[Federal Register Volume 67, Number 10 (Tuesday, January 15, 2002)]
[Rules and Regulations]
[Pages 1862-1880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-438]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 203

RIN 1010-AC71


Relief or Reduction in Royalty Rates--Deep Water Royalty Relief 
for OCS Oil and Gas Leases Issued After 2000

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Final rule.

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SUMMARY: This rule revises regulations on royalty relief for oil and 
gas producers on the Outer Continental Shelf (OCS). It provides for 
suspension or reduction of royalty on a case-by-case basis for certain 
additional categories of OCS leases under part 203 of this title. Also, 
it identifies circumstances when we may consider royalty relief apart 
from our end-of-life and deepwater royalty relief (DWRR) programs.

DATES: This final rule is effective February 14, 2002.

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

SUPPLEMENTARY INFORMATION: On November 16, 2000, we published a 
proposed rule in the Federal Register (65 FR 69259). For leases that 
lie in water 200 meters or deeper in the Gulf of Mexico (GOM) wholly 
west of 87 degrees, 30 minutes West longitude and issued after November 
2000, it provided a process to apply for supplemental royalty relief. 
Also, it proposed to modify the relief qualification process. Some 
proposed modifications apply only to leases issued after November 2000 
(newly issued leases) while others apply both to leases issued before 
the DWRR Act (pre-Act leases) and to newly issued leases. These 
proposed modifications sought to combine more opportunity, certainty, 
and flexibility for applicants with a royalty relief determination 
process more focused on future costs and benefits. We requested 
comments on these proposed changes.
    We also finalized in the Federal Register on February 23, 2001 (66 
FR 11512) regulations on the way we implement OCS leasing incentives on 
newly issued leases. The opportunity for newly issued leases to qualify 
for royalty relief that supplements lease-term incentives when we 
issued them is an important part of the change in these incentives.
    Several comments on the proposed rulemaking addressed the changed 
leasing incentives and the modifications to the royalty relief 
qualification process. This final rule makes changes from the proposed 
rule in response to

[[Page 1863]]

comments we received. The most significant changes relate to sunk costs 
and the timing of our evaluations.
    As sunk costs, which we use to determine only qualification, not 
the volume suspension amount, we proposed to count only the cost of the 
project's first discovery well. Comments convinced us that a more 
expansive definition was appropriate. This final rule allows the costs 
of the first project discovery well on each lease. We believe this 
provides the proper balance between the need to encourage exploration 
of marginal future prospects and the lack of any role sunk costs have 
in determining economic viability after a discovery.
    With respect to timing, we proposed to retain the 180-day period 
for our review of royalty relief requests for projects. Comments 
indicated a strong desire for a shorter period. Efficiencies from 
evaluating expansion or development projects, instead of fields (as 
required for applications involving pre-Act leases), can reduce our 
average evaluation time by 1 month. Hence, this final rule lowers our 
timeframe for evaluating development or expansion projects, but not for 
fields, from 180 to 150 days.

Response to Comments

    We received a joint comment from six oil and gas industry 
associations, and separate comments from one of those associations and 
from five oil and gas companies in response to our request for written 
comments on our proposed rulemaking. Also, two public workshops raised 
questions on the proposed rule. Copies of all the written comments we 
received are available on our Web site at http://www.mms.gov/federalregister/PublicComments/rulecomm.htm.
    We analyzed all comments and workshop questions and revised the 
final language based on many of them. The main changes from the 
proposed rule involve a more expansive definition of allowable sunk 
cost, a shorter evaluation period, and more specificity on several 
subjective terms (significant expansion, most likely resource size, 
most efficient development system).
    Two changes from the proposed version of this rule make the final 
version consistent with changes made in the companion rule on OCS 
leasing incentives. Finally, we note provisions where we adjusted the 
language to clarify but not change the meaning from the proposed rule.

Supplementary Relief

    One general comment objected to reliance on discretionary royalty 
relief because of administrative burdens and increased costs to 
industry.
    Response: We agree that the discretionary royalty relief program 
will become more important when leases issued after 2000 represent 
significant amounts of acreage and discoveries in the deep water GOM. 
But it will be many years before post-2000 leases play a significant 
role in deepwater development. As we explained in earlier Federal 
Register notices on continuing royalty relief in deep water, most of 
the prospective deepwater tracts now have access to the royalty 
suspension volumes prescribed by the DWRR Act. Some 3,400 eligible 
leases already have the potential to receive royalty suspension 
automatically. Another nearly 1,700 pre-Act leases may qualify for 
royalty relief under discretionary relief regulations that have been in 
place for several years. The currently leased acreage--eligible and 
pre-Act leases--represents almost half of the deep water GOM acreage. 
These handpicked opportunities, which industry believes have the best 
hydrocarbon prospects, will occupy the available exploration and 
delineation capability in the GOM for many years. Much of the new 
production in deep water over the next decade or so may be royalty-
free. Hence, we anticipate that the overall royalty expenses for 
deepwater oil and gas production will decrease for some time completely 
independent of future terms and conditions on newly offered tracts.
    We expect to process applications more quickly and efficiently as 
we become more experienced in handling them. These final discretionary 
relief regulations follow the directive in the DWRR Act to consider 
granting royalty suspension only in those circumstances when otherwise 
developable production would be uneconomic because of normal royalty 
obligations. Thus only some, not all, leases should be concerned with 
or have a need for the discretionary royalty relief program. Further, 
to encourage development, we make the uneconomic determination not 
after production occurs, but before, using forecasts of many variables. 
The determination unavoidably involves the collection, analysis, and 
evaluation of detailed information. Questions about possible 
inconsistencies or options in a specific development proposal often 
only become apparent during the review process. Evaluation then 
sometimes requires additional information. Computing and documenting 
forecasts tied to the circumstances of a specific project proposal may 
appear cumbersome at times, but a sound determination requires that we 
understand the key assumptions and risks in the applicant's proposed 
project.
    The comment most relevant to our request for paperwork reduction 
suggestions was the acknowledgment that ``the majority of the 
information requested by MMS is necessary * * * for a comprehensive 
review of a proposed project.'' We have added language to encourage 
potential applicants to meet with MMS prior to filing an application to 
identify unusual elements in the project and for guidance on 
application format, content, and our evaluation perspective. See 
Sec. 203.62(c).
    Several proposed changes we finalized expedite the evaluation 
process by making it less burdensome. We designate the applicant's 
project and the reservoirs targeted by the proposed project as the 
application unit rather than the entire field, as in the current DWRR 
program. Thus the applicant no longer must involve adjacent lessees in 
the application, and we no longer need to speculate about additional 
resources that may affect field economics. Also, this change reduces 
the need for us to evaluate alternative field development scenarios. 
Other changes should reduce the burden on both pre-Act lease applicants 
and new lease applicants by giving them more flexibility to adjust to 
changing conditions. We extend the time period for successful 
applicants to commit to development and allow reapplication in a wider 
range of circumstances. Potential applicants will become more 
comfortable with our application and evaluation process by the time the 
burden for DWRR shifts more to the discretionary royalty relief 
program.

Sunk Costs

    A number of comments expressed concerns about the limited allowance 
of sunk costs to evaluate the economics of a proposed project.
    Response: Our proposed change in allowable sunk costs--from all 
costs of and after discovery to only those of the discovery well--
received the most comments from industry. That reaction may indicate 
that limiting allowable sunk costs is perceived as the most important 
proposed change to the discretionary royalty relief rules. The size of 
sunk costs has been the main reason for royalty relief qualification in 
our determinations to date. We proposed no change to the treatment of 
sunk costs in applications from non-producing pre-Act leases to keep 
within the DWRR Act. Also, we proposed to add for the first time some 
sunk costs to our evaluation of expansion projects. Nonetheless, in 
light of its perceived and past importance, we expand our

[[Page 1864]]

definition of allowable sunk costs for applications from leases issued 
after 2000 and for expansion projects on pre-Act leases.
    One workshop comment suggested that the definition of allowable 
sunk costs include the cost of the first well on each lease that 
discovers hydrocarbons in the reservoirs included in the application. 
We adopt this new definition because it includes the most important and 
readily identifiable delineation costs on a project.
    This more expansive definition of sunk costs may encourage more 
development and more exploration than otherwise. Historic costs 
theoretically do not affect the expected profitability of a particular 
project, as measured from the perspective of its application date. But, 
their treatment can influence decisions on the timing and magnitude of 
pre-application exploration, drilling, and appraisal. Using sunk costs 
in an evaluation makes qualification for discretionary royalty relief 
more likely. The more likely that a prospect of a given size will 
qualify for relief, the larger the expected value of that prospect. 
And, the higher the expected payoff from drilling, the more and sooner 
drilling will take place.
    We choose to rely on supplemental discretionary royalty relief to 
concentrate royalty savings on prospects that show a need for it. 
General lease sale incentives disperse royalty relief over all lease 
prospects regardless of whether they need development assistance. In a 
system where supplemental royalty relief plays a large role in the 
incentive program, it may not be appropriate to narrowly define 
qualification for the supplemental relief based on theoretical rather 
than practical considerations.
    While an expansive consideration of sunk costs is in order, we 
believe the broad definition applicable to pre-Act leases is not 
appropriate for newer leases. The object of the new supplemental 
royalty relief program is a specific and fully identified project, 
rather than a whole, often incompletely identified, field. A royalty 
relief determination on a field with pre-Act leases requires evaluation 
of all resources that may ultimately be assigned to that field and of 
associated development options. The broad field determination provides 
a basis for considering all possible resources and thus the sunk costs 
for a wide range of appraisal activities. Project royalty relief 
determination, on the other hand, is confined to the reservoirs 
identified in the application. Relief qualification need not consider 
alternative development options or potential production from other 
reservoirs. So, fewer post-discovery expenditures are relevant to a 
project application. Therefore, we will count the costs of only the 
discovery well for the project on each lease participating in an 
application for other than an authorized field. To clarify the revision 
as well as the distinction, we separate the definition of sunk costs 
for authorized fields from the definition of sunk costs for development 
and expansion projects and move identification of the critical elements 
to the definitions from the cost report description in Sec. 203.89 (a). 
See changes in Secs. 203.0 and 203.68.
    We continue to count allowable sunk costs on an after-tax, nominal 
basis. A company recoups part of exploratory drilling costs through a 
deduction from taxable income. Crediting all the pre-tax costs to 
royalty relief qualification would substantially raise the benefit 
accorded sunk costs. Adjusting sunk costs for inflation could reward 
applicants that delay applying for royalty relief.

Other Comments

    The written comments and workshop questions raised a number of 
specific or technical issues. The following table summarizes and 
responds to each of those issues. We arranged the table according to 
the section in the rule to which the comment relates. The last part of 
the table addresses comments on information collection under the 
Paperwork Reduction Act.

------------------------------------------------------------------------
                                Industry comments
         CFR section              and questions         MMS response
------------------------------------------------------------------------
203.0, 203.2, and 203.4.....  Delete the word       Accommodating
                               ``significant''       change. The DWRR
                               from the              Act used the word
                               definitions of an     ``significant'' to
                               expansion project     direct relief to
                               and of new            projects that add
                               production because    new resources, not
                               it is too             those that simply
                               subjective when       extend recovery of
                               left to the           reservoirs already
                               discretion of the     in production. We
                               application process.  delete
                                                     ``significant''
                                                     from the definition
                                                     of ``new
                                                     production'' and
                                                     clarify in the
                                                     definition of
                                                     ``expansion
                                                     project,'' that it
                                                     refers to one or
                                                     more new wells
                                                     drilled into a
                                                     reservoir that has
                                                     not previously
                                                     produced. Also, we
                                                     modify the
                                                     definition of ``new
                                                     production''
                                                     accordingly.
203.0 and 203.60............  Don't limit           No change. The DWRR
                               development           Act gives authority
                               projects that can     to grant royalty
                               apply for deepwater   relief to existing
                               royalty suspension    non-producing
                               to those on leases    leases, but only
                               west of 87 degrees    those in this part
                               30 minutes West       of the GOM. We may
                               longitude in the      issue new leases
                               GOM.                  with a variety of
                                                     terms, including
                                                     royalty suspension,
                                                     in other parts of
                                                     the OCS.
203.0, 203.4, 203.70, and     Eliminate from the    No change. The
 203.81.                       definition of         legitimacy of the
                               fabrication a         royalty relief
                               requirement for a     qualification
                               requirement for a     determination
                               letter from the       depends on prompt
                               fabricator            development. We see
                               certifying start of   value in having a
                               continuous            third party witness
                               construction          an event that has
                               because it is an      such important to
                               unnecessary and       an applicant. The
                               redundant burden.     down payment and
                                                     contract alone may
                                                     not ensue that the
                                                     operator has
                                                     actually committed
                                                     to construction
                                                     that will not be
                                                     interrupted after
                                                     it has started. The
                                                     notice could be
                                                     just a copy of
                                                     whatever normal
                                                     notification the
                                                     applicant gets from
                                                     the fabricator that
                                                     construction has
                                                     started on its
                                                     system, with the
                                                     intent to continued
                                                     without
                                                     interruption.

[[Page 1865]]

 
203.0, 203.68, and 203.89...  Redefine sunk costs   Accommodating
                               as all of the         change. We have
                               inflation adjusted    enlarged the scope
                               before-tax costs      of sun costs from
                               of, and after,        the proposed rule.
                               discovery up until    But historic costs
                               the application.      have questionable
                                                     relevance to
                                                     proceeding with
                                                     development of the
                                                     project in the
                                                     application. Also,
                                                     many such costs
                                                     have already been
                                                     recovered through
                                                     tax deductions and
                                                     subsequent savings.
                                                     The expansion in
                                                     the definition is
                                                     limited to
                                                     discovery well
                                                     costs for one
                                                     eligible well per
                                                     lease.
203.0, 203.68, and 203.89...  Does MMS want to      We want a reliable
                               receive               application. The
                               applications before   applicant is the
                               delineation wells     only one in a
                               are drilled which     position to balance
                               help in the           the costs and
                               decision on the       benefits of
                               development           incremental
                               approach.             delineation.
                                                     Performance
                                                     conditions help
                                                     encourage a proper
                                                     balance--enough
                                                     data in hand for
                                                     the applicant to
                                                     commit to a few key
                                                     decisions but not
                                                     to detailed
                                                     development plans.
203.2 and 203.80............  Delete the word       Accommodating
                               ``significantly''     change. We delete
                               word from the         the word from the
                               characterization of   end-of-life relief
                               how much production   cell in the table
                               must increase as a    in Sec.  203.2, but
                               result of royalty     as with deepwater
                               relief because it     expansion projects,
                               is too subjective.    we look for a
                                                     minimum production
                                                     increase for
                                                     consideration of
                                                     royalty relief
                                                     apart from our
                                                     formal programs.
                                                     Relief generally
                                                     must make
                                                     production for an
                                                     extra year
                                                     profitable.
203.4, 203.69 and 203.76....  Clarify the resource  Change. By ``most
                               number used as a      likely resource
                               basis for             size'' we mean the
                               determining the       median value of the
                               minimum royalty       estimated
                               suspension volume.    distribution of
                                                     known recoverable
                                                     resources from
                                                     reservoirs included
                                                     in the application
                                                     for the project.
                                                     The final rule
                                                     adopts this more
                                                     precise
                                                     terminology.
203.4.......................  Indicate that price   Change. We make
                               thresholds will be    clear in
                               specified in the      subsections (e) and
                               Notice of Sale as     (f) that price
                               well as in the        thresholds and
                               lease document.       minimum suspension
                                                     volumes may be set
                                                     in the Notice of
                                                     Sale or the
                                                     regulations or in
                                                     the lease.
203.62......................  Encourage pre-        Change. Such a
                               application           meeting can save
                               meetings between      time both in
                               the MMS regional      preparing an
                               office and a          application and in
                               prospective           avoiding omissions
                               applicant.            that delay the
                                                     evaluation process.
203.63......................  Clarify that neither  Change. We also make
                               a development nor     the same
                               expansion project     clarification that
                               must include all      ``project'' means
                               leases in its field.  development either
                                                     expansion project
                                                     or development
                                                     project in Secs.
                                                     203.64, 203.65,
                                                     203.67, 203.68, and
                                                     203.69.
203.65......................  Change the            Accommodating
                               evaluation deadline   change. We reduce
                               from 180 to 120       the evaluation
                               days for a first      period for
                               application and       development
                               from 120 to 90 for    projects and
                               a redetermination.    expansion projects
                                                     to no more than 150
                                                     days after
                                                     certifying an
                                                     application and
                                                     application
                                                     complete. For field
                                                     evaluations
                                                     involving pre-Act
                                                     leases, the 180-day
                                                     deadline continues
                                                     because we must
                                                     consider potential
                                                     development of all
                                                     resources on the
                                                     field, whether or
                                                     not they are
                                                     identified in the
                                                     application.
203.69......................  If a participating    A lessee can join
                               lease doesn't have    the application
                               or propose, a well    with evidence that
                               into the reservoirs   the reservoir(s)
                               included in the       targeted by the
                               application, does     project occur on
                               MMS include in the    its lease. However,
                               minimum suspension    a lease without
                               volume calculation    enough of the
                               the royalty           project's resources
                               suspension volume     to justify a well
                               with which the        cannot include its
                               lease was             automatic royalty
                               originally issued?    suspension volume
                                                     in the minimum set
                                                     for the project.
                                                     Nevertheless, we
                                                     will count its
                                                     estimated resources
                                                     in the project
                                                     evaluation and in
                                                     the increment to
                                                     the minimum royalty
                                                     suspension volume
                                                     based on the median
                                                     of the distribution
                                                     of resources.
203.69 and 203.76...........  Does a lease retain   Since the
                               the royalty           application
                               suspension volume     qualification
                               with which it was     included
                               originally issued     consideration of
                               if it applies and     the pre-existing
                               qualifies for         royalty suspension
                               project relief but    on the lease, it
                               then violates a       retains that relief
                               performance           if we withdraw
                               condition.            approval of its
                                                     application. We
                                                     don't want to
                                                     discourage early-
                                                     stage applications
                                                     when some
                                                     development
                                                     decisions have not
                                                     yet been made.
203.71......................  If a lease is added   If the reservoir(s)
                               to a project after    targeted by the
                               approval of an        development project
                               application, does     extend to a post-
                               the added lease       2000 lease, that
                               have to give up its   lessee has an
                               automatic relief to   option. The lessee
                               be part of the        may file a short
                               project.              form to share the
                                                     project's remaining
                                                     royalty suspension
                                                     volume or simply
                                                     retain its
                                                     automatic royalty
                                                     suspension volume
                                                     for use with this
                                                     or other reservoirs
                                                     on its lease. If it
                                                     files the short
                                                     form to share in
                                                     the project relief,
                                                     it gives up its
                                                     automatic relief
                                                     volume.
203.74......................  A phrase is missing   Accommodating
                               in the description    change. We rewrote
                               of the new event      to clarify that the
                               that enables a        new technology must
                               redetermination.      improve the
                                                     profitability,
                                                     under equivalent
                                                     market conditions,
                                                     of the field or
                                                     specified set of
                                                     reservoirs relative
                                                     to the development
                                                     system proposed in
                                                     the prior
                                                     application.

[[Page 1866]]

 
203.76......................  Allow retention of    No change. We made
                               half of the royalty   the modification in
                               suspension volume,    the proposed rule
                               not the smaller of    because otherwise
                               that or the most      small fields face
                               likely resource       no disadvantage for
                               size, when costs      overestimating
                               are overestimated     their costs in a
                               in the application.   royalty relief
                                                     application.
203.78......................  If the price          We provide a
                               threshold suspends    reasonable
                               relief when prices    inducement to make
                               rise too much above   a project economic
                               expected levels,      under expected
                               why not augment       market conditions.
                               initial royalty       This is the focus
                               suspension volume     of our program.
                               if prices fall too    Subsequent
                               much below expected   deviations in these
                               levels.               conditions during
                                                     periods of
                                                     production and
                                                     potential relief
                                                     from royalties may
                                                     change
                                                     profitability, but
                                                     are not likely to
                                                     affect project
                                                     viability. Should
                                                     prices decline once
                                                     production begins,
                                                     the lessee can
                                                     pursue our other
                                                     royalty relief
                                                     programs. These
                                                     programs serve as a
                                                     proxy for
                                                     predetermined
                                                     increases in
                                                     royalty suspension
                                                     volume for a price
                                                     decline.
203.80......................  Allow the costs of    Change. Off-lease
                               pre-existing          facilities tied
                               facilities that       back to the lease
                               help justify a        may help justify a
                               royalty relief        relief application
                               application to be     to the extent that
                               off lease.            preservation of
                                                     these pre-existing
                                                     facilities depends
                                                     on continued
                                                     application to be
                                                     production from the
                                                     lease applying for
                                                     royalty relief. We
                                                     will include only a
                                                     logically allocable
                                                     share of costs from
                                                     the off-lease
                                                     facilities.
Information Collection        (a) Under the         (a)We have not
 Questions.                    current evaluation    identified an
                               process,              alternative
                               acknowledgement       evaluation process
                               that the majority     suitable for use
                               of the information    with an irrevocable
                               requested in an       determination such
                               application is        as royalty relief.
                               necessary.            Past applicants and
                                                     industry committees
                                                     have not yet
                                                     identified any
                                                     unnecessary
                                                     information
                                                     elements.
                              (b) Contact past      (b) We welcomed
                               applicants to very    comments from past
                               estimates of the      applicants to help
                               time it takes to      develop our current
                               fill out an           estimates of the
                               application.          burden.
                              (c) Standardize the   (c) We have
                               various application   standardized
                               reports that must     reports as much as
                               be submitted or       we can, and we do
                               generate a set of     invite pre-
                               generic example       application
                               reports as guides     consultation on
                               for future            format and content.
                               applicants.           We do not share
                                                     past applications
                                                     even in generalized
                                                     form so as to avoid
                                                     possibly exposing
                                                     proprietary
                                                     information. We
                                                     already offer an
                                                     example with the
                                                     model that combines
                                                     the information in
                                                     these reports. That
                                                     should clarify many
                                                     questions about
                                                     technical details
                                                     such as units of
                                                     measure.
                              (d) MMS mail server   (d) We are
                               limits make it        implementing the
                               impractical to        Government
                               submit the original   Paperwork
                               application           Elimination Act
                               electronically, but   (GPEA). The Act
                               subsequent            calls for providing
                               information could     an electronic
                               usually be            processing option
                               submitted by e-mail.  when practical for
                                                     information we
                                                     collect. Royalty
                                                     relief applications
                                                     are under review in
                                                     our GPEA
                                                     implementation
                                                     information
                                                     program. We do
                                                     currently accept
                                                     extra copies and
                                                     additional
                                                     information by
                                                     electronic or fax
                                                     means.
------------------------------------------------------------------------

Changes for Consistency and Clarity

    We make two changes in this rule on discretionary royalty relief to 
make it consistent with our rule on OCS leasing incentives published on 
February 23, 2001 (66 FR 11512). Also, we use definitions for 
``eligible,'' ``pre-Act,'' and ``royalty suspension'' leases in this 
rule that are identical to those in the leasing incentive rule.
    The leasing incentive rule includes the option to offer royalty 
incentives for a value of production or for a time period as well as 
for a volume of production. The definition of Royalty Suspension (RS) 
leases in Sec. 203.0 now indicates that the royalty suspension for an 
RS lease need not be in the form of a volume. So, one or more leases on 
a project applying for additional royalty relief may have automatic 
suspensions in a form other than volume. Section 203.69(b) now 
indicates that should this situation arise, we will use the data in 
your application, after any adjustments we make during our evaluation, 
to convert royalty relief already available to a common basis expressed 
in volume, and carry out the evaluation accordingly. Any approval would 
be expressed solely in terms of volume.
    The leasing incentive rule also includes a provision in 
Sec. 260.122(b)(2) for paying royalties, due as a result of the price 
threshold being exceeded, no later than 90 days after the end of the 
period for which royalty is owed. That deadline is shorter than the 
120-day interval to April 30 now specified in Sec. 203.78(a)(1) and 
(b)(1). To avoid confusion, we changed Sec. 203.78 to be consistent 
with Sec. 260.122. The 90-day time lag is longer than the 30-day time 
lag for payment of normal royalty under Sec. 218.50 because we must 
calculate inflation adjustments in the case of price thresholds. The 
actual NYMEX price can be calculated immediately after the end of the 
period specified, but the final value for the implicit price deflator 
for the gross domestic product is not generally available for several 
months after the end of the period.
    In several places, we modified the language in the proposed rule to 
make its meaning clearer to the reader.

[[Page 1867]]



------------------------------------------------------------------------
            CFR section                         Clarification
------------------------------------------------------------------------
203.0.............................  We enhance definitions to:
                                    (1) State that development or
                                     expansion projects must be in water
                                     at least 200 meters deep,
                                    (2) Declare that redetermination is
                                     a procedure we conduct under
                                     certain conditions at your request,
                                     and
                                    (3) Illustrate some elements of
                                     eligible sunk costs incurred before
                                     a discovery.
203.2.............................  We replace ``when'' with ``how'' in
                                     the title question.
                                    Unlike ``expansion project''
                                     ``authorized field'' and
                                     ``development project,'' ``end-of-
                                     life lease'' is a term defined here
                                     but not in Sec.  203.0.
                                    We drop reference to significant
                                     capital investment by an expansion
                                     project because that is not a
                                     separate requirement for an
                                     expansion project on a lease issued
                                     after 2000.
                                    The flexibility of royalty relief
                                     apart from our formal programs may
                                     involve changes in the form of the
                                     royalty as well as in its size or
                                     duration.
203.4.............................  We more carefully explain how to
                                     interpret the tables summarizing
                                     our royalty relief programs.
                                    End-of-Life relief is now withdrawn
                                     only when the effective royalty
                                     rate has prevailed for 12
                                     consecutive months.
                                    We drop reference to charging more
                                     than the original lease royalty
                                     rate after the suspension volume
                                     has been produced.
203.4 and 203.69..................  The various forms of royalty relief
                                     we grant are subject to certain
                                     conditions set out in regulations
                                     or approval letters.
                                    We rephrase the way one determines
                                     cumulative production.
203.60............................  We reversed the phrases in the lead
                                     sentence.
                                    We stipulate that pre-Act leases,
                                     but not leases issued after 2000,
                                     must have been assigned to a field
                                     as well as have a discovery prior
                                     to applying for royalty suspension.
203.63............................  You must, rather than may, submit
                                     data you have on leases that you
                                     believe may become part of your
                                     authorized field in the future.
203.64............................  Only one application may be filed on
                                     a development project designed to
                                     produce a specific set of
                                     reservoirs.
203.66............................  We make explicit that prescribed
                                     evaluation deadlines may be
                                     extended and rephrase the table
                                     lead-in sentence.
                                    We clarify that a penalty suspension
                                     for our late determination applies
                                     to the first production from a
                                     development project.
203.68............................  We do not consider sunk costs when
                                     we determine whether a project is
                                     economic should it never have to
                                     pay royalties.
203.69............................  We substitute the new name for the
                                     publication that gives the water
                                     depth of each lease.
203.71............................  Eligible leases as well as RS leases
                                     retain the royalty suspension
                                     volumes with which they start an
                                     application process, even if we
                                     reject an application that requests
                                     more relief on a field or
                                     development project.
                                    Applying leases are ones that
                                     participate in the application for
                                     royalty relief. Leases issued
                                     without a royalty suspension volume
                                     do not share the relief for a field
                                     with an automatic royalty
                                     suspension volume.
                                    We drop reference to the impossible
                                     situation of adding a lease before
                                     you submit an application from the
                                     paragraph (a) that describes the
                                     effect of adding a lease to an
                                     authorized field after we have
                                     approved royalty relief.
203.74............................  The discussion in the sub-elements
                                     of (c) explains a procedure for
                                     calculating prices, not determining
                                     eligibility for a reconsideration
                                     of a royalty relief determination.
203.78............................  Different price thresholds may apply
                                     to different leases on the same
                                     field, development project, or
                                     expansion project. Different price
                                     thresholds could occur if the
                                     leases were issued at different
                                     times. And, only the base oil and
                                     gas price thresholds for pre-Act
                                     leases are adjusted from 1994
                                     forward. Post-2000 lease price
                                     thresholds are adjusted forward
                                     from other periods as specified in
                                     their Notice of Sale or lease
                                     documents.
203.80............................  We no longer formally refer to
                                     royalty relief apart from our end-
                                     of-life or deepwater programs as
                                     ``special''.
203.83............................  We require a well number and status
                                     as part of the Administrative
                                     Information Report.
203.89............................  We drop restatement of the
                                     definition of sunk costs. We stick
                                     to identifying the measurement
                                     rather than the concept of sunk
                                     costs by, for example, stating that
                                     nominal dollars mean dollars not
                                     adjusted for inflation.
------------------------------------------------------------------------

Summary of Changes

    The following table summarizes the changes this rule makes to the 
existing structure of our DWRR program.

                   Modifications to DWRR Applications
------------------------------------------------------------------------
                                   Current and
                               continuing  program  Changes  (applies to
         Element               (applies to pre-act  post-2000 deep water
                                     leases)            leases only)
------------------------------------------------------------------------
Eligibility (Central,         Leases in 200m or     Leases in 200m or
 Western, and western part     more water depth      more water depth
 of Eastern Gulf of Mexico).   issued before 1996.   issued after 2000.
Royalty-free production can   Any production from   Only production from
 come from.                    the field until       resources
                               cumulative recovery   identified in the
                               volume equals the     application until
                               suspension volume.    cumulative
                                                     production equals
                                                     the suspension
                                                     volume.

[[Page 1868]]

 
Minimum suspension volume     For fields that did   For development
 for non-producing leases.     not produce before    projects, matches
                               the Act, matches      volumes designated
                               eligible lease        in sale and lease
                               suspension volumes    documents for
                               (17.5, 52.5, 87.5     various water
                               MMBOE) in             depths of 200m or
                               equivalent water      greater plus 10
                               depths.               percent of the
                                                     median value of the
                                                     distribution of
                                                     resources.
Credit for sunk costs in      For fields with pre-  For development
 application.                  Act leases that did   projects, after-tax
                               not produce before    eligible costs of
                               the application,      the discovery well
                               after-tax costs of    for the project on
                               and after discovery   each participating
                               well used in          lease.
                               qualification.
Evaluation deadline for non-  180 days for first    150 days for first
 producing leases.             determination, 120    determination, 120
                               days for a            days for a
                               redetermination.      redetermination.
Threshold oil and gas price   Statute sets          Original lease terms
 levels for lifting relief.    threshold price for   or Notice of Sale
                               light sweet crude     set threshold price
                               oil and natural gas.  for light sweet
                                                     crude oil and
                                                     natural gas.


------------------------------------------------------------------------
                                   Current and      Changes  (applies to
                                  discontinuing       pre-act and post-
         Element              program  (applies to     2000 deep water
                                 pre-act leases)           leases)
------------------------------------------------------------------------
Discount rate used in         Same rate used on     Use 10% on viability
 evaluation.                   viability and         test, applicant
                               profitability         chooses rate
                               tests, applicant      between 10% and 15%
                               chooses between 10%   for profitability
                               and 15%.              test.
Redetermination of field      Available for new     Available anytime
 qualification or volume by    well or seismic       after relief
 MMS.                          data, 25% lower       relinquished or
                               prices, or 20%        withdrawn.
                               higher cost.          Otherwise, for new
                                                     well or seismic
                                                     data, 25% lower
                                                     prices, 20% higher
                                                     cost, or more
                                                     efficient
                                                     development system.
Deadline for starting         Within 1 year of      Within 18 months of
 fabrication.                  approval,             approval,
                               extendable for up     extendable for up
                               to 1 year.            to 6 months.
Correction for                Retain only half of   Retain only half of
 overestimating cost by 20%    suspension volume     smaller of the
 or more.                      granted.              granted suspension
                                                     volume or the
                                                     median of the
                                                     distribution of
                                                     resources.
Minimum suspension volume     None................  10 percent of median
 for expansion project.                              of the distribution
                                                     of resources.
Evaluation deadline for       180 days for first    150 days for first
 expansion project.            determination, 120    determination, 120
                               days for a            days for a
                               redetermination.      redetermination.
Credit for sunk costs in      None................  After-tax eligible
 application for expansion                           costs of the
 project.                                            discovery well for
                                                     the project on each
                                                     participating
                                                     lease.
------------------------------------------------------------------------

Procedural Matters

Regulatory Planning and Review (Executive Order 12866)

    The rule is a significant regulatory action under Executive Order 
12866, and subject to review by the Office of Management and Budget 
(OMB).
    a. This rule will not have an annual economic effect of $100 
million or adversely affect an economic sector, productivity, jobs, the 
environment, or other units of government. This action describes how 
new deepwater leases may qualify for royalty suspensions and the 
circumstances under which we might grant royalty relief. Historically, 
we have received only a limited number of applications for royalty 
relief. Based upon our experience, only a small number of leases will 
qualify for royalty relief in any one year. The only field that has 
gone into production after royalty relief approval would have avoided 
about $7 million in royalty payments in its first year of production, 
had prices not exceeded the price threshold for discontinuing royalty 
relief. The royalty suspension options in this proposal will encourage 
new production from a few marginal leases, because they will sustain 
profitability at lower prices than they would without the relief. 
Royalty suspension volumes act as an incentive to production, and 
likely will have a beneficial effect on the offshore oil industry, 
domestic oil and gas supplies, and jobs. This program should increase 
OCS production by making production from marginal fields more 
profitable.
    b. This rule does not create inconsistencies with other agencies' 
actions because it preserves the concepts and requirements from the 
existing rule.
    c. This rule is an administrative change that will not affect 
current entitlements, grants, user fees, loan programs, or their 
recipients. This rule has no effect on these programs or rights of the 
programs' recipients.
    d. This rule does not raise any novel legal issues, but does raise 
policy issues. The rule extends and supplements the existing DWRR rule. 
It describes conditions under which lessees have the opportunity to 
apply for and acquire royalty relief on post-2000 deepwater leases. 
Also, it eases some conditions under which lessees of pre-Act leases 
may seek to obtain royalty relief. In addition, the rule describes 
circumstances not specified in our previous regulations under which 
lessees may apply for royalty relief. All of these changes are 
consistent with the basic philosophy in the current rule of granting 
relief only when applicants show it is economically necessary for 
development.

Regulatory Flexibility (RF) Act

    The Department certifies that this document will not have a 
significant economic effect on a substantial number of small entities 
under the RF Act (5 U.S.C. 601 et seq.). The provisions of this rule 
will not have a significant adverse economic effect on offshore lessees 
and operators, including those that are classified as small businesses. 
The rule extends the benefit of

[[Page 1869]]

discretionary royalty relief to certain OCS leases issued after 
November 2000 that qualify as marginally uneconomic. In any single 
year, we are likely to receive only a small number of royalty relief 
applications, which limits the number of entities the rule may affect. 
Based on past experience, we expect to receive between one and two 
applications a year for DWRR. Also, because firms initiate 
applications, they have the ability to avoid any adverse effects they 
foresee. As suggested below, the new provisions should actually lower 
the cost to those who choose to take advantage of the benefit offered 
by this regulation. An RF analysis is not required. A Small Entity 
Compliance Guide is not required.
    Companies that extract oil, gas, or natural gas liquids or are 
otherwise in oil and gas exploration and development activities acquire 
the vast majority of leases offered at OCS lease sales and will be most 
affected by this rule. The Small Business Administration (SBA) defines 
a small business as having:
     Annual revenues of $5 million or less for exploration 
service and field service companies.
     Fewer than 500 employees for drilling companies and for 
companies that extract oil, gas, or natural gas liquids.
    Under the North American Industry Classification System Code 
211111, Crude Petroleum and Natural Gas Extraction, we estimate that a 
total of 1,380 firms drill oil and gas wells either onshore and/or 
offshore. Of these, approximately 130 companies are offshore lessees/
operators, based on current estimates. Publicly available data indicate 
that 39 companies qualify as large firms according to SBA criteria. 
Many or all of the other 91 companies may qualify as small firms with 
fewer than 500 employees. We cannot determine the exact number because 
the criteria data are not readily available. However, because of the 
extremely high cost and technical complexity involved in exploration 
and development in deep water, the vast majority of lessees/operators 
affected by this rule will be large companies. Of the 211 leases in 
deep water with a discovery or production by mid-2000, 19 large firms 
are the lessee/operator of 193, while 7 small firms are lessee/operator 
of the other 18. While that ratio suggests a 1-in-12 chance that a 
small operator may apply for relief, 4 of the 8 past applications we 
received have been from small operators. This rule continues the same 
basic application system we now use. Small operators do not appear to 
be at a disadvantage in our application process.
    Provisions of the rule, in comparison with existing rules for 
discretionary DWRR for pre-Act leases, may reduce applicant costs in 
three areas:
     First, new applications for DWRR will be based on a fully 
identified project rather than a whole, often incompletely identified, 
field. Consequently, applicants may need to provide less extensive 
geological and geophysical data. For instance, we will not require them 
to submit data on reservoirs that may be in the field but clearly are 
not part of the project. There is no sound basis for estimating the 
size of any savings associated with this reduced data burden because 
only some applications would involve potential extra reservoirs. For 
those that do, however, this change can reduce the amount of follow-up 
data we typically must request from applicants and can expedite our 
evaluation.
     Second, applicants may no longer have to incur the cost of 
additional drilling or acquisition of new seismic data to request a 
redetermination. While significant new geologic information or price or 
cost changes still enable a redetermination, applicants may now also 
seek a redetermination upon identification of a more efficient 
development system. That new reason could save drilling a new deep 
water well at a cost of $20 million or more, or acquiring additional 
seismic data at a cost of about $100,000 per tract. We have received no 
redetermination requests. We attribute this to the fact that the DWRR 
program has not been active long enough to reach the redetermination 
stage for most of the applications we have processed.
     Third, under this rule, we give successful applicants more 
time to initiate development than under existing rules. This added time 
gives operators more time to arrange financing and to negotiate 
contracts with suppliers. Again, there is no sound basis for estimating 
the size of any savings associated with this greater applicant 
flexibility. It is clear, however, that this change, too, cannot be 
considered to impose a significant adverse economic effect on a 
substantial number of small business entities. If anything, all three 
changes lessen the existing applicant cost burden.

Small Business Regulatory Enforcement Fairness Act (SBREFA)

    This rule is not a major rule under 5 U.S.C. 804(2), the SBREFA. 
This rule: a. Does not have an annual effect on the economy of $100 
million or more. This rule modifies some procedures used under the 
current rule, specifies how certain new deep water leases may qualify 
for royalty suspensions in the future, and describes circumstances not 
covered in the current regulations that may cause us to grant royalty 
relief. In general, the effect of qualifying for a royalty suspension 
increases production from a few marginal fields but does not change 
royalty collections--since without relief, no production or royalty 
payments would occur or be expected, so suspending them forfeits no 
revenue. To the extent that royalty relief encourages new production, 
it benefits applicants, one-half of which in the past have been small 
businesses. But only one of the five fields for which we have approved 
relief has gone into production.
    b. Will not cause a major increase in costs or prices for 
consumers, individual industries, Federal, state, or local government 
agencies, or geographic regions. Oil prices are not based on the 
production from any one region, but are based on worldwide production 
and demand at any point in time. While natural gas prices are more 
localized, they correlate to oil prices. The rule does not change any 
existing leasing policies, so it should not cause prices to increase.
    c. Does not have significant adverse effects on competition, 
employment, investment, innovation, or the ability of United States-
based enterprises to compete with foreign-based enterprises. Leasing on 
the United States OCS is limited to citizens or residents of the United 
States, their associations, states, municipalities, or companies 
incorporated in the United States. This rule does not change that 
requirement, so it does not change the ability of United States firms 
to compete in any way.

Paperwork Reduction Act (PRA) of 1995

    We examined the information collection requirements in the final 
rule and determined they remain unchanged from those currently approved 
by OMB under OMB control number 1010-0071, with a current expiration 
date of September 30, 2003. An 83-I submission to OMB is not required 
for review and approval under Sec. 3507(d) of the PRA. The PRA provides 
that an agency may not conduct or sponsor and a person is not required 
to respond to a collection of information unless it displays a 
currently valid OMB control number.
    The title of the collection of information is ``30 CFR part 203, 
Relief or Reduction in Royalty Rates.'' Respondents include 
approximately 130 Federal OCS oil and gas lessees. The

[[Page 1870]]

frequency of response is on occasion. Responses to this collection of 
information are required to obtain or retain a benefit. MMS will 
protect proprietary information under applicable law and 30 CFR 
203.63(b) and 250.196.
    MMS uses the information to make decisions on the economic 
viability of leases requesting a suspension or elimination of royalty 
or net profit share. These decisions have substantial monetary impacts 
to both the lessee and the Federal Government. Royalty relief can lead 
to increased production of natural gas and oil, creating profits for 
lessees and tax revenues for the Government that they might not 
otherwise receive.
    We estimate the total annual paperwork burden is 8,650 burden hours 
and $345,600 for the application and audit fee ``non-hour'' cost 
burdens authorized under Sec. 203.3. The following chart provides a 
breakdown of the components of the estimated paperwork burden of part 
203 final regulations.

----------------------------------------------------------------------------------------------------------------
                                                                Application/audit fees
     Reporting or recordkeeping     ----------------------------------------------------------------------------
    requirement 30 CFR Part 203           Annual  responses         Hours per  response    Annual  burden  hours
----------------------------------------------------------------------------------------------------------------
                                             OCS Lands Act Reporting
----------------------------------------------------------------------------------------------------------------
Application--leases that generate    2 applications.............  100 hours.............  200
 earnings that cannot sustain
 continued production (end-of-life
 lease).
                                    ----------------------------------------------------------------------------
                                                         Application  2  x  $12,000 = $24,000*
                                                            Audit  1  x  $10,000 = $10,000
----------------------------------------------------------------------------------------------------------------
Application--apart from formal       1 Application..............  250 hours.............  250
 programs for royalty relief for
 marginal producing lease (expect
 less than 1 per year--new
 category).
                                    ----------------------------------------------------------------------------
                                                         Application 1   x  $15,000 = $15,000*
                                                            Audit 1   x  $10,000 = $10,000
----------------------------------------------------------------------------------------------------------------
Sec.  203.55 Renounce relief         1 Letter...................   1 hour...............  1
 arrangement (seldom, if ever will
 be used; minimal burden to prepare
 letter).
----------------------------------------------------------------------------------------------------------------
Sec.  203.81, 203.83 through 203.89           Burden included with applications.          ......................
 required reports.
----------------------------------------------------------------------------------------------------------------
    OCS Lands Act Reporting          4 responses................  N/A...................  451
     Subtotal.
----------------------------------------------------------------------------------------------------------------
                                                               Processing Fees = $59,000
----------------------------------------------------------------------------------------------------------------
                                                 DWRAA Reporting
----------------------------------------------------------------------------------------------------------------
Application--leases in designated    1 Application..............  2,000 hours...........  2,000
 areas of GOM deep water acquired
 in lease sale before 11/28/95 or
 after 11/28/00 and are producing
 (deep water expansion project).
                                    ----------------------------------------------------------------------------
                                                         Application  1  x  $39,000 = $39,000
                                                                        Audit
----------------------------------------------------------------------------------------------------------------
Application--leases in designated    1 Application..............  2,000 hours...........  2,000
 areas of deep water GOM, acquired
 in lease sale before 11/28/95 or
 after 11/28/00, that have not
 produced (pre-Act or post-2000
 deep water leases).
                                    ----------------------------------------------------------------------------
                                                         Application  1  x  $49,000 = $49,000*
                                                            Audit  1  x  $25,000 = $25,000
----------------------------------------------------------------------------------------------------------------
Application--short form to add or    1 Application..............  40 hours..............  40
 assign pre-Act lease
                                    ----------------------------------------------------------------------------
                                                          Application  1  x  $1,000 = $1,000
                                                                        No Audit
----------------------------------------------------------------------------------------------------------------
Application--preview assessment      1 Application..............  900 hours.............  900
 (seldom if ever will be used
 because applicants generally opt
 for binding determination by MMS
 instead).
                                    ----------------------------------------------------------------------------
                                                         Application  1  x  $46,600 = $46,600
                                                                        No Audit
----------------------------------------------------------------------------------------------------------------
Application--apart from formal       Application................  1,000 hours...........  1,000
 programs for royalty relief for
 marginal expansion project or
 marginal non-producing lease
 (expect less than 1 per year--new
 category).
                                    ----------------------------------------------------------------------------
                                                         Application  1  x  $49,000 = $49,000
                                                            Audit  1  x  $20,000 = $20,000
----------------------------------------------------------------------------------------------------------------
Redetermination....................  1 Redetermination..........  500 hours.............  500
                                    ----------------------------------------------------------------------------
                                                         Application  1  x  $32,000 = $32,000*
                                                            Audit 1   x  $25,000 = $25,000
----------------------------------------------------------------------------------------------------------------
Sec.  203.70, 203.81, 203.90,        2 Reports..................  20 hours..............  40
 203.91 Submit fabricator's
 confirmation report.
----------------------------------------------------------------------------------------------------------------
Sec.  203.70, 203.81, 203.90,        2 Reports*.................  50 hours..............  100
 203.92 2 Submit post-production
 development report.
----------------------------------------------------------------------------------------------------------------
Sec.  203.77 Renounce relief         1 Letter...................  1 hour................  1
 arrangement (seldom, if ever will
 be used; minimal burden to prepare
 letter).

[[Page 1871]]

 
----------------------------------------------------------------------------------------------------------------
Sec.  203.79(a) Request              4 Requests.................  400 hours.............  1,600
 reconsideration of MMS field
 designation.
----------------------------------------------------------------------------------------------------------------
Sec.  203.79(c) Request extension    1 Request..................  2 hours...............  2
 of deadline to start construction.
----------------------------------------------------------------------------------------------------------------
Sec.  203.81, 203.83 through 230.89           Burden included with applications           0
 Required reports.
----------------------------------------------------------------------------------------------------------------
    DWRR Act Reporting Subtotal....  16 Responses...............  N/A...................  8,183
                                    ----------------------------------------------------------------------------
                                                              Processing Fees = $286,600
----------------------------------------------------------------------------------------------------------------
                                              Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
Sec.  203.91 Retain supporting cost  2 Record-keepers...........  8 hours...............  16
 records for post-production
 development/fabrication reports
 (records retained as usual/
 customary business practice;
 minimal burden to make available
 at MMS request).
----------------------------------------------------------------------------------------------------------------

     In addition, under Sec. 203.81, a report prepared by an 
independent CPA must accompany the application and post-production 
report (except expansion project, short form, and preview assessment 
applications are excluded). The OCS Lands Act applications will require 
this report only once; the DWRR Act applications will require this 
report at two stages--with the application and with the post-production 
development report for successful applicants. We estimate an average 
cost for a report is $45,000, and that seven CPA certifications per 
year will be necessary if the applications are approved. The total 
estimated annual ``non-hour'' cost burden for this requirement is 
$315,000 ($45,000 per certification  x  7 CPA certifications = 
$315,000).

Federalism (Executive Order 13132)

    Under Executive Order 13132, this rule does not have Federalism 
implications. The rule neither substantially nor directly affects the 
relationship between the Federal and State Governments. This rule 
affects the collection of royalty revenues from deepwater lessees in 
the GOM, all of which is outside State jurisdiction. States have no 
role in this activity with or without this rule. This rule does not 
impose costs on States or localities. States and local governments play 
no part in the administration of the DWRR program.

Takings Implications Assessment (Executive Order 12630)

    Under Executive Order 12630, the rule does not have significant 
Takings implications. A Takings Implication Assessment is not required 
because the rule would not take away or restrict a bidder's right to 
acquire or develop OCS leases.

Energy Supply, Distribution, or Use (Executive Order 13211)

    This rule is a significant rule and is subject to review by the 
Office of Management and Budget under Executive Order 12866. The rule 
does not have a significant effect on energy supply, distribution, or 
use because its promotes, rather than adversely affects, the production 
of additional oil and gas from the OCS. It promotes energy supply from 
marginal domestic sources by broadening applicability of the process by 
which we may lower costs for those producers.

Unfunded Mandates Reform Act (UMRA)

    This rule does not impose an unfunded mandate on State, local, or 
tribal governments or the private sector of more than $100 million per 
year. The rule does not have a significant or unique effect on State, 
local, or tribal governments. The rule modifies some procedures in the 
existing regulation, describes how certain new leases may qualify for 
royalty suspensions, and specifies circumstances that might cause us to 
grant royalty relief outside our formal programs. None of these changes 
involve state, local, or tribal mandates. A statement containing 
additional UMRA (2 U.S.C. 1531 et seq.) information is not required.

Civil Justice Reform (Executive Order 12988)

    Under Executive Order 12988, the Office of the Solicitor has 
determined that this rule does not unduly burden the judicial system 
and meets the requirements of sections 3(a) and 3(b)(2) of the Order.

National Environmental Policy Act (NEPA) of 1969

    This rule does not constitute a major Federal action significantly 
affecting the quality of the human environment. A detailed statement 
under the NEPA is not required.

Government-to-Government Relationship With Tribes

    Pursuant to the President's memorandum of April 29, 1994, 
``Government-to-Government Relations with Native American Tribal 
Governments'' (59 FR 22951) and 512 DM 2, we have determined that there 
are no effects from this action on federally recognized Indian tribes.

List of Subjects in 30 CFR Part 203

    Continental shelf, Government contracts, Indians-lands, Minerals 
royalties, Oil and gas exploration, Public lands-mineral resources, 
Reporting and recordkeeping requirements, Sulphur.

    Dated: December 18, 2001.
James E. Cason,
Acting Deputy Secretary.

    For the reasons stated in the preamble, the Minerals Management 
Service (MMS) amends 30 CFR part 203 as follows:

PART 203--RELIEF OR REDUCTION IN ROYALTY RATES

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 25 U.S.C. 396 et seq.; 25 U.S.C. 396a et seq.; 25 
U.S.C. 2101 et seq.; 30 U.S.C. 181 et seq.; 30 U.S.C. 351 et seq.; 
30 U.S.C. 1001 et seq.; 30 U.S.C. 1701 et seq.; 31 U.S.C.

[[Page 1872]]

9701 et seq.; 43 U.S.C. 1301 et seq.; 43 U.S.C. 1331 et seq.; and 43 
U.S.C. 1801 et seq.

    2. Section 203.0 is amended by removing the definition of ``Sunk 
costs,'' adding definitions for ``Development project,'' ``Royalty 
suspension (RS) lease,'' ``Sunk costs for an authorized field,'' and 
``Sunk costs for an expansion or development project'' in alphabetical 
order, and revising the definitions for ``Authorized field,'' 
``Eligible lease,'' ``Expansion project,'' ``Fabrication (or start of 
construction),'' ``New production,'' ``Pre-Act lease,'' and 
``Redetermination,'' to read as follows:


Sec. 203.0  What definitions apply to this part?

    Authorized field means a field:
    (1) Located in a water depth of at least 200 meters and in the Gulf 
of Mexico (GOM) west of 87 degrees, 30 minutes West longitude;
    (2) That includes one or more pre-Act leases; and
    (3) From which no current pre-Act lease produced, other than test 
production, before November 28, 1995;
* * * * *
    Development project means a project to develop one or more oil or 
gas reservoirs located on one or more contiguous leases that:
    (1) Were issued in a sale held after November 28, 2000;
    (2) Are located in a water depth of at least 200 meters and in the 
GOM wholly west of 87 degrees, 30 minutes West longitude; and
    (3) Have had no production (other than test production) before the 
current application for royalty relief.
* * * * *
    Eligible lease means a lease that:
    (1) Is issued as part of an OCS lease sale held after November 28, 
1995, and before November 28, 2000;
    (2) Is located in the Gulf of Mexico in water depths of 200 meters 
or deeper;
    (3) Lies wholly west of 87 degrees, 30 minutes West longitude; and
    (4) Is offered subject to a royalty suspension volume.
    Expansion project means a project you propose in a Development 
Operations Coordination Document (DOCD) or a Supplement approved by the 
Secretary of the Interior after November 28, 1995, that will 
significantly increase the ultimate recovery of resources from one or 
more reservoirs that have not produced on a pre-Act lease or a lease 
issued in a sale held after November 28, 2000. A significant increase 
does not simply extend recovery from reservoirs already in production. 
For a pre-Act lease, the expansion project must also involve a 
substantial capital investment (e.g., fixed-leg platform, subsea 
template and manifold, tension-leg platform, multiple well project, 
etc.). For a lease issued after November 28, 2000, the expansion 
project must involve a new well drilled into a reservoir that has not 
previously produced. In all cases, all leases in an expansion project 
must be wholly located in a water depth of at least 200 meters and in 
the GOM wholly west of 87 degrees, 30 minutes West longitude.
    Fabrication (or start of construction) means evidence of an 
irreversible commitment to a concept and scale of development. Evidence 
includes copies of a binding contract between you (as applicant) and a 
fabrication yard, a letter from a fabricator certifying that continuous 
construction has begun, and a receipt for the customary down payment.
* * * * *
    New production means any production from a current pre-Act lease 
from which no royalties are due on production, other than test 
production, before November 28, 1995. Also, it means any additional 
production resulting from new lease-development activities on a lease 
issued in a sale after November 28, 2000, or a current pre-Act lease 
under a DOCD or a Supplement approved by the Secretary of the Interior 
after November, 28, 1995.
* * * * *
    Pre-Act lease means a lease that:
    (1) Results from a sale held before November 28, 1995;
    (2) Is located in the GOM in water depths of 200 meters or deeper; 
and
    (3) Lies wholly west of 87 degrees, 30 minutes West longitude.
* * * * *
    Redetermination means our reconsideration of our determination on 
royalty relief because you request it after:
    (1) We have rejected your application;
    (2) We have granted relief but you want a larger suspension volume;
    (3) We withdraw approval; or
    (4) You renounce royalty relief.
* * * * *
    Royalty suspension (RS) lease means a lease that:
    (1) Is issued as part of an OCS lease sale held after November 28, 
2000;
    (2) Is in locations or planning areas specified in a particular 
Notice of OCS Lease Sale offering that lease; and
    (3) Is offered subject to a royalty suspension specified in a 
Notice of OCS Lease Sale published in the Federal Register.
    Sunk costs for an authorized field means the after-tax eligible 
costs that you (not third parties) incur for exploration, development, 
and production from the spud date of the first discovery on the field 
to the date we receive your complete application for royalty relief. 
The discovery well must be qualified as producible under part 250, 
subpart A of this title. Sunk costs include the rig mobilization and 
material costs for the discovery well that you incurred before its spud 
date.
    Sunk costs for an expansion or development project means the after-
tax eligible costs that you (not third parties) incur for only the 
first well that encounters hydrocarbons in the reservoir(s) included in 
the application and that meets the producibility requirements under 
part 250, subpart A of this chapter on each lease participating in the 
application. Sunk costs include rig mobilization and material costs for 
the discovery wells that you incurred before their spud dates.
* * * * *

    3. Section 203.2 is revised to read as follows:


Sec. 203.2  How can I get royalty relief?

    We may reduce or suspend royalties for Outer Continental Shelf 
(OCS) leases or projects that meet the criteria in the following table.

 
------------------------------------------------------------------------
                                                       Then we may grant
    If you have a lease . . .      And if you . . .        you . . .
------------------------------------------------------------------------
(a) With earnings that cannot     Would abandon       A reduced royalty
 sustain production (i.e., End-    otherwise           rate on current
 of-life lease).                   potentially         monthly
                                   recoverable         production and a
                                   resources but       higher royalty
                                   seek to increase    rate on
                                   production by       additional
                                   operating beyond    monthly
                                   the point at        production. (See
                                   which the lease     Secs.  203.50
                                   is economic under   through 203.56.)
                                   the existing
                                   royalty rate.

[[Page 1873]]

 
(b) Located in a designated GOM   Are producing and   A royalty
 deep water area, and acquired     seek to increase    suspension for
 in a lease sale before November   ultimate resource   additional
 28, 1995, or after November 28,   recovery from one   production large
 2000, and you propose in a DOCD   or more             enough to make
 or supplement to expand           reservoirs not      the project
 production significantly.         previously or       economic. (See
                                   currently           Secs.  203.60
                                   producing on the    through 203.79.)
                                   field or lease,
                                   not simply extend
                                   recovery of
                                   reservoirs that
                                   already produced.
                                   (Expansion
                                   project).
(c) Located in a designated GOM   Are on a field       A royalty
 deep water area and acquired in   from which no       suspension for a
 a lease sale held before          current pre-Act     minimum
 November 28, 1995 (Pre-Act        lease produced      production volume
 lease).                           (other than test    plus any
                                   production)         additional volume
                                   before November     needed to make
                                   28, 1995            the field
                                   (Authorized         economic. (See
                                   field).             Secs.  203.60
                                                       through 203.79.)
(d) Located in a designated GOM   Have not produced   A royalty
 deep water area and acquired in   and can             suspension for a
 a lease sale held after           demonstrate that    minimum
 November 28, 2000.                the suspension      production volume
                                   volume, if any,     plus any
                                   in your lease is    additional volume
                                   not enough to       needed to make
                                   make development    your project
                                   economic            economic. (See
                                   (Development        Secs.  203.60
                                   project).           through 203.79.)
(e) Where royalty relief would    Are not eligible    A royalty
 recover significant additional    to apply for end-   modification in
 resources or, in certain areas    of-life or deep     size, duration,
 of the GOM, would enable          water royalty       or form that
 development.                      relief, but show    makes your lease
                                   us you meet         or project
                                   certain             economic. (See
                                   elligibility        Sec.  203.80.)
                                   conditions.
------------------------------------------------------------------------


    4. Section 203.4 is revised to read as follows:


Sec. 203.4  How do the provisions in this part apply to different types 
of leases and projects?

    The tables in this section summarize how similar provisions of this 
part apply in different situations.
    (a) We require the information elements indicated by an X in the 
following table and described in Secs. 203.51, 203.62, and 203.81 
through 203.89 for applications for royalty relief.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                   Information elements                        life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) Administrative information report.....................         X               X          X               X
(2) Net revenue and relief justification report                    X
 (prescribed format)......................................
(3) Economic viability and relief justification report                             X          X               X
 (Royalty Suspension Viability Program (RSVP) model inputs
 justified with Geological and Geophysical (G&G),
 Engineering, Production, & Cost reports).................
(4) G&G report............................................                         X          X               X
(5) Engineering report....................................                         X          X               X
(6) Production report.....................................                         X          X               X
(7) Deep water cost report................................                         X          X               X
----------------------------------------------------------------------------------------------------------------

    (b) We require the confirmation elements indicated by an X in the 
following table and described in Secs. 203.70, 203.81 and 203.90 
through 203.91 to retain royalty relief.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                   Confirmation elements                       life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) Fabricator's confirmation report......................                         X          X               X
(2) Post-production development report approved by an                              X          X               X
 independent certified public accountant (CPA)............
----------------------------------------------------------------------------------------------------------------

    (c) The following table indicates by an X, and Secs. 203.50, 
203.52, 203.60 and 203.67 describe, the prerequisites for our approval 
of your royalty relief application.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                    Approval conditions                        life                     Pre-act     Development
                                                              lease       Expansion      lease        project
----------------------------------------------------------------------------------------------------------------
(1) At least 12 of the last 15 months have the required            X
 level of production......................................
(2) Already producing.....................................         X
(3)A producible well into a reservoir that has not                                 X          X               X
 produced before..........................................
(4) Royalties for qualifying months exceed 75% of net              X
 revenue (NR).............................................
(5) Substantial investment on a pre-Act lease (e.g.,                               X
 platform, subsea template)...............................

[[Page 1874]]

 
(6) Determined to be economic only with relief............                         X          X               X
----------------------------------------------------------------------------------------------------------------

    (d) The following table indicates by an X, and Secs. 203.52 and 
203.74 through 203.75 describe, the prerequisites for a redetermination 
of our royalty relief decision.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                Redetermination conditions                     Life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) After 12 months under current rate, criteria same as           X
 for approval.............................................
(2) For material change in geologic data, prices, costs,                           X          X               X
 or available technology..................................
----------------------------------------------------------------------------------------------------------------

    (e) The following table indicates by an X, and Secs. 203.53 and 
203.69 describe, the characteristics of approved royalty relief.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
   Relief rate and volume, subject to certain conditions       life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) One-half pre-application effective lease rate on the           X
 qualifying amount, 1.5 times pre-application effective
 lease rate on additional production up to twice the
 qualifying amount, and the pre-application effective
 lease rate for any larger volumes........................
(2) Qualifying amount is the average monthly production            X
 for 12 qualifying months.................................
(3) Zero royalty rate on the suspension volume and the                             X          X               X
 original lease rate on additional production.............
(4) Suspension volume is at least 17.5, 52.5 or 87.5                                          X
 million barrels of oil equivalent (MMBOE)................
(5) Suspension volume is at least the minimum set in the                           X                          X
 Notice of Sale, the lease, or the regulations............
(6) Amount needed to become economic......................                         X          X               X
----------------------------------------------------------------------------------------------------------------

    (f) The following table indicates by an X, and Secs. 203.54 and 
203.78 describe, circumstances under which we discontinue your royalty 
relief.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                 Full royalty resumes when                     life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) Average NYMEX price for last 12 months is at least 25          X
 percent above the average for the qualifying months......
(2) Average NYMEX price for last calendar year exceeds $28/                        X          X
 bbl or $3.50/mcf, escalated by the gross domestic product
 (GDP) deflator since 1994................................
(3) Average prices for designated periods exceed levels we                         X                          X
 specify in the Notice of Sale or the lease...............
----------------------------------------------------------------------------------------------------------------

    (g) The following table indicates by an X, and Secs. 203.55 and 
203.76 through 203.77 describe, circumstances under which we end or 
reduce royalty relief.

 
----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                Relief withdrawn or reduced                    life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) If recipient requests.................................         X               X          X               X
(2) Lease royalty rate is at the effective rate for 12             X
 consecutive months.......................................
(3) Conditions occur that we specified in the approval             X
 letter in individual cases...............................
(4) Recipient does not submit post-production report that                          X          X               X
 compares expected to actual costs........................

[[Page 1875]]

 
(5) Recipient changes development system..................                         X          X               X
(6) Recipient excessively delays starting fabrication.....                         X          X               X
(7) Recipient spends less than 80 percent of proposed pre-                         X          X               X
 production costs prior to start of production............
(8) Amount of relief volume is produced...................                         X          X               X
----------------------------------------------------------------------------------------------------------------


    5. Section 203.60 is revised to read as follows:


Sec. 203.60  Who may apply for deep water royalty relief?

    You may apply for royalty relief under Secs. 203.61(b) and 203.62 
if:
    (a) You are a lessee of a lease in water at least 200 meters deep 
in the GOM and lying wholly west of 87 degrees, 30 minutes West 
longitude;
    (b) We have assigned your pre-Act lease to a field (as defined in 
Sec. 203.0); and
    (c) You either:
    (1) Hold a pre-Act lease on an authorized field (as defined in 
Sec. 203.0) or
    (2) Propose an expansion project (as defined in Sec. 203.0) or
    (3) Propose a development project (as defined in Sec. 203.0).

    6. In Sec. 203.62, the introductory sentence and paragraph (c) are 
revised to read as follows:


Sec. 203.62  How do I apply for relief?

    You must send a complete application and the required fee to the 
MMS Regional Director for the GOM.
* * * * *
    (c) Sections 203.81, 203.83, and 203.85 through 203.89 describe 
what these reports must include. The MMS regional office for the GOM 
will guide you on the format for the required reports, and we encourage 
you to contact this office prior to preparing your application for this 
guidance.

    7. In Sec. 203.63, the following changes are made:
    A. Paragraphs (a), (b), and (c) following the introductory 
paragraph are redesignated paragraphs (a)(1), (a)(2), and (a)(3).
    B. The introductory paragraph is redesignated (a) and is revised to 
read as set forth below.
    C. A new paragraph (b) is added as set forth below.


Sec. 203.63  Does my application have to include all leases in the 
field?

    (a) For authorized fields, we will accept only one joint 
application for all leases that are part of the designated field on the 
date of application, except as provided in paragraph (a)(3) of this 
section and Sec. 203.64. However, we will evaluate all acreage that may 
eventually become part of the authorized field. Therefore, if you have 
any other leases that you believe may eventually be part of the 
authorized field, you must submit data for these leases according to 
Sec. 203.81.
* * * * *
    (b) If your application seeks only relief for a development project 
or an expansion project, your application does not have to include all 
leases in the field.

    8. In Sec. 203.64, the section heading and the first sentence in 
the introductory paragraph are revised to read as follows:


Sec. 203.64  How many applications may I file on a field or a 
development project?

    You may file one complete application for royalty relief during the 
life of the field or for a development project or an expansion project 
designed to produce a reservoir or set of reservoirs. * * *
* * * * *
    9. In Sec. 203.65, paragraph (b) is revised to read as follows:


Sec. 203.65  How long will MMS take to evaluate my application?

* * * * *
    (b) We will evaluate your first application on a field within 180 
days, evaluate your first application on a development project or an 
expansion project within 150 days and evaluate a redetermination under 
Sec. 203.75 within 120 days after we determine that it is complete.
* * * * *

    10. Section 203.66 revised to read as follows:


Sec. 203.66  What happens if MMS does not act in the time allowed?

    If we do not act within the timeframes established under 
Sec. 203.65, you get royalty relief according to the following table.

 
------------------------------------------------------------------------
                                     And we do not
 If you apply for royalty relief   decide within the    As long as you
               for                  time specified
------------------------------------------------------------------------
(a) An authorized field.........  You get the         Abide by Secs.
                                   minimum             203.70 and
                                   suspension          203.76.
                                   volumes specified
                                   in Sec.  203.69.
(b) An expansion project........  You get a royalty   Abide by Secs.
                                   suspension for      203.70 and
                                   the first year of   203.76.
                                   production.
(c) A development project.......  You get a royalty   Abide by Secs.
                                   suspension for      203.70 and
                                   initial             203.76.
                                   production for
                                   the number of
                                   months that a
                                   decision is
                                   delayed beyond
                                   the stipulated
                                   timeframes set by
                                   Sec.  203.65,
                                   plus all the
                                   royalty
                                   suspension volume
                                   for which you
                                   qualify.
------------------------------------------------------------------------


[[Page 1876]]


    11. Section 203.67 is revised to read as follows:


Sec. 203.67  What economic criteria must I meet to get royalty relief 
on an authorized field or project?

    We will not approve applications if we determine that royalty 
relief cannot make the field, development project, or expansion project 
economically viable. Your field or project must be uneconomic while you 
are paying royalties and must become economic with royalty relief.

    12. In Sec. 203.68, paragraph (b) is revised to read as follows:


Sec. 203.68  What pre-application costs will MMS consider in 
determining economic viability?

* * * * *
    (b) We will consider sunk costs according to the following table.

 
------------------------------------------------------------------------
                We will                          When determining
------------------------------------------------------------------------
(1) Include sunk costs.................  Whether a field that includes a
                                          pre-Act lease which has not
                                          produced, other than test
                                          production, before the
                                          application or redetermination
                                          submission date needs relief
                                          to become economic.
(2) Not include sunk costs.............  Whether an authorized field, a
                                          development project, or an
                                          expansion project can become
                                          economic with full relief (see
                                          Sec.  203.67).
(3) Not include sunk costs.............  How much suspension volume is
                                          necessary to make the field, a
                                          development project, or an
                                          expansion project economic
                                          (see Sec.  203.69(c)).
(4) Include sunk costs for the project   Whether a development project
 discovery well on each lease.            or an expansion project needs
                                          relief to become economic.
------------------------------------------------------------------------


    13. In Sec. 203.69, the introductory paragraph and paragraphs (b) 
through (e) are revised, and paragraph (f) is added to read as follows:


Sec. 203.69  If my application is approved, what royalty relief will I 
receive?

    If we approve your application, subject to certain conditions, we 
will not collect royalties on a specified suspension volume for your 
field, development project, or expansion project. Suspension volumes 
include volumes allocated to a lease under an approved unit agreement, 
but exclude any volumes of production that are not normally royalty-
bearing under the lease or the regulations of this chapter (e.g., fuel 
gas).
* * * * *
    (b) For development projects, any relief we grant applies only to 
project wells and replaces the royalty suspension volume with which we 
issued your lease. If your project is economic given the royalty 
suspension volume with which we issued your lease, we will reject the 
application. Otherwise, the minimum royalty suspension volumes are as 
shown in the following table:

 
------------------------------------------------------------------------
                                  The minimum royalty
              For                suspension volume is         Plus
------------------------------------------------------------------------
(1) RS leases.................   A volume equal to the  10 percent of
                                 combined royalty        the median of
                                 suspension volumes      the
                                 (or the volume          distribution of
                                 equivalent based on     known
                                 the data in your        recoverable
                                 approved application    resources upon
                                 for other forms of      which we based
                                 royalty suspension)     approval of
                                 with which we issued    your
                                 the leases              application
                                 participating in the    from all
                                 application that have   reservoirs
                                 or plan a well into a   included in the
                                 reservoir identified    project.
                                 in the application.
(2) Other deep water leases     A volume equal to 10
 issued in sales after           percent of the median
 November 28, 2000.              of the distribution
                                 of known recoverable
                                 resources upon which
                                 we based approval of
                                 your application from
                                 all reservoirs
                                 included in the
                                 project.
------------------------------------------------------------------------

    (c) If your application includes pre-Act or eligible leases in 
different categories of water depth, we apply the minimum royalty 
suspension volume for the deepest such lease then assigned to the 
field. We base the water depth and makeup of a field on the water-depth 
delineations in the ``Lease Terms and Economic Conditions'' map and the 
``Field Names Master List'' documents and updates in effect at the time 
your application is deemed complete. These publications are available 
from the MMS Regional Office for the GOM.
    (d) You will get a royalty suspension volume above the minimum if 
we determine that you need more to make the field or development 
project economic.
    (e) For expansion projects, the minimum royalty suspension volume 
equals 10 percent of the median of the distribution of known 
recoverable resources upon which we based approval of your application 
from all reservoirs included in your project plus any suspension 
volumes required under Sec. 203.66. If we determine that your expansion 
project may be economic only with more relief, we will determine and 
grant you the royalty suspension volume necessary to make the project 
economic.
    (f) The royalty suspension volume applicable to specific leases 
will continue through the end of the month in which cumulative 
production reaches that volume. You must calculate cumulative 
production from all the leases in the authorized field or project that 
are entitled to share the royalty suspension volume.

    14. Section 203.70 is revised to read as follows:


Sec. 203.70  What information must I provide after MMS approves relief?

    You must submit reports to us as indicated in the following table. 
Sections 203.81, 203.90, and 203.91 describe what these reports must 
include. The MMS regional office for the GOM will prescribe the 
formats.

[[Page 1877]]



 
------------------------------------------------------------------------
                                                           Due date
         Required report            When due to MMS       extensions
------------------------------------------------------------------------
(a) Fabricator's confirmation     Within 18 months    MMS Director may
 report.                           after approval of   grant you an
                                   relief.             extension under
                                                       Sec.  203.79(c)
                                                       for up to 6
                                                       months.
(b) Post-production report......  Within 120 days     With acceptable
                                   after the start     justification
                                   of production       from you, MMS
                                   that is subject     Regional Director
                                   to the approved     for the GOM may
                                   royalty             extend due date
                                   suspension volume.  up to 30 days.
------------------------------------------------------------------------


    15. In Sec. 203.71, the introductory paragraph and paragraphs (a) 
through (c) are revised to read as follows:


Sec. 203.71  How does MMS allocate a field's suspension volume between 
my lease and other leases on my field?

    The allocation depends on when production occurs, when we issued 
the lease, when we assigned it to the field, and whether we award the 
volume suspension by an approved application or establish it in the 
lease terms, as prescribed in this section.
    (a) If your authorized field has an approved royalty suspension 
volume under Secs. 203.67 and 203.69, we will suspend payment of 
royalties on production from all leases in the field that participate 
in the application until their cumulative production equals the 
approved volume. The following conditions also apply:

 
------------------------------------------------------------------------
            If . . .                  Then . . .           And . . .
------------------------------------------------------------------------
(1) We assign an eligible lease   We will not change  The assigned
 to your field after we approve    your field's        lease(s) may
 relief.                           royalty             share in any
                                   suspension volume.  remaining royalty
                                                       relief.
(2) We assign a pre-Act or post-  We will not change  The assigned
 November 2000 deep water lease    your field's        lease(s) may
 to your field after we approve    royalty             share in any
 your application.                 suspension volume.  remaining royalty
                                                       relief by filing
                                                       the short-form
                                                       application
                                                       specified in Sec.
                                                        203.83 and
                                                       authorized in
                                                       Sec.  203.82. An
                                                       assigned RS lease
                                                       also gets any
                                                       portion of its
                                                       royalty
                                                       suspension volume
                                                       remaining even
                                                       after the field
                                                       has produced the
                                                       approved relief
                                                       volume.
(3) We assign another lease(s)    We will change      (i) You toll the
 that you operate to your field    your field's        time period for
 while we are evaluating your      minimum             evaluation until
 application.                      suspension volume   you modify your
                                   if the assigned     application to be
                                   lease is a pre-     consistent with
                                   Act or eligible     the new field;
                                   lease entitled to  (ii) We have an
                                   a larger minimum    additional 60
                                   or automatic        days to review
                                   suspension volume.  the new
                                                       information; and
                                                      (iii) The assigned
                                                       lease(s) shares
                                                       the royalty
                                                       suspension we
                                                       grant to the new
                                                       field. If you do
                                                       not agree to
                                                       toll, we will
                                                       have to reject
                                                       your application
                                                       due to incomplete
                                                       information. But,
                                                       an eligible lease
                                                       we assigned to
                                                       the field kept
                                                       its automatic
                                                       suspension
                                                       volume.
(4) We assign another operator's  We will change      (i) You both toll
 lease to your field while we      your field's        the time period
 are evaluating your application.  minimum             for evaluation
                                   suspension volume   until both of you
                                   provided the        modify your
                                   assigned lease      application to be
                                   joins the           consistent with
                                   application and     the new field;
                                   is entitled to a   (ii) We have an
                                   larger minimum      additional 60
                                   suspension volume.  days to review
                                                       the new
                                                       information; and
                                                      (iii) The assigned
                                                       lease(s) shares
                                                       the royalty
                                                       suspension we
                                                       grant to the new
                                                       field. If you
                                                       (the original
                                                       applicant) do not
                                                       agree to toll,
                                                       the other
                                                       operator's lease
                                                       retains any
                                                       suspension volume
                                                       it has or may
                                                       share in any
                                                       relief that we
                                                       grant by filing
                                                       the short form
                                                       application
                                                       specified in Sec.
                                                        203.83 and
                                                       authorized in
                                                       Sec.  203.82.
(5) We reassign a well on a pre-  The past            The past
 Act, eligible, or post-November   production from     production from
 2000 deep water lease to          the well counts     that well will
 another field.                    toward the          not count toward
                                   royalty             any royalty
                                   suspension volume   suspension volume
                                   of the field to     granted to the
                                   which we assigned   field from which
                                   the well.           we reassigned it.
------------------------------------------------------------------------

    (b) If your authorized field has a royalty suspension volume 
established under Sec. 260.111 of this title (i.e., a field with a pre-
Act lease where an eligible lease starts production first), we will 
suspend payment of royalties on production from all eligible leases in 
the field until their cumulative production equals the established 
volume. The following conditions also apply:

[[Page 1878]]



 
------------------------------------------------------------------------
            If . . .                  Then . . .           And . . .
------------------------------------------------------------------------
(1) We assign another eligible    Your field's        The assigned lease
 lease to your field.              royalty             may share in any
                                   suspension volume   remaining royalty
                                   does not change.    relief.
(2) We assign an RS lease to      Your field's        The assigned lease
 your field.                       royalty             gets only the
                                   suspension volume   volume suspension
                                   does not change.    with which we
                                                       issued it, and
                                                       its production
                                                       volume counts
                                                       against the
                                                       field's royalty
                                                       suspension
                                                       volume.
(3) We assign a pre-Act lease or  Your field's        We assign lease
 a lease issued after November     royalty             shares none of
 2000 without royalty suspension   suspension volume   the volume
 to your field.                    does not change.    suspension, and
                                                       its production
                                                       does not count as
                                                       part of the
                                                       suspension
                                                       volume.
(4) A pre-Act or post-November    Your field's        (i) All leases in
 2000 deep water lease applies     royalty             the field share
 (along with the other leases in   suspension volume   the royalty
 the field) and qualifies          may increase or     suspension volume
 (subject to any pre-existing      stay the same,      if we approve the
 suspension volumes) for royalty   but will not        application; or
 relief under Secs.  203.67 and    diminish.          (ii) The eligible
 203.69.                                               or RS leases in
                                                       the field keep
                                                       their respective
                                                       volumes if we
                                                       reject the
                                                       application.
------------------------------------------------------------------------

    (c) When a project has more than one lease, the royalty suspension 
volume for each lease equals that lease's actual production from the 
project (or production allocated under an approved unit agreement) 
until total production for all leases in the project equals the 
project's approved royalty suspension volume.
* * * * *

    16. In Sec. 203.74, the introductory paragraph is revised, 
paragraphs (b) and (c) are redesignated as paragraphs (c) and (d) and 
revised, and a new paragraph (b) is added to read as follows:


Sec. 203.74  When will MMS reconsider its determination?

    You may request a redetermination after we withdraw approval or 
after you renounce royalty relief, unless we withdraw approval due to 
your providing false or intentionally inaccurate information. Under 
certain conditions you may also request a redetermination if we deny 
your application or if you want your approved royalty suspension volume 
to change. In these instances, to be eligible for a redetermination, at 
least one of the following four conditions must occur.
* * * * *
    (b) You demonstrate in your new application that the technology 
that most efficiently develops this field or lease was not considered 
or deemed feasible in the original application. Your newly proposed 
technology must improve the profitability, under equivalent market 
conditions, of the field or lease relative to the development system 
proposed in the prior application.
    (c) Your current reference price decreases by more than 25 percent 
from your base reference price as calculated under this paragraph.
    (1) Your current reference price is a weighted-average of daily 
closing prices on the NYMEX for light sweet crude oil and natural gas 
over the most recent full 12 calendar months;
    (2) Your base reference price is a weighted average of daily 
closing prices on the NYMEX for light sweet crude oil and natural gas 
for the full 12 calendar months preceding the date of your most 
recently approved application for this royalty relief; and
    (3) The weighting factors are the proportions of the total 
production volume (in BOE) for oil and gas associated with the most 
likely scenario (identified in Secs. 203.85 and 203.88) from your most 
recently approved application for this royalty relief.
    (d) Before starting to build your development and production 
system, you have revised your estimated development costs, and they are 
more than 120 percent of the eligible development costs associated with 
the most likely scenario from your most recently approved application 
for this royalty relief.

    17. In Sec. 203.76, paragraphs (a), (b), and (c) are revised to 
read as follows:


Sec. 203.76  When might MMS withdraw or reduce the approved size of my 
relief?

* * * * *
    (a) You change the type of development system proposed in your 
application (e.g., change from a fixed platform to floating production 
system, or from an independent development and production system to one 
with subsea wells tied back to a host production facility, etc.).
    (b) You do not start building the proposed development and 
production system within18 months of the date we approved your 
application, unless the MMS Director grants you an extension under 
Sec. 203.79(c). If you start building the proposed system and then 
suspend its construction before completion, and you do not restart 
continuous building of the proposed system within 18 months of our 
approval, we will withdraw the relief we granted.
    (c) Your actual development costs are less than 80 percent of the 
eligible development costs estimated in your application's most likely 
scenario, and you do not report that fact in your post-production 
development report (Sec. 203.70). Development costs are those 
expenditures defined in Sec. 203.89(b) incurred between the application 
submission date and start of production. If you report this fact in the 
post-production development report, you may retain the lesser of 50 
percent of the original royalty suspension volume or 50 percent of the 
median of the distribution of the potentially recoverable resources 
anticipated in your application.
* * * * *

    18. Section 203.77 is revised to read as follows:


Sec. 203.77  May I voluntarily give up relief if conditions change?

    Yes, by sending a letter to that effect to the MMS Regional 
Director for the GOM.

    19. In Sec. 203.78, the introductory paragraph, and paragraphs 
(a)(1), (b)(1) and (f) are revised to read as follows:


Sec. 203.78  Do I keep relief if prices rise significantly?

    If prices rise above a base price for light sweet crude oil or 
natural gas, set by statute for pre-Act leases, indicated in your 
original lease agreement or Notice of Sale for post-November 2000 deep 
water leases, you must pay full royalties as prescribed in this 
section. For post-November 2000 deepwater leases, price thresholds 
apply on a lease basis, so different leases on the same field, 
development project, or expansion

[[Page 1879]]

project may have different price thresholds.
    (a) * * *
    (1) Pay royalties on all oil production for the previous year at 
the lease stipulated royalty rate plus interest (under 30 U.S.C. 1721 
and Sec. 218.54 of this chapter) by March 31 of the current calendar 
year, and
* * * * *
    (b) * * *
    (1) Pay royalties on all natural gas production for the previous 
year at the lease stipulated royalty rate plus interest (under 30 
U.S.C. 1721 and Sec. 218.54 of this chapter) by March 31 of the current 
calendar year, and
* * * * *
    (f) We change the prices referred to in paragraphs (a), (b), and 
(d) of this section periodically. For pre-Act leases, these prices 
change during each calendar year after 1994 by the percentage that the 
implicit price deflator for the gross domestic product changed during 
the preceding calendar year. For post-November 2000 deepwater leases, 
these prices change as indicated in the lease instrument or in the 
Notice of Sale under which we issued the lease.

    20. Section 203.80 is added to read as follows:


Sec. 203.80  When can I get royalty relief if I am not eligible for 
end-of-life or deep water royalty relief?

    We may grant royalty relief when it serves the statutory purposes 
summarized in Sec. 203.1, and our formal relief programs provide 
inadequate encouragement to increase production or development. Unless 
your lease lies wholly west of 87 degrees, 30 minutes West longitude in 
the Gulf of Mexico, your lease must be producing to qualify for relief. 
Before you may apply for royalty relief apart from our end-of-life or 
deepwater programs, we must agree that your lease or project has two or 
more of the following characteristics:
    (a) The lease has produced for a substantial period and the lessee 
can recover significant additional resources. Significant additional 
resources means enough to allow production for at least a year more 
than would be profitable without royalty relief.
    (b) Valuable facilities (e.g., a platform or pipeline that would be 
removed upon lease relinquishment) exist that we do not expect a 
successor lessee to use. If the facilities are located off the lease, 
their preservation must depend on continued production from the lease 
applying for royalty relief. We will only consider an allocable share 
of costs for off-lease facilities in the relief application.
    (c) A substantial risk exists that no new lessee will recover the 
resources.
    (d) The lessee made major efforts to reduce operating costs too 
recently to use the formal program for royalty relief (e.g., recent 
significant change in operations).
    (e) Circumstances beyond the lessee's control, other than water 
depth, preclude reliance on one of the existing royalty relief 
programs.

    21. In Sec. 203.81, paragraphs (a) and (c) are revised to read as 
follows:


Sec. 203.81  What supplemental reports do royalty relief applications 
require?

    (a) You must send us the supplemental reports, indicated in the 
following table by an X, that apply to your field. Sections 203.83 
through 203.91 describe these reports in detail.

----------------------------------------------------------------------------------------------------------------
                                                                                       Deep water
                                                             End-of-  ------------------------------------------
                     Required reports                          life       Expansion     Pre-act     Development
                                                              lease        project       lease        project
----------------------------------------------------------------------------------------------------------------
(1) Administrative information Report.....................         X               X          X               X
(2) Net revenue & relief justification report.............         X
(3) Economic viability & relief justification report (RSVP                         X          X               X
 model imputs justified by other required reports)........
(4) G&G report............................................                         X          X               X
(5) Engineering report....................................                         X          X               X
(6) Production report.....................................                         X          X               X
(7) Deep water cost report................................                         X          X               X
(8) Fabricator's confirmation report......................                         X          X               X
(9) Post-production development report....................                         X          X               X
----------------------------------------------------------------------------------------------------------------

* * * * *
    (c) With your application and post-production development report, 
you must submit an additional report prepared by an independent CPA 
that:
    (1) Assesses the accuracy of the historical financial information 
in your report; and
    (2) Certifies that the content and presentation of the financial 
data and information conform to our most recent guidelines on royalty 
relief. This means the data and information must--
    (i) Include only eligible costs that are incurred during the 
qualification months; and
    (ii) Be shown in the proper format.
* * * * *

    22. In Sec. 203.83, paragraph (c) is revised to read as follows:


Sec. 203.83  What is in an administrative information report?

* * * * *
    (c) Well number, API number, location, and status of each well that 
has been drilled on the field or lease or project (not required for 
non-oil and gas leases);
* * * * *

    23. In Sec. 203.86, the following changes are made:
    A. The word ``and'' is removed at the end of paragraph (b)(6).
    B. The ``.'' is removed and ``; and'' is added at the end of 
paragraph (b)(7).
    C. Paragraph (b)(8) is added.
    D. Paragraph (c)(4) is revised.
    E. The word ``and'' is removed at the end of paragraph (d)(6).
    F. The ``.'' is removed and ``; and'' is added at the end of 
paragraph (d)(7)
    G. Paragraph (d)(8) is added.
    The revisions and additions read as follows:


Sec. 203.86  What is in a G&G report?

* * * * *
    (b) * * *
    (8) A table listing the wells and completions, and indicating which 
sands and fault blocks will be targeted for completion or recompletion.
    (c) * * *
    (4) An explanation for excluding the reservoirs you are not 
planning to develop.
    (d) * * *

[[Page 1880]]

    (8) Reserve or resource distribution by reservoir.
* * * * *

    24. In Sec. 203.87, paragraphs (a)(1) and (d) are revised to read 
as follows:


Sec. 203.87  What is in an engineering report?

* * * * *
    (a) * * *
    (1) Its size along with basic design specifications and drawings; 
and
* * * * *
    (d) A discussion of any plans for multi-phase development which 
includes the conceptual basis for developing in phases and goals or 
milestones required for starting later phases.
* * * * *

    25. In Sec. 203.89, paragraph (a) is revised to read as follows:


Sec. 203.89  What is in a deep water cost report?

* * * * *
    (a) Sunk costs. Report sunk costs in dollars not adjusted for 
inflation and only if you have documentation.
* * * * *

    26. In Sec. 203.91, a new last sentence is added to read as 
follows:


Sec. 203.91  What is in a post-production development report?

    * * * Also, you must have this report certified by an independent 
CPA according to Sec. 203.81(c).

[FR Doc. 02-438 Filed 1-14-02; 8:45 am]
BILLING CODE 4310-MR-P