decisions to individual lessees;
    (4) establishes a simple and concise application process requiring 
only the data and information necessary to evaluate properly the 
specific circumstances addressed by the application and to ensure 
compliance with payment obligations;
    (5) uses procedures for the submission and review of applications 
similar to those MMS used in consideration of royalty relief for all 
leases regardless of water depth; and
    (6) minimizes the personnel required for both lessees and MMS to 
carry out the Act's activities.

Issues and Informational Needs

    The specific circumstances associated with existing and future OCS 
oil and natural gas exploration, development, and production activities 
require the MMS to make several critical determinations in formulating 
the regulations to implement royalty relief for deep-water leases. Some 
of the determinations MMS must make affect all circumstances addressed 
under the legislation, while others apply only to specific lease 
circumstances.
    Hence, for the purpose of soliciting comments and recommendations, 
this notice seeks input on all relevant issues and topics, including 
(I) Common Technical Issues, (II) Existing Deep-water Leases, and (III) 
New Leases (i.e., leases resulting from sales conducted after November 
28, 1995). The issues raised below will help MMS implement the Act but 
may not become part of future regulations.

I. Common Technical Issues

    (1) The Act sets minimum suspension volumes based on the water 
depth of leases in a field eligible for royalty relief. What water 
depth data should MMS use for royalty relief classification purposes? 
The options range from prelease MMS-determined water depth boundaries 
based on published Gulfwide bathymetric data to postlease tract-
specific data. Should MMS determine water depths for new and existing 
leases in the same way?
    a. If you recommend that MMS use published bathymetric data, what 
are the best or most acceptable data sets available?
    b. If you recommend that MMS use prelease data, how should MMS 
handle possible inconsistencies with postlease tract-specific water 
depth data that may become available on a block?
    c. If you recommend that MMS use postlease data, what should be the 
nature and timing of the data?
    d. What water depth on a block should MMS use to determine the 
royalty relief to be granted, e.g., shallowest, deepest, average, or 
location of production facility?
    e. How would MMS and bidders decide on the fair value of a tract if 
the tract's water depth isn't specified at the time of sale? How could 
MMS assure the receipt of fair market value if the royalty suspension 
volume could change after the lease award?
    (2) Should MMS use a standard conversion factor e.g., British 
Thermal Units (BTU), in computing barrels of oil equivalent for 
determining relief volumes, or should MMS make the calculations on a 
case-by-case basis?
    a. If you recommend one or more standard conversion factors, 
specify the factor(s) and rationale for its/their use.
    b. If you recommend case-by-case analyses, how should MMS base 
specific decisions and how should MMS address production stream 
variances over time? How should MMS determine factors for new leases or 
existing leases that have never produced?
    (3) Should MMS consider a fixed time period for evaluating economic 
viability of proposals, or should MMS use specific case-by-case 
projections of the productive life of the field? If you 

[[Page 6960]]
recommend a stipulated time limit, what should that limit be and why?
    (4) What specific criteria should MMS consider in determining 
whether existing leases or units are economically viable?
    a. Should MMS base such criteria upon case-by-case circumstances or 
more generic industry standards?
    b. If you recommend case-by-case analyses, what publicly available 
economic analysis models might MMS employ in making such determinations 
in a manner that would yield results acceptable to the diverse 
companies operating leases on the OCS?
    c. If you recommend industry standards, identify specific criteria 
(e.g., return on investment, return on equity, etc.) and the basis for 
specific levels of acceptability.
    (5) For existing leases, the Act states that royalty relief 
determinations can be on a lease or unit basis.
    a. How should MMS treat applications for an individual lease that 
comprises only a portion of a geologic structure common to several 
leases or unleased tracts?
    b. Should MMS require joint applications where such leases are not 
unitized?
    c. Should MMS change its regulations addressing unitization in 
these circumstances?
    d. When a lease is added to a unit that already has a royalty 
suspension, how should MMS modify the approved royalty relief to 
recognize the water depth, production projections, and/or other data 
relating to the added lease?
    (6) How should MMS treat nonlease costs (e.g., pipelines, shared 
production systems, etc.) in determining economic viability?
    (7) How should MMS determine gas/oil ratios for non-producing 
leases for determining economic viability? Similarly, how should MMS 
determine gas/oil ratios for ``new production'' from producing leases?

II. Existing Deep-Water Leases

    (1) The Act requires the Secretary to define clearly the 
information required for a complete application.
    a. What information should MMS require for an application to be 
considered complete?
    b. What minimum amount and types of information do you think MMS 
needs to make a determination of economic viability?
    c. How should MMS establish the reasonableness of the amount and 
timing of projected production, costs, and revenues?
    (2) The Act states that, in determining the need for and amount of 
royalty relief, the Secretary must consider the increased technological 
and financial risk of deep-water development.
    a. Identify specific ``technological and financial risks'' of deep-
water development that MMS should consider in determining economic 
viability of leases or units addressed by the legislation.
    b. Are such risks tract-specific or industry-wide?
    c. How do such risks vary with water depth?
    d. What means are available for quantifying such risks?
    e. How should MMS account for such risks in the application and 
decision process?
    f. How should MMS differentiate between the ``technological and 
financial risks'' of non-producing leases with approved Development 
Operations Coordination Documents (DOCD) and those of leases without 
approved DOCD's?
    (3) Similarly, the Act requires the Secretary to consider all costs 
associated with exploring, developing, and producing the lease when 
determining economic viability.
    a. What costs should be included and how should they be 
``considered''? Please provide the rationale for your answer.
    b. Should such costs be tract-specific or industry-wide?
    c. What means are available for quantifying such costs?
    d. At what point should such costs be considered ``sunk costs'' for 
determining allowable costs in the application and decision process?
    (4) For existing leases, the suspensions cease when oil or natural 
gas prices exceed specified ceilings. When leases produce both oil and 
natural gas or related products, and only one of the ceiling prices is 
reached, should the MMS lift the suspension for the entire production 
or just the product for which the price ceiling is reached? For tracts 
offered in upcoming sales, should price ceilings affect suspension 
volumes in the same ways as for existing leases and units?
    (5) The Secretary must redetermine the need for or the volume of 
relief when the lessee applies prior to the commencement of the ``new 
production'' and a significant change occurs in the factors upon which 
the original determination was made.
    a. Identify specific factors and what should constitute 
``significant'' changes that would require reconsideration of the 
original determination the Secretary made.
    b. Should MMS establish a limit on the number of redetermination 
applications or a minimum time stipulation between redeterminations?
    c. Are there any circumstances in which the Secretary should 
redetermine the suspension volume without an applicant's request?
    (6) The second part of the definition of new production includes 
any production resulting from lease activities pursuant to a supplement 
to an approved DOCD that would ``expand production significantly beyond 
the level anticipated'' in a prior approved DOCD.
    a. How should MMS determine the amount of ``any production . . . 
that would expand production significantly beyond the level 
anticipated'' in the prior DOCD?
    b. Should MMS make this determination on anticipated reserves or 
production levels?
    c. How should MMS determine the ``start date'' for ``new 
production'' from this category of existing leases?
    d. How should MMS quantify the level of ``significant'' expanded 
production for purposes of royalty relief determinations for this 
category of leases? Assuming MMS grants royalty relief, how should MMS 
allocate production between the baseline production level and the 
``expanded'' production level?
    e. What costs, if any, incurred prior to November 28, 1995, or 
prior to the date of an application for royalty relief, should MMS 
include in determining economic viability?
    f. How should MMS consider production quantities and revenues for 
past production?
    g. For leases with approved DOCD's, how should MMS determine the 
``level of anticipated production'' if not specifically stated in the 
DOCD? Should MMS make this determination on anticipated reserves or 
production levels (e.g., barrels of oil per day, annual production, 
etc.)?
    h. Should MMS require that all future DOCD's include the level of 
anticipated production?

III. New Leases Issued as the Result of Lease Sales Conducted After 
November 28, 1995

    Provisions included in the legislation require that MMS employ a 
bidding system for any lease sale within five years of November 28, 
1995, which provides for suspensions of royalty payments in water 
depths of 200 meters or greater for stipulated minimum volumes of 
production. The suspension volumes in section 304 of the Act were based 
on MMS analyses of fields at various water depths, consistent with the 
way in which investment decisions 

[[Page 6961]]
on deep water development projects are made.
    (1) The provisions of the Act dealing with existing leases allow 
the Secretary to grant suspensions on an individual lease or unit 
basis. However, section 304 of the Act (Lease Sales) refers to 
``tracts'' and ``leases'' (plural). How should MMS apply the royalty 
suspension volumes to tracts offered for sale?
    (2) Is there any basis for MMS to offer suspension volumes larger 
than the minimums specified in the Act?

    Dated: February 20, 1996.
Bob Armstrong,
Assistant Secretary for Land and Minerals Management.
[FR Doc. 96-4106 Filed 2-22-96; 8:45 am]
BILLING CODE 4310-MR-M