[Federal Register Volume 62, Number 134 (Monday, July 14, 1997)]
[Notices]
[Pages 37589-37591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18291]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service


Modifications to the Bid Adequacy Procedures

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Notification of procedural changes.

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SUMMARY: The Minerals Management Service (MMS) has modified its 
existing bid adequacy procedures for ensuring receipt of fair market 
value on Outer Continental Shelf (OCS) oil and gas leases. In Phase 1 
these procedures establish a new number of bids rule for acceptance of 
selected tracts. In Phase 2 these procedures expand the scope of tract 
evaluation; replace the geometric average evaluation of tract with a 
revised arithmetic average measure of the tract; eliminate the one-
eighth rule for anomalous bids; and clarify the treatment of tracts 
identified as having unusual bidding patterns.
    These changes were made following a review of bidding activity in 
OCS sales. The new number of bids rule relies more on market-determined 
factors to ensure receipt of fair market value. This new rule, along 
with expansion of evaluation procedures beyond only tract specific 
assessments, will allow for earlier acceptance on tracts that would be 
accepted later in the evaluation process. The revised average measure 
is designed to generate a better estimate of tract value when all bids 
fall below the Government's original estimate of tract value. The 
stricter screening rules associated with the revised average measure 
eliminate the need for the one-eighth rule. The Regional Director's 
expanded authority to handle

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documented instances of unusual bidding patterns provides flexibility 
to modify certain acceptance rules and allows for a decision to reject 
the high bid on identified tracts.

DATES: This modification is effective July 14, 1997.

FOR FURTHER INFORMATION CONTACT: Dr. Marshall Rose, Chief, Economics 
Division, at (703) 787-1536.

SUPPLEMENTARY INFORMATION: The following set of bid adequacy procedures 
incorporates the most recent changes. During the bid review process, 
MMS conducts evaluations in a two-phased process for bid adequacy 
determination. In Phase 1 we review the bid for legal sufficiency 
1 and anomalies 2 to establish the set of 
qualified bids 3 to be evaluated.
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    \1\ Legal bids are those bids which comply with MMS regulations 
(30 CFR 256) and the Notice of Sale. Any illegal high bid will be 
returned to the bidder.
    \2\ Anomalous bids include all but the highest bid submitted for 
a tract by the same company, parent or subsidiary (bidding alone or 
jointly). Such bids are excluded when applying the number of bids 
rule or any bid adequacy measure.
    \3\ Qualified bids are those bids which are legal and not 
anomalous.
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    (1) Phase 1 partitions the tracts receiving bids into three general 
categories:
     Those tracts which the MMS identifies as being nonviable 
4 based on adequate data and maps;
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    \4\ Nonviable tracts or prospects are those geographic or 
geologic configurations of hydrocarbons whose risk weighted most 
probable resource size is below the minimum economic field size for 
the relevant cost regime and anticipated future prices. The risk 
used is below the lowest level anticipated for any tract or prospect 
in the same cost regime.
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     Those tracts where competitive market forces can be relied 
upon to assure fair market value; and
     Those tracts where opportunities for strategic 
underbidding, information asymmetry, collusion, and other 
noncompetitive practices are greatest and where the Government has the 
most detailed and reliable data.
    Based on these categories, four Phase 1 rules are applied to all 
tracts receiving bids:
     Pass directly to Phase 2 for further evaluation all tracts 
t that require additional information to make a determination on 
viability or tract type and all drainage and development tracts.
     Accept the highest qualified bid on confirmed and wildcat 
tracts receiving three or more qualified bids where the third highest 
such bid on the tract is at least 50 percent of the highest qualified 
bid.
     Pass to Phase 2 confirmed and wildcat tracts receiving 
either one or two qualified bids, or three or more qualified bids where 
the third highest such bid is less than 50 percent of the highest 
qualified bid.
     Accept the highest qualified bid on confirmed and wildcat 
tracts determined to be nonviable.
In assuring the integrity of the bidding process, the Regional Director 
(RD) may identify an unusual bidding pattern 5 at any time 
during the bid review process, but before a tract is accepted. If the 
finding is documented, the RD has discretionary authority, after 
consultation with the Solicitor, to pass those tracts so identified to 
Phase 2 for further analysis. The RD may eliminate all but the highest 
of the unusual bids from consideration when applying any bid adequacy 
rule, may choose not to apply a bid adequacy rule, or may reject the 
tract's highest qualified bid.
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    \5\ Within the context of our bid adequacy procedures, the term 
``unusual bidding patterns'' typically refers to a situation in 
which there is an excessive amount of coincident bidding by 
different companies on a set of tracts in a sale. Other forms of 
unusual bidding patterns exist as well, and generally involve anti-
competitive practices, e.g., when there is an uncommon absence of 
competition among companies active in a sale on a set of prospective 
tracts.
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    Phase 1 procedures are generally completed simultaneously within 
three weeks of the bid opening.
    (2) Phase 2 applies criteria designed to resolve bid adequacy 
assessments by analyzing, partitioning, and evaluating tracts in two 
steps:
     Further mapping and/or analysis is done to review, modify 
and finalize viability determinations and tract classifications.
     Tracts identified as being viable must undergo an 
evaluation to determine if fair market value has been received.
    After completing these two steps, the following rules and 
procedures are used in Phase 2.
     Accept the highest qualified bid on all tracts determined 
to be nonviable.
     Accept newly classified confirmed and wildcat tracts 
having three or more qualified bids where the third highest such bid is 
at least 50 percent of the highest qualified bid.
     Determine whether any categorical fair market evaluation 
technique(s) will be used. If so:

 Evaluate, define and identify the appropriate threshold 
measure(s).
 Accept all tracts whose individual cash flow values, if 
estimated by MMS and used in the bid adequacy procedures, would result 
in satisfaction of the threshold categorical requirements.

     Conduct a full-scale evaluation, which could include the 
use of MONTCAR 6, on all remaining tracts 7 
passed to Phase 2 and still awaiting an acceptance or rejection 
decision. Compare the highest qualified bid on each of these remaining 
tracts to two measures of bid adequacy: the Mean Range of Values (MROV) 
8 and the Adjusted Delayed Value (ADV).9
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    \6\ MONTCAR is a probabilistic, cash flow computer simulation 
model designed to conduct a resource-economic evaluation that 
results in an estimate of the expected net present value of a tract 
(or prospect) along with other measures.
    \7\ These include tracts not accepted by a categorical rule that 
are classified as drainage and development tracts and those 
classified as confirmed and wildcat tracts that are viable and 
received (a) one or two qualified bids, or (b) three or more 
qualified bids where the third highest such bid is less than 50 
percent of the highest qualified bid.
    \8\ The MROV is a dollar measure of a tract's expected net 
present private value, given that the tract is leased in the current 
sale, allowing for exploration and economic risk, and including tax 
consequences including depletion of the cash bonus.
    \9\ The ADV is the minimum of the MROV and the Delayed MROV 
(DMROV). The DMROV is a measure used to determine the size of the 
high bid needed in the current sale to equalize it with the 
discounted sum of the bonus and royalties expected in the next sale, 
less the forgone royalties from the current sale. The bonus for the 
next sale is computed as the MROV associated with the delay in 
leasing under the projected economic, engineering, and geological 
conditions, including drainage. If the high bid exceeds the DMROV, 
then the leasing receipts from the current sale are expected to be 
greater than those from the next sale, even in cases where the MROV 
exceeds the high bid.
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--Accept the highest qualified bid for those tracts where such a bid 
equals or exceeds the tract's ADV.
--Reject the highest qualified bid on drainage and development tracts 
receiving three or more qualified bids where such a bid is less than 
one-sixth of the tract's MROV.
--Reject the highest qualified bid on drainage and development tracts 
receiving one or two qualified bids and on confirmed and wildcat tracts 
receiving only one qualified bid where the high bid is less than the 
tract's ADV.
     Select from the outstanding tracts 10 those (a) 
drainage and development tracts having three or more qualified bids 
with the third highest such bid being at least 25 percent of the 
highest qualified bid and (b) confirmed and wildcat tracts having two 
or more qualified bids with the second highest such bid being at least 
25 percent of the highest qualified bid. Compare the

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highest qualified bid on each of these selected, outstanding tracts to 
the tract's Revised Arithmetic Average Measure (RAM).11 For 
all these tracts:

    \10\ These consist of those tracts having a highest qualified 
bid that does not exceed the MROV or the ADV, and are either (a) 
drainage or development tracts receiving three or more qualified 
bids with the highest such bid exceeding one-sixth of the tract's 
MROV, or (b) confirmed and wildcat tracts that are viable and 
receive two or more qualified bids.
    \11\ The RAM is the arithmetic average of the MROV and all 
qualified bids on the tract that are equal to at least 25 percent of 
the high bid.
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--Accept the highest qualified bid where such a bid equals or exceeds 
the tract's RAM.
--Reject the highest qualified bid where such a bid is less than the 
tract's RAM.

     Reject the highest qualified bid on all leftover tracts, 
i.e., those that were in the ``outstanding'' set above but not selected 
for comparison to the RAM.
    The Phase 2 bid adequacy determinations are normally completed 
sequentially over a period ranging between 21 and 90 days after the 
sale. The total evaluation period can be extended, if needed, at the 
RD's discretion (61 FR 34730, July 3, 1996).

    Dated: July 7, 1997.
Carolita U. Kallaur,
Associate Director for Offshore Minerals Management.
[FR Doc. 97-18291 Filed 7-11-97; 8:45 am]
BILLING CODE 4310-MR-P