[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)] [Notices] [Pages 31520-31521] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-15283] [[Page 31520]] ----------------------------------------------------------------------- DEPARTMENT OF THE INTERIOR Minerals Management Service Mid-term Assessment of the New Leases Provision in the Outer Continental Shelf (OCS) Deep Water Royalty Relief Act AGENCY: Office of the Assistant Secretary, Land and Minerals Management. ACTION: Notice of Workshop to discuss an assessment of the new leases provision of the OCS Deep Water Royalty Relief Act. ----------------------------------------------------------------------- SUMMARY: Implementation of section 304 of the OCS Deep Water Royalty Relief Act (DWRRA), the provision related to OCS lease sales in the Gulf of Mexico (GOM) held after the date of enactment, is about at the half way point in its 5 year authorized period. The Assistant Secretary for Land and Minerals Management (ASLM) is the official responsible for administering and overseeing the offshore oil and gas program for the Secretary of the Interior (Secretary). The ASLM is interested in assessing the contribution that the new lease provision has made to the levels of bidding activity observed in the deep water areas of the GOM. Taken in conjunction with recent changes in technological development, market conditions, and a number of other factors prevalent in current deep water operations, the ASLM would like to determine whether modifications in the terms and conditions of deep water leases issued in 1999 and 2000 may be warranted. Additionally, the ASLM is interested in assessing whether the new lease provision should be continued beyond the current 5-year period, and if so, in what form. A public workshop will be held to discuss these issues. DATES: Assistant Secretary Robert Armstrong will chair the workshop which will be held on Monday, June 29, 1998, from 1:00 p.m. to 5:30 p.m. Written comments received within 60 days after the workshop is held will be considered and made part of the record. ADDRESSES: The workshop will be held at the Sheraton Crown Hotel & Conference Center, 15700 John F. Kennedy Blvd., Houston, Texas 77032. The telephone number is (281) 442-5100. Mail or hand carry comments to the Department of the Interior; Minerals Management Service; [Mail Stop 5114; 1201 Elmwood Park Blvd., New Orleans, Louisiana 70123; Attention: Thierry M. De Cort, Supervisor, Resource and Economic Analysis Unit, or send comments via e-mail to [email protected] or Fax to (504)736- 2905.] FOR FURTHER INFORMATION CONTACT: Thomas R. Kitsos, Staff Assistant, Office of ASLM, at (202) 208-5220, e-mail to [email protected], or Fax to (202) 208-3144 or (202) 208-6243. Background On November 28, 1995, President Clinton signed Public Law 104-58, which included the DWRRA. The new law carries a number of discretionary and mandatory provisions related to the granting, by the Secretary, of royalty relief on existing and new deep water leases in the GOM, west of 87 degrees, 30 minutes west longitude. Section 304 of the DWRRA provides that all such leases offered in water at least 200 meters deep within 5 years of the date of enactment must be offered under a new bidding system established in section 303 (bonus bids with royalty suspensions for a period, volume, or value determined by the Secretary) and with mandatory minimum suspension royalty volumes of: 17.5 million barrels of oil equivalent (MMBOE) for leases in 200-400 meters of water; 52.5 MMBOE for leases in 400-800 meters; and 87.5 MMBOE for leases in more than 800 meters. The MMS issued an interim rule for new lease sales on March 25, 1996, and published a final rule on January 16, 1998. As little as 5 years ago, technology for developing deep water projects was still in its infancy. At that time, there were only two platforms producing in water depths greater than 400 meters and development costs were expected easily to exceed $1 billion per project. The facility design and construction phase was expected to take two or three times that needed in shallow water and the hydrocarbon recovery period was expected to be much longer in deeper waters. Since that time, and particularly in the 2\1/2\ years since enactment of the DWRRA, there have been dramatic changes in deep water exploration, development, and production. Industry has demonstrated that production rates can be high, improved technologies can reduce the costs of floating production systems, projects can get on line quickly, and geologic risk can be reduced primarily because of improved seismic imaging and processing tools. Additionally, five extremely active OCS sales in which a number of leasing records were broken have been held since enactment of the DWRRA, and the experience and technological advances by the oil and gas industry in deep water operations in the GOM continue to grow. On the other hand, the robust activity in the GOM which has led to many of these unanticipated and very positive developments also has resulted in some added costs. It appears, for example, that there has been a steep rise in the day rates for drilling rigs, crew and supply boats, and pipeline lay barges. Also, there is an apparent shortage of skilled, experienced personnel which is driving up the costs in the deep water and there is some recent indication that certain technological approaches may have run into costly problems. Finally, the price of oil, about one third lower than a year ago, adds to the uncertainties in deep water development. The mandatory minimum royalty relief provided to newly leased fields under section 304 of the DWRRA can be substantial. For example, ultra deep water fields at 800 meters or deeper are entitled to royalty free production of a minimum of 87.5 million barrels. Assuming a well- head price (gross price minus transportation and processing costs for some gas) of $16 per barrel of oil ($2.15 per mcf of gas), the operators of an oil field at that depth would be able to produce about $1.4 billion in gross value of energy ($1.1 billion for a gas field) without paying royalty to the Federal Government. The standard 1/ 8th royalty rate for development at this depth would result in a royalty payment of some $175 million for an oil field ($138 million for a gas field), which represents the amount of royalty not paid under the terms of the DWRRA. In view of these developments, deep water production may be more economic than first anticipated. Consequently, deep water fields leased since enactment of the DWRRA may be benefitting from royalty relief beyond simply the recoupment of capital costs, which was the original intent of the Act. The ASLM wants to assess this situation as decisions are made on terms and conditions for future lease sales and in anticipation of the end of the 5-year period of mandatory relief for new leases. Under the OCS Lands Act (OCSLA), the Secretary is directed to carry out an offshore energy development program that, among many goals, assures ``receipt of fair market value for the lands leased and the rights conveyed by the Federal Government.'' A concern of the ASLM is whether bidders, particularly those bidding at or near the per acre minimum for deep water tracts, are acquiring large amounts of acreage to ``bank'' them as options rather than for near term exploration and development. Such a strategy, if being practiced, may be at odds with the [[Page 31521]] Secretary's responsibility to assure receipt of fair market value, increases the post sale tract evaluation workload on MMS, precludes other companies from acquiring and possibly exploring the tract for many years, and fails to result in expeditious development. Given this mix of policy concerns regarding deep water leasing issues, the ASLM believes that a workshop held with industry at the half-way point of the new lease provision is desirable. This workshop will review, among other factors, the state of knowledge about deep water exploration and production profitability today in comparison with what was anticipated at the time the suspension volumes were developed. In particular, industry and MMS will participate in a series of presentations addressing the following issues: --General economic parameters (e.g., well rates, average finding and other costs, production times, rates of return) in the GOM; and --Technological developments (e.g., seismic acquisition and processing, production facility design, subsea completions). Moreover, through these presentations, the ASLM is seeking information that will allow him to answer the following questions: --To what extent has section 304 of the DWRRA contributed to the increased bidding activity observed for the last five lease sales? --What refinements, if any, should be made in lease terms and conditions for the remainder of the 5-year new lease provision? --At the end of the five year authorization period for section 304, should MMS continue to offer leases with royalty suspensions and why-- or why not? If yes, should the terms of the suspension (period, volume or value) or other financial terms be modified at that time? --To what extent, if any, is option bidding occurring on deep water tracts? --If some option bidding is occurring, is it having a beneficial or adverse impact on the Secretary's ability to assure a fair return to the public for its resources, on energy markets, and on the national economy? --With respect to leasing in the deep water of the GOM, to what extent, if any, should MMS modify its lease terms to assure a fair return to the public for its resources and to lessen any adverse impacts that option bidding may be having on the economy? --How does the deep water of the GOM currently compare in the global market to other areas, both offshore and onshore, with respect to its attractiveness for investment? Additional Information 1. An agenda of scheduled workshop presentations and times will be available through the Minerals Management Service on the MMS homepage approximately 1 week before the workshop. 2. The next Western Gulf of Mexico sale, Lease Sale 171, scheduled for August 26, 1998, in New Orleans, will not be affected in any way by the workshop. Dated: June 3, 1998. Bob Armstrong, Assistant Secretary, Land and Minerals Management. [FR Doc. 98-15283 Filed 6-8-98; 8:45 am] BILLING CODE 4310-MR-P