[Federal Register Volume 63, Number 80 (Monday, April 27, 1998)]
[Notices]
[Pages 20644-20645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11012]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

SUMMARY: The Deep Water Royalty Relief Act of 1995 (Act) granted the 
Secretary of the Interior (Secretary) the authority to reduce or 
eliminate royalties on producing or nonproducing leases in the Central 
and Western Gulf of Western Gulf of Mexico. On January 24, 1997, MMS 
published a Notice (62 FR 3714) seeking public input on whether and how 
MMS should implement that authority for nonproducing leases. This 
Notice summarizes comments received and presents the MMS decision not 
to implement the authority at this time.

FOR FURTHER INFORMATION CONTACT:
Larry Maloney, Department of the Interior, Minerals Management Service; 
Mail Stop 4230; 1849 C Street NW; Washington, DC 20240; telephone 
number, (202) 208-5461; E-mail address, [email protected].

SUPPLEMENTARY INFORMATION: 

Background

    The Act (Pub. L. 104-58) authorized the Secretary to modify the 
royalty terms of certain exiting 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. We implemented these provisions in rules covering new leases (63 
FR 2626, January 16, 1998) and existing leases (63 FR 2605, January 16, 
1998). The latter rule also established a royalty relief program for 
producing leases in all water depths and in all OCS areas.
    The Act also provides 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. This provision applies to active leases, not to the terms under 
which new leases are offered.
    On January 24, 1997, MMS published a Notice seeking public input on 
whether and how MMS should implement that authority for nonproducing 
leases. We requested specific proposals, including information on the 
types of situations warranting royalty relief that cannot be addressed 
through existing programs; what criteria should be used in evaluating 
proposals; and, for any relief program recommended, specific 
information on its expected effects, including levels and costs of 
exploration, development, and production, and the volume of additional 
resources that may be recovered.

Comments Received

    The following briefly summarizes the main points in comments 
submitted by the nine respondents to the January 24, 1997 Federal 
Register Notice.
     Five respondents (one oil and gas firm, one offshore 
service firm and three trade associations) strongly supported a program 
of royalty relief for nonproducing leases in the Central and Western 
Gulf, but did not offer comments on how MMS should implement such a 
program.
     One oil and gas firm supported the concept of royalty 
relief for OCS nonproducing leases. They believed that application of 
royalty relief should be based upon such factors as drill depth, 
pressure, and subsalt. The firm also stated that certainty of royalty 
relief early in the life of a project, before investment decisions are 
made, decreases the risk associated with evaluating business 
alternatives and increases the likelihood that the intent of the Deep 
Water Royalty Relief Act will be carried out.
     One trade association supported royalty relief for 
nonproducing leases. The association recommended that tracts not leased 
after initially being placed on the indicated hydrocarbon list be 
offered with a reduced royalty rate (i.e., from one-sixth to one-eighth 
the next time MMS offered the tracts for leasing.
     One oil and gas firm indicated that any royalty relief 
program established under this authority should grant relief only on a 
case-by-case basis using the same basic methodology established under 
the earlier program of royalty relief for existing deep water leases.
     Another trade association said that it might be wiser if 
MMS developed its thinking as to how such a program should be 
structured but defer implementation until market conditions signal a 
need for stimulative incentives. The association noted that conditions 
in the Gulf of Mexico are very robust and healthy and that the level of 
activity is so high that the infrastructure of tools, equipment, and 
trained personnel cannot meet all the demands placed on it.

Decision

    After carefully considering public input and other information, we 
have decided not to implement, at this time, the statutory authority to 
reduce royalty rates on nonproducing leases in the Central and Western 
Gulf of Mexico. Our decision is based primarily on the fact that, in 
spite of lower oil prices, the oil and gas industry in the Gulf of 
Mexico is healthy and in little need of financial incentives at the 
present time.
    Industry interest in acquiring relinquished leases is high. More 
than 50 percent of relinquished leases in the Gulf are re-leased within 
3 years. In total, more than 80 percent of leases

[[Page 20645]]

relinquished have been re-leased. Thus, leases that may be uneconomic 
at today's oil and gas prices can be re-leased and developed later as 
economic, geologic, or technological conditions changes. In this case, 
allowing market conditions and future discoveries to determine the best 
time to explore and develop tracts is preferable to offering financial 
incentives for current development.
    In addition, we considered other issues that would have impacts on 
implementing a sound program of royalty relief for nonproducing leases.

Auction and Tract Evaluation Process Impacts

    Reducing royalties on nonproducing leases could distort the auction 
process because some losing bidders may have submitted higher bids had 
they known that lease royalty rates could be reduced. Also, the program 
would complicate fair market value determinations because lease 
stipulated royalty rates could change before the start of production.

Workload Impacts

    The potential workload associated with a relief program could 
become burdensome and drain MMS resources from other important jobs. 
Even a program of categorical relief (i.e., one based on predetermined 
qualifying criteria such as drill depth or pressure) could create a 
significant new workload. Although certain criteria may have 
substantial impact on project costs, many factors ultimately determine 
a project's economic viability. The effort to develop comprehensive 
qualifying criteria and keep them up to date may actually create more 
of a workload for MMS than accepting applications on a case-by-case 
basis.

Revenue Impacts

    We considered the proposal to offer certain relinquished tracts at 
a lower royalty rate. However, the relinquishment of a tract, even if 
it is on the indicated hydrocarbons list, and its failure to be re-
leased at the next lease sale, are not absolute determinants of its 
current or future economic viability. Tracts in the Central and Western 
Gulf may be offered time and again. As noted earlier, tracts that are 
uneconomic at one time may be re-leased and developed with changes in 
oil and gas prices or advances in technology that reduce drilling and 
production costs or enhance ultimate resource recovery. In these cases, 
the government would receive royalties at the regular royalty rate plus 
any bonus received on re-leasing.
    In summary, the economic climate for the oil and gas industry in 
the Gulf of Mexico does not warrant taking action at this time. We will 
continue to monitor activities in the Central and Western Gulf and will 
move to exercise the authority if changed conditions require it.
    We welcome all comments on issues related to this Notice and will 
consider them in determining the nature and timing of future actions.

    Dated: April 21, 1998.
Walter Cruickshank,
Associate Director for Policy and Management Improvement.
[FR Doc. 98-11012 Filed 4-24-98; 8:45 am]
BILLING CODE 4310-MR-M