[Federal Register Volume 72, Number 96 (Friday, May 18, 2007)]
[Proposed Rules]
[Pages 28396-28423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-9294]



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Part III





Department of the Interior





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Minerals Management Service



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30 CFR Parts 203 and 260



Oil and Gas and Sulphur Operations in the Outer Continental Shelf 
(OCS)--Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on OCS 
Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS 
Leases Offshore of Alaska; Proposed Rule

  Federal Register / Vol. 72, No. 96 / Friday, May 18, 2007 / Proposed 
Rules  

[[Page 28396]]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 203 and 260

RIN 1010-AD33


Oil and Gas and Sulphur Operations in the Outer Continental Shelf 
(OCS)--Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on OCS 
Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS 
Leases Offshore of Alaska

AGENCY: Minerals Management Service (MMS), Interior

ACTION: Proposed rule.

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SUMMARY: MMS is proposing to amend its deep gas royalty relief 
regulations to incorporate statutory changes enacted in the Energy 
Policy Act of 2005. This proposed rule would provide additional royalty 
relief for certain wells on the Outer Continental Shelf (OCS) leases in 
the Gulf of Mexico (GOM). It would also extend the applicability of 
existing deep gas royalty relief regulatory provisions to more OCS 
leases. MMS is also proposing amendments to discretionary royalty 
relief provisions and associated definitions to extend the 
applicability of certain royalty relief to leases offshore of Alaska.

DATES: Submit comments by July 17, 2007. MMS may not consider comments 
received after this date. Submit comments to the Office of Management 
and Budget on the information collection burden in this rule by June 
18, 2007.

FOR FURTHER INFORMATION CONTACT: Marshall Rose, Chief, Economics 
Division, at (703) 787-1536 or [email protected].

ADDRESSES: You may submit comments on the proposed rulemaking by any of 
the following methods. Please use the Regulation Identifier Number 
(RIN) 1010-AD33 as an identifier in your message. See also Public 
Availability of Comments under Procedural Matters.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions on the Web site for submitting comments.
     E-mail MMS at [email protected]. Use the RIN 1010-
AD33 in the subject line.
     Fax: 703-787-1546. Identify with the RIN, 1010-AD33.
     Mail or hand-carry comments to the Department of the 
Interior; Minerals Management Service; Attention: Regulations and 
Standards Branch (RSB); 381 Elden Street, MS-4024; Herndon, Virginia 
20170-4817. Please reference ``Royalty Relief--Ultra-Deep Gas Wells on 
OCS Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS 
Leases Offshore of Alaska, 1010-AD33'' in your comments and include 
your name and return address.
     Send comments on the information collection in this rule 
to: Interior Desk Officer 1010-AD33, Office of Management and Budget; 
202-395-6566 (fax); e-mail: [email protected]. Please also send 
a copy to MMS.

SUPPLEMENTARY INFORMATION: 

A. Background and Summary of the Proposed Rule

    Section 344 of the Energy Policy Act of 2005, Pub. L. 109-58, 119 
Stat. 594, 702 (codified at 42 U.S.C. 15904) (referred to hereinafter 
as ``section 344''), enacted on August 8, 2005, provides incentives to 
producers in the form of royalty relief for production of certain deep 
gas from offshore federal oil and gas leases in the shallow waters of 
the GOM wholly west of 87 degrees, 30 minutes West longitude. This 
statutorily-mandated relief supplements royalty relief MMS previously 
provided by regulation.
    On January 26, 2004 (69 FR 3510), MMS adopted regulations at 30 CFR 
Sec. Sec.  203.40-203.48 to provide royalty relief incentives for deep 
gas production from GOM leases in less than 200 meters of water that 
lie wholly west of 87 degrees, 30 minutes West longitude (the rule was 
effective for wells spudded on or after the date of the proposed rule, 
March 26, 2003). These rules, subject to certain limitations, provide a 
royalty suspension volume (RSV) for two basic categories of deep gas 
production: 15 billion cubic feet (BCF) of RSV is provided for 
qualifying wells with a perforated interval the top of which is between 
15,000 and 18,000 feet true vertical depth subsea (TVD SS); and 25 BCF 
of RSV is provided for qualifying wells completed at least 18,000 feet 
TVD SS. The rules also provide lesser amounts of royalty relief for 
deep sidetracks and for drilling certain unsuccessful deep wells.
    Section 344 requires MMS to adopt regulations providing for 
additional categories of deep gas royalty relief for GOM leases wholly 
west of 87 degrees, 30 minutes West longitude. First, section 344(a) 
provides that for certain ultra-deep wells in less than 400 meters of 
water (defined in section 344(a)(3)(A) as wells with a perforated 
interval the top of which is at least 20,000 feet TVD SS), the agency 
shall issue regulations granting an RSV of not less than 35 BCF. This 
requires adding a new well depth category and new RSV amount to the 
existing deep gas royalty relief rule.
    Second, section 344(b) requires MMS to promulgate regulations 
granting royalty relief suspension volumes for gas produced from deep 
wells on leases in waters more than 200 meters but less than 400 meters 
deep. In calculating the suspension volumes, section 344(b) requires 
MMS to use the same methodology used to calculate suspension volumes 
for deep wells in shallower waters. This requires adding a new water 
depth category to the existing deep gas royalty relief rule. These 
proposed regulations implement these two statutory directives.
    In addition, section 346 of the Energy Policy Act, 119 Stat. 704, 
amended section 8(a)(3)(B) of the OCS Lands Act (OCSLA), 43 U.S.C. 
1337(a)(3)(B), to extend the Secretary's discretionary authority to 
grant royalty relief to leases offshore of Alaska. This proposed rule 
also implements this provision. However, neither the existing deep gas 
royalty relief rule nor the additional deep gas royalty relief granted 
in section 344 applies to leases offshore of Alaska.
    Both subsections (a) and (b) of section 344 provide that any final 
rule that the Secretary adopts will be retroactive to the date of this 
proposed rule. Therefore, production from any wells that earn royalty 
relief under section 344 drilled on or after the publication date of 
the proposed rule would qualify for the relief provided for in the 
final rule, if the well meets the requirements of the final rule. Of 
course, MMS may modify the rule between this proposed rule and the 
final rule, so lessees should not assume that the proposed rules would 
apply.
    With respect to ultra-deep wells on leases located wholly west of 
87 degrees, 30 minutes West longitude in the GOM in shallow waters less 
than 400 meters deep, section 344(a)(1) provides:

    [T]he Secretary shall issue regulations granting royalty relief 
suspension volumes of not less than 35 BCF with respect to the 
production of natural gas from ultra deep wells on leases issued in 
shallow waters less than 400 meters deep located in the Gulf of 
Mexico wholly west of 87 degrees, 30 minutes west longitude.

    While this statutory language does not specify how the rulemaking 
should allocate or grant the 35 or greater BCF ``with respect to the 
production of natural gas from ultra deep wells on leases,'' Congress 
certainly intended an incentive to drill and produce ultra-deep wells 
beyond what MMS rules currently provide. Section 344(a)(2) further 
grants the Secretary considerable discretion when an ultra-deep well is 
not an original well or if there has been

[[Page 28397]]

previous deep gas production on the lease. Section 344(a)(2) provides:

    (2) Suspension Volumes.--The Secretary may grant suspension 
volumes of not less than 35 billion cubic feet in any case in 
which--
    (A) The ultra deep well is a sidetrack; or
    (B) The lease has previously produced from wells with a 
perforated interval the top of which is at least 15,000 feet true 
vertical depth below the datum at mean sea level. (Emphasis added.)

Therefore, section 344 requires that an ultra-deep well drilled on a 
lease receive an RSV of at least 35 BCF except for (1) an ultra-deep 
well that is a sidetrack, or (2) an ultra-deep well on a lease that has 
previously produced from a well with a perforated interval the top of 
which is at least 15,000 feet TVD SS. The combined effect of these 
provisions is that only the first ultra-deep original well on a lease 
with no prior production from a deep well is entitled to the 35 BCF 
RSV. Thus, while Congress directed generally that the first ultra-deep 
well on a lease drilled after the date of the proposed rule receive 35 
BCF or more of RSV, Congress' use of the term ``may'' in section 
344(a)(2) gives the Secretary discretion to decide whether any 
sidetracks completed to depths below 20,000 feet TVD SS or the first 
ultra-deep well completed after production from any deep well 
(including a second ultra-deep well on a lease) should be granted an 
additional 35 BCF or more of royalty relief. One objective of this 
proposed rulemaking is to determine whether MMS should grant RSVs of 
not less than 35 BCF for ultra-deep sidetracks and subsequent ultra-
deep wells. Because of the statutory language, MMS cannot use section 
344's authority to grant an RSV of between 0 and 35 BCF.
    Since the royalty relief is available only upon the ``production of 
natural gas from ultra-deep wells on leases,'' Congress intended to 
supplement the existing rules that were promulgated with the objective 
of reducing the cost of producing domestic natural gas from deep 
formations in the shallow waters of the GOM. MMS intends to adopt an 
approach that is consistent with the statute. In general, with only 
limited exceptions, MMS is proposing to give no more relief than 
section 344 compels. Therefore, MMS seeks comments on its proposal to 
grant royalty relief only for the first ultra-deep well.
    Subject to the receipt and analysis of requested comments regarding 
those discretionary provisions, for any lease that has never produced 
from any deep well, MMS is proposing to grant 35 BCF of RSV for the 
first producing ultra-deep original well or sidetrack with a sidetrack 
measured depth (i.e., length) of at least 20,000 feet drilled after the 
date of this proposed rule. (One exception is discussed below.) MMS is 
not proposing to grant an RSV for subsequent ultra-deep wells or 
shorter sidetracks on a lease.
    Because section 344 is not retroactive, it does not provide for 
additional royalty relief for ultra-deep wells drilled before the 
publication date of this proposed rule. However, an ultra-deep well 
drilled before the publication date of this proposed rule would, if it 
met the other requirements of the existing rule, earn the same royalty 
relief as a deep well with a perforated interval the top of which is 
18,000 feet TVD SS or deeper. Thus, MMS is proposing to treat ultra-
deep wells drilled before the publication date of this proposed rule in 
the same manner as any other deep well in the 18,000-feet-or-deeper 
depth range.
    MMS is not proposing to grant an RSV of 35 BCF under section 344 
for an ultra-deep well that is a sidetrack that has a measured depth of 
less than 20,000 feet. Treatment of such a well for purposes of royalty 
relief under this proposed rule, as explained further below, depends on 
when the well begins producing.
    For purposes of clarity, MMS proposes to revise the definitions in 
the existing rule to segregate a ``deep well'' (a well with a 
perforated interval the top of which is at least 15,000 feet and less 
than 20,000 feet TVD SS) from an ``ultra-deep well'' (a well with a 
perforated interval the top of which is at or below 20,000 feet TVD SS) 
for all purposes. This is also consistent with section 344(a)(3)(A)'s 
definition of ``ultra-deep well.'' Trying to use the term ``deep well'' 
to include an ultra-deep well in some contexts but not in others 
carries a high potential for confusion. The changes in definitions 
necessitate revisions to several provisions of the existing rule to 
accommodate the change in terminology. These changes do not change the 
substance of the existing rule with regard to deep wells or ultra-deep 
wells drilled before the publication date of this proposed rule.
    Section 344(a) provides no time limit on the relief it grants for 
ultra-deep wells (a ``sunset'' provision). MMS therefore is not 
proposing one in this rulemaking.
    The sunset provision in the existing deep gas rule is contained in 
the definition of ``qualifying well'' in the current Sec.  203.0, which 
limits qualifying deep wells to those that produce gas before May 3, 
2009. That date is 5 years after the effective date of the final rule 
currently in force and 6 years (plus a few weeks) after the publication 
date of the original proposed deep gas rule (March 26, 2003). Because 
section 344(b) requires that MMS use the same methodology in 
calculating RSVs for deep wells in 200-400 meters of water that is used 
to calculate RSVs for deep wells in shallower water, MMS is proposing a 
sunset provision for deep wells in 200-400 meters of water of May 3, 
2013, which is exactly 4 years after the sunset date for relief for gas 
produced from deep wells in 200 meters of water or less, and about 6 
years from the publication date of this proposed rule.
    Section 344(c) provides that ``[t]he Secretary may place 
limitations on the royalty relief granted under this section based on 
market price.'' Therefore, as explained more fully below, MMS is 
proposing price thresholds that, if exceeded, would require the lessee 
to pay royalty on production that otherwise would be royalty-free. The 
concept underlying the price threshold terms proposed here is that to 
the extent ultra-deep gas and deep gas royalty relief granted under the 
proposed provisions would have been granted under the existing rule for 
existing leases, the existing rule's price threshold ($9.88 per MMBtu, 
adjusted annually for inflation after 2006) would apply. For all deep 
gas and ultra-deep gas royalty relief that results from section 344's 
new provisions, and for deep gas royalty relief for leases issued after 
the effective date of the final rule that are located partly or 
entirely in less than 200 meters of water, a different price threshold 
of $4.47 per MMBtu, adjusted annually for inflation after 2006, would 
apply. MMS is requesting comment, data, information, and other input on 
this proposed threshold or why a threshold other than $4.47 per MMBtu 
might be more appropriate for section 344 royalty relief.
    Section 344(c) also provides that ``The royalty relief granted 
under this section shall not apply to a lease for which deep water 
royalty relief is available.'' The proposed rule reflects this 
limitation.
    The existing regulations at Sec.  203.44 provide royalty relief in 
the form of a royalty suspension supplement (RSS) of up to 5 BCF for 
certain unsuccessful wells drilled to a depth below 18,000 feet TVD SS. 
MMS is not proposing any additional relief for unsuccessful wells 
simply because an unsuccessful well or sidetrack was drilled to a depth 
below 20,000 feet TVD SS. Unsuccessful wells drilled to a depth below 
20,000 feet TVD SS would continue to be treated the same as 
unsuccessful wells drilled

[[Page 28398]]

to a depth between 18,000-20,000 feet TVD SS.
    The fact that section 344 is not retroactive also means that the 
extension of deep gas royalty relief to leases in the 200-400 meter 
water depth range does not apply to deep or ultra-deep wells drilled on 
such leases before the publication date of this proposed rule.

B. Section-by-Section Analysis

    The discussion in part A of this preamble summarized the principal 
concepts of this proposed rule. This section-by-section analysis will 
describe the more significant proposed changes in additional detail.

What definitions apply to this part? (Sec.  203.0)

    MMS proposes changes to some definitions in the existing rule and 
some new definitions to implement section 344's requirements.
    MMS proposes to revise the definition of ``deep well'' to mean a 
well with a perforated interval the top of which is at least 15,000 
feet and less than 20,000 feet TVD SS, and to add a definition of 
``ultra-deep well'' to mean a well with a perforated interval the top 
of which is 20,000 feet TVD SS or deeper. Under the existing rule, the 
term ``deep well'' includes all wells deeper than 15,000 feet TVD SS.
    Because section 344 adds a new water depth category (leases located 
in more than 200 meters and less than 400 meters of water) to deep gas 
royalty relief, the coverage of these definitions extends beyond the 
existing rule, which applies only to leases in 200 meters of water or 
less.
    Further, the existing rule does not cover all leases located in 
water entirely or partly less than 200 meters deep. At the end of 
October 2006, about 70 leases in that water depth range are subject to 
deep gas RSV's, conditions, and requirements specified in the lease 
instruments because their lessees did not opt to convert to the deep 
gas royalty relief terms in the existing regulations. To accommodate 
section 344 requirements for these leases, MMS proposes to add a 
definition of ``non-converted lease'' in Sec.  203.0. This category of 
leases must be separated from leases in the 0-200 meter water depth 
category that are covered by the existing rule because their deep gas 
wells have different timing and reservoir conditions for qualification, 
earn different RSV's, and are subject to different price thresholds.
    In addition to distinguishing between deep wells and ultra-deep 
wells, MMS further proposes to add definitions for the terms ``phase 1 
ultra-deep well,'' ``phase 2 ultra-deep well,'' and ``phase 3 ultra-
deep well.'' The proposed royalty relief treatment of ultra-deep wells 
depends first on whether an ultra-deep well was drilled before or after 
the date of publication of this proposed rule. Wells drilled before the 
date of publication of the proposed rule are phase 1 ultra-deep wells.
    A phase 1 ultra-deep well would be an ultra-deep well on a lease 
that is located in water entirely or partly less than 200 meters deep 
for which drilling began before the date of publication of this 
proposed rule. In other words, these are wells that would continue to 
be treated the same as they are under the provisions of the existing 
rule for deep wells of more than 18,000 feet TVD SS. Phase 1 ultra-deep 
wells would not be eligible for the higher RSVs prescribed in section 
344.
    A phase 2 ultra-deep well would be an ultra-deep well for which 
drilling began on or after the publication date of this proposed rule 
and that falls into one of the three following categories: (1) The 
ultra-deep well begins gas production before May 3, 2009, on a lease 
that is located in water partly or entirely less than 200 meters deep 
that is not a non-converted lease; (2) the ultra-deep well begins gas 
production within the primary term of a non-converted lease; or (3) the 
ultra-deep well begins production before May 3, 2013, on a lease that 
is located in water entirely more than 200 meters and entirely less 
than 400 meters deep.
    A phase 3 ultra-deep well would be an ultra-deep well for which 
drilling began on or after the publication date of this proposed rule 
and that begins gas production on or after the dates prescribed for 
production from a phase 2 ultra-deep well. Only phase 2 ultra-deep 
wells and phase 3 ultra-deep wells would be eligible to earn the higher 
35 BCF RSV prescribed in section 344.
    Because MMS also proposes to differentiate the treatment of ultra-
deep wells that are sidetracks with a sidetrack measured depth of 
20,000 feet or more from sidetracks with a sidetrack measured depth of 
less than 20,000 feet, MMS also proposes to add a definition of 
``ultra-deep short sidetrack'' to mean ultra-deep wells that are 
sidetracks with a sidetrack measured depth of less than 20,000 feet.
    The reasons for distinguishing between phase 2 and phase 3 ultra-
deep wells relate to both the proposed royalty relief treatment of 
ultra-deep short sidetracks and the proposed price threshold 
provisions. Both of these matters are addressed in detail below.
    Under the existing rule, the term ``qualified well'' means a deep 
well for which drilling begins on or after March 26, 2003, the date the 
original deep gas proposed rule was published, and which meets other 
applicable requirements. Qualified wells are wells to whose gas 
production an RSV may be applied. The fact that a well is a qualified 
well does not mean that it earns an RSV. A well must be a qualified 
well to earn an RSV, but it also must meet other requirements. Wells 
that earn an RSV are a subset of qualified wells. But RSVs also are 
applied to gas production from qualified wells that do not themselves 
earn an RSV. MMS proposes to amend the definition of ``qualified well'' 
and add definitions for ``qualified deep well'' and ``qualified ultra-
deep well,'' to address all four categories of deep gas royalty relief 
that exist after enactment of section 344--namely, deep gas wells on 
leases located in less than 200 meters of water that are covered by the 
existing rule, deep gas wells on non-converted leases (all of which are 
in less than 200 meters of water), deep gas wells on leases located in 
200-400 meters of water, and ultra-deep gas wells on leases in all 
water depths less than 400 meters.
    MMS also proposes to revise the definition of ``certified 
unsuccessful well'' in Sec.  203.0, used in the royalty suspension 
supplement provisions in re-designated Sec. Sec.  203.45 and 203.46 
(Sec. Sec.  203.44 and 203.45 in the existing rule), to add the new 
200-400 meter water depth category.
    In the definition of ``expansion project,'' MMS proposes to specify 
that reservoirs to whose production an RSV would be applied under 
Sec. Sec.  203.30 through 203.36 and 203.40 through 203.48 cannot be 
included as part of an expansion project.
    MMS also proposes amendments to certain of the part 203 provisions 
to include leases offshore of Alaska under section 346 of the Energy 
Policy Act. These amendments would involve modifying the definitions of 
``development project'' and ``expansion project'' and the royalty 
relief provisions for development projects and expansion projects in 
Sec.  203.2. In addition, references to a lease location or water depth 
in Sec. Sec.  203.60, 203.69, and 203.78, mention of a specific MMS 
Regional office in Sec. Sec.  203.62, 203.70, 203.77, 203.81, and 
203.90, and the associated price threshold provisions in Sec.  203.78 
would be revised to accommodate leases offshore of Alaska.

[[Page 28399]]

Royalty Relief for Drilling Ultra-Deep Gas Wells on Leases Not Subject 
to Deep Water Royalty Relief (Sec. Sec.  203.30 through 203.36)

    For the most part, the new proposed ultra-deep gas provisions in 
Sec. Sec.  203.30 through 203.36 follow the structure of the existing 
deep gas rule at Sec. Sec.  203.40 through 203.48, and many of the 
provisions are similar. MMS is also proposing changes in Sec. Sec.  
203.40 through 203.48 to accommodate the new ultra-deep gas provisions 
in Sec. Sec.  203.30 through 203.36.

Which leases are eligible for royalty relief as a result of drilling an 
ultra-deep well? (Sec.  203.30)

    Proposed Sec.  203.30 prescribes the basic criteria for a lease to 
be eligible for deep gas royalty relief. Paragraph (a) of this proposed 
section follows the statutory requirement in section 344(a) and (b) 
that the lease must be located in the GOM wholly west of 87 degrees, 30 
minutes West longitude.
    Paragraph (c) of this proposed section implements the requirement 
of section 344(c) that deep gas royalty relief shall not apply to a 
lease for which deep water royalty relief is available. (In this 
context, ``available'' means either provided for in the lease terms or 
granted in response to an application.) This issue arises because 
section 344(b) requires the Secretary to extend deep gas royalty relief 
to leases located in more than 200 but less than 400 meters of water. 
Deep water royalty relief applied to leases in that water depth range 
under the Outer Continental Shelf Deep Water Royalty Relief Act of 
1995, Pub. L. No. 104-58, Title III, 109 Stat. 563 (DWRRA). Thus, to be 
eligible for deep gas royalty relief, a lease located in more than 200 
but less than 400 meters of water had to have been issued either before 
November 28, 1995 (the date of enactment of the DWRRA), or after 
November 28, 2000. Leases issued between those dates (i.e., in the 
first 5 years after the DWRRA's enactment) were issued under the 
mandatory deep water royalty relief provisions of DWRRA section 304. 
All the leases issued under section 304 provide for deep water royalty 
relief and therefore are not eligible for deep gas royalty relief.
    A lease issued before November 28, 1995, would not be eligible for 
deep gas royalty relief if MMS had granted deep water royalty relief 
under section 302 of the DWRRA (adding 43 U.S.C. 1337(a)(3)(C)).
    A lease issued after November 28, 2000, would not be eligible for 
deep gas royalty relief if MMS had granted deep water royalty relief 
under 30 CFR 203.60 through 203.79. The royalty suspension (RS) 
provisions in 30 CFR 260.120 through 260.124 that apply to post-
November 2000 leases do not themselves grant deep water royalty relief 
and refer back to the specific lease terms. There are no RS leases in 
the 200-400 meter water depth interval--in other words, there is no 
lease issued in a lease sale held after November 28, 2000, in the 200-
400 meter water depth interval that provides for any royalty relief in 
the lease terms. Therefore, the only leases issued in lease sales held 
after November 28, 2000, that are excluded from deep gas royalty relief 
are those that have applied for and been granted deep water relief 
under Sec. Sec.  203.60 through 203.79.
    Paragraph (b) of this proposed section reflects MMS' general 
proposal, under section 344(a)(2)(B), not to grant deep gas royalty 
relief if the lease has previously produced gas or oil from a deep well 
or an ultra-deep well. Proposed section 203.31(b) contains an 
exception.

If I have a qualified phase 2 or phase 3 ultra-deep well, what royalty 
relief would my lease earn? (Sec.  203.31)

    In proposed Sec.  230.31(a), the text preceding the table and the 
table reflect the interpretation of the statute described above that 
the first qualifying original phase 2 or phase 3 ultra-deep well on a 
lease that meets the requirements of proposed Sec.  203.30 would earn 
an RSV of 35 BCF.
    The table in Sec.  230.31(a) shows that if a sidetrack drilled 
after the publication date of this proposed rule is completed to a 
depth below 20,000 feet TVD SS and has a length (measured depth) of at 
least 20,000 feet, i.e., a length equivalent to that of an original 
ultra-deep well, the sidetrack would earn an RSV of 35 BCF if there has 
been no gas production from a deep well or an ultra-deep well on the 
lease. As a practical matter, MMS believes that the only sidetracks 
that are likely to have a sidetrack measured depth of 20,000 feet or 
more are sidetracks drilled from a platform slot reclaimed from a 
previously drilled well. (See the inclusion in the definition of 
``sidetrack'' in section 344(a)(3)(B)(ii)(I).) These wells are new 
wells and are the functional equivalent of original wells. (MMS does 
not believe that a 20,000-foot-long sidetrack drilled to a new 
objective bottom-hole location by leaving a previously drilled well--
see section 344(a)(3)(B)(i)--is a practical likelihood.)
    As stated above, in light of the fact that section 344 requires MMS 
to grant either a 35 BCF RSV or 0 BCF RSV, MMS does not believe it is 
appropriate or consistent with statutory objectives or congressional 
intent to grant a 35 BCF RSV for a relatively short sidetrack simply 
because it was completed at a depth below 20,000 feet TVD SS. (An 
example would be a 6,000-foot-long sidetrack that left the main 
wellbore at 14,700 feet and was completed at 20,100 feet TVD SS.) It 
would appear that under such a circumstance, granting a 35 BCF RSV 
would be disproportionate to the costs and risks of drilling the 
sidetrack and to the degree of relief that would encourage ultra-deep 
production.
    At the same time, in view of the general congressional policy 
underlying section 344, it is difficult to believe that Congress 
intended to compel MMS to grant either a disproportionate RSV or no RSV 
at all for a sidetrack drilled to an ultra-deep depth from an existing 
wellbore (if there has been no production from any deep or ultra-deep 
well) simply because the sidetrack was completed to a depth below 
20,000 feet TVD SS, even though the statutory phraseology could be read 
to permit no other result. Therefore, MMS proposes to treat sidetracks 
of lengths less than an original ultra-deep well but completed to 
ultra-deep depths (i.e., ultra-deep short sidetracks) in the same 
manner as they are treated under the existing rule, to more fully 
effectuate what appears to be the overall intent of Congress. Under the 
proposed Sec.  203.31(a), such a sidetrack would earn an RSV of 4 BCF 
plus 600 MCF times the sidetrack measured depth. Likewise, the same 
sunset dates would apply to these sidetracks that apply to sidetracks 
under the existing rule (and as the existing rule is proposed to be 
amended to add leases in the 200-400 meter water depth range under 
section 344(b)). In other words, the ultra-deep short sidetrack would 
have to be a phase 2 ultra-deep well. If an ultra-deep short sidetrack 
would not have earned an RSV under the existing rule (as it is proposed 
to be amended to add leases in the 200-400 meter water depth range), 
MMS proposes to grant no RSV to it here.
    MMS specifically requests comments regarding the adequacy of its 
authority to prescribe this RSV. If MMS concludes that the proposed 
provision is not supported by adequate statutory authority, MMS' 
alternative proposal would be to grant no RSV to an ultra-deep short 
sidetrack, and not to grant an RSV of 35 BCF.
    Proposed Sec.  203.31(b) contains an exception from the requirement 
that the lease not have produced previously from any deep well or 
ultra-deep well. Some background explanation is necessary to explain 
the reasons for the

[[Page 28400]]

proposed exception. Under the existing rule, in cases where a deep well 
completed at a depth between 15,000 feet and 18,000 feet TVD SS has 
produced and earned an RSV of 15 BCF, a subsequent well completed at a 
depth greater than 18,000 feet TVD SS may earn an additional RSV of 10 
BCF. But under the proposed rule, if the subsequent well is an ultra-
deep well (completed at a depth greater than 20,000 feet TVD SS), it 
would earn no additional RSV. Thus, if a lessee has produced from a 
deep well that earned an RSV of 15 BCF and then drills an ultra-deep 
well, the lease would get less royalty relief than under the existing 
rule and less royalty relief than if the lessee had drilled a deep well 
to a depth between 18,000 and 20,000 feet TVD SS. Section 344, however, 
allows that result. (MMS anticipates that the number of cases in which 
this scenario might occur before deep gas royalty relief under the 
existing rule expires in May 2009 would be very small.)
    Similarly, consistent with the proposed policy explained above, MMS 
proposes to grant no RSV for a sidetrack completed at a depth of 20,000 
feet or more if there has been production from any deep well, 
regardless of the length of the sidetrack. This proposal would result 
in the possibility of a similar scenario arising in which a lessee 
drills a sidetrack to an ultra-deep depth after the lease has earned an 
RSV of 15 BCF from a well completed at a depth between 15,000 feet and 
18,000 feet TVD SS. Under the proposed rule, the sidetrack would earn 
no additional RSV, while under the existing rule it would earn an RSV 
of 4 BCF plus 600 MCF times the sidetrack measured depth, up to a 
maximum of an additional 10 BCF. Under such a scenario, the lease would 
receive less royalty relief than under the existing rule and less than 
if the lessee had completed the sidetrack at a depth between 18,000 
feet and 20,000 feet TVD SS.
    The exception proposed in Sec.  203.31(b) arises because all leases 
issued in water depths of 200 meters or less during 2004 and 2005, that 
is in lease sales 190, 192, 194, and 196, specifically cite the 
existing deep gas rule in the lease terms--unlike leases issued before 
2004 or after 2005. Although deep gas royalty relief under the existing 
rule was effective for wells drilled after publication of the proposed 
rule (March 26, 2003), that relief did not become effective until the 
final rule. The final rule initially had an effective date of March 1, 
2004, but an administrative oversight led to the effective date of the 
final rule being delayed until May 3, 2004. The lease sales held in 
2004 were all after the initial effective date, and the terms of the 
leases issued in those sales referred to royalty relief terms in the 
existing rule. While MMS does not believe that a reference to the 
citation of the existing rule makes the terms of the rule as they 
existed on that date a fixed property right, MMS also doubts that 
Congress would have intended to reduce potential royalty relief that 
existing leases already had under the rules on the date of enactment of 
the Energy Policy Act if the lease instrument itself referred to the 
rule.
    Leases issued before 2004, which preceded the effective date of the 
existing rule, do not refer to the rule in their terms. For these 
leases, the existing rule, including the opportunity for a deep well to 
earn relief after the lease already has production from a deep well, 
was a benefit that MMS granted on its own initiative after the lease 
was already in force. MMS may change, or even entirely eliminate, that 
benefit prospectively through a subsequent rulemaking should it choose 
to do so. In this rulemaking, MMS proposes to do just that--eliminate 
the additional relief these pre-2004 leases could have earned for 
drilling a well deeper than 20,000 feet TVS SS after producing from a 
well completed between 15,000 and 18,000 feet TVD SS.
    However, to avoid potential future conflict regarding the terms of 
leases issued in the four Gulf of Mexico sales held in 2004 and 2005, 
i.e., Sales 190, 192, 194, and 196, MMS proposes to allow the 
additional relief associated with drilling an ultra-deep well after 
producing from a well completed between 15,000 and 18,000 feet TVD SS 
provided for in the existing rule for these leases. MMS specifically 
requests comments on this proposed exception.
    MMS further notes that the issue discussed in the preceding 
paragraph does not arise in the context of leases issued between 
January 1, 2001 and January 1, 2004, that contain deep gas royalty 
relief in their lease terms and for which the lessee exercised the 
option in Sec.  203.48, re-designated Sec.  203.49 in this proposed 
rule, to convert to the rule. The lessees filed a form with an election 
to go under the rule. The intent was to treat these leases identically 
to pre-2001 leases. Nor does the issue discussed above arise in the 
context of leases issued after January 1, 2001, that are located partly 
in water less than 200 meters deep (and, therefore, partly in water 
more than 200 meters deep) that are covered by the existing rule 
because no deep water royalty relief terms in statutes or lease terms 
apply (see the existing Sec.  203.40(a)(2) and (3)). These leases also 
are in a situation that is functionally identical to pre-2001 leases, 
and for which there is no question that MMS may change the rule 
prospectively. Therefore, MMS does not propose to include leases in 
these two categories within the exception proposed in Sec.  203.31(b).
    Proposed Sec.  203.31(c) specifies that all gas production from 
qualified wells (i.e., qualified deep and qualified ultra-deep wells) 
on the lease, including gas production that is not subject to royalty, 
counts toward the RSV earned by a qualified deep well or qualified 
ultra-deep well on the lease, in the manner required under proposed 
Sec. Sec.  203.32 and 203.36. For example, assume that the lessee 
drills and produces from a qualified 22,000-foot phase 2 ultra-deep 
well that earns an RSV of 35 BCF. Further assume that the lessee then 
drills and produces from two qualified deep wells (completed at 16,500 
feet TVD SS and 17,200 feet TVD SS, respectively), neither of which 
earns an RSV. In this circumstance, the 35 BCF RSV earned by the first 
well applies to the earliest production from all 3 wells until the 35 
BCF of RSV is used.
    Proposed Sec.  203.31(d) would provide that lessees may recoup any 
royalties paid on production from a qualified phase 2 or phase 3 ultra-
deep well that occurs before 30 days after the date of publication of 
the final rule. This provision is necessary because of the provisions 
in subsections (a) and (b) of section 344 that ``[r]egulations issued 
under this subsection shall be retroactive to the date that the notice 
of proposed rulemaking is published in the Federal Register.'' Those 
provisions make royalty relief applicable to gas produced after the 
date of the proposed rule and before the final rule. A lessee may begin 
producing gas from a qualified phase 2 or phase 3 ultra-deep well after 
the date of this proposed rule, but would not be able to claim royalty 
relief under this proposed rule for any of that production unless and 
until a final rule is promulgated and becomes effective. (However, 
royalty relief may be available under existing regulations.) The lessee 
therefore might have to pay royalty on production occurring before a 
final rule becomes effective. Because the royalty relief provided for 
under section 344 would then be retroactive to the proposed rule's 
publication date, the lessee would have to recoup or seek a refund of 
the royalties paid in the meantime. Proposed paragraph (d) would 
clarify that the lessee could do so.
    Proposed Sec.  203.31(e) includes several examples of how the 
proposed provisions would work in various circumstances. Example 1 
illustrates a

[[Page 28401]]

situation in which a lessee drills and produces from a qualified ultra-
deep well after the date of this proposed rule (in this example, a 
phase 2 ultra-deep well), and earns a 35 BCF RSV. The lessee then 
drills a second qualified ultra-deep well on the lease. Under the 
proposed rule, the second ultra-deep well would not earn any additional 
RSV. (The 35 BCF RSV would be applied to gas production from both 
wells.)
    MMS bases this proposal on section 344(a)(2), which expressly 
grants the Secretary discretion whether to provide royalty relief for 
ultra-deep wells if the lease has previously produced from a well with 
a perforated interval the top of which is at least 15,000 feet TVD SS 
(i.e., any deep well under the existing rule). As discussed previously, 
section 344 does not command the Secretary to grant 35 BCF of royalty 
relief for each and every ultra-deep well drilled and produced on a 
lease simply because a well is an ultra-deep well. To accomplish the 
statutory objective of encouraging exploration for and production from 
ultra-deep wells, and at the same time to avoid excessive reductions in 
royalty payments that would not further that objective, MMS proposes to 
limit the 35 BCF in royalty relief to the first producing ultra-deep 
well on the lease that was drilled after the publication date of the 
proposed rule, with the condition that there has been no production 
from any other deep wells or ultra-deep wells on the lease.
    The same rationale would apply to situations where more than one 
ultra-deep well is drilled after the date of this proposed rule. MMS 
proposes that the first ultra-deep well drilled after the publication 
date of this proposed rule that produces from a lease that has not 
previously produced from a deep well or an ultra-deep well would earn a 
35 BCF RSV, but subsequent ultra-deep wells on the same lease would not 
earn additional RSVs. MMS believes that this is clearly within the 
discretion granted to the Secretary in section 344(a)(2), which permits 
the Secretary to disallow royalty relief if there has been prior 
production from any deep well.
    Example 2 illustrates a situation in which a lessee has produced 
gas from an ultra-deep well drilled on the lease before the effective 
date of the ultra-deep provisions as specified in section 344(a), i.e., 
the date of publication of this proposed rule. Under the proposed 
definitions, this would be a phase 1 ultra-deep well. In Example 2, the 
ultra-deep well was drilled before the publication date of this 
proposed rule but after March 26, 2003. In this circumstance, any 
ultra-deep well drilled after the publication date of this proposed 
rule (the second ultra-deep well on the lease) would not earn an RSV. 
However, in Example 2 the ultra-deep well drilled after March 26, 2003, 
is also a qualified deep well under the existing rule and may qualify 
for an RSV of 25 BCF under its provisions. If the first ultra-deep well 
had earned 25 BCF under the current rule, the lease would keep that 
relief. However, drilling an additional ultra-deep well after the 
publication of this proposed rule would not earn the lease any 
additional royalty relief.
    Example 3 illustrates a situation in which a deep well was drilled 
and produced before the existing deep gas rule became effective. The 
deep well therefore did not earn an RSV for the lease. The lessee then 
drilled a phase 2 ultra-deep well after the publication date of the 
proposed rule. Under the proposed rule, the ultra-deep well would not 
earn an RSV.
    In Example 4, a lessee drills and produces gas from a qualified 
phase 2 ultra-deep well and earns an RSV of 35 BCF on a lease located 
in water 300 meters deep. Subsequently, the lessee drills a deep well 
that is not an ultra-deep well. Under the existing regulations at Sec.  
203.41(e), the later well would not earn any RSV because the lease has 
already produced from a deep well with a perforated interval the top of 
which is 18,000 feet TVD SS or deeper. However, any remaining RSV 
earned by the ultra-deep well would be applied to production from the 
new deep well, as well as production from the ultra-deep well that 
earned the RSV, because the new deep well is also a qualified well 
under the hypothetical facts stated. In contrast, if the new deep well 
hypothesized in this example (for which drilling begins in 2010) begins 
production on or after May 3, 2013 (or if the new deep well were on a 
lease located in water less than 200 meters deep), the new deep well 
would not be a qualified well. In that event, the lessee would have to 
pay royalty on all production from that well notwithstanding the RSV 
earned by the phase 2 ultra-deep well.
    In Example 5, a lessee drills and produces from a qualified deep 
well completed at a depth between 15,000 and 18,000 feet TVD SS that 
earns an RSV of 15 BCF for the lease under the existing Sec.  203.41. 
The lessee then later drills and produces from a qualified phase 2 or 
phase 3 ultra-deep well (depending on the water depth of the lease) on 
the same lease. The ultra-deep well would earn no additional RSV under 
the proposed rule, but the 15 BCF RSV earned by the deep well would be 
applied to production from both the deep well and the ultra-deep well. 
Example 7 illustrates an exception to this case.
    Example 6 illustrates the proposed difference in consequences 
between drilling sidetracks of different lengths to ultra-deep depths. 
Section 344(a)(2) provides discretion whether to grant royalty relief 
if the ultra-deep well is a sidetrack. To be consistent with the 
statutory objectives, and to avoid granting excessive amounts of 
royalty relief for sidetracks that are shorter than the length 
necessary for an original well from the surface to earn royalty relief 
as an ultra-deep well, MMS proposes to grant a 35 BCF RSV if the 
sidetrack measured depth (i.e., the length of the sidetrack) is at 
least 20,000 feet and the sidetrack has a perforated interval the top 
of which is at least 20,000 feet TVD SS (and otherwise is a qualified 
phase 2 or phase 3 ultra-deep well). However, MMS would not grant 
additional royalty relief under the section 344 ultra-deep provisions 
if the sidetrack measured depth is less than 20,000 feet. A sidetrack 
of less than 20,000 feet measured depth may qualify for a lesser RSV 
that is equivalent to the relief granted under the deep well provisions 
if it is a phase 2 ultra-deep well, i.e, one that begins production 
before the applicable sunset date for royalty relief for deep wells.
    Example 7 illustrates the exception proposed in Sec.  203.31(b). In 
this example, the lease was issued after the initial effective date of 
the existing rule and before the enactment of the Energy Policy Act, 
and its terms specifically referred to the existing rule. In this 
example, the lessee completed a deep well in the 15,000-18,000 feet TVD 
SS water depth range that earned a 15 BCF RSV before enactment of the 
Energy Policy Act. The lessee then drilled and completed a phase 2 
ultra-deep well. Under the proposed Sec.  203.31(b) exception, the 
ultra-deep well would earn an additional 10 BCF RSV.

What other requirements or restrictions apply to royalty relief for a 
qualified phase 2 or phase 3 ultra-deep well? (Sec.  203.32)

    This section addresses various further requirements and some 
restrictions that would apply to RSVs earned by ultra-deep wells. These 
are self-explanatory.

To which production do I apply the RSV earned by qualified phase 2 and 
phase 3 ultra-deep wells on my lease? (Sec.  203.33)

    Proposed Sec.  203.33(a), which applies to leases that are not 
within an MMS-approved unit, has a structure similar to

[[Page 28402]]

the existing deep well provision at Sec.  203.42(a), re-designated 
Sec.  203.43(a) in this proposed rule. This paragraph specifies that an 
RSV earned by a qualified phase 2 or phase 3 ultra-deep well applies to 
all gas produced from all qualified wells (i.e., all qualified deep and 
qualified ultra-deep wells) on the lease. Proposed Sec.  203.32(f) also 
reflects this principle.
    Proposed Sec.  203.33(b), which applies to leases within a unit, 
follows the same structure for ultra-deep wells that the existing Sec.  
203.42(b), re-designated Sec.  203.43(b) in this proposed rule, has for 
deep wells. An RSV earned by a qualified phase 2 or phase 3 ultra-deep 
well would be applied to production from all qualified wells on non-
unitized areas of the lease on which the ultra-deep well is located and 
to production allocated to the lease, under the approved unit 
agreement, from qualified wells on unitized areas of the lease and on 
other leases in the unit. The allocation of production from qualified 
wells on other leases in the unit would not increase the RSV for your 
lease.
    Proposed paragraph (c) of this section is similar to Sec.  
203.42(e) of the existing rule, re-designated Sec.  203.43(c) in this 
proposed rule and specifies that the lessee would have to pay royalties 
on all production when the cumulative production from all qualified 
wells on the lease reaches the applicable RSV.

To which production may an RSV earned by qualified phase 2 and phase 3 
ultra-deep wells on my lease not be applied? (Sec.  203.34)

    This proposed provision is analogous to the existing Sec.  
203.42(d) for deep wells, re-designated Sec.  203.43(d) in this 
proposed rule, with changes to reflect section 344's addition of leases 
in the 200-400 meter water depth range.

What administrative steps must I take to use the RSV earned by a 
qualified phase 2 or phase 3 ultra-deep well? (Sec.  203.35)

    This proposed section is analogous, with one exception, to the 
existing Sec.  203.43 that applies to deep wells, re-designated Sec.  
203.44 in this proposed rule. That exception deals with the temporary 
extension of the deadline by which production must start to qualify a 
well for relief. There is no deadline by which production must start 
for most ultra-deep wells to qualify for relief, so no such extension 
is needed. The analogous temporary extension is provided for ultra-deep 
short sidetracks which do face a deadline.

Do I keep royalty relief if prices rise significantly? (Sec.  203.36)

    As explained above, the concept underlying the proposed price 
threshold terms is that to the extent ultra-deep gas and deep gas 
royalty relief granted under the proposed provisions would have been 
granted under the existing rule for existing leases (as of the date the 
final rule becomes effective), the existing rule's price threshold 
($9.88 per MMBtu, adjusted annually for inflation after calendar year 
2006) would apply. The value $9.88 per MMBtu in 2006 dollars is 
equivalent to the value $9.34 per MMBtu in 2004 dollars as stated in 
the existing rule. The inflation adjustment is described in the 
existing Sec.  203.47 (redesignated Sec.  203.48 in this proposed 
rule). The MMS webpage at http://www.mms.gov/econ/DWRRAPrice1.htm shows 
results from applying that adjustment. Excepted where noted, all price 
threshold values discussed in this proposed rule are stated in 2006 
dollars. Hence, those values are adjusted for inflation after 2006.
    For all deep gas and ultra-deep gas royalty relief that results 
from section 344's new provisions, and for deep gas and ultra-deep gas 
royalty relief for leases issued after the effective date of the final 
rule, a different price threshold of $4.47 per MMBtu, adjusted annually 
for inflation after calendar year 2006, would apply. Lessees would have 
to pay royalty on all gas production to which an RSV otherwise would be 
applied under the proposed ultra-deep well provisions for any calendar 
year in which the average daily closing New York Mercantile Exchange 
(NYMEX) natural gas price exceeds $4.47 per MMBtu (adjusted for 
inflation after 2006).
    The RSVs specified for ultra-deep wells in proposed Sec.  203.31 
for existing leases (and any future leases issued before the effective 
date of the final rule) are a consequence of section 344, with three 
exceptions. The first exception is the first 25 BCF of RSV earned under 
proposed Sec.  203.31(a) by a phase 2 ultra-deep well on a lease 
located in water partly or entirely less than 200 meters deep (i.e., a 
well drilled after the publication of this proposed rule that begins 
production before May 3, 2009). Such a well would also earn a 25 BCF 
RSV under the existing rule, so this RSV would be subject to the same 
price threshold as in the existing rule--$9.88 per MMBtu, adjusted 
annually after calendar year 2006 for inflation.
    The second exception is an RSV of up to 10 BCF earned by a phase 2 
ultra-deep well under proposed Sec.  203.31(b)'s exception for leases 
issued after the initial effective date of the existing rule and before 
enactment of the Energy Policy Act that specifically refer to the 
existing rule in the lease terms. Such a well would earn the RSV 
specified in proposed Sec.  203.31(b) under the existing rule. 
Therefore, paragraph (a) of this proposed provision would apply the 
same price threshold as in the existing rule to this RSV of 10 BCF, 
i.e., $9.88 per MMBtu, adjusted annually after calendar year 2006 for 
inflation.
    The third exception is the first 20 BCF of the 35 BCF RSV earned by 
a phase 2 ultra-deep well on a non-converted lease that begins 
production before 5 years after the date the lease was issued. Parallel 
to the situation with the RSV under proposed Sec.  203.31(a), paragraph 
(b) of proposed Sec.  203.36 would apply the price threshold specified 
in the lease terms to this RSV. For non-converted leases issued in the 
central GOM lease sale in 2001 (Sale 178), that price threshold 
originally was $3.50 per MMBtu, adjusted annually after calendar year 
2000 for inflation. For non-converted leases issued in the western GOM 
sale in 2001 and the central and western GOM sales in 2002 and 2003 
(Sales 180, 182, 182, 185, and 187), that price threshold originally 
was $5.00 per MMBtu, adjusted annually after calendar year 2000 for 
inflation. Inflation between 2000 and 2006 raised these price 
thresholds to $4.00 and $5.72 per MMBtu, respectively, as of 2006. The 
proposed Sec.  203.36(a)(3) and (4) therefore express the price 
thresholds at those levels, and they would be adjusted annually after 
calendar year 2006 for inflation in the same manner as all the other 
price thresholds.
    Paragraph (a)(2) of this proposed section addresses the RSVs earned 
by ultra deep wells that result from section 344 or that are earned by 
wells on leases issued after the effective date of the final rule that 
are located party or entirely in less than 200 meters of water. These 
RSVs include (1) the last 10 BCF (in the case of a non-converted lease, 
the last 15 BCF) of the 35 BCF of RSV earned under Sec.  203.31(a) by a 
phase 2 ultra-deep well on a lease that is located in water partly or 
entirely less than 200 meters deep issued before the effective date of 
the final rule; (2) any RSV earned under Sec.  203.31(a) by a phase 2 
ultra-deep well on a lease that is located in water partly or entirely 
less than 200 meters deep issued after the effective date of the final 
rule; (3) any RSV earned under Sec.  203.31(a) by a phase 2 ultra-deep 
well on a lease that is located in water entirely more than 200 meters 
and entirely less than 400 meters deep; and

[[Page 28403]]

(4) any RSV earned under Sec.  203.31(a) by a phase 3 ultra-deep well.
    MMS proposes to apply a lower price threshold to the RSV that 
results from section 344 than the $9.88 per MMBtu (adjusted for 
inflation after 2006) level in the existing rule. Three factors drive 
this decision. First, the absence of a sunset date for ultra-deep well 
relief risks generating in perpetuity a fiscally expensive program that 
may prove unnecessary or ineffective. A lower price threshold will 
mitigate the likelihood of such an outcome when the program is least 
necessary, that is, when prices are higher than expected. Second, 
results to date show a weaker than expected lessee reaction to the deep 
drilling incentive in the existing rule. This experience demonstrates 
the prudence of imposing tighter fiscal controls on the statutorily 
mandated expansion of that program. Third, this price threshold would 
apply when the deep drilling incentive would likely be less important, 
e.g., when other sources of natural gas have become more available and 
when current long range forecasts indicate natural gas prices will have 
retreated significantly from current levels.
    MMS analyzed several different price thresholds taking into 
consideration predicted gas prices, volatility of gas prices, and 
expected economics for deep and ultra-deep wells covered by the Energy 
Policy Act. The economic analysis that accompanies this rulemaking 
provides estimates of the effects of each option on measures of social 
welfare such as consumer and producer surplus, production and royalty 
revenues.
    MMS has chosen to propose $4.47 per MMBtu, adjusted annually for 
inflation after calendar year 2006, for incentives covered by the 
Energy Policy Act for several reasons. First, it simplifies the gas 
price threshold structure across royalty relief programs, because $4.47 
per MMBtu (adjusted for inflation after 2006) is the same gas price 
threshold that applies to all leases covered by the DWRRA. That means 
both congressionally mandated royalty relief programs provide the same 
balance between the incentive to explore and produce in a frontier area 
and the fiscal risk of offering that categorical incentive. Second, 
this choice recognizes that gas produced from deepwater leases and gas 
produced from deep wells on leases in shallower waters sells in the 
same market. The RSV in each program is the policy variable tailored to 
the costs and risks specific to the different frontier areas that 
produce that product. Third, though recent gas market conditions led 
MMS to use price thresholds above $4.47 per MMBtu (adjusted for 
inflation after 2006), those higher price thresholds are used where 
bonus bids or sunset provisions provide added controls against 
incurring unnecessary fiscal costs. Finally, given the typical time 
frame between the decision to drill and the potential emergence of deep 
gas production, the ever-present risk exists that future events will 
prove the assumptions and forecasts used to justify the proposed 
additional RSV incentives inaccurate. This observation suggests the 
need for a conservative policy for selecting the appropriate deep gas 
price threshold level.
    Also, Sec.  203.36(a) includes a default price threshold of $4.47 
per MMBtu (adjusted for inflation after 2006) for ultra-deep wells on 
future leases should their lease terms fail to provide for a different 
price threshold.
    Proposed Sec.  203.36(c) sets out several examples that clarify how 
the price thresholds would work. Example 1 assumes that a lessee drills 
and begins producing from a qualified phase 2 ultra-deep well in 2008 
on a lease issued in 2004 in less than 200 meters of water. The ultra-
deep well earns the lease an RSV of 35 BCF. The well produces a total 
of 18 BCF by the end of 2009. In both 2008 and 2009, the average daily 
NYMEX closing natural gas price is less than $9.88 per MMBtu (adjusted 
for inflation after 2006). In 2010, the well produces another 13 BCF. 
In that year, the average daily closing NYMEX natural gas price is 
greater than $4.47 per MMBtu (adjusted for inflation after 2006), but 
less than $9.88 per MMBtu (adjusted for inflation after 2006). Under 
these circumstances, the first 7 BCF produced in 2010 will exhaust the 
first 25 BCF of the 35 BCF RSV that the well earned that is subject to 
the $9.88 per MMBtu (adjusted for inflation after 2006) threshold. The 
lessee must pay royalty on the remaining 6 BCF produced in 2010, which 
is subject to the $4.47 per MMBtu threshold (adjusted for inflation 
after 2006) that was exceeded.
    Example 2 addresses a situation in which a lessee in 2008 drills 
and produces from Well No.1, a qualified deep well, to a depth of 
15,500 feet TVD SS that earns a 15 BCF RSV for the lease under Sec.  
203.41, which would be subject to a price threshold of $9.88 per MMBtu 
(adjusted for inflation after 2006). Later in 2008, the lessee drills 
and produces from Well No. 2, a second qualified deep well to a depth 
of 17,000 feet TVD SS that earns no additional RSV. Then in 2013, the 
lessee drills and produces from Well No. 3, a qualified phase 3 ultra-
deep well that earns no additional RSV. Further assume that in 2013, 
the average daily closing NYMEX natural gas price exceeds the $4.47 per 
MMBtu (adjusted for inflation after 2006) but does not exceed $9.88 per 
MMBtu (adjusted for inflation after 2006). In 2013, any remaining RSV 
earned by Well No. 1 (which would have been applied to production from 
Well Nos. 1 and 2 in the intervening years), would be applied to 
production from all three qualified wells. Because the price threshold 
applicable to that RSV was not exceeded, the production from all three 
qualified wells would be royalty-free until the 15 BCF RSV earned by 
Well No. 1 is exhausted.
    Example 3 assumes the same initial facts regarding the 3 wells as 
in Example 2. Further assume that Well No. 1 stopped producing in 2011 
after it had produced 8 BCF, and that Well No. 2 stopped producing in 
2012 after it had produced 5 BCF. Two BCF of the RSV earned by Well No. 
1 remain. That RSV would be applied to production from Well No. 3 until 
it is exhausted, and the lessee therefore would not pay royalty, 
because the $9.88 per MMBtu (adjusted for inflation after 2006) price 
threshold is not exceeded.
    In example 4, assume that in February 2010 a lessee completes and 
begins producing from an ultra-deep well (at a depth of 21,500 feet TVD 
SS) on a lease located in 325 meters of water with no prior production 
from any deep well and no deep water royalty relief. The ultra-deep 
well would be a phase 2 ultra-deep well, and would earn the lease an 
RSV of 35 BCF. Further assume that during 2010, the average daily 
closing NYMEX natural gas price exceeds $4.47 per MMBtu (adjusted for 
inflation after 2006) but does not exceed $9.88 per MMBtu (adjusted for 
inflation after 2006). Because the lease is located in more than 200 
but less than 400 meters of water, the price threshold of $4.47 per 
MMBtu (adjusted for inflation after 2006) applies to all of the RSV, 
and the lessee will owe royalty on all gas produced from the ultra-deep 
well in 2010. The volume of gas produced from the ultra-deep well in 
2010 counts against the RSV, as provided in proposed paragraph (e).
    The same principles would apply when a lessee applies RSVs to 
production allocated to a lease from qualified wells on other leases 
under an MMS-approved unit agreement. The price threshold associated 
with the RSV determines whether royalty is suspended on the production 
volume allocated to the lease.
    Proposed Sec.  203.36(d) provides that in the event the price 
threshold is exceeded in any calendar year, royalties

[[Page 28404]]

on production would be due by March 31 of the following year. The 
purpose of this proposed provision would be to allow the lessee a 
reasonable time to compute and pay royalties for the year for which 
they were due. If royalties were not paid by that date, late payment 
interest would accrue beginning April 1 until paid. MMS is also 
proposing a corresponding change to the late payment interest provision 
in the existing deep gas rule at Sec.  203.47 (proposed to be 
redesignated as Sec.  203.48).
    Finally, paragraph (e) of this proposed section specifies that 
production volumes on which a lessee must pay royalty as a result of 
the applicable price threshold being exceeded would count against the 
RSV.

Which leases are eligible for royalty relief as a result of drilling a 
deep well or a phase 1 ultra-deep well? (Sec.  203.40)

    MMS is proposing to expand the existing deep well eligibility 
provision at Sec.  203.40(b) to require that the lease be located in 
the GOM wholly west of 87 degrees, 30 minutes West longitude in water 
depths entirely less than 400 meters deep to implement section 344(b). 
MMS also proposes other amendments to reflect the addition of leases in 
the 200-400 meter water depth range, and proposes to change the wording 
of the section heading to reflect the change in the definition of 
``deep well'' and the addition of the definition of ``phase 1 ultra-
deep well.''

If I have a qualified deep well or a qualified phase 1 ultra-deep well, 
what royalty relief would my lease earn? (Sec.  203.41)

    MMS proposes to modify the tables at existing Sec.  203.41(a) and 
(c), other parts of the text of the section, and the wording of the 
section heading to reflect the new ultra-deep well category of royalty 
relief and the changes in the definition of terms. The proposed 
revision adds a new paragraph (a) to emphasize the pivotal role that 
prior deep production plays in the incentive. Also, the proposal 
changes the existing paragraph (a) to paragraph (b), and combines the 
content of the existing paragraphs (b) and (d) into a new paragraph 
(d), and divides that content into numbered subparagraphs.
    The expanded coverage of this section and the proposed new 
paragraph (e) result from section 344's extension of royalty relief for 
deep wells to leases located in the 200-400 meter water depth interval. 
The extent of and requirements for deep gas royalty relief would not 
change, except that (1) there is a later proposed sunset date for deep 
gas royalty relief for leases in the 200-400 meter water depth range, 
and (2) lessees may recoup royalties paid before the effective date of 
the final rule on volumes that are subject to an RSV for leases in that 
water depth range, as explained immediately below.
    Proposed new paragraph (e) of this section is analogous to proposed 
Sec.  203.31(d) for ultra-deep wells to allow lessees to recoup any 
royalties paid on production from a qualified deep well on a lease 
located in the 200-400 meter water depth range that occurs before 30 
days after the date of publication of the final rule which is subject 
to an RSV earned by either a deep well or an ultra-deep well. As 
explained previously, this provision is part of implementing section 
344's retroactivity provisions.
    MMS proposes to move the examples in paragraphs (b) and (d) of the 
existing rule to a new paragraph (f). Example 5 in this new paragraph 
(Example 2 in the existing paragraph (d)) also would be revised to 
reflect the effect of the new proposed ultra-deep gas provisions.

What conditions and limitations apply to royalty relief for deep wells 
and phase 1 ultra-deep wells? (Sec.  203.42)

    This new proposed section corresponds to paragraphs (e) through (k) 
of the existing Sec.  203.41. Paragraph (c) of the existing Sec.  
203.42 is transferred to paragraph (h) of this proposed section. The 
proposed revisions to Sec.  203.42, as well as proposed revisions to 
other sections of the existing rule, also include minor wording changes 
for precision and consistency with usage throughout the proposed rule. 
MMS proposes to redesignate the existing Sec. Sec.  203.42 through 
203.48 as Sec. Sec.  203.43 through 203.49.

To which production do I apply the RSV earned from qualified deep wells 
or qualified phase 1 ultra-deep wells on my lease? (Sec.  203.43)

    MMS proposes changes to this re-numbered section to implement 
section 344's extension of royalty relief for deep wells to leases in 
the 200-400 meter water depth interval and to reflect the proposed 
changes in defined terms. MMS also proposes to revise the examples to 
improve the illustration of how this section operates. Paragraph (e) of 
the existing Sec.  203.42 is moved to paragraph (c) of this proposed 
section. Paragraph (f) of the existing section is made part of 
paragraph (d) of the proposed section.

What administrative steps must I take to use the RSV earned by a 
qualified deep well or qualified phase 1 ultra-deep well? (Sec.  
203.44)

    The proposed changes in wording to this section reflect the 
addition of leases in the 200-400 meter water depth range and the 
changes in definitions of terms.

If I drill a certified unsuccessful well, what royalty relief will my 
lease earn? (Sec.  203.45)

    MMS proposes minor changes in wording to reflect the proposed 
changes in definitions and for consistency of usage throughout the 
proposed rule. The substantive change in coverage of existing Sec.  
203.44 (redesignated Sec.  203.45) for certified unsuccessful wells to 
extend these provisions to leases in the 200--400 meter water depth 
interval are a consequence of the proposed change to the defined term 
``certified unsuccessful well'' in Sec.  203.0.

To which production do I apply the RSV from drilling one or two 
certified unsuccessful wells on my lease? (Sec.  203.46)

    The proposed changes to this section, as well as in the 
redesignated Sec.  203.49, reflect the revised section references 
necessary for consistency with changes proposed elsewhere in this part.

What administrative steps do I take to obtain and use the royalty 
suspension supplement? (Sec.  203.47)

    The proposed changes in wording to this section reflect the 
addition of leases in the 200-400 meter water depth range and the 
changes in definitions of terms. The provisions of the current Sec.  
203.46(c) requiring submission of necessary information no later than 
August 3, 2004, for certified unsuccessful wells drilled after the date 
of publication of the proposed rule that resulted in the current rule 
(March 26, 2003) and before the effective date of the current rule (May 
3, 2004) are obsolete and no longer necessary. This proposed rule 
therefore would delete them.

Do I keep royalty relief if prices rise significantly? (Sec.  203.48)

    MMS proposes to revise existing Sec.  203.47, as well as re-
designate it Sec.  203.48, to reflect the overall proposed price 
threshold approach discussed above. The price threshold under the 
existing rule ($9.88 per MMBtu, adjusted annually after calendar year 
2006 for inflation) would continue to apply to deep gas royalty relief 
for leases located in water partly or entirely less than 200 meters 
deep that are in existence before the effective date of the final rule. 
The new price threshold of

[[Page 28405]]

$4.47 per MMBtu (adjusted for inflation after 2006) would apply to deep 
gas royalty relief for leases in that water depth range issued after 
the effective date of the final rule and for all leases in the 200-400 
meter water depth range. Also, Sec.  203.48 includes a default price 
threshold of $4.47 per MMBtu (adjusted for inflation after 2006) for 
deep wells on future leases should their lease terms fail to provide 
for a different price threshold.
    MMS proposes to revise the language of the royalty payment deadline 
that applies in the event the price threshold is exceeded to read 
consistently with the corresponding provision of proposed Sec.  
203.36(d), but the substantive meaning would remain unchanged.
    MMS also requests comments on whether any other provisions in 
Sec. Sec.  203.40 through 203.48, applicable to deep wells, need to be 
changed to conform with section 344 so that the provisions governing 
the different categories of deep gas wells function together 
harmoniously, or whether any other of these provisions should be 
applied to ultra-deep wells.

Summary of the Proposed Deep Gas Royalty Relief Program

    The following five tables summarize the deep gas royalty relief 
incentives if this proposed rule were adopted. Each table refers to a 
different lease type. Abbreviations used in each table include:

 
 
 
BCF.................................  Billion cubic feet.
K...................................  Thousand.
MD..................................  Measured depth (length in thousands of feet).
MMBtu...............................  Million British thermal units.
NA..................................  Not applicable.
PT..................................  Price Threshold (2006$ per MMBtu).
PR..................................  Proposed rule implementing Section 344 of the Energy Policy Act of 2005.
RSS.................................  Royalty Suspension Supplement (in BCF).
RSV.................................  Royalty Suspension Volume (in BCF).
ST..................................  Sidetrack.
TVD SS..............................  True Vertical Depth Sub-Sea.
 

The last two columns of each table outline the royalty relief that 
exists in the current regulations and the additional relief proposed 
under Section 344 rulemaking. The first range of numbers in each of 
these two columns represents the well depth (in feet), the second 
number represents the associated RSV or RSS granted (in BCF), and the 
third number represents the applicable price threshold (in $2006/
MMBtu).

Table 1.--Terms Applicable to a Lease With No Previous Production From a
   Deep or Ultra-Deep Well, Located in Water 0-200 Meters Deep, Issued
 Before 2001 or After 2003 or That Converted to the Royalty Relief Terms
                          in the Existing Rule
------------------------------------------------------------------------
                                                           Additional
                                       Royalty relief     relief under
     Well type  Spud date   1st date   under existing       proposed
                            produced     regulations       section 344
                                                           rulemaking
------------------------------------------------------------------------
     .........  .........  .........      Depth (feet): RSV [RSS], PT
------------------------------------------------------------------------
 A   Well       Before 3/  Not         None.     NA
      :                    .
      Original
      well or
      ST.
------------------------------------------------------------------------
 B   Well       Between 3/ Before 5/   If 15K-   NA
      :         and PR.               BCF, $9.88, or
      Original                         If >=
      well.                            18K TVD SS: 25
                                       BCF, $9.88.
---------------                      -----------------------------------
  C  Well       .........  .........   If >=     NA
      : ST.                           BCF+ (0.6 * MD)
                                       BCF up to 15 or
                                       25 BCF, $9.88.
--------------------------           -----------------------------------
 D   Well       After PR.  .........   If 15K-   NA.
      :                               BCF, $9.88 \a\,   NA.
      Original                         or               ................
      well.                            If 18K-   If >=
                                       20K TVD SS: 25    20K TVD SS: Add
                                       BCF, $9.88 \a\,   10 BCF, $4.47
                                       or                \a\.
                                       If >=
                                       20K TVD SS: 1st
                                       25 BCF, $9.88
                                       \a\.
---------------                      -----------------------------------
 E   Well       .........  .........   If >=     If >=
      : ST                            25 BCF, $9.88     10 BCF, $4.47
      with MD                          \a\.              \a\.
      >= 20K
      ft.
---------------                      -----------------------------------
 F   Well       .........  .........   If >=     None.
      : ST                            BCF + (0.6 *
      with MD                          MD) BCF up to
      < 20K                            15 or 25 BCF,
      ft.                              $9.88 \a\.
---------------           ----------------------------------------------
 G   Well       .........  After 5/3/  None.     If >=
      :                                                 BCF, $4.47 \a\.
      Original
      well or
      ST with
      MD >=
      20K ft.
------------------------------------------------------------------------

[[Page 28406]]

 
 H   Well       Between 3/ Never.      If 15K-  ................
      :         and 5/3/              [None], or        NA.
      Original   2009.                 If >=
      well.                            18K TVD SS: [5
                                       BCF], $9.88
                                       \a\.
---------------                      -----------------------------------
 I   Well       .........  .........   If 15K-  ................
      : ST                            [None], or        NA.
      with MD                          If >=
      >= 10K                           18K TVD SS:
      ft.                              [0.8 BCF +
                                       (0.12 * MD) BCF
                                       up to 5 BCF],
                                       $9.88 \a\.
------------------------------------------------------------------------
\a\ For wells on leases issued after [DATE THAT IS 30 DAYS AFTER THE
  DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal Register], the
  price threshold will be $4.47/MMBtu (adjusted for inflation after
  2006) unless the lease terms prescribe a different price threshold.

    For example, suppose an original well (one that does not use an 
existing wellbore) is drilled to a depth of 23,000 feet TVD SS between 
September and December 2007 (after this proposed rule has been issued) 
on a lease that has had no production from a well completed at a depth 
deeper than 15,000 ft TVD SS. If the well starts producing in 2008, 
Table 1, row D indicates the well earns an RSV of 35 BCF. Further, the 
first 25 BCF of that RSV is subject to a price threshold of $9.88 per 
MMBtu (adjusted for inflation after 2006) while the remaining RSV of 10 
BCF is subject to a price threshold of $4.47 per MMBtu (adjusted for 
inflation after 2006). Alternatively, if delays prevent production 
starting until July of 2009, Table 1, row G indicates this well still 
earns an RSV of 35 BCF, but the entire RSV is subject to a price 
threshold of $4.47 per MMBtu (adjusted for inflation after 2006). If 
this well were unsuccessful rather than productive, Table 1, row H 
indicates that it earns an RSS of 5 BCF that is subject to a price 
threshold of $9.88 per MMBtu (adjusted for inflation after 2006).

  Table 2.--Terms Applicable to a Lease With Previous Production From a
  Deep Well Completed Between 15,000 and 18,000 Feet TVD SS, Located in
    Water 0-200 Meters Deep, Issued Before 2001 or After 2003 or That
       Converted to the Royalty Relief Terms in the Existing Rule
------------------------------------------------------------------------
                                                           Additional
                            1st date   Royalty relief     relief under
     Well type  Spud date   produced   under existing   proposed section
                                         regulations     344 rulemaking
------------------------------------------------------------------------
     .........  .........  .........      Depth (feet): RSV [RSS], PT
------------------------------------------------------------------------
 A   Well       Between 3/ Before 5/   If 15K-   NA.
      :         and PR.               None, or
      Original                         If >=
      well.                            18K TVD SS: 10
                                       BCF, $9.88.
---------------                      -----------------------------------
 B   Well       .........  .........   If 15K-   NA.
      : ST.                           None, or
                                       If >=
                                       18K TVD SS: 4
                                       BCF + (0.6 *
                                       MD) BCF up to
                                       10 BCF, $9.88.
--------------------------           -----------------------------------
  C  Well       After PR.  .........   If 15K-   If >=
      :                               None, or          10 BCF if lease
      Original                         If 18K-   issued in lease
      well.                            20K TVD SS: 10    sale held
                                       BCF, $9.88 \a\.   between 1/1/
                                                         2004 and 12/31/
                                                         2005 otherwise
                                                         none, $9.88.
---------------                      -----------------------------------
 D   Well       .........  .........   If 15K-   If >=
      : ST                            None, or          10 BCF if lease
      with MD                          If 18K-   issued in lease
      >= 20K                           20K TVD SS: 4     sale held
      ft.                              BCF + (0.6 *      between 1/1/
                                       MD) BCF up to     2004 and 12/31/
                                       10 BCF, $9.88     2005 otherwise
                                       \a\.              none, $9.88.
---------------                                        -----------------
 E   Well       .........  .........  ................   If >=
      : ST                                              4BCF + (0.6 *
      with MD                                            MD) BCF if
      < 20K                                              lease issued in
      ft.                                                lease sale held
                                                         between 1/1/
                                                         2004 and 12/31/
                                                         2005 otherwise
                                                         none, $9.88.
---------------           ----------------------------------------------
 F   Well       .........  After 5/3/  None.     None.
      :
      Original
      well or
      ST.
------------------------------------------------------------------------
 G   Well       Between 3/ Never.      If 15K-   NA
      :         and 5/3/              [None], or
      Original   2009.                 If >=
      well or                          18K TVD SS: [2
      ST with                          BCF], $9.88
      MD >=                            \a\.
      10K ft.
------------------------------------------------------------------------
\a\ For wells on leases issued after [DATE THAT IS 30 DAYS AFTER THE
  DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal Register], the
  price threshold will be $4.47/MMBtu (adjusted for inflation after
  2006) unless the lease terms prescribe a different price threshold.


[[Page 28407]]

    For example, suppose a sidetrack with a length of 7,000 feet is 
drilled to a depth of 23,000 feet TVD SS beginning in September 2007 
(after this proposed rule has been issued) and begins production in 
December 2007 on a lease issued in 1998 that already has production 
from a well completed at 16,000 feet TVD SS. This well earns no 
additional RSV because Table 2, row E shows that the lease is too old 
to come within the exception proposed for leases issued in lease sales 
held between January 1, 2004 and December 31, 2005. However, this 
ultra-deep short sidetrack does qualify to share the RSV, if any, 
earned by the deep well that remains.

Table 3.--Terms Applicable to a Lease With No Previous Production From a
  Deep or Ultra-Deep Well, Located in Water Between 200-400 Meters Deep
------------------------------------------------------------------------
                                                           Additional
                            1st date   Royalty relief     relief under
     Well type  Spud date   produced   under existing   proposed Section
                                         regulations     344 rulemaking
------------------------------------------------------------------------
     .........  .........  .........      Depth (feet): RSV [RSS], PT
------------------------------------------------------------------------
 A   Well       Before     Not         None.     None.
      :                    .
      Original
      well or
      ST.
-------------------------------------                  -----------------
 B   Well       After PR.  Before 5/  ................   If 15K-
      :                                                 BCF, $4.47 \a\,
      Original                                           or
      well.                                              If 18K-
                                                         20K TVD SS: 25
                                                         BCF, $4.47 \a\,
                                                         or
                                                         If >=
                                                         20K TVD SS: 35
                                                         BCF, $4.47 \a\.
---------------                                        -----------------
  C  Well       .........  .........  ................   If 15K-
      : ST                                              BCF + (0.6 *
      with MD                                            MD) BCF up to
      >= 20K                                             15 or 25 BCF,
      ft.                                                $4.47 \a\, or
                                                         If >=
                                                         20K TVD SS: 35
                                                         BCF, $4.47 \a\.
---------------                                        -----------------
 D   Well       .........  .........  ................   If >=
      : ST                                              BCF + (0.6 *
      with MD                                            MD) BCF up to
      < 20K                                              15 or 25 BCF,
      ft.                                                $4.47 \a\.
---------------           -----------                  -----------------
 E   Well       .........  After 5/3/ ................   If 15K-
      :                                                 None, or
      Original                                           If >=
      well.                                              20K TVD SS: 35
                                                         BCF, $4.47 \a\.
---------------                                        -----------------
 F   Well       .........  .........  ................   If 15K-
      : ST                                              None, or
      with MD                                            If >=
      >= 20K                                             20K TVD SS: 35
      ft.                                                BCF, $4.47 \a\.
---------------                                        -----------------
 G   Well       .........  .........  ................   None
      : ST
      with MD
      < 20K
      ft.
-------------------------------------                  -----------------
 H   Well       Between    Never.     ................   If 15K-
      :         3/2013.                                 [None], or
      Original                                           If >=
      well.                                              18K TVD SS: [5
                                                         BCF], $4.47
                                                         \a\.
---------------                                        -----------------
 I   Well       .........  .........  ................   If 15K-
      : ST                                              [None], or
      with MD                                            If >=
      >= 10K                                             18K TVD SS:
      ft.                                                [0.8 BCF +
                                                         (0.12 * MD) BCF
                                                         up to 5 BCF],
                                                         $4.47 \a\.
------------------------------------------------------------------------
\a\ Unless the lease terms of a lease issued after [DATE THAT IS 30 DAYS
  AFTER THE DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal
  Register], prescribe a different price threshold.

    For example, suppose a sidetrack with a length of 9,000 feet is 
drilled to a depth of 18,000 feet TVD SS between February and October 
2010 (after this proposed rule has been issued) on a lease that has had 
no production from a well completed deeper than 15,000 feet TVD SS. If 
it starts producing in 2011, Table 3, row D indicates the well earns an 
RSV of 9.4 BCF subject to a price threshold of $4.47 per MMBtu 
(adjusted for inflation after 2006). Alternatively, if delays prevent 
production starting until July of 2013, Table 3, row F indicates this 
well earns no RSV. If this well were unsuccessful, Table 3, row H 
indicates that it would not qualify for an RSS because its measured 
depth is too short.

  Table 4.--Terms Applicable to a Lease With Previous Production From a
  Deep Well Completed Between 15,000 and 18,000 Feet TVD SS, Located in
                    Water Between 200-400 Meters Deep
------------------------------------------------------------------------
                                                           Additional
                            1st date   Royalty relief     relief under
     Well type  Spud date   produced   under existing   proposed section
                                         regulations     344 rulemaking
------------------------------------------------------------------------
     .........  .........  .........      Depth (feet): RSV [RSS], PT
------------------------------------------------------------------------
 A   Well       Between    Before 5/   None.     If 15K-
      :         3/2013.                                 None, or
      Original                                           If 18K-
      well.                                              20K TVD SS: 10
                                                         BCF, $4.47 \a\,
                                                         or
                                                         If >=
                                                         20K TVD SS:
                                                         None.
---------------                                        -----------------

[[Page 28408]]

 
 B   Well       .........  .........  ................   If 15K-
      : ST.                                             None, or
                                                         If 18K-
                                                         20K TVD SS: 4
                                                         BCF + (0.6 *
                                                         MD) BCF up to
                                                         10 BCF, $4.47
                                                         \a\, or
                                                         If >=
                                                         20K TVD SS:
                                                         None.
-------------------------------------                  -----------------
  C  Well          After 5/3/2013.    ................   None.
      :
      Original
      well or
      ST.
-------------------------------------                  -----------------
 D   Well       Between    Never.     ................   If 15K-
      :         3/2013.                                 [None], or
      Original                                           If >=
      well or                                            18K TVD SS: [2
      ST with                                            BCF], $4.47
      MD >=                                              \a\.
      10K ft.
------------------------------------------------------------------------
\a\ Unless the lease terms of a lease issued after [DATE THAT IS 30 DAYS
  AFTER THE DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal
  Register] prescribe a different price threshold.

    For example, suppose an original well is drilled to a depth of 
19,000 feet TVD SS between June and November 2011 (after this proposed 
rule has been issued) on a lease that already has production from a 
well completed at 16,000 ft TVD SS. If it starts producing in March 
2012, Table 4, row A indicates the well earns an RSV of 10 BCF for the 
lease. If the prior deep well also earned an RSV, then this 10 BCF is 
an additional RSV. However, if production is delayed until July 2013, 
Table 4, row C indicates this deep well earns no additional RSV. Nor 
may any remaining RSV that the prior deep well may have earned be 
applied to production from this well.

   Table 5.--Terms Applicable to a Lease Located in Water 0-200 Meters
    Deep, Issued From 2001 Through 2003 That Did Not Convert From the
              Royalty Relief Terms With Which It Was Issued
------------------------------------------------------------------------
                                      Existing royalty     Additional
                            1st date      relief in       relief under
     Well type  Spud date   produced   original lease   proposed section
                                            terms        344 rulemaking
------------------------------------------------------------------------
     .........  .........  .........      Depth (feet): RSV [RSS], PT
------------------------------------------------------------------------
 A   Well       Before     Within 5    If >=     None.
      :                    lease      reservoir:
      Original              effectiv   20BCF, $4.00
      well or               e date.    (Sale 178), or
      ST.                              If >=
                                       15K in new
                                       reservoir:
                                       20BCF, $5.72
                                       (Sales 180,
                                       182, 184, 185,
                                       or 187).
----           -----------           -----------------------------------
 B   .........  After PR.  .........   If 15K-   If 15K-
                                       20K in new        20K TVD SS:
                                       reservoir:        None, or
                                       20BCF, $4.00      If >=
                                       (Sale 178), or    20K TVD SS: Add
                                       If 15K-   15 BCF, $4.47.
                                       20K in new
                                       reservoir:
                                       20BCF, $5.72
                                       (Sales 180,
                                       182, 184, 185,
                                       or 187), or
                                       If >=
                                       20K in new
                                       reservoir: 1st
                                       20 BCF, $4.00
                                       or $5.72.
----                      ----------------------------------------------
  C  .........  .........  More than   None.     If 15K-
                            5 years                      20K TVD SS:
                            after                        None, or
                            lease                        If >=
                            effectiv                     20K in new
                            e date.                      reservoir:
                                                         35BCF, $4.47.
------------------------------------------------------------------------

    For example, suppose an original well or sidetrack is drilled to a 
depth of 23,000 feet TVD SS between August 2007 and March 2008 (after 
this proposed rule has been issued) on a lease issued in November 2002. 
If this well starts producing from a reservoir that has not produced on 
any current lease, Table 5, row B indicates the well earns an RSV of 35 
BCF. Further, the first 20 BCF of that RSV is subject to a price 
threshold of $5.72 per MMBtu (adjusted for inflation after 2006) while 
the remaining RSV of 15 BCF is subject to a price threshold of $4.47 
per MMBtu (adjusted for inflation after 2006).
    Additional information on the structure of the deep gas royalty 
relief incentives both in existing regulations and in this proposed 
rule can be found on the Minerals Management Service Web site at http://www.mms.gov/econ/.

Royalty Relief for Pre-Act Deep Water Leases and for Development and 
Expansion Projects

    The proposed changes to Sec. Sec.  203.60, 203.62, 230.69, 203.70, 
203.77, 203.78, 203.79, 203.81, 203.89, 203.90, and 260.121 reflect 
adding leases offshore of Alaska to the coverage of these provisions as 
section 346 of the Energy Policy Act requires. The proposed change to 
Sec.  260.122 would add the default price threshold proposed for future 
leases issued with deep gas and ultra-deep gas royalty relief to future 
deepwater leases issued with royalty relief.
    In Sec.  203.69, MMS proposes to specify that if a lease issued 
after November 28, 2000 (the class of leases on which

[[Page 28409]]

development projects are undertaken), has earned or may earn deep gas 
royalty relief, and if the lessee then applies for deep water royalty 
relief for a development project, MMS would take the value of the deep 
gas relief into account as part of the determination of whether the 
lease needs additional royalty relief for the development project.
    If the lessee applies for deep water royalty relief for an 
expansion project, none of the reservoirs covered by the application 
could be reservoirs for which the lease could earn deep gas royalty 
relief, as reflected in the proposed amendment to the definition of 
``expansion project'' in Sec.  203.0.
    The definition of ``RS lease'' in Sec.  260.102 (a lease issued 
after November 28, 2000 with an RSV) does not exclude leases offshore 
Alaska issued with an RSV. The change proposed in Sec.  260.121 would 
authorize lessees of RS leases issued offshore Alaska with an 
inadequate RSV to apply for additional relief before they produce.
    The change proposed to Sec.  260.122 would adopt a default price 
threshold for future leases in deep water equal to the level specified 
in the Deep Water Royalty Relief Act of 1995. This is the same price 
threshold that applies to all existing deepwater leases issued before 
2001 in the Gulf of Mexico. Since all lease sale notices from 2000 
forward have included price thresholds, this edit is not retroactively 
applying price thresholds where they did not already exist. It does 
serve to preclude the accidental omission of a price threshold for RS 
leases issued in future lease sales.

Procedural Matters

Public Availability of Comments

    Before including your address, phone number, email address, or 
other personal identifying information in your comment, you should be 
aware that your entire comment--including your personal identifying 
information--may be made publicly available at any time. While you can 
ask us in your comment to withhold your personal identifying 
information from public review, we cannot guarantee that we will be 
able to do so.

Regulatory Planning and Review (Executive Order (E.O.) 12866)

    According to the criteria in E.O. 12866, this proposed rule is a 
significant regulatory action for which a Regulatory Analysis has been 
prepared. The Office of Management and Budget (OMB) has made that 
determination under E.O. 12866.
    (1) The actions left to agency discretion in section 344 of the 
Energy Policy Act and incorporated into this proposed rule would not 
have an economic effect of $100 million or more in any year.
    The added eligibility of leases in water depths from 200-400 meters 
for the deep gas royalty incentive would represent a 12 percent 
increase in the estimated gas resources that would be eligible for the 
deep gas incentive, and only a fraction of those resources would 
actually qualify because the program would sunset in May 2013. Further, 
existing relief terms already grant leases located partly or entirely 
in less than 200 meters of water with ultra-deep wells over 70 percent 
of the relief this proposed rule would prescribe (25 BCF increasing to 
35 BCF for successful ultra-deep wells). However, because this 
incentive would have no explicit sunset date, it conceivably could 
apply to all undiscovered ultra-deep resources.
    One of the few areas of significant programmatic discretion MMS has 
in implementing section 344 is in the choice of the price threshold for 
RSVs. MMS proposes to prescribe a different and lower price threshold 
for RSVs earned and used by ultra-deep wells, except to the extent of 
the royalty relief that an ultra-deep well would earn under the 
existing rule on leases in existence on the effective date of the final 
rule. MMS has updated key parts of the economic analysis done for the 
original deep gas rule to reflect both higher gas prices and the larger 
open-ended duration of RSVs for ultra-deep wells. The update estimates 
the incremental production and net fiscal cost which would result from 
the added incentives on ultra-deep wells and additional deep wells for 
a range of price thresholds applied to the anticipated gas market 
environment. The proposed formulation would apply a price threshold for 
ultra-deep gas royalty relief at the same level as used for deepwater 
royalty relief for leases issued before 2001 ($4.47 per MMBtu, adjusted 
for inflation after 2006). For comparison, MMS estimates that the 
ultra-deep well and additional deep well incentives required by the 
Energy Policy Act, together with a reduced price threshold of $4.47 per 
MMBtu (adjusted for inflation after 2006) would, over the next 15 
years, increase deep gas production by 54 BCF instead of by 223 BCF and 
reduce the aggregate loss in federal royalty receipts by $955 million 
(present value $539 million) relative to using the same price threshold 
as in the existing regulations. Over the next 15 years, we estimate 
that the proposed price threshold of $4.47 per MMBtu would result in an 
annualized forgone royalties of about $11 million, generate an 
annualized social welfare measure of consumer plus producer surplus of 
about $460, and add over 50 billion cubic feet of deep gas production 
to the domestic energy supply. The full economic analysis for the 
original deep gas rule, as well as this update, is available at http://www.mms.gov/econ.
    This proposed rule would also add 66 currently active Alaska leases 
to the roughly 2,200 deepwater leases in the GOM that could apply for 
an RSV (for both oil and gas) before production. Again, section 346 of 
the Energy Policy Act mandates this expansion of existing discretionary 
royalty relief, so the implementation provisions in this proposed rule 
would add no economic effect to the effect that necessarily results 
from section 346. Historically, we have received less than one 
application per year in the GOM under the procedure now being extended 
to leases offshore of Alaska. Those leases that previously have 
qualified for this form of relief have avoided an average of $30 
million annually in royalties since 1999, an amount that was restrained 
by price thresholds. The value of the relief offered by this added 
rulemaking action may not significantly ease the daunting obstacles to 
developing offshore Alaska. In any event, the award of royalty relief 
in this form to leases offshore of Alaska is discretionary, and MMS 
would only approve relief in the appropriate amount if MMS deemed the 
project uneconomic absent relief. Thus, there would be no negative 
effect on federal revenue from this rulemaking proposal.
    (2) This proposed rule would not create any inconsistencies with 
actions by other agencies because royalty relief is confined to leasing 
in federal offshore waters that lie outside the coastal jurisdiction of 
state and other local agencies. Careful review of the lease sale 
notices, along with stringent leasing policies now in force, ensures 
that the federal OCS leasing program, of which royalty relief is only a 
component, would not conflict with the work of other federal agencies.
    (3) This proposed rule would have no effect on entitlements, 
grants, user fees, loan programs, or their recipients.
    (4) This proposed rule raises novel legal or policy issues. The 
proposed rule would expand previously established royalty relief 
programs for deep gas in the GOM and expand existing statutory 
discretionary royalty relief authority to offshore Alaska leases.

Regulatory Flexibility Act (RFA)

    The Department certifies that this proposed rule would not have a 
significant economic effect on a

[[Page 28410]]

substantial number of small entities under the RFA (5 U.S.C. 601 et 
seq.). The provisions of this proposed rule would not have a 
significant adverse economic effect on offshore lessees and operators, 
including those that are classified as small businesses.
    This proposed rule would expand existing deep gas well production 
incentives. A detailed analysis of the small business impacts and 
alternatives for the deep gas provisions established in 2004 were 
considered and can be found in the economic analysis of the original 
version of this regulation available at http://www.mms.gov/econ. This 
rule would not materially alter the findings of that analysis because 
it would expand by less than five percent the set of leases affected.
    The proposed rule would also extend the benefit of discretionary 
royalty relief to 66 OCS leases located offshore Alaska, some of which 
may qualify as marginally uneconomic. Two of the four companies 
involved are ``majors'' and therefore are not small entities. In any 
single year, MMS is likely to receive only a small number of royalty 
relief applications, if indeed it receives any at all. That limits the 
number of entities the proposed rule may affect. In the past, we have 
received less than one application a year from a candidate set of 2,200 
leases in the GOM. Also, because firms initiate applications, they have 
the ability to avoid adverse effects they foresee. A Regulatory 
Flexibility Analysis is not required. A Small Entity Compliance Guide 
is not required.
    Your comments are important. The Small Business and Agriculture 
Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were 
established to receive comments from small businesses about Federal 
agency enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to small 
business. If you wish to comment on the actions of MMS, call 1-888-734-
3247. You may comment to the Small Business Administration without fear 
of retaliation. Disciplinary action for retaliation by an MMS employee 
may include suspension or termination from employment with the DOI.

Small Business Regulatory Enforcement Fairness Act (SBREFA)

    This proposed rule is not a major rule under SBREFA (5 U.S.C. 
804(2)). This proposed rule:
    a. Would expand coverage of existing royalty relief programs by 
about 3 percent, adding about 160 leases to the set of about 5,000 
leases eligible either for the deep gas incentive or to apply for 
royalty relief before production begins on the lease. These leases 
represent only a small fraction of the leases already eligible for 
these incentives as a result of earlier rules. The provisions in this 
proposed rule that would result from exercise of the Secretary's 
discretion do not change their effects substantially from those 
estimated for the earlier rules.
    b. Would not cause a major increase in costs or prices for 
consumers, individual industries, federal, state, local government 
agencies, or geographic regions. The additional deep gas incentive 
provisions would not cause an increase in prices and should result in 
some downward pressure on prices, but its degree and ultimate effect is 
difficult to anticipate.
    c. Would not have significant adverse effects on competition, 
employment, investment, or the ability of U.S.-based enterprises to 
compete with foreign-based enterprises. Companies eligible for the new 
royalty relief should produce some more natural gas and earn more 
income while encountering no negative effects.

Unfunded Mandates Reform Act (UMRA)

    This proposed rule would not impose an unfunded mandate on state, 
local, or tribal governments or the private sector of more than $100 
million per year. The proposed rule would not have any federal mandates 
for non-federal entities. Nor would the proposed rule have a 
significant or unique effect on state, local, or tribal governments or 
the private sector. A statement containing the information required by 
the UMRA (2 U.S.C. 1531 et seq.) is not necessary.

Takings Implication Assessment (Executive Order 12630)

    According to E.O. 12630, the proposed rule would not have 
significant takings implications; therefore a Takings Implication 
Assessment is not required. The proposed reduction in the price 
threshold would be purposely delayed until after the existing deep gas 
incentives expire to avoid risking a takings situation.

Federalism (Executive Order 13132)

    According to E.O. 13132, this proposed rule would not have 
meaningful Federalism implications. As noted above, the deep gas 
provisions in this proposed rule should have a small effect relative to 
the original rule, which itself may have only a small consequence ($1-
$2 million per year) on Gulf Coast states in the form of reduced 
payments under section 8(g) of the OCSLA. However, any relief awarded 
to offshore Alaska leases could significantly affect that State's share 
of OCS revenue. In view of the fact that section 346 mandated extending 
existing discretionary royalty relief rules to leases offshore of 
Alaska, and that Alaska congressional representatives supported it, the 
State presumably believes that this provision would operate to its 
advantage.

Civil Justice Reform (Executive Order 12988)

    With respect to E.O. 12988, The Office of the Solicitor has 
determined that the proposed rule does not unduly burden the judicial 
system and does meet the requirements of sections 3(a) and 3(b)(2) of 
the Executive Order.

Paperwork Reduction Act (PRA) of 1995

    This proposed rule contains a collection of information that has 
been submitted to OMB for review and approval under Sec.  3507(d) of 
the PRA. This proposed rule also refers to, but does not change, 
information collection burdens already covered and approved under OMB 
Control Number 1010-0071.
    As part of our continuing effort to reduce paperwork and respondent 
burdens, MMS invites the public and other federal agencies to comment 
on any aspect of the reporting and recordkeeping burden. You may submit 
your comments on the information collection aspects of this rule 
directly to the Office of Management and Budget (OMB), Office of 
Information and Regulatory Affairs, OMB Attention: Desk Officer for the 
Department of the Interior via OMB e-mail: ([email protected]); 
or by fax (202) 395-6566; identify with 1010-AD33. Send a copy of your 
comments to the Rules Processing Team (RPT), Attn: Comments; 381 Elden 
Street, MS-4024; Herndon, Virginia 20170-4817. Please reference 
``Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on Outer 
Continental Shelf (OCS) Oil and Gas Leases; Extension of Royalty Relief 
Provisions to OCS Leases Offshore of Alaska--AD33'' in your comments. 
You may obtain a copy of the supporting statement for the new 
collection of information by contacting the Bureau's Information 
Collection Clearance Officer at (202) 208-7744.
    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. OMB is 
required to make a decision concerning the collection of information 
contained in these proposed regulations between 30 to 60 days after 
publication

[[Page 28411]]

of this document in the Federal Register. Therefore, a comment to OMB 
is best assured of having its full effect if OMB received it by June 
18, 2007. This does not affect the deadline for the public to comment 
to MMS on the proposed regulations.
    The title of the collection of information for the rule is ``30 CFR 
203, Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on Outer 
Continental Shelf (OCS) Oil and Gas Leases; Extension of Royalty Relief 
Provisions to OCS Leases Offshore of Alaska.''
    Respondents are those from the approximately 130 federal oil and 
gas lessees who may apply for royalty relief. Responses to this 
collection are required to obtain benefits. The frequency of response 
is on occasion. The information collection (IC) does not include 
questions of a sensitive nature. MMS will protect proprietary 
information according to the Freedom of Information Act (5 U.S.C. 522) 
and its implementing regulations (43 CFR part 2), 30 CFR part 203, 
``Does my application have to include all leases in the field?'' and 30 
CFR 250.196, ``Data and information to be made available to the 
public.''
    The collection of information required by the current 30 CFR part 
203 regulations was approved under OMB Control Number 1010-0071 
(expiration 12/31/06), currently under renewal with OMB. The currently 
approved burden already covers the requirements for respondents to 
notify MMS of their intent to drill (89 annual burden hours) and when 
production actually begins for all wells (50 annual burden hours). Due 
to statutory changes enacted in section 344 of the Energy Policy Act of 
2005, these proposed regulations differentiate these notifications into 
``deep'' and ``ultra-deep'' well drilling categories. This change, 
however, does not affect the approved burdens for these requirements.
    The currently approved burden also covers the requirements (3,130 
total annual burden hours) for respondents to apply for royalty relief 
in the Gulf of Mexico Region (GOMR). Due to statutory changes enacted 
in section 344 of the Energy Policy Act of 2005, the scope for royalty 
relief will include the Alaska Region (AKOCSR) as well, but will not 
change the currently approved burdens. The hour burdens for the 
required applications relating to royalty relief for either the GOMR or 
the AKOCSR are still estimated to be 3,130 total annual hours. In the 
11 years that MMS had had this regulatory requirement, only 9 lessees 
have submitted applications. This approved estimate is adequate for 
both regions for information collection requirements in both proposed 
requirements and current regulations.
    The proposed rule does impose minor changes to the information 
collection burden hours. In the proposed rule, respondents may request 
a refund of or recoup royalties from qualified ultra-deep and deep 
wells, and they may request to extend the deadline for beginning 
production for up to one year. The burden estimates include the time 
for submitting requests to MMS for review. The following table provides 
a breakdown of the new paperwork burden estimates for this proposed 
rulemaking. We estimate a total of 3 annual burden hours. Based on $50 
an hour, the estimated annual hour burden is $150 ($50 x 3 hours = 
$150). The information collection does not include questions of a 
sensitive nature.

----------------------------------------------------------------------------------------------------------------
                                                                                          Average
                                             Reporting & recordkeeping                   number of      Annual
      Citation 30 CFR 203 subpart B                 requirement            Hour burden     annual       burden
                                                                                         responses      hours
----------------------------------------------------------------------------------------------------------------
31(d)...................................  Request a refund of or recoup              1            1            1
                                           royalties from qualified ultra-
                                           deep wells.
41(e)...................................  Request a refund of or recoup              1            1            1
                                           royalties from qualified wells
                                           >200 meters but <400 meters.
35(d); 44(e)............................  Request to extend the deadline             1            1            1
                                           for beginning production.
                                                                          --------------------------------------
    Total Burden........................  ...............................  ...........            3            3
----------------------------------------------------------------------------------------------------------------

    MMS specifically solicits comments on the following questions:
    (a) Is the proposed collection of information necessary for MMS to 
properly perform its functions, and will it be useful?
    (b) Are the estimates of the burden hours of the proposed 
collection reasonable?
    (c) Do you have any suggestions that would enhance the quality, 
clarity, or usefulness of the information to be collected?
    (d) Is there a way to minimize the information collection burden on 
those who are to respond, including the use of appropriate automated 
electronic, mechanical, or other forms of information technology?
    In addition, the PRA requires agencies to estimate the total annual 
reporting and recordkeeping ``non-hour cost'' burden resulting from the 
collection of information. We have not identified any, and we solicit 
your comments on this item. For reporting and recordkeeping only, your 
response should split the cost estimate into two components:
    (a) Total capital and start-up cost component and (b) annual 
operation, maintenance, and purchase of services component. Your 
estimates should consider the costs to generate, maintain, and disclose 
or provide the information. You should describe the methods you use to 
estimate major cost factors, including system and technology 
acquisition, expected useful life of capital equipment, discount 
rate(s), and the period over which you incur costs. Capital and start-
up costs include, among other items, computers and software you 
purchase to prepare for collecting information; monitoring, sampling, 
drilling, and testing equipment; and record storage facilities. 
Generally, your estimates should not include equipment or services 
purchased:
    (1) Before October 1, 1995;
    (2) To comply with requirements not associated with the information 
collection;
    (3) For reasons other than to provide information or keep records 
for the Government; or
    (4) As part of customary and usual business or private practices.

National Environmental Policy Act (NEPA) of 1969

    We have analyzed this proposed rule in accordance with the criteria 
of the National Environmental Policy Act and the Department Manual at 
516 DM. We determined this proposed rule does not constitute a major 
Federal action significantly affecting the quality of the human 
environment. This proposed rule deals with financial matters and has no 
direct effect on MMS decisions on environmental activities; hence, an

[[Page 28412]]

environmental impact statement is not required. Pursuant to Department 
Manual 516 DM 2.3A (2), Section 1.10 of 516 DM 2, Appendix 1 excludes 
from documentation in an environmental assessment or impact statement 
``policies, directives, regulations and guidelines of an 
administrative, financial, legal, technical or procedural nature; or 
the environmental effects of which are too broad, speculative or 
conjectural to lend themselves to meaningful analysis and will be 
subject later to the NEPA process, either collectively or case-by-
case.'' Section 1.3 of the same appendix clarifies that royalties and 
audits are considered routine financial transactions that are subject 
to categorical exclusion from the NEPA process. No exception to the 
categorical exclusion applies.

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

    This proposed rule would not have a significant adverse effect on 
energy supply, distribution, or use. This proposed rule may slightly 
increase and accelerate the production of oil and gas from offshore 
Alaska and gas from deep wells in shallow waters of the GOM, so it 
would have a positive effect on energy supplies.

Consultation with Indian Tribes (Executive Order 13175)

    Under the criteria in E.O. 13175, we have evaluated this proposed 
rule and determined that it has no potential effects on federally 
recognized Indian tribes. There are no Indian lands or tribes on the 
OCS.

Clarity of This Regulation

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand. MMS invites your comments on how to make 
this proposed rule easier to understand, including answers to questions 
such as the following:
    (1) Are the requirements in the proposed rule clearly stated?
    (2) Does the rule contain technical language or jargon that 
interferes with its clarity?
    (3) Does the format of the proposed rule (grouping and order of 
sections, use of headings, paragraphing, etc.) aid or reduce its 
clarity?
    (4) Is the description of the proposed rule in the ``Supplementary 
Information'' section of this preamble helpful in understanding the 
rule? What else can MMS do to make the rule easier to understand?
    Send a copy of any comments that concern how MMS could make this 
proposed rule easier to understand to: Office of Regulatory Affairs, 
Department of the Interior, Room 7229, 1849 C Street, NW., Washington, 
DC 20240. You may also e-mail the comments to this address: 
[email protected].

List of Subjects in 30 CFR Parts 203 and 260

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

    Dated: December 19, 2006.
Julie A. Jacobson,
Acting Assistant Secretary, Land and Minerals Management.

    Editorial Note: This document was received at the Office of the 
Federal Register on May 10, 2007.
    For the reasons stated in the preamble, the Minerals Management 
Service (MMS) proposes to amend 30 CFR parts 203 and 260 as follows:

PART 203 RELIEF OR REDUCTION IN ROYALTY RATES

    1. The authority citation for part 203 is revised 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. 9701 et 
seq.; 42 U.S.C. 15903-15906; 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 revising the definitions for 
``certified unsuccessful well,'' ``deep well,'' ``development 
project,'' ``expansion project,'' ``royalty suspension supplement'' and 
``royalty suspension volume;'' removing the definition of ``qualified 
well;'' and by adding definitions for ``non-converted lease,'' ``phase 
1 ultra-deep well,'' ``phase 2 ultra-deep well,'' ``phase 3 ultra-deep 
well,'' ``qualified deep well,'' ``qualified ultra-deep well,'' 
``qualified wells,'' and ``ultra-deep well'' to read as follows:


Sec.  203.0  What definitions apply to this part?

* * * * *
    Certified unsuccessful well means an original well, or a sidetrack 
with a sidetrack measured depth of at least 10,000 feet, on your lease 
that:
    (1) You begin drilling on or after March 26, 2003, and before May 
3, 2009, on a lease that is located in water partly or entirely less 
than 200 meters deep and that is not a non-converted lease, or on or 
after May 18, 2007, and before May 3, 2013, on a lease that is located 
in water entirely more than 200 meters and entirely less than 400 
meters deep;
    (2) You begin drilling before your lease produces gas or oil from a 
well with a perforated interval the top of which is at least 18,000 
feet true vertical depth subsea (TVD SS), (i.e., below the datum at 
mean sea level);
    (3) You drill to at least 18,000 feet TVD SS with a target 
reservoir on your lease, identified from seismic and related data, 
deeper than that depth;
    (4) Fails to meet the producibility requirements of 30 CFR part 
250, subpart A, and does not produce gas or oil, or MMS agrees is not 
commercially producible; and
    (5) For which you have provided the notices and information 
required under Sec.  203.47.
* * * * *
    Deep well means either an original well or a sidetrack with a 
perforated interval the top of which is at least 15,000 feet TVD SS and 
less than 20,000 feet TVD SS. A deep well subsequently re-perforated at 
less than 15,000 feet TVD SS in the same reservoir is still a deep 
well.
* * * * *
    Development project means a project to develop one or more oil or 
gas reservoirs located on one or more contiguous leases that have had 
no production (other than test production) before the current 
application for royalty relief and are either:
    (1) Located in planning areas offshore Alaska; or
    (2) Located in the GOM in a water depth of at least 200 meters and 
wholly west of 87 degrees, 30 minutes West longitude, and were issued 
in a sale held after November 28, 2000.
* * * * *
    Expansion project means a project that meets the requirements in 
this definition.
    (1) You must propose the project in a Development and Production 
Plan, a Development Operations Coordination Document (DOCD), or a 
Supplement to a DOCD, approved by the Secretary of the Interior after 
November 28, 1995.
    (2) The project must be located on either:
    (i) A pre-Act lease in the GOM, or a lease in the GOM issued in a 
sale held after November 28, 2000, located wholly west of 87 degrees, 
30 minutes West longitude; or
    (ii) A lease in planning areas offshore Alaska.
    (3) On a pre-Act lease in the GOM, the project:
    (i) Must significantly increase the ultimate recovery of resources 
from one or more reservoirs that have not previously produced 
(extending recovery from reservoirs already in

[[Page 28413]]

production does not constitute a significant increase); and
    (ii) Must involve a substantial capital investment (e.g., fixed-leg 
platform, subsea template and manifold, tension-leg platform, multiple 
well project, etc.).
    (4) For a lease issued in planning areas offshore Alaska, or in the 
GOM after November 28, 2000, the project must involve a new well 
drilled into a reservoir that has not previously produced.
    (5) If an RSV under Sec. Sec.  203.30 through 203.36 or 203.40 
through 203.48 would be applied to production from a reservoir that has 
not previously produced and that otherwise would constitute part of an 
expansion project under this definition, that reservoir may not be 
included as part of an expansion project.
* * * * *
    Non-converted lease means a lease located partly or entirely in 
water less than 200 meters deep issued in a lease sale held after 
January 1, 2001, and before January 1, 2004, whose original lease terms 
provided for an RSV for deep gas production and the lessee has not 
exercised the option under Sec.  203.49 to replace the lease terms for 
royalty relief with those in Sec. Sec.  203.0 and 203.40 through 
203.48.
    Phase 1 ultra-deep well means an ultra-deep well on a lease that is 
located in water partly or entirely less than 200 meters deep for which 
drilling began before May 18, 2007, and that begins production before 
May 3, 2009, or that meets the requirements to be a certified 
unsuccessful well.
    Phase 2 ultra-deep well means an ultra-deep well for which drilling 
began on or after May 18, 2007, and that either meets the requirements 
to be a certified unsuccessful well or that begins production:
    (1) Before May 3, 2009, on a lease that is located in water partly 
or entirely less than 200 meters deep and that is not a non-converted 
lease, or
    (2) Before the date which is 5 years after the lease issuance date 
on a non-converted lease; or
    (3) Before May 3, 2013, on a lease that is located in water 
entirely more than 200 meters and entirely less than 400 meters deep.
    Phase 3 ultra-deep well means an ultra-deep well for which drilling 
began on or after May 18, 2007, and that begins production:
    (1) On or after May 3, 2009, on a lease that is located in water 
partly or entirely less than 200 meters deep and that is not a non-
converted lease, or
    (2) On or after the date which is 5 years after the lease issuance 
date on a non-converted lease; or
    (3) On or after May 3, 2013, on a lease that is located in water 
entirely more than 200 meters and entirely less than 400 meters deep.
* * * * *
    Qualified deep well means:
    (1) On a lease that is located in water partly or entirely less 
than 200 meters deep that is not a non-converted lease, a deep well for 
which drilling began on or after March 26, 2003, that produces natural 
gas (other than test production), including gas associated with oil 
production, before May 3, 2009, and for which you have met the 
requirements prescribed in Sec.  203.44;
    (2) On a non-converted lease, a deep well that produces natural gas 
(other than test production) before the date which is 5 years after the 
lease issuance date from a reservoir that has not produced from a deep 
well on any lease; or
    (3) On a lease that is located in water entirely more than 200 
meters but entirely less than 400 meters deep, a deep well for which 
drilling began on or after May 18, 2007, that produces natural gas 
(other than test production), including gas associated with oil 
production, before May 3, 2013, and for which you have met the 
requirements prescribed in Sec.  203.44.
    Qualified ultra-deep well means:
    (1) On a lease that is located in water partly or entirely less 
than 200 meters deep that is not a non-converted lease, an ultra-deep 
well for which drilling began on or after March 26, 2003, that produces 
natural gas (other than test production), including gas associated with 
oil production, and for which you have met the requirements prescribed 
in Sec.  203.35 or Sec.  203.44, as applicable; or
    (2) On a lease that is located in water entirely more than 200 
meters and entirely less than 400 meters deep, or on a non-converted 
lease, an ultra-deep well for which drilling began on or after May 18, 
2007, that produces natural gas (other than test production), including 
gas associated with oil production, and for which you have met the 
requirements prescribed in Sec.  203.35.
    Qualified well means either a qualified deep well or a qualified 
ultra-deep well.
* * * * *
    Royalty suspension supplement (RSS) means a royalty suspension 
volume resulting from drilling a certified unsuccessful well that is 
applied to future natural gas and oil production generated at any 
drilling depth on, or allocated under an MMS-approved unit agreement 
to, the same lease.
    Royalty suspension volume. (RSV) means a volume of production from 
a lease that is not subject to royalty under the provisions of this 
part.
* * * * *
    Ultra-deep well means either an original well or a sidetrack 
completed with a perforated interval the top of which is at least 
20,000 feet TVD SS. An ultra-deep well subsequently re-perforated less 
than 20,000 feet TVD SS in the same reservoir is still an ultra-deep 
well.
    Ultra-deep short sidetrack means an ultra-deep well that is a 
sidetrack with a sidetrack measured depth of less than 20,000 feet.
* * * * *
    3. In Sec.  203.1, paragraph (b) is revised to read as follows:


Sec.  203.1  What is MMS's authority to grant royalty relief?

* * * * *
    (b) Under 43 U.S.C. 1337(a)(3)(B), we may reduce, modify, or 
eliminate any royalty or net profit share to promote development, 
increase production, or encourage production of marginal resources on 
certain leases or categories of leases. This authority is restricted to 
leases in the GOM that are west of 87 degrees, 30 minutes West 
longitude and in the Planning Areas offshore Alaska.
* * * * *
    4. In Sec.  203.2, the section heading and paragraphs (b) and (d) 
are revised, and new paragraphs (f), (g) and (h) are added to read as 
follows:


Sec.  203.2  How can I obtain royalty relief?

* * * * *

[[Page 28414]]



------------------------------------------------------------------------
                                                      Then we may grant
  If you have a lease . . .     And if you . . .          you . . .
------------------------------------------------------------------------
 
                              * * * * * * *
(b) Located in a designated   Propose an expansion  A royalty suspension
 GOM deep water area and       project and can       for a minimum
 acquired in a lease sale      demonstrate your      production volume
 held before November 28,      project is            plus any additional
 1995, or after November 28,   uneconomic without    production large
 2000.                         royalty relief.       enough to make the
                                                     project economic.
                                                     (See Sec.  Sec.
                                                     203.60 through
                                                     203.79.)
 
                              * * * * * * *
(d) Located in a designated   Propose a             A royalty suspension
 GOM deep water area and       development project   for a minimum
 acquired in a lease sale      and can demonstrate   production volume
 held after November 28,       that the suspension   plus any additional
 2000.                         volume, if any, for   volume needed to
                               your lease is not     make your project
                               enough to make        economic. (See Sec.
                               development            Sec.   203.60
                               economic.             through 203.79.)
 
                              * * * * * * *
(f) Located in a designated   Drill a deep well on  A royalty suspension
 GOM shallow water area and    a lease that is not   for a volume of gas
 acquired in a lease sale      eligible for deep     produced from
 held before January 1,        water royalty         successful deep and
 2001, or after January 1,     relief and you have   ultra-deep wells,
 2004, or have exercised an    not previously        or, for certain
 option to substitute for      produced oil or gas   unsuccessful deep
 royalty relief in your        from a deep well or   and ultra-deep
 lease terms.                  an ultra-deep well.   wells, a smaller
                                                     royalty suspension
                                                     for a volume of gas
                                                     or oil produced by
                                                     all wells on your
                                                     lease. (See Sec.
                                                     Sec.   203.40
                                                     through 203.49).
(g) Located in a designated   Drill and produce     A royalty suspension
 GOM shallow water area.       gas from an ultra-    for a volume of gas
                               deep well on a        produced from
                               lease that is not     successful ultra-
                               eligible for deep     deep and deep wells
                               water royalty         on your lease. (See
                               relief and you have   Sec.  Sec.   203.30
                               not previously        through 203.36.)
                               produced oil or gas
                               from an ultra-deep
                               well.
(h) Located in planning       Propose an expansion  A royalty suspension
 areas offshore Alaska.        project or propose    for a minimum
                               a development         production volume
                               project and can       plus any additional
                               demonstrate that      volume needed to
                               the project is        make your project
                               uneconomic without    economic. (See Sec.
                               relief or that the     Sec.   203.60,
                               suspension volume,    203.62, 203.67
                               if any, for your      through 203.70,
                               lease is not enough   203.73 and 203.76
                               to make development   through 203.79.)
                               economic.
------------------------------------------------------------------------

    5. A new undesignated center heading and new Sec. Sec.  203.30 
through 203.36 are added to subpart B to read as follows:

Royalty Relief for Drilling Ultra-Deep Wells on Leases Not Subject to 
Deep Water Royalty Relief

Sec.
203.30 Which leases are eligible for royalty relief as a result of 
drilling a phase 2 or phase 3 ultra-deep well?
203.31 If I have a qualified phase 2 or qualified phase 3 ultra-deep 
well, what royalty relief would my lease earn?
203.32 What other requirements or restrictions apply to royalty 
relief for a qualified phase 2 or phase 3 ultra-deep well?
203.33 To which production do I apply the RSB earned by qualified 
phase 2 and phase 3 ultra-deep wells on my lease?
203.34 To which production may an RSB earned by qualified phase 2 
and phase 3 ultra-deep wells on my lease not be applied?
203.35 What administrative steps must I take to use the RSB earned 
by a qualified phase 2 or phase 3 ultra-deep well?
203.36 Do I keep royalty relief if prices rise significantly?

Royalty Relief for Drilling Ultra-Deep Wells on Leases Not Subject to 
Deep Water Royalty Relief


Sec.  203.30  Which leases are eligible for royalty relief as a result 
of drilling a phase 2 or phase 3 ultra-deep well?

    Your lease may receive a royalty suspension volume (RSV) under 
Sec. Sec.  203.31 through 203.36 if the lease meets all the 
requirements of this section.
    (a) The lease is located in the GOM wholly west of 87 degrees, 30 
minutes West longitude in water depths entirely less than 400 meters 
deep.
    (b) The lease has not produced gas or oil from a deep well or an 
ultra-deep well. See Sec.  203.31(b) for an exception.
    (c) If the lease is located entirely in more than 200 meters and 
less than 400 meters of water, it must either:
    (1) Have been issued before November 28, 1995, and not been granted 
deep water royalty relief under 43 U.S.C. 1337(a)(3)(C), added by 
section 302 of the Deep Water Royalty Relief Act; or
    (2) Have been issued after November 28, 2000, and not been granted 
deep water royalty relief under 30 CFR 203.60 through 203.79.


Sec.  203.31  If I have a qualified phase 2 or qualified phase 3 ultra-
deep well, what royalty relief would my lease earn?

    (a) Subject to the administrative requirements of Sec.  203.35 and 
the price conditions in Sec.  203.36, your lease earns an RSV shown in 
the following table in billions of cubic feet (BCF) or in thousands of 
cubic feet (MCF) as prescribed in Sec.  203.33:

------------------------------------------------------------------------
   If you have a qualified phase 2 or
qualified phase 3 ultra-deep  well that  Then your lease earns an RSV on
                  is:                     this volume of gas production:
------------------------------------------------------------------------
(1) An original well,                    35 BCF.
(2) A sidetrack with a sidetrack         35 BCF.
 measured depth of at least 20,000
 feet,
(3) An ultra-deep short sidetrack that   4 BCF plus 600 MCF times
 is a phase 2 ultra-deep well,            sidetrack measured depth
                                          (rounded to the nearest 100
                                          feet) but no more than 25 BCF.
(4) An ultra-deep short sidetrack that   0 BCF.
 is a phase 3 ultra-deep well,
------------------------------------------------------------------------

    (b)(1) This paragraph applies if your lease:
    (i) Has produced gas or oil from a deep well with a perforated 
interval the top of which is less than 18,000 feet TVD SS;

[[Page 28415]]

    (ii) Was issued in a lease sale held between January 1, 2004, and 
December 31, 2005; and
    (iii) The terms of your lease expressly incorporate the provisions 
of Sec.  203.41-203.47 as they existed at the time the lease was 
issued.
    (2) Subject to the administrative requirements of Sec.  203.35 and 
the price conditions in Sec.  203.36, your lease earns an RSV shown in 
the following table in BCF or MCF as prescribed in Sec.  203.33:

------------------------------------------------------------------------
 If you have a qualified phase 2 ultra-  Then your lease earns an RSV on
        deep well that is . . .           this volume of gas production:
------------------------------------------------------------------------
(i) An original well or a sidetrack      10 BCF.
 with a sidetrack measured depth of at
 least 20,000 feet TVD SS,
(ii) An ultra-deep short sidetrack,      4 BCF plus 600 MCF times
                                          sidetrack measured depth
                                          (rounded to the nearest 100
                                          feet) but no more than 10 BCF.
------------------------------------------------------------------------

    (c)(1) You must apply the RSV prescribed in paragraphs (a) and (b) 
of this section to gas volumes produced from qualified wells on or 
after May 18, 2007, reported on the Oil and Gas Operations Report, Part 
A (OGOR-A) for your lease under Sec.  216.53, and to the extent 
prescribed in Sec.  203.33.
    (2) All gas production from qualified wells reported on the OGOR-A, 
including production not subject to royalty, counts toward the total 
lease RSV earned by both deep and ultra-deep wells on the lease, in the 
manner prescribed in Sec. Sec.  203.33 and 203.36.
    (d) Lessees may request a refund of or recoup royalties paid on 
production from qualified phase 2 or phase 3 ultra-deep wells that:
    (1) Occurs before [DATE THAT IS 30 DAYS AFTER THE DATE OF 
PUBLICATION OF THE FINAL RULE IN THE Federal Register] and
    (2) Is subject to application of an RSV under either Sec.  203.31 
or Sec.  203.41.
    (e) The following examples illustrate how this section applies. 
These examples assume that the price thresholds prescribed in Sec.  
203.36 have not been exceeded.

    Example 1: In 2007, you drill and begin producing from an ultra-
deep well with a perforated interval the top of which is 25,000 feet 
TVD SS, and your lease has had no prior production from a deep or 
ultra-deep well. Your lease earns an RSV of 35 BCF under this 
section when this well begins producing. Then in 2013, you drill and 
produce from another ultra-deep well with a perforated interval the 
top of which is 29,000 feet TVD SS. Your lease earns no additional 
RSV under this section when this second ultra-deep well produces, 
but any remaining RSV earned by the first ultra-deep well would be 
applied to production from both the first and the second ultra-deep 
well as prescribed in Sec.  203.33.
    Example 2: In 2005, you spudded and began producing from an 
ultra-deep well with a perforated interval the top of which is 
23,000 feet TVD SS. Your lease earns no RSV under this section from 
this phase 1 ultra-deep well because you spudded the well before the 
publication date of the proposed rule. However, this ultra-deep well 
may earn an RSV of 25 BCF for your lease under Sec.  203.41 (that 
became effective May 3, 2004), if the lease is located in water 
depths partly or entirely less than 200 meters and has not 
previously produced from a deep well.
    Example 3: In 2000, you began producing from a deep well with a 
perforated interval the top of which is 16,000 feet TVD SS and your 
lease is located in water 100 meters deep. Then in 2008, you drill 
and produce from an ultra-deep well with a perforated interval the 
top of which is 24,000 feet TVD SS. Your lease earns no RSV under 
either this section or Sec.  203.41.
    Example 4: In 2008, you spud and produce from an ultra-deep well 
with a perforated interval the top of which is 22,000 feet TVD SS, 
your lease is located in water 300 meters deep, and your lease has 
had no previous production from a deep or ultra-deep well. Your 
lease earns an RSV of 35 BCF under this section when this well 
begins producing. Then in 2010, you spud and produce from a deep 
well with a perforated interval the top of which is 16,000 feet TVD 
SS. Your 16,000-foot well earns no RSV (see Sec.  203.42(a)), but 
any remaining RSV earned by the ultra-deep well would also be 
applied to production from the deep well as prescribed in Sec. Sec.  
203.33 and 203.43. However, if the 16,000-foot deep well does not 
begin production until 2014 (or if your lease were located in water 
less than 200 meters deep), then the 16,000-foot well would not be a 
qualified deep well, and the RSV earned by the ultra-deep well would 
not be applied to production from the deep well.
    Example 5: In 2008, you spud a deep well with a perforated 
interval the top of which is 17,000 feet TVD SS that becomes a 
qualified well and earns an RSV of 15 BCF under Sec.  203.41 when it 
begins producing. Then in 2011, you spud an ultra-deep well with a 
perforated interval the top of which is 26,000 feet TVD SS. Your 
26,000-foot well becomes a qualified ultra-deep well when it begins 
producing but your lease earns no additional RSV under this section 
or Sec.  203.41. Both the qualified deep well and the qualified 
ultra-deep well would share your lease's total RSV of 15 BCF in the 
manner prescribed in Sec. Sec.  203.33 and 203.43.
    Example 6: In 2008, you spud a qualified ultra-deep well that is 
a sidetrack with a sidetrack measured depth of 21,000 feet and a 
perforated interval the top of which is 25,000 feet TVD SS. If your 
lease is located in 150 meters of water and has not previously 
produced from a deep well, your lease earns an RSV of 35 BCF of gas 
production from qualified deep and qualified ultra-deep wells on 
your lease, as prescribed in Sec.  203.33. If your sidetrack has a 
sidetrack measured depth of 14,000 feet and begins production in 
March 2009, it earns an RSV of 12.4 BCF under this section. However, 
if it does not begin production until 2010, it earns no RSV.
    Example 7: Your lease was issued in June 2004 and expressly 
incorporates the provisions of Sec. Sec.  203.41 through 203.47 as 
they existed at that time. In January 2005, you spud a deep well 
(well no. 1) with a perforated interval the top of which is 16,800 
feet TVD SS that becomes a qualified well and earns an RSV of 15 BCF 
under Sec.  203.41 when it begins producing. Then in February 2008, 
you spud an ultra-deep well (well no. 2) with a perforated interval 
the top of which is 22,300 feet that begins producing in November 
2008. Well no. 2 earns your lease an additional RSV of 10 BCF under 
paragraph (b) of this section. If, on the other hand, well no. 2 had 
begun producing in June 2009, it would earn no additional RSV for 
the lease.


Sec.  203.32  What other requirements or restrictions apply to royalty 
relief for a qualified phase 2 or phase 3 ultra-deep well?

    (a) If a qualified ultra-deep well on your lease is within a 
unitized portion of your lease, the RSV earned by that well under this 
section applies only to your lease and not to other leases within the 
unit.
    (b) If your qualified ultra-deep well is a directional well (either 
an original well or a sidetrack) drilled across a lease line, then 
either:
    (1) The lease with the perforated interval that initially produces 
earns the RSV or
    (2) If the perforated interval crosses a lease line, the lease 
where the surface of the well is located earns the RSV.
    (c) Any RSV earned under Sec.  203.31 is in addition to any royalty 
suspension supplement (RSS) for your lease under Sec.  203.45 that 
results from a different wellbore.
    (d) If your lease earns an RSV under Sec.  203.31 and later 
produces from a deep well that is not a qualified well, the RSV is not 
forfeited or terminated, but you may not apply the RSV earned under 
Sec.  203.31 to production from the non-qualified well.
    (e) You owe minimum royalties or rentals in accordance with your 
lease terms notwithstanding any RSVs

[[Page 28416]]

allowed under paragraphs (a) and (b) of Sec.  203.31.
    (f) Unused RSVs transfer to a successor lessee and expire with the 
lease.


Sec.  203.33  To which production do I apply the RSV earned by 
qualified phase 2 and phase 3 ultra-deep wells on my lease?

    (a) This paragraph applies to any lease with a qualified phase 2 or 
phase 3 ultra-deep well that is not within an MMS-approved unit. 
Subject to the price conditions of Sec.  203.36, you must apply the RSV 
prescribed in Sec.  203.31 as required under the following paragraphs 
(a)(1) and (a)(2) of this section.
    (1) You must apply the RSV to the earliest gas production occurring 
on and after the later of May 18, 2007, or the date the first qualified 
phase 2 or phase 3 ultra-deep well that earns your lease the RSV begins 
production (other than test production).
    (2) You must apply the RSV to gas production from all qualified 
wells on your lease, regardless of their depth, for which you have met 
the requirements in Sec.  203.35 or Sec.  203.44.
    (b) This paragraph applies to any lease with a qualified phase 2 or 
phase 3 ultra-deep well where all or part of the lease is within an 
MMS-approved unit. Under the unit agreement, a share of the production 
from all the qualified wells in the unit participating area would be 
allocated to your lease each month according to the participating area 
percentages. Subject to the price conditions of Sec.  203.36, you must 
apply the RSV prescribed in Sec.  203.31 as required under the 
following paragraphs (b)(1) through (b)(3) of this section.
    (1) You must apply the RSV to the earliest gas production occurring 
on and after the later of May 18, 2007, or the date that the first 
qualified phase 2 or phase 3 ultra-deep well that earns your lease the 
RSV begins production (other than test production).
    (2) You must apply the RSV to gas production:
    (i) From all qualified wells on the non-unitized area of your 
lease, regardless of their depth, for which you have met the 
requirements in Sec.  203.35 or Sec.  203.44; and
    (ii) Allocated to your lease under an MMS-approved unit agreement 
from qualified wells on unitized areas of your lease and on unitized 
areas of other leases in the unit, regardless of their depth, for which 
the requirements in Sec.  203.35 or Sec.  203.44 have been met.
    (3) The allocated share under paragraph (a)(2)(ii) of this section 
does not increase the RSV for your lease. None of the volumes produced 
from a well that is not within a unit participating area may be 
allocated to other leases in the unit.

    Example: The east half of your lease A is unitized with all of 
lease B. There is one qualified phase 2 ultra-deep well on the non-
unitized portion of lease A that earns lease A an RSV of 35 BCF 
under Sec.  203.31, one qualified deep well on the unitized portion 
of lease A (drilled after the ultra-deep well on the non-unitized 
portion of that lease) and a qualified phase 2 ultra-deep well on 
lease B that earns lease B a 35 BCF RSV under Sec.  203.31. The 
participating area percentages allocate 40 percent of production 
from both of the unit qualified wells to lease A and 60 percent to 
lease B. If the non-unitized qualified phase 2 ultra-deep well on 
lease A produces 12 BCF, and the unitized qualified well on lease A 
produces 18 BCF, and the qualified well on lease B produces 37 BCF, 
then the production volume from and allocated to lease A to which 
the lease A RSV applies is 34 BCF [12 + (18 + 37)(0.40)]. The 
production volume allocated to lease B to which the lease B RSV 
applies is 33 BCF [(18 + 37)(0.60)].

    (c) You must begin paying royalties when the cumulative production 
of gas from all qualified wells on your lease, or allocated to your 
lease under paragraph (b) of this section, reaches the applicable RSV 
allowed under Sec.  203.31 or Sec.  203.41. For the month in which 
cumulative production reaches this RSV, you owe royalties on the 
portion of gas production that exceeds the RSV remaining at the 
beginning of that month.


Sec.  203.34  To which production may an RSV earned by qualified phase 
2 and phase 3 ultra-deep wells on my lease not be applied?

    You may not apply an RSV earned under Sec.  203.31:
    (a) To production from completions less than 15,000 feet TVD SS, 
except in cases where the qualified well is re-perforated in the same 
reservoir previously perforated deeper than 15,000 feet TVD SS;
    (b) To production from a deep well or ultra-deep well on any other 
lease, except as provided in paragraph (b) of Sec.  203.33;
    (c) To any liquid hydrocarbon (oil and condensate) volumes; or
    (d) To production from a deep well or ultra-deep well that 
commenced drilling before:
    (1) March 26, 2003, on a lease that is located entirely or partly 
in water less than 200 meters deep; or
    (2) May 18, 2007, on a lease that is located entirely in water more 
than 200 meters deep.


Sec.  203.35  What administrative steps must I take to use the RSV 
earned by a qualified phase 2 or phase 3 ultra-deep well?

    (a) To use an RSV earned under Sec.  203.31, you must:
    (1) Notify the MMS Regional Supervisor for Production and 
Development in writing of your intent to begin drilling operations on 
all ultra-deep wells;
    (2) Within 30 days of the beginning of production from all wells 
that would become qualified phase 2 or phase 3 ultra-deep wells by 
satisfying the requirements of this section:
    (i) Provide written notification to the MMS Regional Supervisor for 
Production and Development that production has begun; and
    (ii) Request confirmation of the size of the RSV earned by your 
lease.
    (b) Before beginning production, you must meet any production 
measurement requirements that the MMS Regional Supervisor for 
Production and Development has determined are necessary under 30 CFR 
Part 250, Subpart L.
    (c) If you produced from a qualified phase 2 or phase 3 ultra-deep 
well before [DATE THAT IS 30 DAYS AFTER THE DATE OF PUBLICATION OF THE 
FINAL RULE IN THE Federal Register], you must provide the information 
in paragraph (b)(1) of this section no later than [DATE THAT IS 60 DAYS 
AFTER THE DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal 
Register].
    (d) If you cannot produce from a well that otherwise meets the 
criteria for a qualified phase 2 ultra-deep well that is an ultra-deep 
short sidetrack before May 3, 2009, on a lease that is located entirely 
or partly in water less than 200 meters deep, or before May 3, 2013, on 
a lease that is located entirely in water more than 200 meters but less 
than 400 meters deep, the MMS Regional Supervisor for Production and 
Development may extend the deadline for beginning production for up to 
1 year, based on the circumstances of the particular well involved, 
provided that you demonstrate that:
    (1) The delay occurred after reaching total depth in your well;
    (2) Production (other than test production) was expected to begin 
from the well before May 3, 2009, on a lease that is located entirely 
or partly in water less than 200 meters deep or before May 3, 2013, on 
a lease that is located entirely in water more than 200 meters but less 
than 400 meters deep; and
    (3) The delay in beginning production is for reasons beyond your 
control, including but not limited to adverse weather and unavoidable 
accidents.


Sec.  203.36  Do I keep royalty relief if prices rise significantly?

    (a) You must pay royalties on all gas production to which an RSV 
otherwise

[[Page 28417]]

would be applied under Sec.  203.33 for any calendar year in which the 
average daily closing New York Mercantile Exchange (NYMEX) natural gas 
price exceeds the applicable threshold price shown in the following 
table.

------------------------------------------------------------------------
  A price threshold in year
    2006 dollars of . . .                   Applies to . . .
------------------------------------------------------------------------
(1) $9.88 per MMBtu..........   The first 25 BCF of RSV earned
                                under Sec.   203.31(a) by a phase 2
                                ultra-deep well on a lease that is
                                located in water partly or entirely less
                                than 200 meters deep issued before [DATE
                                THAT IS 30 DAYS AFTER THE DATE OF
                                PUBLICATION OF THE FINAL RULE IN THE
                                Federal Register]; and
                                Any RSV earned under Sec.
                                203.31(b) by a phase 2 ultra-deep well.
(2) $4.47 per MMBtu..........   Any RSV earned under Sec.
                                203.31(a) by a phase 3 ultra-deep well
                                unless the lease terms prescribe a
                                different price threshold;
                                The last 10 BCF of the 35 BCF of
                                RSV earned under Sec.   203.31(a) by a
                                phase 2 ultra-deep well on a lease that
                                is located in water partly or entirely
                                less than 200 meters deep issued before
                                [DATE THAT IS 30 DAYS AFTER THE DATE OF
                                PUBLICATION OF THE FINAL RULE IN THE
                                Federal Register] and that is not a non-
                                converted lease;
                                The last 15 BCF of the 35 BCF of
                                RSV earned under Sec.   203.31(a) by a
                                phase 2 ultra-deep well on a non-
                                converted lease;
                                Any RSV earned under Sec.
                                203.31(a) by a phase 2 ultra-deep well
                                on a lease in water partly or entirely
                                less than 200 meters deep issued on or
                                after [DATE THAT IS 30 DAYS AFTER THE
                                DATE OF PUBLICATION OF THE FINAL RULE IN
                                THE Federal Register] unless the lease
                                terms prescribe a different price
                                threshold; and
                                Any RSV earned under Sec.
                                203.31(a) by a phase 2 ultra-deep well
                                on a lease in water entirely more than
                                200 meters deep and entirely less than
                                400 meters deep.
(3) $4.00 per MMBtu..........   The first 20 BCF of RSV earned
                                by a well that is located on a non-
                                converted lease issued in OCS Lease Sale
                                178.
(4) $5.72 per MMBtu..........   The first 20 BCF of RSV earned
                                by a well that is located on a non-
                                converted lease issued in OCS Lease
                                Sales 180, 182, 184, 185, or 187.
------------------------------------------------------------------------

    (b) For purposes of paragraph (a) of this section, determine the 
threshold price for any calendar year after 2006 by:
    (1) Determining the percentage of change during the year in the 
Department of Commerce's implicit price deflator for the gross domestic 
product; and
    (2) Adjusting the threshold price for the previous year by that 
percentage.
    (c) The following examples illustrate how this section applies.

    Example 1: Assume that a lessee drills and begins producing from 
a qualified phase 2 ultra-deep well in 2008 on a lease issued in 
2004 in less than 200 meters of water that earns the lease an RSV of 
35 BCF. The well produces a total of 18 BCF by the end of 2009. In 
both of those years, the average daily NYMEX closing natural gas 
price is less than $9.88 (adjusted for inflation after 2006). The 
lessee does not pay royalty on the 18 BCF. In 2010, the well 
produces another 13 BCF. In that year, the average daily closing 
NYMEX natural gas price is greater than $4.47 per MMBtu (adjusted 
for inflation after 2006), but less than $9.88 per MMBtu (adjusted 
for inflation after 2006). The first 7 BCF produced in 2010 will 
exhaust the first 25 BCF of the 35 BCF RSV that the well earned that 
is subject to the $9.88 threshold. The lessee must pay royalty on 
the remaining 6 BCF produced in 2010, which is subject to the $4.47 
per MMBtu threshold that was exceeded.

    Example 2: Assume that a lessee:
    (1) Drills and produces from Well No.1, a qualified deep well in 
2008 to a depth of 15,500 feet TVD SS that earns a 15 BCF RSV for 
the lease under Sec.  203.41, which would be subject to a price 
threshold of $9.88 per MMBtu (adjusted for inflation after 2006);
    (2) Later in 2008 drills and produces from Well No. 2, a second 
qualified deep well to a depth of 17,000 feet TVD SS that earns no 
additional RSV; and
    (3) In 2013 drills and produces from Well No. 3, a qualified 
phase 3 ultra-deep well that earns no additional RSV. Further assume 
that in 2013, the average daily closing NYMEX natural gas price 
exceeds $4.47 per MMBtu (adjusted for inflation after 2006) but does 
not exceed $9.88 per MMBtu (adjusted for inflation after 2006). In 
2013, any remaining RSV earned by Well No. 1 (which would have been 
applied to production from Well Nos. 1 and 2 in the intervening 
years), would be applied to production from all three qualified 
wells. Because the price threshold applicable to that RSV was not 
exceeded, the production from all three qualified wells would be 
royalty-free until the 15 BCF RSV earned by Well No. 1 is exhausted.
    Example 3: Assume the same initial facts regarding the three 
wells as in Example 2. Further assume that Well No. 1 stopped 
producing in 2011 after it had produced 8 BCF, and that Well No. 2 
stopped producing in 2012 after it had produced 5 BCF. Two BCF of 
the RSV earned by Well No. 1 remain. That RSV would be applied to 
production from Well No. 3 until it is exhausted, and the lessee 
therefore would not pay royalty, because the $9.88 per MMBtu 
(adjusted for inflation after 2006) price threshold is not exceeded.
    Example 4:  Assume that in February 2010 a lessee completes and 
begins producing from an ultra-deep well (at a depth of 21,500 feet 
TVD SS) on a lease located in 325 meters of water with no prior 
production from any deep well and no deep water royalty relief. The 
ultra-deep well would be a phase 2 ultra-deep well, and would earn 
the lease an RSV of 35 BCF. Further assume that the average daily 
closing NYMEX natural gas price exceeds $4.47 per MMBtu (adjusted 
for inflation after 2006) but does not exceed $9.88 per MMBtu 
(adjusted for inflation after 2006) during 2010. Because the lease 
is located in more than 200 but less than 400 meters of water, the 
$4.47 per MMBtu price threshold applies, and the lessee will owe 
royalty on all gas produced from the ultra-deep well in 2010.

    (d) You must pay any royalty due under this section no later than 
March 31 of the year following the calendar year for which you owe 
royalty. If you do not pay by that date, you must pay late payment 
interest under Sec.  218.54 beginning April 1 until the date of 
payment.
    (e) Production volumes on which you must pay royalty under this 
section count as part of your RSV.


Sec. Sec.  203.42 through 203.48  [Redesignated as Sec. Sec.  203.43 
through 203.49]

    6. Sections 203.42 through 203.48 are redesignated as Sec. Sec.  
203.43 through 203.49.
    7. Sections 203.40 and 203.41 are revised to read as follows:


Sec.  203.40  Which leases are eligible for royalty relief as a result 
of drilling a deep well or a phase 1 ultra-deep well?

    Your lease may receive an RSV under Sec. Sec.  203.41 through 
203.44, and may receive an RSS under Sec. Sec.  203.45 through 203.47, 
if it meets all the requirements of this section.
    (a) The lease is located in the GOM wholly west of 87 degrees, 30 
minutes West longitude in water depths entirely less than 400 meters 
deep.
    (b) The lease has not produced gas or oil from a well with a 
perforated interval the top of which is 18,000 feet TVD SS or deeper 
that commenced drilling either:

[[Page 28418]]

    (1) Before March 26, 2003, on a lease that is located partly or 
entirely in water less than 200 meters deep; or
    (2) Before May 18, 2007, on a lease that is located in water 
entirely more than 200 meters and entirely less than 400 meters deep.
    (c) In the case of a lease located partly or entirely in water less 
than 200 meters deep, the lease was issued in a lease sale held either:
    (1) Before January 1, 2001;
    (2) On or after January 1, 2001, and before January 1, 2004, and, 
in cases where the original lease terms provided for an RSV for deep 
gas production, the lessee has exercised the option provided for in 
Sec.  203.49; or
    (3) On or after January 1, 2004, and the lease terms provide for 
royalty relief under Sec. Sec.  203.41 through 203.47 of this part. 
(Note: Because the original Sec.  203.41 has been divided into new 
Sec. Sec.  203.41 and 203.42 and subsequent sections have been 
redesignated as Sec. Sec.  203.43 through 203.48, royalty relief in 
lease terms for leases issued on or after January 1, 2004, should be 
read as referring to Sec. Sec.  203.41 through 203.48.)
    (d) If the lease is located entirely in more than 200 meters and 
less than 400 meters of water, it must either:
    (1) Have been issued before November 28, 1995, and not been granted 
deep water royalty relief under 43 U.S.C. 1337(a)(3)(C), added by 
section 302 of the Deep Water Royalty Relief Act; or
    (2) Have been issued after November 28, 2000, and not been granted 
deep water royalty relief under Sec. Sec.  203.60 through 203.79.


Sec.  203.41  If I have a qualified deep well or a qualified phase 1 
ultra-deep well, what royalty relief would my lease earn?

    (a) To qualify for a suspension volume under paragraphs (b) or (c) 
of this section, your lease must meet the requirements in Sec.  203.40 
and the requirements in the following table.

------------------------------------------------------------------------
                               And if it later . .   Then your lease . .
 If your lease has not . . .            .                     .
------------------------------------------------------------------------
(1) Produced gas or oil from  has a qualified deep  earns an RSV
 any deep well or ultra-deep   well or qualified     specified in
 well.                         phase 1 ultra-deep    paragraph (b) of
                               well.                 this section.
(2) Produced gas or oil from  has a qualified deep  earns an RSV
 a well with a perforated      well with a           specified in
 interval whose top is         perforated interval   paragraph (c) of
 18,000 feet TVD SS or         whose top is 18,000   this section.
 deeper.                       feet TVD SS or
                               deeper or a
                               qualified phase 1
                               ultra-deep well.
------------------------------------------------------------------------

    (b) If your lease meets the requirements in paragraph (a)(1) of 
this section, it earns the RSV prescribed in the following table:

------------------------------------------------------------------------
 If you have a qualified deep well or a
 qualified phase 1 ultra-deep well that  Then your lease earns an RSV on
                  is:                     this volume of gas production:
------------------------------------------------------------------------
(1) An original well with a perforated   15 BCF.
 interval the top of which is from
 15,000 to less than 18,000 feet TVD
 SS,
(2) A sidetrack with a perforated        4 BCF plus 600 MCF times
 interval the top of which is from        sidetrack measured depth
 15,000 to less than 18,000 feet TVD      (rounded to the nearest 100
 SS,                                      feet) but no more than 15 BCF.
(3) An original well with a perforated   25 BCF.
 interval the top of which is at least
 18,000 feet TVD SS,
(4) A sidetrack with a perforated        4 BCF plus 600 MCF times
 interval the top of which is at least    sidetrack measured depth
 18,000 feet TVD SS,                      (rounded to the nearest 100
                                          feet) but no more than 25 BCF.
------------------------------------------------------------------------

    (c) If your lease meets the requirements in paragraph (a)(2) of 
this section, it earns the RSV prescribed in the following table. The 
RSV specified in this paragraph is in addition to any RSV your lease 
already may have earned from a qualified deep well with a perforated 
interval whose top is from 15,000 feet to less than 18,000 feet TVD SS.

------------------------------------------------------------------------
 If you have a qualified deep well or a
 qualified phase 1 ultra-deep well that    Then you earn an RSV on this
                is . . .                    amount of gas production:
------------------------------------------------------------------------
(1) An original well or a sidetrack      0 BCF.
 with a perforated interval the top of
 which is from 15,000 to less than
 18,000 feet TVD SS,
(2) An original well with a perforated   10 BCF.
 interval the top of which is 18,000
 feet TVD SS or deeper,
(3) A sidetrack with a perforated        4 BCF plus 600 MCF times
 interval the top of which is 18,000      sidetrack measured depth
 feet TVD SS or deeper,                   (rounded to the nearest 100
                                          feet) but no more than 10 BCF.
------------------------------------------------------------------------

    (d) You must apply the RSV prescribed in paragraphs (b) and (c) of 
this section to gas volumes produced from qualified wells on or after 
May 3, 2004, reported on the OGOR-A for your lease under Sec.  216.53, 
as and to the extent prescribed in Sec. Sec.  203.43 and 203.48.
    (1) Except as provided in paragraph (d)(2) of this section, all gas 
production from qualified wells reported on the OGOR-A, including 
production that is not subject to royalty, counts toward the lease RSV.
    (2) Production to which an RSS applies under Sec. Sec.  203.45 and 
203.46 does not count toward the lease RSV.
    (e) Lessees may request a refund of or recoup royalties paid on 
production from qualified wells on a lease that is located in water 
entirely deeper than 200 meters but entirely less than 400 meters deep 
that:
    (1) Occurs before [DATE THAT IS 30 DAYS AFTER THE PUBLICATION DATE 
OF THE FINAL RULE IN THE Federal Register]; and
    (2) Is subject to application of an RSV under either Sec.  203.31 
or Sec.  203.41.

[[Page 28419]]

    (f) The following examples illustrate how this section applies:

    Example 1: If you have a qualified deep well that is an original 
well with a perforated interval the top of which is 16,000 feet TVD 
SS, your lease earns an RSV of 15 BCF that would be applied to gas 
production from all qualified wells on your lease, as prescribed in 
Sec.  203.43. However, if the top of the perforated interval is 
18,500 feet TVD SS, the RSV is 25 BCF.
    Example 2: If you have a qualified deep well that is a 
sidetrack, with a perforated interval the top of which is 16,000 
feet TVD SS and a sidetrack measured depth of 6,789 feet, we round 
the measured depth to 6,800 feet and your lease earns an RSV of 8.08 
BCF that would be applied to gas production from all qualified wells 
on your lease, as prescribed in Sec.  203.43.
    Example 3: If you have a qualified deep well that is a 
sidetrack, with a perforated interval the top of which is 16,000 
feet TVD SS and a sidetrack measured depth of 19,500 feet, your 
lease earns an RSV of 15 BCF that would be applied to gas production 
from all qualified wells on your lease, as prescribed in Sec.  
203.43, even though 4 BCF plus 600 MCF per foot of sidetrack 
measured depth equals 15.7 BCF.
    Example 4: If you have drilled and produced a deep well with a 
perforated interval the top of which is 16,000 feet TVD SS before 
March 26, 2003 (and the well therefore is not a qualified well and 
has earned no RSV under this section), and later drill:
    (i) A deep well with a perforated interval the top of which is 
17,000 feet TVD SS, your lease earns no RSV;
    (ii) A qualified deep well that is an original well with a 
perforated interval the top of which is 19,000 feet TVD SS, your 
lease earns an RSV of 10 BCF that would be applied to gas production 
from qualified wells on your lease, as prescribed in Sec. Sec.  
203.43 and 203.48; or
    (iii) A qualified deep well that is a sidetrack with a 
perforated interval the top of which is 19,000 feet TVD SS, that has 
a sidetrack measured depth of 7,000 feet, your lease earns an RSV of 
8.2 BCF that would be applied to gas production from qualified wells 
on your lease, as prescribed in Sec. Sec.  203.43 and 203.48.
    Example 5: If you have a qualified deep well that is an original 
well with a perforated interval the top of which is 16,000 feet TVD 
SS, and later drill a second qualified well that is an original well 
with a perforated interval the top of which is 19,000 feet TVD SS, 
we increase the total RSV for your lease from 15 BCF to 25 BCF. MMS 
would apply that RSV to gas production from qualified wells on your 
lease, as prescribed in Sec. Sec.  203.43 and 203.48. If the second 
well has a perforated interval the top of which is 22,000 feet TVD 
SS (instead of 19,000 feet), the total RSV for your lease would 
increase to 25 BCF only if the second well was a phase 1 ultra-deep 
well, i.e., if drilling began before May 18, 2007. If drilling of 
the second well began after that date, the second well would not 
earn any additional RSV (as prescribed in Sec.  203.30), and the 
total RSV for your lease would remain at 15 BCF.
    Example 6: If you have a qualified deep well that is a 
sidetrack, with a perforated interval the top of which is 16,000 
feet TVD SS and a sidetrack measured depth of 4,000 feet, and later 
drill a second qualified well that is a sidetrack, with a perforated 
interval the top of which is 19,000 feet TVD SS and a sidetrack 
measured depth of 8,000 feet, we increase the total RSV for your 
lease from 6.4 BCF to 15.2 BCF. MMS would apply that RSV to gas 
production from qualified wells on your lease, as prescribed in 
Sec. Sec.  203.43 and 203.48. The difference of 8.8 BCF represents 
the RSV earned by the second sidetrack that has a perforated 
interval the top of which is deeper than 18,000 feet TVD SS.
    8. A new Sec.  203.42 is added to read as follows:


Sec.  203.42  What conditions and limitations apply to royalty relief 
for deep wells and phase 1 ultra-deep wells?

    The conditions and limitations in the following table apply to 
royalty relief under Sec.  203.41.

------------------------------------------------------------------------
                If . . .                            Then . . .
------------------------------------------------------------------------
(a) Your lease has produced gas or oil   your lease cannot earn an RSV
 from a well with a perforated interval   under Sec.   203.41 as a
 the top of which is 18,000 feet TVD SS   result of drilling any
 or deeper,                               subsequent deep wells or phase
                                          1 ultra-deep wells.
(b) You determine RSV under Sec.         that determination establishes
 203.41 for the first qualified deep      the total RSV available for
 well or qualified phase 1 ultra-deep     that drilling depth interval
 well on your lease (whether an           on your lease (i.e., either
 original well or a sidetrack),           15,000-18,000 feet TVD SS, or
                                          18,000 feet TVD SS and
                                          deeper), regardless of the
                                          number of subsequent qualified
                                          wells you drill to that depth
                                          interval.
(c) A qualified deep well or qualified   the RSV earned by that well
 phase 1 ultra-deep well on your lease    under Sec.   203.41 applies
 is within a unitized portion of your     only to production from
 lease,                                   qualified wells on or
                                          allocated to your lease and
                                          not to other leases within the
                                          unit.
(d) Your qualified deep well or          the lease with the perforated
 qualified phase 1 ultra-deep well is a   interval that initially
 directional well (either an original     produces earns the RSV.
 well or a sidetrack) drilled across a    However, if the perforated
 lease line,                              interval crosses a lease line,
                                          the lease where the surface of
                                          the well is located earns the
                                          RSV.
(e) You earn an RSV under Sec.           that RSV is in addition to any
 203.41,.                                 RSS for your lease under Sec.
                                           203.45 that results from a
                                          different wellbore.
(f) Your lease earns an RSV under Sec.   the RSV is not forfeited or
  203.41 and later produces from a well   terminated, but you may not
 that is not a qualified well,            apply the RSV under Sec.
                                          203.41 to production from the
                                          non-qualified well.
(g) You qualify for an RSV under         You still owe minimum royalties
 paragraphs (b) or (c) of Sec.            or rentals in accordance with
 203.41,                                  your lease terms.
(h) You transfer your lease,...........  Unused RSVs transfer to a
                                          successor lessee and expire
                                          with the lease.
------------------------------------------------------------------------

    Example to paragraph (b):  If your first qualified deep well is 
a sidetrack with a perforated interval whose top is 16,000 feet TVD 
SS and earns an RSV of 12.5 BCF, and you later drill a qualified 
original deep well to 17,000 feet TVD SS, the RSV for your lease 
remains at 12.5 BCF and does not increase to 15 BCF. However, under 
paragraph (c) of Sec.  203.41, if you subsequently drill a qualified 
deep well to a depth of 18,000 feet or greater TVD SS, you may earn 
an additional RSV.
    9. Newly redesignated Sec.  203.43 is revised to read as follows:


Sec.  203.43  To which production do I apply the RSV earned from 
qualified deep wells or qualified phase 1 ultra-deep wells on my lease?

    (a) This paragraph applies to any lease with a qualified deep well 
or qualified phase 1 ultra-deep well that is not within an MMS-approved 
unit. Subject to the price conditions in Sec.  203.48, you must apply 
the RSV prescribed in Sec.  203.41 as required under the following 
paragraphs (a)(1) and (a)(2) of this section.
    (1) You must apply the RSV to the earliest gas production occurring 
on and after the later of:
    (i) May 3, 2004, for an RSV earned by a qualified deep well or 
qualified phase 1 ultra-deep well on a lease that is located entirely 
or partly in water less than 200 meters deep;
    (ii) May 18, 2007, for an RSV earned by a qualified deep well on a 
lease that is located entirely in water more than 200 meters deep; or
    (iii) The date that the first qualified well that earns your lease 
the RSV

[[Page 28420]]

begins production (other than test production).
    (2) You must apply the RSV to gas production from all qualified 
wells on your lease, regardless of their depth, for which you have met 
the requirements in Sec.  203.35 or Sec.  203.44.

    Example 1: On a lease in water less than 200 meters deep, you 
began drilling an original deep well with a perforated interval the 
top of which is 18,200 feet TVD SS in September 2003, that became a 
qualified deep well in July 2004, when it began producing and using 
the RSV. You subsequently drill another original deep well with a 
perforated interval the top of which is 16,600 feet TVD SS, which 
becomes a qualified deep well when production begins in August 2008. 
The first well earned an RSV of 25 BCF. You must apply any remaining 
RSV each month beginning in August 2008 to production from both 
wells until the 25 BCF RSV is fully utilized. If the second well had 
begun production in August 2009, it would not be a qualified deep 
well because it started production after expiration of this 
provision in May 2009, and could not share any of the remaining RSV.
    Example 2: On a lease in water between 200 and 400 meters deep, 
you begin drilling an original deep well with a perforated interval 
the top of which is 17,100 feet TVD SS in November 2010 that becomes 
a qualified deep well in June 2011 when it begins producing and 
using the RSV. You subsequently drill another original deep well 
with a perforated interval the top of which is 15,300 feet TVD SS 
which becomes a qualified deep well by beginning production in 
October 2011. Only the first well earns an RSV equal to 15 BCF. You 
must apply any remaining RSV each month beginning in October 2011 to 
production from both qualified deep wells until the 15 BCF RSV is 
fully utilized.

    (b) This paragraph applies to any lease with a qualified deep well 
or qualified phase 1 ultra-deep well when all or part of the lease is 
within an MMS-approved unit. Under the unit agreement, a share of the 
production from all the qualified wells in the unit participating area 
would be allocated to your lease each month according to the 
participating area percentages. Subject to the price conditions in 
Sec.  203.48, you must apply the RSV prescribed under Sec.  203.41 as 
required under the following paragraphs (b)(1) through (b)(3) of this 
section.
    (1) You must apply the RSV to the earliest gas production occurring 
on and after the later of:
    (i) May 3, 2004, for an RSV earned by a qualified well or qualified 
phase 1 ultra-deep well on a lease that is located entirely or partly 
in water less than 200 meters deep;
    (ii) May 18, 2007, for an RSV earned by a qualified deep well on a 
lease that is located entirely in water more than 200 meters deep; or
    (iii) The date that the first qualified well that earns your lease 
the RSV begins production (other than test production).
    (2) You must apply the RSV to gas production:
    (i) From all qualified wells on the non-unitized area of your 
lease, regardless of their depth, for which you have met the 
requirements in Sec.  203.35 or Sec.  203.44; and,
    (ii) Allocated to your lease under an MMS-approved unit agreement 
from qualified wells on unitized areas of your lease and on unitized 
areas of other leases in the unit, regardless of their depth, for which 
the requirements in Sec.  203.35 or Sec.  203.44 have been met.
    (3) The allocated share under paragraph (b)(2)(ii) of this section 
does not increase the RSV for your lease. None of the volumes produced 
from a well that is not within a unit participating area may be 
allocated to other leases in the unit.

    Example: The east half of your lease A is unitized with all of 
lease B. There is one qualified 19,000-foot TVD SS deep well on the 
non-unitized portion of lease A, one qualified 18,500-foot TVD SS 
deep well on the unitized portion of lease A, and a qualified 
19,400-foot TVD SS deep well on lease B. The participating area 
percentages allocate 32 percent of production from both of the unit 
qualified deep wells to lease A and 68 percent to lease B. If the 
non-unitized qualified deep well on lease A produces 12 BCF and the 
unitized qualified deep well on lease A produces 15 BCF, and the 
qualified deep well on lease B produces 10 BCF, then the production 
volume from and allocated to lease A to which the lease an RSV 
applies is 20 BCF [12 + (15 + 10) * (0.32)]. The production volume 
allocated to lease B to which the lease B RSV applies is 17 BCF [(15 
+ 10) * (0.68)].

    (c) You must begin paying royalties when the cumulative production 
of gas from all qualified wells on your lease, or allocated to your 
lease under paragraph (b) of this section, reaches the applicable RSV 
allowed under Sec.  203.31 or Sec.  203.41. For the month in which 
cumulative production reaches this RSV, you owe royalties on the 
portion of gas production that exceeds the RSV remaining at the 
beginning of that month.
    (d) You may not apply the RSV allowed under Sec.  203.41 to:
    (1) Production from completions less than 15,000 feet TVD SS, 
except in cases where the qualified deep well is re-perforated in the 
same reservoir previously perforated deeper than 15,000 feet TVD SS;
    (2) Production from a deep well or phase 1 ultra-deep well on any 
other lease, except as provided in paragraph (b) of this section;
    (3) Any liquid hydrocarbon (oil and condensate) volumes; or
    (4) Production from a deep well or phase 1 ultra-deep well that 
commenced drilling before:
    (i) March 26, 2003, on a lease that is located entirely or partly 
in water less than 200 meters deep or
    (ii) May 18, 2007, on a lease that is located entirely in water 
more than 200 meters deep.
    10. In redesignated Sec.  203.44, the section heading and 
paragraphs (a), (d), and (e) are revised to read as follows:


Sec.  203.44  What administrative steps must I take to use the RSV 
earned by a qualified deep well or qualified phase 1 ultra-deep well?

    (a) You must notify the MMS Regional Supervisor for Production and 
Development in writing of your intent to begin drilling operations on 
all deep wells and phase 1 ultra-deep wells.
* * * * *
    (d) You must provide the information in paragraph (b) of this 
section by [DATE THAT IS 60 DAYS AFTER THE DATE OF PUBLICATION OF THE 
FINAL RULE IN THE Federal Register] if you produced before [DATE THAT 
IS 30 DAYS AFTER THE DATE OF PUBLICATION OF THE FINAL RULE IN THE 
Federal Register] from a qualified deep well or qualified phase 1 
ultra-deep well on a lease that is located entirely in water more than 
200 meters and less than 400 meters deep.
    (e) The MMS Regional Supervisor for Production and Development may 
extend the deadline for beginning production for up to one year for a 
well that cannot begin production before the applicable date prescribed 
in the definition of ``qualified deep well'' in Sec.  203.0 if it meets 
all of the following criteria.
    (1) The well otherwise meets the criteria in the definition of a 
qualified deep well in Sec.  203.0.
    (2) The delay in production occurred after reaching total depth in 
the well.
    (3) Production (other than test production) was expected to begin 
from the well before the applicable date from the definition of a 
qualified deep well in Sec.  203.0.
    (4) The delay in beginning production is for reasons beyond your 
control, e.g., adverse weather or unavoidable accidents.
    11. In redesignated Sec.  203.45, paragraphs (a), (b) and (e) are 
revised to read as follows:


Sec.  203.45  If I drill a certified unsuccessful well, what royalty 
relief will my lease earn?

* * * * *
    (a) If you drill a certified unsuccessful well and you satisfy the 
administrative

[[Page 28421]]

requirements of Sec.  203.47, subject to the price conditions in Sec.  
203.48, your lease earns an RSS shown in the following table. The RSS 
are shown in billions of cubic feet of gas equivalent (BCFE) or in 
thousands of cubic feet of gas equivalent (MCFE) and are applicable to 
oil and gas production as prescribed in Sec.  204.46.

------------------------------------------------------------------------
                                         Then your lease earns an RSS on
  If you have a certified unsuccessful      this volume of oil and gas
             well that is:                 production as prescribed in
                                         this section and Sec.   203.46:
------------------------------------------------------------------------
(1) An original well and your lease has  5 BCFE.
 not produced gas or oil from a deep
 well or an ultra-deep well,
(2) A sidetrack (with a sidetrack        0.8 BCFE plus 120 MCFE times
 measured depth of at least 10,000        sidetrack measured depth
 feet) and your lease has not produced    (rounded to the nearest 100
 gas or oil from a deep well or an        feet) but no more than 5 BCFE.
 ultra-deep well,
(3) An original well or a sidetrack      2 BCFE.
 (with a sidetrack measured depth of at
 least 10,000 feet) and your lease has
 produced gas or oil from a deep well
 with a perforated interval the top of
 which is from 15,000 to less than
 18,000 feet TVD SS,
------------------------------------------------------------------------

    (b) This paragraph applies to oil and gas volumes you report on the 
OGOR-A for your lease under Sec.  216.53.
    (1) You must apply the RSS prescribed in paragraph (a) of this 
section, in accordance with the requirements in Sec.  203.46, to all 
oil and gas produced from the lease:
    (i) On or after [DATE THAT IS 30 DAYS AFTER THE DATE OF PUBLICATION 
OF THE FINAL RULE IN THE Federal Register], if your lease is located in 
water more than 200 meters but less than 400 meters deep; or
    (ii) On or after May 3, 2004, if your lease is located in water 
partly or entirely less than 200 meters deep.
    (2) Production to which an RSV applies under Sec. Sec.  203.31 
through 203.33 and 203.41 through 203.43 does not count toward the 
lease RSS. All other production, including production that is not 
subject to royalty, counts toward the lease RSS.

    Example 1: If you drill a certified unsuccessful well that is an 
original well to a target 19,000 feet TVD SS, your lease earns an 
RSS of 5 BCFE that would be applied to gas and oil production if 
your lease has not previously produced from a deep well or an ultra-
deep well, or you earn an RSS of 2 BCFE of gas and oil production if 
your lease has previously produced from a deep well with a 
perforated interval from 15,000 to less than 18,000 feet TVD SS, as 
prescribed in Sec.  203.46.
    Example 2: If you drill a certified unsuccessful well that is a 
sidetrack that reaches a target 19,000 feet TVD SS, that has a 
sidetrack measured depth of 12,545 feet, and your lease has not 
produced gas or oil from any deep well or ultra-deep well, MMS 
rounds the sidetrack measured depth to 12,500 feet and your lease 
earn an RSS of 2.3 BCFE of gas and oil production as prescribed in 
Sec.  203.45.
* * * * *
    (e) If the same wellbore that earns an RSS as a certified 
unsuccessful well later produces from a perforated interval the top of 
which is 15,000 feet TVD or deeper and becomes a qualified well, it 
will be subject to the following conditions:
* * * * *
    12. In redesignated Sec.  203.46, paragraphs (a) introductory text, 
(c), and (e) are revised to read as follows:


Sec.  203.46  To which production do I apply the RSS from drilling one 
or two certified unsuccessful wells on my lease?

    (a) Subject to the requirements of Sec. Sec.  203.40, 203.43, 
203.45, 203.47, and 203.48, you must apply an RSS in Sec.  203.45 to 
the earliest oil and gas production:
* * * * *
    (c) If you have no current production on which to apply the RSS 
allowed under Sec.  203.45, your RSS applies to the earliest subsequent 
production of gas and oil from, or allocated under an MMS-approved unit 
agreement to, your lease.
* * * * *
    (e) You may not apply the RSS allowed under Sec.  203.45 to 
production from any other lease, except for production allocated to 
your lease from an MMS-approved unit agreement. If your certified 
unsuccessful well is on a lease subject to an MMS-approved unit 
agreement, the lessees of other leases in the unit may not apply any 
portion of the RSS for your lease to production from the other leases 
in the unit.
* * * * *
    13. In redesignated Sec.  203.47, paragraph (c) is revised to read 
as follows:


Sec.  203.47  What administrative steps do I take to obtain and use the 
royalty suspension supplement?

* * * * *
    (c) If you commenced drilling a well that otherwise meets the 
criteria for a certified unsuccessful well on a lease located entirely 
in more than 200 meters and entirely less than 400 meters of water on 
or after May 18, 2007, and finished it before [DATE THAT IS 30 DAYS 
AFTER THE DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal 
Register], you must provide the information in paragraph (b) of this 
section no later than [DATE THAT IS 90 DAYS AFTER THE DATE OF 
PUBLICATION OF THE FINAL RULE IN THE Federal Register].
    14. Redesignated Sec.  203.48 is revised to read as follows:


Sec.  203.48  Do I keep royalty relief if prices rise significantly?

    (a) You must pay royalties on all gas and oil production for which 
an RSV or an RSS otherwise would be allowed under Sec. Sec.  203.40 
through 203.47 for any calendar year when the average daily closing 
NYMEX natural gas price exceeds the applicable threshold price shown in 
the following table.

------------------------------------------------------------------------
                                                       the applicable
For a lease located in water    And issued . . .    threshold price is .
            . . .                                            . .
------------------------------------------------------------------------
(1) Partly or entirely less   before [DATE THAT IS  $9.88 per MMBtu,
 than 200 meters deep,         30 DAYS AFTER THE     adjusted annually
                               DATE OF PUBLICATION   after calendar year
                               OF THE FINAL RULE     2006 for inflation.
                               IN THE Federal
                               Register].
(2) Partly or entirely less   after [DATE THAT IS   $4.47 per MMBtu,
 than 200 meters deep,         30 DAYS AFTER THE     adjusted annually
                               DATE OF PUBLICATION   after calendar year
                               OF THE FINAL RULE     2006 for inflation
                               IN THE Federal        unless the lease
                               Register].            terms prescribe a
                                                     different price
                                                     threshold.

[[Page 28422]]

 
(3) Entirely more than 200    on any date.........  $4.47 per MMBtu,
 meters and entirely less                            adjusted annually
 than 400 meters deep,                               after calendar year
                                                     2006 for inflation
                                                     unless the lease
                                                     terms prescribe a
                                                     different price
                                                     threshold.
------------------------------------------------------------------------

    (b) Determine the threshold price for any calendar year after 2006 
by adjusting the threshold price in the previous year by the percentage 
that the implicit price deflator for the gross domestic product, as 
published by the Department of Commerce, changed during the calendar 
year.
    (c) You must pay any royalty due under this section no later than 
March 31 of the year following the calendar year for which you owe 
royalty. If you do not pay by that date, you must pay late payment 
interest beginning April 1 until the date of payment.
    (d) Production volumes on which you must pay royalty under this 
section count as part of your RSV and RSS.
    15. In redesignated Sec.  203.49, the section heading and 
paragraphs (a) introductory text and paragraph (c) are revised to read 
as follows:


Sec.  203.49  May I substitute the deep gas drilling provisions in this 
part for the deep gas royalty relief provided in my lease terms?

    (a) You may exercise an option to replace the applicable lease 
terms for royalty relief related to deep-well drilling with those in 
Sec.  203.0 and 203.40 through 203.48 if you have a lease issued with 
royalty relief provisions for deep-well drilling. Such leases:
* * * * *
    (c) Once you exercise the option under paragraph (a) of this 
section, you are subject to all the activity, timing, and 
administrative requirements pertaining to deep gas royalty relief as 
specified in Sec. Sec.  203.40 through 203.48.
* * * * *
    16. The undesignated center heading preceeding Sec.  203.60 is 
revised to read as follows:

Royalty Relief for Pre-Act Deep Water Leases and for Development and 
Expansion Projects

    17. Section 203.60 is revised to read as follows:


Sec.  203.60  Who may apply for royalty relief offshore Alaska or in 
deep water in the Gulf of Mexico?

    You may apply for royalty relief under Sec. Sec.  203.61(b) and 
203.62 if you:
    (a) Hold a pre-Act lease (as defined in Sec.  203.0) that we have 
assigned to an authorized field (as defined in Sec.  203.0);
    (b) Propose an expansion project (as defined in Sec.  203.0); or
    (c) Propose a development project (as defined in Sec.  203.0).
    18. In Sec.  203.62, paragraphs (a) through (c) are redesignated 
paragraphs (b) through (d), the introductory paragraph is designated 
paragraph (a), and redesignated paragraphs (b) and (d) are revised to 
read as follows:


Sec.  203.62  How do I apply for relief?

* * * * *
    (b) Your application for royalty relief offshore Alaska or in deep 
water in the GOM must include an original and two copies (one set of 
digital information) of:
    (1) Administrative information report;
    (2) Economic Viability and relief justification report;
    (3) G&G report;
    (4) Engineering report;
    (5) Production report; and
    (6) Cost report.
* * * * *
    (d) Sections 203.81, 203.83, and 203.85 through 203.89 describe 
what these reports must include. The MMS regional office for your 
region will guide you on the format for the required reports, and we 
encourage you to contact this office before preparing your application 
for this guidance.
    19. In Sec.  203.69, paragraphs (c) through (f) are redesignated as 
paragraphs (f) through (i), paragraph (b) is revised, and new 
paragraphs (c) through (e) are added to read as follows:


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

* * * * *
    (b) For development projects, any relief we grant applies only to 
project wells and replaces the royalty relief, if any, with which we 
issued your lease.
    (c) If your project is economic given the royalty relief with which 
we issued your lease, we will reject the application.
    (d) If the lease has earned or may earn deep gas royalty relief 
under Sec. Sec.  203.40 through 203.49 or ultra-deep gas royalty relief 
under Sec. Sec.  203.30 through 203.36, we will take the deep gas 
royalty relief or ultra-deep gas royalty relief into account in 
determining whether further royalty relief for a development project is 
necessary for production to be economic.
    (e) If neither paragraph (c) nor (d) of this section apply, the 
minimum royalty suspension volumes are as shown in the following table:

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


[[Page 28423]]

    20. In Sec.  203.70, the introductory paragraph 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 your region will prescribe the 
formats.
* * * * *
    21. Section 203.77 is revised to read as follows:


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

    Yes, you may voluntarily give up relief by sending a letter to that 
effect to the MMS Regional office for your region.
    22. In Sec.  203.78, the introductory paragraph is revised, 
paragraphs (a) through (f) are redesignated as paragraphs (b) through 
(g), respectively, and a new paragraph (a) is added, to read as 
follows:


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

    If prices rise above a base price threshold for light sweet crude 
oil or natural gas, you must pay full royalties as prescribed in this 
section.
    (a) The following table shows the base price threshold for various 
types of leases. Note that, for post-November 2000 deepwater leases, 
price thresholds apply on a lease basis, so different leases on the 
same development project or expansion project may have different price 
thresholds.

------------------------------------------------------------------------
                                         The base price threshold is . .
               For . . .                                .
------------------------------------------------------------------------
(1) Pre-Act leases.....................  set by statute.
(2) Post-November 2000 deep water        indicated in your original
 leases in the GOM or leases offshore     lease agreement or Notice of
 Alaska.                                  Sale.
(3) Post-November 2000 deep water        the threshold set by statute
 leases in the GOM or leases offshore     for pre-Act leases.
 of Alaska that did not set a base
 price threshold.
------------------------------------------------------------------------

* * * * *
    23. In Sec.  203.79, the section heading is revised to read as 
follows:


Sec.  203.79  How do I appeal MMS's decisions related to royalty relief 
for a deepwater lease or a development or expansion project?

* * * * *
    24. In Sec.  203.81, paragraph (b) is revised to read as follows:


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

* * * * *
    (b) You must certify that all information in your application, 
fabricator's confirmation and post-production development reports is 
accurate, complete, and conforms to the most recent content and 
presentation guidelines available from the MMS Regional office for your 
region.
* * * * *
    25. In Sec.  203.89, the section heading is revised to read as 
follows:


Sec.  203.89  What is in a cost report?

* * * * *
    26. In Sec.  203.90, paragraph (b) is revised to read as follows:


Sec.  203.90  What is in a fabricator's confirmation report?

* * * * *
    (b) A letter from the contractor building the system to the MMS 
Regional Director for your region certifying when construction started 
on your system; and
* * * * *

PART 260 OUTER CONTINENTAL SHELF OIL AND GAS LEASING

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

    Authority: 43 U.S.C. 1331 et seq.

    28. In Sec.  260.121, paragraph (b) is revised to read as follows:


Sec.  260.121  When does a lease issued in a sale held after November 
2000 get a royalty suspension?

* * * * *
    (b) You may apply for a supplemental royalty suspension for a 
project under part 203 of this title, if your lease is located:
    (1) In the Gulf of Mexico, in water 200 meters or deeper, and 
wholly west of 87 degrees, 30 minutes West longitude; or
    (2) Offshore of Alaska.
* * * * *
    29. In Sec.  260.122, paragraph (b)(1) is revised to read as 
follows:


Sec.  260.122  How long will a royalty suspension volume be effective 
for a lease issued in a sale held after November 2000?

* * * * *
    (b)(1) Notwithstanding any royalty suspension volume under this 
subpart, you must pay royalty at the lease stipulated rate on:
    (i) Any oil produced for any period stipulated in the lease during 
which the arithmetic average of the daily closing price on the New York 
Mercantile Exchange (NYMEX) for light sweet crude oil exceeds the 
applicable threshold price of $35.75 per barrel, adjusted annually 
after calendar year 2006 for inflation unless the lease terms prescribe 
a different price threshold.
    (ii) Any natural gas produced for any period stipulated in the 
lease during which the arithmetic average of the daily closing price on 
the NYMEX for natural gas exceeds the applicable threshold price of 
$4.47 per MMBtu, adjusted annually after calendar year 2006 for 
inflation unless the lease terms prescribe a different price threshold.
    (iii) Determine the threshold price for any calendar year after 
2006 by adjusting the threshold price in the previous year by the 
percentage that the implicit price deflator for the gross domestic 
product, as published by the Department of Commerce, changed during the 
calendar year.
* * * * *
[FR Doc. E7-9294 Filed 5-17-07; 8:45 am]
BILLING CODE 4310-MR-P