05-4032. Collection of Royalties, Rentals, Bonuses, and Other Monies Due the Federal Government

AGENCY:

Minerals Management Service (MMS), Interior.

ACTION:

Notice requesting comments on an increase in base rentals and the use of sliding scale rentals in the Gulf of Mexico (GOM) lease sales.

SUMMARY:

MMS is considering an increase to the base level rentals and the use of sliding scale rentals in Gulf of Mexico lease sales. This notice explains the purpose of the change and what the sliding scale rentals might be. MMS requests comments on both the increase to the base amounts and on the structure of the sliding scale system and its potential effects.

DATES:

MMS will consider all comments received by April 1, 2005, and may not fully consider comments received after April 1, 2005.

ADDRESSES:

You may submit comments on the notice by any of the following methods listed below. Please use “Increasing Base Rentals and Sliding Scale Rentals” as an identifier in your message. See also Public Comment Policy at the end of this notice.

• MMS's Public Connect on-line commenting system, http://ocsconnect.mms.gov. Follow the instructions on the website for submitting comments.
• Email MMS at [e-mail]. Use “Increasing Base Rentals and Sliding Scale Rentals” in the subject line.
• Fax: [phone]. Identify as “Increasing Base Rentals and Sliding Scale Rentals”.
• Mail or hand-carry comments to the Department of the Interior; Minerals Management Service; Attention: Rules Processing Team (RPT); 381 Elden Street, MS-4024; Herndon, Virginia 20170-4817. Please reference “Increasing Base Rentals and Sliding Scale Rentals” in your comments.

FOR FURTHER INFORMATION CONTACT:

Marshall Rose, Chief, Economics Division, at [phone] or [e-mail].

SUPPLEMENTARY INFORMATION:

Background

The increase in the pace of leasing since the introduction of the Deep Water Royalty Relief Act (DWRRA) has been about twice as high as the increase in the pace of exploration. In order to encourage exploration drilling in deepwater areas earlier in the lease term, MMS is considering the use of a sliding scale rental system in future GOM sales. Under this policy, annual rentals would escalate gradually beginning with the sixth year of the initial lease term period except under certain conditions. If a lease is drilled within the first 5 years of its initial period, escalating rentals can be avoided either through a discovery, at which time the rental rate would stay the same until the start of royalty-bearing production, or, as might occur in the case of unsuccessful exploration, through relinquishment. If a discovery is made after the first 5 years of the primary term of the lease, the rental rates would return to the level that prevailed during the first 5-year period.

Most deepwater blocks, i.e., those located in water depths of 400 meters or greater, are issued with longer primary terms and lower royalty rates than shallow water blocks. MMS issues all deepwater blocks, i.e., those located in water depths of 200 meters or greater, with provisions for royalty suspension or the possibility of royalty suspension, unlike shallow water blocks. Partly due to these lease terms, a $7.50 per acre annual rental rate has been used in deeper water depths since the implementation of the DWRRA in 1996. In contrast, the annual rental rate for leases in shallow water has been set at $5.00 per acre over this same time period. The authority for MMS to require payment of a rental, at a rate specified in the lease, exists under 43 U.S.C. 1337 (b)(6): An oil and gas lease issued pursuant to this section shall “ * * * contain such rental and other provisions as the Secretary may prescribe at the time of offering the area for lease * * *.”

The President's FY 2006 Budget submission includes language that MMS would increase the base level for rentals. The current base amounts are $5.00 per acre or fraction thereof for blocks in water depths of less than 200 meters and $7.50 per acre or fraction thereof for blocks in water depths of 200 meters or greater. These rates were last adjusted in 1993 for the shallow water depth and in 1996 for the deeper water depth. MMS is considering raising these base levels to approximately $6.25 per acre or fraction thereof for blocks in water depths of less than 200 meters and $9.50 per acre or fraction thereof for blocks in water depths of 200 or greater in subsequent GOM sales. These increased rental rates mostly reflect inflationary adjustments from the last time rentals were revised.

Potential Structure for Rental Rates

For future lease sales for the GOM, MMS is considering using a sliding scale structure for blocks in water depths of 400 meters or greater, where royalty relief is typically offered. MMS would not use this escalating system in shallow water blocks of less than 200 meters or for deepwater blocks between 200 meters and less than 400 meters. However, as noted above, the base level of the rental rate for leases in water depths less than 400 meters may be raised. For leases in water depths of 400 meters or deeper, the table below lists the possible annual rental rates being considered, both base levels and escalated levels.

Year	Rental rate (per acre per year or fraction thereof)
1	$9.50
2	9.50
3	9.50
4	9.50
5	9.50
6	10.50
7	12.00
8	13.75
9	15.50
10	17.50

Rentals must be paid on or before the first day of each lease year until a discovery in paying quantities of oil or gas, and then at the expiration of each lease year until the start of royalty-bearing production. In water depths of 400 meters or deeper, if a discovery in paying quantities is made (see 30 CFR 250.115 or 250.116 and NTL No. 2000-G04 for requirements to demonstrate well producibility), regardless of the rental rate in effect before or at the time of the discovery, the rental rate will revert to $9.50 per acre per year or fraction thereof in years subsequent to such a discovery. Thus, if a discovery in paying quantities is made in year 8, at the beginning of which the lessee paid a rental of $13.75 per acre per year or fraction thereof, then at the expiration of each lease year thereafter until the start of royalty-bearing production, the rental rate would be fixed at $9.50 per acre per year or fraction thereof.

MMS would like to receive comments about both the increase to a new base level of rentals for all water depths, and the structure of the escalating rental rates that MMS is considering for water depths 400 meters or greater and their possible effects on acquisition and exploration decisions. Would fewer tracts receive bids? Would the amount of the individual bids change? Would escalating rentals at the rate specified above have any effect on the timing of exploration? Depending on upcoming sale results, changing market conditions, responses to this notice, and revisions in future projections, a sliding scale rental structure also might have to be adjusted. MMS will advise you of its final decision regarding base rental rates and any sliding scale rental stipulations in a future Notice of Lease Sale.

Public Comments Procedures

All submissions received must include the agency name and refer to “Increasing Base Rentals and Sliding Scale Rentals.’ MMS’ practice is to make comments, including names and addresses of respondents, available for public review during regular business hours. Individual respondents may request that MMS withhold their address from the record, which will be honored to the extent allowable by law. There may be circumstances in which MMS would withhold from the record a respondent's identity, as allowable by the law. If you wish us to withhold your name and/or address, you must state this prominently at the beginning of your comment. However, MMS will not consider anonymous comments. Except for proprietary information, MMS will make all submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials of organizations or businesses, available for public inspection in their entirety.

Dated: January 25, 2005.

Thomas Readinger,

Associate Director for Offshore Minerals Management.