[Federal Register Volume 73, Number 106 (Monday, June 2, 2008)]
[Notices]
[Pages 31502-31504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-12225]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service


Notice of the Annual Price Threshold Determination

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Notice of annual price threshold determination and annual 
average oil and gas market price calculations, along with their effects 
for the Gulf of Mexico royalty relief programs.

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SUMMARY: This notice provides the official MMS documentation of which 
Gulf of Mexico price thresholds have been exceeded by annual market 
prices for oil or gas, by lease vintage, for calendar year 2007. This 
notice also explains in detail how MMS calculates the annual oil and 
gas prices and applicable price thresholds used to determine whether 
royalty relief applies in calendar year 2007 for our various deepwater 
and deep depth royalty relief programs.

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

SUPPLEMENTARY INFORMATION: By various laws (Outer Continental Shelf 
Lands Act, Deep Water Royalty Relief Act, Energy Policy Act) and 
regulations (30 CFR 203.47, 203.54, 203.78, 260.110, and 260.122), MMS 
has authority to impose price thresholds for royalty relief. As 
prescribed in applicable regulations or lease terms, notwithstanding 
any provisions for royalty relief, companies are required to pay 
royalties for those calendar years when annual average New York 
Mercantile Exchange (NYMEX) market prices for oil or gas exceed the 
adjusted price thresholds levels. As a courtesy, MMS tracks, 
calculates, and posts on its Web site a variety of relevant information 
about applicable oil and gas prices and the price threshold levels to 
be used in determining whether a particular lease continues to be 
eligible for deep gas, deep water, or other royalty relief. The 
information contained in this published notice was previously posted on 
the MMS Web site.
    The following table represents the official MMS price threshold and 
market price calculation determinations made for calendar year 2007. 
Any subsequent inflation adjustments or market price adjustments will 
not affect these official results or their implication for royalty 
relief on the designated categories of leases.

                      Applicable Price Thresholds and Market Prices for Calendar Year 2007
----------------------------------------------------------------------------------------------------------------
                                                            Annual
                                                           average       Adjusted price
             Product                Lease vintage (sale  NYMEX price   threshold level ($/     Royalty relief
                                         held in)        ($/bbl or $/    bbl or $/mmbtu)          suspended
                                                            mmbtu)
----------------------------------------------------------------------------------------------------------------
Deepwater oil....................  Before 1996; 1996-         $72.39  $36.39..............  Yes
                                    1997\1\; 2000\1\;
                                    2002-3/2004; 2007.
Deepwater oil....................  2001................        72.39  32.64...............  Yes
Deepwater oil....................  8/2004-2006.........        72.39  42.37...............  Yes
Deepwater gas....................  Before 1996; 1996-           7.12  4.55................  Yes
                                    1997\1\; 2000\1\;
                                    2002-3/2004; 2007.
Deepwater gas....................  2001................         7.12  4.08................  Yes
Deepwater gas....................  8/2004-2006.........         7.12  7.06................  Yes
Deep gas.........................  3/2001..............         7.12  4.08................  Yes
Deep gas.........................  8/2001-2003.........         7.12  5.83................  Yes
Deep gas (0-200 meters)..........  Before 2001, 2004-           7.12  10.15...............  No
                                    2007; Reg 30 CFR
                                    203.47.
Deep gas (200-400 meters) and      All years...........          7.1  TBD\2\..............
 Ultra-Deep gas (0-400 meters).
----------------------------------------------------------------------------------------------------------------
bbl = barrel, mmbtu = million British Thermal Units.
\1\ Leases issued in Deepwater during the years 1996-1997 and 2000 may be affected by the outcome of pending
  litigation on price thresholds imposed at that time. The MMS has sent correspondence to the affected lessees
  addressing the impact of the litigation during the interim.
\2\ The Energy Policy Act of 2005 mandated additional royalty relief for deep gas in shallow water in the Gulf
  of Mexico. The MMS published a proposed rule on May 18, 2007 (72 FR 28396), to implement this new relief,
  including a gas price threshold. The level of that price threshold and how it applies will be set in the final
  rule for ultra-deep wells spud after the date of the proposed rule.

Technical Documentation

    The data and methodology used for making the 2007 calculations and 
determinations are discussed below. This same information for all years 
since 1996 is available at the Economics Division Web site http://www.mms.gov/econ/DWRRAPrice1.htm. Additional information and notes 
about understanding this web site are included at the end of this 
notice.

Methodology for Calculation of the Actual Annual Average NYMEX Nearby 
Delivery Price

    1. We use the price for the nearby delivery month or front month. 
That is, the price for the first contract or earliest month that you 
can get the delivery/inventory for buying and selling today's product. 
For example, on October 1, 2007, the nearby delivery month was November 
2007. There are prices for other delivery months that can be bought and 
sold on October 1, 2007, such as December 2007, January 2008, etc., but 
the ``nearby delivery month''

[[Page 31503]]

would be November 2007. However, the nearby delivery month is not 
always the next month because the last trading day of the month differs 
for oil and gas futures. For example, on March 27, 2008, the nearby 
delivery month for light sweet crude oil is May 2008 while for natural 
gas it is still April 2008.
    2. The daily NYMEX closing price is listed as the settle price at 
the end of business trading hours for each commodity. These are listed 
at http://www.nymex.com and also summarized at http://www.oilnergy.com.
    3. The daily closing average is used to calculate the monthly 
average. For holidays and weekends, we use the previous business day's 
closing average. For example, Table A illustrates the calculation of 
the average NYMEX oil price for the month of November 2007 (Note--this 
methodology is different from the Minerals Revenue Management's Royalty 
In-Kind Program that excludes weekends and holidays). Our analysis 
indicates that inclusion or exclusion of weekends and holidays does not 
bias the annual average price calculation in either direction. We chose 
to include the weekends and holidays, as highlighted in Table A, to 
avoid the necessity to keep track of actual trading days each month all 
year, and because our source summarizes the monthly price data with the 
inclusion.

                             Table A.--Example of Monthly Average Price Calculation
----------------------------------------------------------------------------------------------------------------
                                                  Daily                                                 Daily
                                                 closing                                               closing
               Day                    Date      price ($/           Day                 Date          price ($/
                                                   bbl)                                                  bbl)
----------------------------------------------------------------------------------------------------------------
Thursday........................    11/1/2007       $93.49  Friday.............  11/16/2007........       $95.10
Friday..........................    11/2/2007        95.93  Saturday...........  11/17/2007........        95.10
Saturday........................    11/3/2007        95.93  Sunday.............  11/18/2007........        95.10
Sunday..........................    11/4/2007        95.93  Monday.............  11/19/2007........        94.64
Monday..........................    11/5/2007        93.98  Tuesday............  11/20/2007........        98.03
Tuesday.........................    11/6/2007        96.70  Wednesday..........  11/21/2007........        97.29
Wednesday.......................    11/7/2007        96.37  Thursday (Holiday).  11/22/2007........        97.29
Thursday........................    11/8/2007        95.46  Friday.............  11/23/2007........        98.18
Friday..........................    11/9/2007        96.32  Saturday...........  11/24/2007........        98.18
Saturday........................   11/10/2007        96.32  Sunday.............  11/25/2007........        98.18
Sunday..........................   11/11/2007        96.32  Monday.............  11/26/2007........        97.70
Monday..........................   11/12/2007        94.62  Tuesday............  11/27/2007........        94.42
Tuesday.........................   11/13/2007        91.17  Wednesday..........  11/28/2007........        90.62
Wednesday.......................   11/14/2007        94.09  Thursday...........  11/29/2007........        91.01
Thursday........................   11/15/2007        93.43  Friday.............  11/30/2007........        88.71
                                  ...........  ...........  ...................  Average...........        95.19
----------------------------------------------------------------------------------------------------------------

    4. The monthly average is used to calculate the annual average. For 
example, Table B illustrates the calculation of the NYMEX oil price for 
2007. The calculation for the year-to-date average consists of the 
monthly averages so far in the year. The dollar amount of the result is 
rounded to the nearest tenth decimal point (i.e., cents). We do not 
weight the average each month by the number of days in that month, 
again to avoid adding superfluous complexity.

          Table B.--Example of Annual Average Price Calculation
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                                              Average closing price ($/
                   Month                                bbl)
------------------------------------------------------------------------
January...................................  $54.70
February..................................  59.52
March.....................................  60.78
April.....................................  64.21
May.......................................  63.61
June......................................  67.43
July......................................  74.13
August....................................  72.40
September.................................  79.11
October...................................  85.83
November..................................  95.19
December..................................  91.75
Average...................................  72.39
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Methodology for Calculation of the Applicable Oil and Natural Gas Price 
Thresholds

    1. The price thresholds are estimates until they are locked-in for 
a calendar year based on the most current inflation data available 
after the close of the year. In conjunction with the calculation of the 
annual market prices for oil and gas above, once the price thresholds 
are locked in, MMS makes an official determination regarding whether 
these market prices have exceeded the applicable price thresholds for 
the calendar year for a given vintage of lease and royalty relief 
program. After this official MMS determination is made, any subsequent 
revisions in the underlying source of the inflation figures will not 
affect the locked-in price thresholds or the determination of 
eligibility for royalty relief for that calendar year.
    2. The source for inflation data is the Department of Commerce, 
Bureau of Economic Analysis (BEA) http://www.bea.gov: The U.S. Economic 
Accounts--Gross Domestic Product (GDP), National Income and Products 
Account (NIPA) Table 1.1.9. The 4th quarter implicit price deflator is 
not available from BEA until late March of the subsequent calendar 
year.
    3. The implicit price deflator for GDP is used to calculate the 
applicable annual inflation rate, as illustrated in Table C. The 
deflator from the applicable year is divided by the deflator from the 
previous year and subtracted by one. For example, the inflation rate 
used to set the 2007 price threshold is calculated as {(119.66 / 
116.57)-1 = 2.7%{time} .

[[Page 31504]]



                                Table C.--Inflation Rates (Current and Locked-In)
                                             [Derived from BEA Data]
----------------------------------------------------------------------------------------------------------------
                                        Implicit price     Implicit price
            Calendar year              deflator for GDP   deflator for GDP    Current annual    Locked-in annual
                                        (base = 1996)      (base = 2000)      inflation rate     inflation rate
----------------------------------------------------------------------------------------------------------------
1994................................             $96.01
1995................................              98.10
1996................................             100.00
1997................................             101.95
1998................................             103.20
1999................................             104.65
2000................................             107.04            $100.00
2001................................  .................             102.40                2.2                2.2
2002................................  .................             104.19                1.2                1.2
2003................................  .................             106.40                2.1                1.7
2004................................  .................             109.46                2.9                2.1
2005................................  .................             113.00                3.2                2.8
2006................................  .................             116.57                3.2                2.9
2007................................  .................             119.66                2.7                2.7
----------------------------------------------------------------------------------------------------------------

    4. Because price thresholds are fixed for previous years, the 
current inflation rate displayed in Table C above may not correspond 
precisely to the rate actually employed to calculate previous price 
thresholds. For example, the GDP deflator posted on the BEA Web site in 
March 2008 shows an inflation rate for 2004 of 2.9 percent. However, 
back in March 2005, when the 2004 price threshold was locked-in, the 
BEA Web site showed an inflation rate of 2.1 percent, resulting in a 
change for the deepwater oil price threshold for most leases, as shown 
in the first column of the Deepwater Table on the Web site, from 
$32.81/bbl in 2003 to $33.50/bbl in 2004. Note that the figures that 
were shown on the BEA Web site in March of each year would be 
consistent with the adjustments made in the price thresholds from year 
to year. Rounding explains any remaining small differences between 
calculated locked-in inflation rates and those rates depicted on the 
MMS Web site. Therefore, to replicate the calculation for previous 
price thresholds, use the locked-in inflation rate. To replicate the 
calculation for the estimated price threshold, prior to March of the 
subsequent year, use the current inflation rate.

Additional Information and Notes About the Web Site

    1. Beginning in the second quarter of each year, the MMS will 
estimate the average market price at which oil or gas would have to 
sell during the remainder of the calendar year for the estimated price 
threshold to be exceeded for that year. If that estimated market price 
is shown in the table as a zero, the average price at which oil or gas 
would have to be sold during the rest of the calendar year as of that 
time is guaranteed to exceed the estimated price threshold for the 
calendar year.
    2. The yellow highlight shown for selected actual annual market 
prices indicates years in which at least some leases were not eligible 
for royalty relief because actual prices exceeded the applicable price 
thresholds set for those leases. The coral highlight indicates years in 
which no leases were eligible for royalty relief because actual prices 
exceed all applicable price thresholds. For example, in calendar year 
2007, the actual average price of natural gas of $7.12 (per mmbtu) 
exceeded the shallow water, deep natural gas price threshold levels of 
$4.08 for leases issued in Sale 178 (2001), and $5.83 for leases issued 
in all other Gulf of Mexico Sales held from 2001-2003 that did not 
exercise the option to switch terms offered under 30 CFR 203.48, but 
did not exceed the price threshold level of $10.15 for all other leases 
with relief under 30 CFR 203.47.
    3. Production generated royalty-free under the deep gas program 
counts against the remaining royalty suspension volume, with one 
exception. That exception involves production from March 1, 2004, 
through May 2, 2004, from deep wells that qualified for royalty 
suspension under 30 CFR 203.40 through 203.48 (see 69 FR 24055).
    4. Regulations pertaining to price thresholds include 30 CFR 
203.47, 203.54, 203.78, 260.110, and 260.122.

    Dated: April 21, 2008.
Chris C. Oynes,
Associate Director for Offshore Minerals Management.
 [FR Doc. E8-12225 Filed 5-30-08; 8:45 am]
BILLING CODE 4310-MR-P