[Federal Register Volume 62, Number 16 (Friday, January 24, 1997)]
[Notices]
[Pages 3714-3715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1705]


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DEPARTMENT OF THE INTERIOR
Minerals Management Service


Discretionary Authority for Royalty Relief on Nonproducing Leases 
on the Outer Continental Shelf

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Notice.

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SUMMARY: The Outer Continental Shelf (OCS) Deep Water Royalty Relief 
Act of 1995 (Act) granted the Secretary of the Interior (Secretary) the 
authority to reduce or eliminate royalties in order to promote 
development, increase production, or encourage the production of 
marginal resources on producing and nonproducing leases in any water 
depth in certain areas of the Gulf of Mexico. This Notice seeks public 
input on whether and how MMS should implement this new authority for 
nonproducing leases.

DATES: We will consider all comments we receive by March 25, 1997. We 
will begin review of comments at that time and may not fully consider 
comments we receive after March 25, 1997.

ADDRESSES: Mail or hand-carry comments to the Department of the 
Interior; Minerals Management Service; Mail Stop 4230; 1849 C Street, 
NW; Washington, D.C. 20240; Attention: Chief, Washington Division, 
Office of Policy and Management Improvement.

FOR FURTHER INFORMATION CONTACT:

Dr. Walter Cruickshank, Washington Division, at the above address or by 
telephone: (202) 208-3822.

SUPPLEMENTARY INFORMATION:

Legislative Background

    The Act (Pub. L. 104-58) authorizes the Secretary to modify the 
royalty terms of certain existing leases and to offer new leases 
subject to royalty suspension volumes in water depths of 200 meters or 
more in parts of the Gulf of Mexico. Most of the Act addresses 
mandatory royalty relief programs for leases in water depths of 200 
meters or more. These provisions have been implemented in interim rules 
covering new leases (61 FR 12022, March 25, 1996) and existing leases 
(61 FR 27263, May 31, 1996).
    We are now considering whether and how to implement new authority 
provided by the Act for a discretionary royalty relief program. In 
part, section 302 of the Act amends section 8(a) of the OCS Lands Act 
by adding subparagraph (3)(B), which applies to all leases in the Gulf 
of Mexico west of 87 degrees, 30 minutes West longitude (i.e., the 
Central and Western Gulf of Mexico Planning Areas and the portion of 
the Eastern Gulf of Mexico Planning Area lying offshore Alabama). In 
this area, the Secretary may reduce or eliminate any royalty or net 
profit share in order to promote development, increase production, or 
encourage production of marginal resources on producing or nonproducing 
leases. With the lessee's consent, the Secretary may make other 
modifications to the royalty or net profit share terms of leases in 
order to achieve these purposes. This provision applies to active 
leases, not to the terms under which new leases are offered.
    We already have a royalty relief program in place for producing 
leases, as well as the mandated program for nonproducing leases in at 
least 200 meters of water in the specified areas of the Gulf of Mexico. 
This Notice seeks input on whether and how we should consider royalty 
relief for nonproducing leases in any water depth.
    We welcome comments and recommendations on all issues relevant to 
this Notice. In particular, please address the issues and questions 
raised below.

Issues

I. Should MMS Consider Royalty Relief on Nonproducing Leases?

    (1) Currently, the Gulf of Mexico OCS program is very healthy, with 
record setting lease sales in 1996 and vigorous drilling and 
development activities.

[[Page 3715]]

What additional net benefits would an expanded royalty relief program 
create?
    (2) We have established royalty relief programs for producing 
lessons throughout the OCS and for nonproducing leases in greater than 
200 meters of water in the Gulf of Mexico, west of 87 degrees, 30 
minutes West longitude. What types of situations warranting royalty 
relief arise which cannot be addressed through these programs? Please 
be as specific as possible; MMS will protect any confidential 
information that you submit.
    (3) Under the OCS Lands Act, we have an obligation to insure a fair 
and equitable return on the resources of the OCS. Important components 
of meeting this mandate are our lease sale and bid adequacy review 
processes.
    a. Will these processes still insure a fair return where the least-
stipulated royalty rate may be modified prior to production?
    b. How should we incorporate the potential for royalty relief on 
future production in determining whether a high bid for a lease is 
adequate?
    c. Should such royalty relief be available to current leases, where 
an expectation of royalty relief prior to production did not exist at 
the time of the lease sale and bid adequacy review?
    d. Would such a royalty relief program be fair to companies that 
submitted losing bids but which might have been willing to produce at 
the lease stipulated royalty rate?
    (4) Many companies, especially some smaller companies, rely on the 
turnover of undeveloped leases for a significant portion of their 
offshore activities. This turnover takes the form of bidding on 
previously relinquished tracts in lease sales or acquiring an interest 
in leases through the lease assignment process. How would the 
availability of royalty relief on nonproducing leases affect the rate 
at which leases change hands?

II. Under What Circumstances Should MMS Consider Relief for 
Nonproducing Leases?

    (1) If the Secretary chooses to establish a royalty relief program 
for nonproducing leases, what criteria should we use in evaluating 
applications? Are there special circumstances that warrant relief, such 
as costs substantially higher than normal or the introduction of a new 
technology? Please be as specific as possible.
    (2) How should we define ``marginal resources''?
    (3) At present, when a lease is relinquished, we offer the tract 
for lease in the next round of scheduled sales, which are held annually 
in the Central and Western Gulf of Mexico. Tracts that have undeveloped 
discoveries are usually acquired by another company in a subsequent 
sale. Granting royalty relief to the initial lessee could preclude the 
Treasury from receiving the additional bonus and a subsequent lessee 
from testing alternative concepts and possibly producing at the lease-
stipulated royalty rate. How should we consider this tradeoff in 
evaluating a request for royalty relief?
    (4) Prospect economics in the Gulf of Mexico change very rapidly 
along with changes in technologies, availability of infrastructure, 
costs, and geologic information. How could we structure a royalty 
relief program to ensure that a decision to grant relief isn't rapidly 
overtaken by such changes?

III. Design of a Royalty Relief Program for Nonproducing Leases

    Our only experience with royalty relief on nonproducing leases is 
in the deep water Gulf of Mexico. However, many of the elements of that 
program arise from the specific mandates of the Act for such leases. 
These mandates, and thus the design elements of the deep water program, 
do not necessarily apply to a more generally applicable program. Please 
comment on how and why an additional royalty relief program might vary 
from current programs, including the following questions:
    (1) Current OCS programs provide royalty relief in the form of 
royalty suspension volumes for deep water leases in the Gulf of Mexico 
and in the form of net revenue sharing for producing leases elsewhere. 
What form of royalty relief should we use for nonproducing leases not 
subject to the deep water royalty relief programs?
    (2) For nonproducing leases in deep water, we require a discovery 
capable of producing in paying quantities and design of the engineering 
concept as minimum precursors to an application.
    a. When during the exploration and development process should a 
lessee be allowed to apply for relief?
    b. When in this process would sufficient data be available to allow 
us to evaluate the need for royalty relief?
    c. How would we assure that projections of the amount and timing of 
production, costs, and revenues are reasonable?
    (3) What type of information is needed, and how should it be 
evaluated, to ensure that royalty relief is necessary to promote 
development, increase production, or encourage production of marginal 
resources on nonproducing leases?
    (4) Should we establish safeguards to remove or modify relief when 
the factors on which relief was granted change significantly before 
production starts? If so, what types of safeguards are appropriate?

IV. General Issues

    (1) For any particular royalty relief program you recommend, please 
provide specific information on its anticipated effects, including any 
effects on the levels and costs of exploration, development, and 
production, and the volume of additional resources that may be 
recovered.
    (2) The current royalty relief regulation at 30 CFR 203.51(b) 
restates the statutory authority for granting royalty relief for 
nonproducing leases in the Gulf of Mexico, but the regulations provide 
no additional guidance on how to apply or how MMS will evaluate 
applications. Are additional regulations needed to provide this detail, 
or should MMS operate the program under the existing regulation? Is the 
existing regulation adequate until such time as we become more familiar 
with the types of situations that will lead to applications and the 
accompanying evaluation issues?
    (3) In addition to authority to grant royalty relief for 
nonproducing leases, the Act gives the Secretary the authority to grant 
relief to categories of producing and nonproducing leases, rather than 
just on a case-by-case basis. Given that prospect economics change 
rapidly and depend on site-specific characteristics, we were unable to 
identify any additional categories of leases that warrant across-the-
board relief. However, we welcome comments on categories deserving 
relief, the type of relief that's appropriate, and what criteria we 
should use to determine when across-the-broad relief is preferable to 
case-specific relief.

    Dated: January 16, 1997.
Cynthia Quarterman,
Director.
[FR Doc. 97-1705 Filed 1-24-97; 8:45 am]
BILLING CODE 4310-MR-M