[Federal Register Volume 62, Number 16 (Friday, January 24, 1997)]
[Notices]
[Pages 3714-3715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1705]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
Discretionary Authority for Royalty Relief on Nonproducing Leases
on the Outer Continental Shelf
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Notice.
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SUMMARY: The Outer Continental Shelf (OCS) Deep Water Royalty Relief
Act of 1995 (Act) granted the Secretary of the Interior (Secretary) the
authority to reduce or eliminate royalties in order to promote
development, increase production, or encourage the production of
marginal resources on producing and nonproducing leases in any water
depth in certain areas of the Gulf of Mexico. This Notice seeks public
input on whether and how MMS should implement this new authority for
nonproducing leases.
DATES: We will consider all comments we receive by March 25, 1997. We
will begin review of comments at that time and may not fully consider
comments we receive after March 25, 1997.
ADDRESSES: Mail or hand-carry comments to the Department of the
Interior; Minerals Management Service; Mail Stop 4230; 1849 C Street,
NW; Washington, D.C. 20240; Attention: Chief, Washington Division,
Office of Policy and Management Improvement.
FOR FURTHER INFORMATION CONTACT:
Dr. Walter Cruickshank, Washington Division, at the above address or by
telephone: (202) 208-3822.
SUPPLEMENTARY INFORMATION:
Legislative Background
The Act (Pub. L. 104-58) authorizes the Secretary to modify the
royalty terms of certain existing leases and to offer new leases
subject to royalty suspension volumes in water depths of 200 meters or
more in parts of the Gulf of Mexico. Most of the Act addresses
mandatory royalty relief programs for leases in water depths of 200
meters or more. These provisions have been implemented in interim rules
covering new leases (61 FR 12022, March 25, 1996) and existing leases
(61 FR 27263, May 31, 1996).
We are now considering whether and how to implement new authority
provided by the Act for a discretionary royalty relief program. In
part, section 302 of the Act amends section 8(a) of the OCS Lands Act
by adding subparagraph (3)(B), which applies to all leases in the Gulf
of Mexico west of 87 degrees, 30 minutes West longitude (i.e., the
Central and Western Gulf of Mexico Planning Areas and the portion of
the Eastern Gulf of Mexico Planning Area lying offshore Alabama). In
this area, the Secretary may reduce or eliminate any royalty or net
profit share in order to promote development, increase production, or
encourage production of marginal resources on producing or nonproducing
leases. With the lessee's consent, the Secretary may make other
modifications to the royalty or net profit share terms of leases in
order to achieve these purposes. This provision applies to active
leases, not to the terms under which new leases are offered.
We already have a royalty relief program in place for producing
leases, as well as the mandated program for nonproducing leases in at
least 200 meters of water in the specified areas of the Gulf of Mexico.
This Notice seeks input on whether and how we should consider royalty
relief for nonproducing leases in any water depth.
We welcome comments and recommendations on all issues relevant to
this Notice. In particular, please address the issues and questions
raised below.
Issues
I. Should MMS Consider Royalty Relief on Nonproducing Leases?
(1) Currently, the Gulf of Mexico OCS program is very healthy, with
record setting lease sales in 1996 and vigorous drilling and
development activities.
[[Page 3715]]
What additional net benefits would an expanded royalty relief program
create?
(2) We have established royalty relief programs for producing
lessons throughout the OCS and for nonproducing leases in greater than
200 meters of water in the Gulf of Mexico, west of 87 degrees, 30
minutes West longitude. What types of situations warranting royalty
relief arise which cannot be addressed through these programs? Please
be as specific as possible; MMS will protect any confidential
information that you submit.
(3) Under the OCS Lands Act, we have an obligation to insure a fair
and equitable return on the resources of the OCS. Important components
of meeting this mandate are our lease sale and bid adequacy review
processes.
a. Will these processes still insure a fair return where the least-
stipulated royalty rate may be modified prior to production?
b. How should we incorporate the potential for royalty relief on
future production in determining whether a high bid for a lease is
adequate?
c. Should such royalty relief be available to current leases, where
an expectation of royalty relief prior to production did not exist at
the time of the lease sale and bid adequacy review?
d. Would such a royalty relief program be fair to companies that
submitted losing bids but which might have been willing to produce at
the lease stipulated royalty rate?
(4) Many companies, especially some smaller companies, rely on the
turnover of undeveloped leases for a significant portion of their
offshore activities. This turnover takes the form of bidding on
previously relinquished tracts in lease sales or acquiring an interest
in leases through the lease assignment process. How would the
availability of royalty relief on nonproducing leases affect the rate
at which leases change hands?
II. Under What Circumstances Should MMS Consider Relief for
Nonproducing Leases?
(1) If the Secretary chooses to establish a royalty relief program
for nonproducing leases, what criteria should we use in evaluating
applications? Are there special circumstances that warrant relief, such
as costs substantially higher than normal or the introduction of a new
technology? Please be as specific as possible.
(2) How should we define ``marginal resources''?
(3) At present, when a lease is relinquished, we offer the tract
for lease in the next round of scheduled sales, which are held annually
in the Central and Western Gulf of Mexico. Tracts that have undeveloped
discoveries are usually acquired by another company in a subsequent
sale. Granting royalty relief to the initial lessee could preclude the
Treasury from receiving the additional bonus and a subsequent lessee
from testing alternative concepts and possibly producing at the lease-
stipulated royalty rate. How should we consider this tradeoff in
evaluating a request for royalty relief?
(4) Prospect economics in the Gulf of Mexico change very rapidly
along with changes in technologies, availability of infrastructure,
costs, and geologic information. How could we structure a royalty
relief program to ensure that a decision to grant relief isn't rapidly
overtaken by such changes?
III. Design of a Royalty Relief Program for Nonproducing Leases
Our only experience with royalty relief on nonproducing leases is
in the deep water Gulf of Mexico. However, many of the elements of that
program arise from the specific mandates of the Act for such leases.
These mandates, and thus the design elements of the deep water program,
do not necessarily apply to a more generally applicable program. Please
comment on how and why an additional royalty relief program might vary
from current programs, including the following questions:
(1) Current OCS programs provide royalty relief in the form of
royalty suspension volumes for deep water leases in the Gulf of Mexico
and in the form of net revenue sharing for producing leases elsewhere.
What form of royalty relief should we use for nonproducing leases not
subject to the deep water royalty relief programs?
(2) For nonproducing leases in deep water, we require a discovery
capable of producing in paying quantities and design of the engineering
concept as minimum precursors to an application.
a. When during the exploration and development process should a
lessee be allowed to apply for relief?
b. When in this process would sufficient data be available to allow
us to evaluate the need for royalty relief?
c. How would we assure that projections of the amount and timing of
production, costs, and revenues are reasonable?
(3) What type of information is needed, and how should it be
evaluated, to ensure that royalty relief is necessary to promote
development, increase production, or encourage production of marginal
resources on nonproducing leases?
(4) Should we establish safeguards to remove or modify relief when
the factors on which relief was granted change significantly before
production starts? If so, what types of safeguards are appropriate?
IV. General Issues
(1) For any particular royalty relief program you recommend, please
provide specific information on its anticipated effects, including any
effects on the levels and costs of exploration, development, and
production, and the volume of additional resources that may be
recovered.
(2) The current royalty relief regulation at 30 CFR 203.51(b)
restates the statutory authority for granting royalty relief for
nonproducing leases in the Gulf of Mexico, but the regulations provide
no additional guidance on how to apply or how MMS will evaluate
applications. Are additional regulations needed to provide this detail,
or should MMS operate the program under the existing regulation? Is the
existing regulation adequate until such time as we become more familiar
with the types of situations that will lead to applications and the
accompanying evaluation issues?
(3) In addition to authority to grant royalty relief for
nonproducing leases, the Act gives the Secretary the authority to grant
relief to categories of producing and nonproducing leases, rather than
just on a case-by-case basis. Given that prospect economics change
rapidly and depend on site-specific characteristics, we were unable to
identify any additional categories of leases that warrant across-the-
board relief. However, we welcome comments on categories deserving
relief, the type of relief that's appropriate, and what criteria we
should use to determine when across-the-broad relief is preferable to
case-specific relief.
Dated: January 16, 1997.
Cynthia Quarterman,
Director.
[FR Doc. 97-1705 Filed 1-24-97; 8:45 am]
BILLING CODE 4310-MR-M
