[Federal Register Volume 63, Number 11 (Friday, January 16, 1998)]
[Rules and Regulations]
[Pages 2626-2630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-843]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 260

RIN 1010-AC14


Royalty Relief for New Leases in Deep Water

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Final rule.

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SUMMARY: The Secretary of the Interior is authorized to offer Outer 
Continental Shelf (OCS) tracts in parts of the Gulf of Mexico for lease 
with suspension of royalties for a volume, value, or period of 
production. This applies to tracts in water depths of 200 meters or 
more. This final rule specifies the royalty-suspension terms for lease 
sales using this bidding system.

DATES: This final rule is effective February 17, 1998.

FOR FURTHER INFORMATION CONTACT: Walter Cruickshank, Chief, Washington 
Division, Office of Policy and Management Improvement, at (202) 208-
3822.

SUPPLEMENTARY INFORMATION:

I. Background

Legislative

    On November 28, 1995, President Clinton signed Public Law 104-58, 
which included the Outer Continental Shelf Deep Water Royalty Relief 
Act (``Act''). The Act contains four major provisions concerning new 
and existing leases. New leases are tracts leased during a sale held 
after the Act's enactment on November 28, 1995. Existing leases are all 
other leases.
    First, section 302 of the Act clarifies the Secretary's authority 
in 43 U.S.C. 1337(a)(3) to reduce royalty rates on existing leases to 
promote development, increase production, and encourage production of 
marginal resources on

[[Page 2627]]

producing or non-producing leases. This provision applies only to 
leases in the Gulf of Mexico west of 87 degrees, 30 minutes West 
longitude.
    Second, section 302 also provides that ``new production'' from 
existing leases in deep water (water at least 200 meters deep) 
qualifies for royalty suspensions if the Secretary determines that the 
new production would not be economic without royalty relief. The Act 
defines ``new production'' as production (1) From a lease from which no 
royalties are due on production, other than test production, before the 
date of the enactment of the Outer Continental Shelf Deep Water Royalty 
Relief Act; or (2) resulting from lease development activities under a 
Development Operations Coordination Document (DOCD), or supplement 
thereto that would expand production significantly beyond the level 
anticipated in the DOCD approved by the Secretary after the date of the 
Act. The Secretary must determine the appropriate royalty-suspension 
volume on a case-by-case basis, subject to specified minimums for 
leases not in production before the date of enactment. This provision 
also applies only to leases in the Gulf of Mexico west of 87 degrees, 
30 minutes West longitude.
    Third, section 303 establishes a new bidding system that allows the 
Secretary to offer tracts with royalty suspensions for a period, 
volume, or value the Secretary determines.
    Fourth, section 304 provides that all tracts offered within 5 years 
of the date of enactment in deep water (water at least 200 meters deep) 
in the Gulf of Mexico west of 87 degrees, 30 minutes West longitude, 
must be offered under the new bidding system. The following minimum 
volumes of production are not subject to a royalty obligation:
     17.5 million barrels of oil equivalent (MMBOE) for leases 
in 200 to 400 meters of water;
     52.5 MMBOE for leases in 400 to 800 meters of water; and
     87.5 MMBOE for leases in more than 800 meters.

Regulatory

    On February 2, 1996, we published a final rule modifying the 
regulations governing the bidding systems we use to offer OCS tracts 
for lease (61 FR 3800). New Sec. 260.110(a)(7) implements the new 
bidding system under section 303 of the Act.
    We published an advance notice of proposed rulemaking (ANPR) in the 
Federal Register on February 23, 1996 (61 FR 6958), and informed the 
public of our intent to develop comprehensive regulations implementing 
the Act. The ANPR sought comments and recommendations to assist us in 
that process. In addition, we conducted a public meeting in New Orleans 
on March 12-13, 1996, about the matters the ANPR addressed.
    On March 25, 1996, we published an interim final rule in the 
Federal Register (61 FR 12022) specifying the royalty-suspension terms 
under which the Secretary would make tracts available under the bidding 
system requirements of sections 303 and 304 of the Act. We issued an 
interim final rule, in part, because we needed royalty relief rules in 
place before the lease sale held on April 24, 1996. However, in the 
interim final rule we asked for comments on any of the provisions and 
stated that we would consider those comments and issue a final rule. 
This final rule now modifies some of the provisions in the March 25, 
1996, interim final rule.
    On May 31, 1996, we published another interim final rule in the 
Federal Register (61 FR 27263) implementing section 302 of the Act. The 
interim final rule established the terms and conditions under which the 
Minerals Management Service (MMS) would suspend royalty payments on 
certain deep water leases issued as a result of a lease sale held 
before November 28, 1995. (The rule also contained provisions dealing 
with royalty relief on producing leases under the authority granted the 
Secretary by the OCS Lands Act.) We again asked for comments that we 
would consider before issuing a final rule.
    Simultaneous with the publication of this rule, we are issuing 
another final rule (RIN 1010-AC13) to replace the interim final rule 
implementing section 302 of the Act. The final rule will revise 30 CFR 
203 to establish conditions for suspension of royalty payments on 
certain deep water leases issued as a result of lease sales held before 
November 28, 1995.

II. Responses to Comments

    One respondent--Exxon Exploration Company (Exxon)--submitted 
comments on the Interim Final Rule for Deep Water Royalty Relief for 
New Leases, issued March 25, 1996.
    Exxon disagreed with our definition of the term ``Field'' 
(Sec. 260.102). Exxon said that our definition could be applied in such 
a way as to place unrelated and widely separated reservoirs within the 
same field. Exxon offered an alternative definition that it said 
provides for the creation of fields based on geology by allowing the 
inclusion of separate reservoirs in the same field when there is a 
meaningful geologic relationship between those reservoirs and avoids 
inclusion of reservoirs when such a relationship does not exist.
    Exxon offered this alternative definition:

    ``Field means an area consisting of a single hydrocarbon 
reservoir or multiple hydrocarbon reservoirs all grouped on or 
related to same local geologic feature or stratigraphic trapping 
condition. There may be two or more reservoirs in a field that are 
separated vertically by intervening impervious strata. Separate 
reservoirs would be considered to constitute separate fields if 
significant lateral separation exists and/or they are controlled by 
separate trapping mechanisms. Reservoirs vertically separated by a 
significant interval of nonproductive strata may be considered as 
separate fields when their reservoir quality, fluid content, drive 
mechanisms, and trapping mechanisms are sufficiently different to 
support such a determination.''

    Except for a minor editorial change, we have decided to leave the 
definition of ``Field'' unchanged from the interim final rule for the 
following reasons:
     The definition in the interim final rule is similar to, or 
consistent with, standard definitions used in industry and government, 
including the American Petroleum Institute, the National Petroleum 
Council, and the Department of Energy's Energy Information 
Administration.
     We do not segregate reservoirs vertically since the 
reservoirs are developed from the same platforms and use the same 
infrastructure. Affected lessees/operators typically make development 
decisions based on a primary objective(s) knowing that secondary 
targets exist which they will pursue subsequently.
     Reservoir quality, fluid content, and drive mechanisms are 
not appropriate determinants for field designations. These factors are 
reservoir performance/recovery issues. Indeed, such information is 
rarely available to MMS at the time field determinations are made. We 
have not considered these factors in our past field designations and 
their inclusion now would complicate the process significantly and lead 
to too much subjectivity.
     Elements of the alternative definition, e.g., ``a 
significant interval of nonproductive strata'' and ``significant 
lateral separation'' would be difficult to define and even more 
difficult to apply consistently.
    We recognize industry's concerns about field designations. This 
rule establishes, as discussed below, a process whereby lessees may 
appeal field designations to the Director, MMS.
    Other steps include:
     The MMS Field Naming Handbook, which explains our 
methodology for

[[Page 2628]]

designating fields, is available on the Internet (www.mms.gov). The 
Gulf of Mexico Region will entertain suggestions for improvements in 
the methodology.
     We will elevate the level at which we make field 
definition decisions in the Gulf of Mexico Region. The Chief, Reserves 
Section, Office of Resource Evaluation, will make these determinations 
after a lease has a well into the field qualified as producible.
     As part of the field designation process, affected 
lessees/operators will have the chance to review and discuss the field 
designation with Gulf of Mexico Region personnel before MMS makes a 
final decision.

III. Summary of Modifications to the Interim Final Rule

    As discussed below, we have modified the interim final rule to:
     Allow for appeals of field designations;
     Clarify when the cumulative royalty-suspension volume 
ends;
     Describe how MMS will establish and allocate royalty-
suspension volume in fields that have a combination of eligible leases 
and leases that are granted a royalty-suspension volume under section 
302 of the Act; and
     Eliminate the reference to a pressure base standard in the 
provision for the conversion of natural gas to oil equivalency 
(Sec. 260.110(d)(14)). The rule now indicates you must measure that 
natural gas in accordance with the procedures set forth in 30 CFR 250, 
subpart L.
    1. We have added a new provision (Sec. 260.110(d)(2)) establishing 
that you or any other affected lessees may appeal to the Director the 
decision designating your lease as part of a field. The Director's 
decision is a final agency action subject to judicial review.
    2. The preamble to the interim final rule indicated that a royalty-
suspension volume would continue until the end of the month in which 
cumulative production from eligible leases in the field reached the 
royalty-suspension volume for the field. The interim final rule itself 
did not include this provision. This final rule now includes a 
provision (Sec. 260.110(d)(10)) that a royalty-suspension volume will 
continue through the end of the month in which cumulative production 
from leases in the field entitled to share the royalty-suspension 
volume reaches that volume. The purpose of this provision is to avoid 
the complications that would occur for royalty payors if the royalty 
rate changed in the middle of the month.
    3. We have modified Sec. 260.110(d)(9) and added a new 
Sec. 260.110(d)(10) to describe how MMS will establish and allocate 
royalty-suspension volumes in fields having a combination of pre-Act 
and eligible leases. (Pre-Act leases are defined as OCS leases issued 
as a result of a sale held before November 28, 1995; in a water depth 
of at least 200 meters; and in the Gulf of Mexico west of 87 degrees, 
30 minutes West longitude. See 30 CFR 203.60 through 203.80). The 
provisions are necessary to account for and ensure consistency with the 
deep water royalty relief rules for pre-Act leases (Sec. 203.60). We 
published the interim final rule for pre-Act leases on May 31, 1996 (61 
FR 27263), after publication of the interim final rule for new leases 
in deep water on March 25, 1996.
    We have added wording in Sec. 260.110(d)(9) for cases where an 
eligible lease is added to a field that includes pre-Act leases granted 
a royalty-suspension volume under section 302 of the Act. This rule 
provides that the addition of the eligible lease will not change the 
field's established royalty-suspension volume. The added lease(s) may 
share in the suspension volume even if the volume is more than the 
eligible lease would qualify for based on its water depth.
    The new Sec. 260.110(d)(10) describes a case where pre-Act leases 
in a field that includes eligible leases apply for and receive a 
royalty-suspension volume larger than the suspension volume established 
for the field by the eligible leases. This rule provides that the 
eligible leases may share in the larger suspension volume to the extent 
of their actual production until cumulative production by all lessees 
equals the royalty-suspension volume.
    4. This final rule states that lessees must measure natural gas in 
accordance with 30 CFR 250, Subpart L. We have eliminated the specific 
measurement procedures from the interim final rule because a 
forthcoming final rule will change those procedures.

IV. Administrative Matters

Executive Order (E.O.) 12866

    This rule is a significant rule under E.O. 12866 due to novel 
policy issues arising out of legal mandates. You may obtain a copy of 
the determination from MMS. The Office of Management and Budget (OMB) 
has reviewed this rule.

Regulatory Flexibility Act

    The Department of the Interior (DOI) has determined that the 
primary impact of this rule, i.e., royalty relief to spur deep water 
oil and gas development, may have a significant effect on small 
entities although we can't estimate their number at this time. The 
number of small entities affected will depend on how many of them 
acquire leases that meet the statutory and regulatory criteria for 
royalty relief at lease sales between November 28, 1995, and November 
28, 2000.
    Exploration and development activities in the deep water areas of 
the Gulf of Mexico have traditionally been conducted by the major oil 
companies because of the expertise and financial resources required. 
``Small entities'' (classified by the Small Business Administration as 
oil and gas producers with fewer than 500 employees) are increasingly 
active on the OCS, including in deep water, and we expect that trend to 
continue. The only firm to whom we have granted royalty relief so far 
under section 302 of the Act is a small entity.
    In any case, this rule will have positive impacts on OCS oil and 
gas companies, large or small. Royalty relief in the form of a royalty-
suspension volume is automatically established for leases that meet the 
statutory and regulatory criteria. No applications or special reports 
are necessary.
    The beneficial effect of this relief on companies' financial 
operations will be substantial. Once we determine that a lease is 
eligible for a royalty-suspension volume, the value of that relief may 
range from tens of millions of dollars to over $100 million. The 
suspensions will allow companies to recover more of their investment 
costs before paying royalties, which may allow greater opportunity for 
small companies to operate in deep water.
    This rule also will have a very positive impact on small entities. 
Constructing and equipping the platforms and other infrastructure 
associated with deep water development are huge projects that involve 
not only large companies but numerous small businesses nationwide as 
well. Once the platforms are operational, other small businesses will 
provide supplies and services.

Paperwork Reduction Act

    This rule contains no reporting and recordkeeping requirements 
subject to the Paperwork Reduction Act of 1995.

Takings Implication Assessment

    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, Governmental Actions and Interference with

[[Page 2629]]

Constitutionally Protected Property Rights, is not required.

Unfunded Mandates Reform Act of 1995

    DOI has determined and certifies according to the Unfunded Mandates 
Reform Act, 2 U.S.C. 1502 et seq., that this final rule will not impose 
a cost of $100 million or more in any given year on State, local, and 
tribal governments, or the private sector.

E.O. 12988

    DOI has certified to OMB that this regulation meets the applicable 
standards provided in section 3(b)(2) of E.O. 12988.

National Environmental Policy Act

    We examined this rulemaking and have determined that this rule does 
not constitute a major Federal action significantly affecting the 
quality of the human environment pursuant to Section 102(2)(C) of the 
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)).

List of Subjects in 30 CFR Part 260

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

    Dated: September 22, 1997.
Sylvia V. Baca,
Assistant Secretary, Land and Minerals Management.
    For the reasons stated in the preamble, the Minerals Management 
Service (MMS) amends 30 CFR part 260, as follows:

PART 260--OUTER CONTINENTAL SHELF OIL AND GAS LEASING

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

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

    2. In Sec. 260.102, the definitions for ``Eligible lease'' and 
``Field'' are revised to read as follows:


Sec. 260.102  Definitions.

* * * * *
    Eligible lease means a lease that results from a sale held after 
November 28, 1995; is located in the Gulf of Mexico in water depths 200 
meters or deeper; lies wholly west of 87 degrees, 30 minutes West 
longitude; and is offered subject to a royalty-suspension volume 
authorized by statute.
    Field means an area consisting of a single reservoir or multiple 
reservoirs all grouped on, or related to, the same general geological 
structural feature and/or stratigraphic trapping condition. Two or more 
reservoirs may be in a field, separated vertically by intervening 
impervious strata, or laterally by local geologic barriers, or by both.
* * * * *
    3. In Sec. 260.110, paragraph (d) is revised to read as follows:


Sec. 260.110  Bidding systems.

* * * * *
    (d) This paragraph explains how the royalty-suspension volumes in 
section 304 of the Outer Continental Shelf Deep Water Royalty Relief 
Act, Public Law 104-58, apply to eligible leases. For purposes of this 
paragraph, any volumes of production that are not royalty bearing under 
the lease or the regulations in this chapter do not count against 
royalty-suspension volumes. Also, for the purposes of this paragraph, 
production includes volumes allocated to a lease under an approved unit 
agreement.
    (1) Your eligible lease may receive a royalty-suspension volume 
only if your lease is in a field where no current lease produced oil or 
gas (other than test production) before November 28, 1995. Paragraph 
(d) of this section applies only to eligible leases in fields that meet 
this condition.
    (2) We will assign your lease to an existing field or designate a 
new field and will notify you and other affected lessees of that 
assignment. Within 15 days of that notification, you or any of the 
other affected lessees may file a written request with the Director, 
MMS, for reconsideration accompanied by a statement of reasons. The 
Director will respond in writing either affirming or reversing the 
assignment decision. The Director's decision is final for the 
Department and is not subject to appeal to the Interior Board of Land 
Appeals under 30 CFR part 290 and 43 CFR part 4.
    (3) The Final Notice of Sale will specify the water depth for each 
eligible lease. Our determination of water depth for each lease is 
final once we issue the lease. The Notice also will specify the 
royalty-suspension volume applicable to each water depth. The minimum 
royalty-suspension volumes for fields are:
    (i) 17.5 million barrels of oil equivalent (MMBOE) in 200 to 400 
meters of water;
    (ii) 52.5 MMBOE in 400 to 800 meters of water; and
    (iii) 87.5 MMBOE in more than 800 meters of water.
    (4) When production (other than test production) first occurs from 
any of the eligible leases in a field, we will determine what royalty-
suspension volume applies to the eligible lease(s) in that field. The 
determination is based on the royalty-suspension volumes specified in 
paragraph (d)(3) of this section.
    (5) If a new field consists of eligible leases in different water 
depth categories, the royalty-suspension volume associated with the 
deepest eligible lease applies.
    (6) If your eligible lease is the only eligible lease in a field, 
you do not owe royalty on the production from your lease up to the 
applicable royalty-suspension volume.
    (7) If a field consists of more than one eligible lease, payment of 
royalties on the eligible leases' initial production is suspended until 
their cumulative production equals the field's established royalty-
suspension volume. The royalty-suspension volume for each eligible 
lease is equal to each lease's actual production (or production 
allocated under an approved unit agreement) until the field's 
established royalty-suspension volume is reached.
    (8) If an eligible lease is added to a field that has an 
established royalty-suspension volume as the result of an approved 
application for royalty relief submitted under 30 CFR part 203 or as 
the result of one or more eligible leases having been assigned 
previously to the field, the field's royalty-suspension volume will not 
change even if the added lease is in deeper water. If a royalty-
suspension volume has been granted under 30 CFR part 203 that is larger 
than the minimum specified for that water depth, the added eligible 
lease may share in the larger suspension volume. The lease may receive 
a royalty-suspension volume only to the extent of its production before 
the cumulative production from all leases in the field entitled to 
share in the suspension volume equals the field's previously 
established royalty-suspension volume.
    (9) If a pre-Act lease(s) receives a royalty-suspension volume 
under 30 CFR part 203 for a field that already has a royalty-suspension 
volume due to eligible leases, then the eligible and pre-Act leases 
will share a single royalty-suspension volume. (Pre-Act leases are OCS 
leases issued as a result of a sale held before November 28, 1995; in a 
water depth of at least 200 meters; and in the Gulf of Mexico west of 
87 degrees, 30 minutes West longitude. See 30 CFR part 203). The 
field's royalty-suspension volume will be the larger of the volume for 
the eligible leases or the volume MMS grants in response to the pre-Act 
leases' application. The suspension volume for each lease will be its 
actual production from the field until cumulative production from all 
leases in the field equals the suspension volume.

[[Page 2630]]

    (10) A royalty-suspension volume will continue through the end of 
the month in which cumulative production from leases in a field 
entitled to share the royalty-suspension volume reaches that volume.
    (11) If we reassign a well on an eligible lease to another field, 
the past production from that well will count toward the royalty-
suspension volume, if any, specified for the field to which it is 
reassigned. The past production will not count toward the royalty 
suspension volume, if any, for the field from which it was reassigned.
    (12) You may receive a royalty-suspension volume only if your 
entire lease is west of 87 degrees, 30 minutes West longitude. A field 
that lies on both sides of this meridian will receive a royalty-
suspension volume only for those eligible leases lying entirely west of 
the meridian.
    (13) Your lease may obtain more than one royalty-suspension volume. 
If a new field is discovered on your eligible lease that already 
benefits from the royalty-suspension volume for another field, 
production from that new field receives a separate royalty suspension.
    (14) You must measure natural gas production subject to the 
royalty-suspension volume as follows: 5.62 thousand cubic feet of 
natural gas, measured in accordance with 30 CFR part 250, subpart L, 
equals one barrel of oil equivalent.

[FR Doc. 98-843 Filed 1-15-98; 8:45 am]
BILLING CODE 4310-MR-P