07-2991. 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.

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 2006. 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 2006 for our various deepwater and deep depth royalty relief programs.

FOR FURTHER INFORMATION CONTACT:

Marshall Rose, Chief, Economics Division at [phone].

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 website 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 posted on MMS Web site previously.

The following table represents the official MMS price threshold and market price calculation determinations made for calendar year 2006. 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 2006

Product	Lease vintage (sales held in)	Annual average NYMEX price ($/bbl or $/mmbtu)	Adjusted price threshold level ($/bbl or $/mmbtu)	Royalty relief suspended
Deepwater oil	Before 1996; 1996-1997; 2000; 2002-3/2004	$66.22	$35.75	Yes
Deepwater oil	2001	66.22	32.06	Yes
Deepwater oil	8/2004-2006	66.22	41.36	Yes
Deepwater gas	Before 1996; 1996-1997; 2000; 2002-3/2004	6.99	4.47	Yes
Deepwater gas	2001	6.99	4.00	Yes
Deepwater gas	8/2004-2006	6.99	6.88	Yes
Deep gas	3/2001	6.99	4.00	Yes
Deep gas	8/2001-2003	6.99	5.72	Yes
Deep gas	2004-2006	6.99	9.88	No
Deep gas	Reg 30 CFR 203.47	6.99	9.88	No
bbl = barrel, mmbtu = million British Thermal Units.

Technical Documentation

The data and methodology used for making the 2006 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. 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 September 1, 2006, the nearby delivery month was October 2006. There are prices for other delivery months that can be bought and sold on September 1, 2006, such as November 2006, December 2006, etc., but the “nearby delivery month” would be October 2006. However, the nearby delivery month is not always the next month because trading days may differ for oil and gas futures. For example, on September 28, 2006, the nearby delivery month was November 2006.

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 September 2006. (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, because our source summarizes the monthly price data with the inclusion.

Table A.—Example of Monthly Average Price Calculation

Day	Date	Daily closing price ($/bbl)	Day	Date	Daily closing price ($/bbl)
Friday	9/1/2006	$69.19	Saturday	9/16/2006	$63.33
Saturday	9/2/2006	69.19	Sunday	9/17/2006	63.33
Sunday	9/3/2006	69.19	Monday	9/18/2006	63.80
Monday (Holiday)	9/4/2006	69.19	Tuesday	9/19/2006	61.66
Tuesday	9/5/2006	68.60	Wednesday	9/20/2006	60.46
Wednesday	9/6/2006	67.50	Thursday	9/21/2006	61.59
Thursday	9/7/2006	67.32	Friday	9/22/2006	60.55
Friday	9/8/2006	66.25	Saturday	9/23/2006	60.55
Saturday	9/9/2006	66.25	Sunday	9/24/2006	60.55
Sunday	9/10/2006	66.25	Monday	9/25/2006	61.45
Monday	9/11/2006	65.61	Tuesday	9/26/2006	61.01
Tuesday	9/12/2006	63.76	Wednesday	9/27/2006	62.96
Wednesday	9/13/2006	63.97	Thursday	9/28/2006	62.76
Thursday	9/14/2006	63.22	Friday	9/29/2006	62.91
Friday	9/15/2006	63.33	Saturday	9/30/2006	62.91
Average					64.29

4. The monthly average is used to calculate the annual average. For example, Table B illustrates the calculation of the NYMEX oil price for 2006. 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).

Table B. Example of Annual Average Price Calculation

Month	Average closing price ($/bbl)
January	$65.33
February	62.02
March	62.89
April	70.11
May	70.86
June	71.03
July	74.45
August	73.11
September	64.29
October	59.22
November	59.14
December	62.22
Average	66.22

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. 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 usually not available from BEA until 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 2003 price threshold is calculated as {(106.40/104.19) − 1 = 2.1%}

Table C.—Inflation Rates (Current and Locked-In)

[Derived from BEA data]

Calendar year	Implicit price deflator for GDP ( base=1996)	Implicit price deflator for GDP (base=2000)	Current annual inflation rate	Locked-in annual 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	2.3
2002		104.19	1.2	1.2
2003		106.40	2.1	1.6
2004		109.43	2.8	2.3
2005		112.74	3.0	3.5
2006		116.04	2.9	2.9

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 2007 shows an inflation rate for 2004 of 2.8 percent. However, back in March 2005, when the 2004 price threshold was locked-in, the BEA Web site showed an inflation rate of 2.3 percent, resulting in a change for the deepwater oil price threshold for lease vintage 1996-2000*; 2002-3/2004*, as shown in the Deepwater Table on the Web site, from $32.80/bbl in 2003 to $33.55/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. 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 negative number, 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 bold font 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. For example, in calendar year 2004, the actual average price of natural gas of $6.18 (per million Btu) exceeded the shallow water, deep natural gas price threshold levels of $3.76 for leases issued in Sale 178 (2001), and $5.37 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.

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 48 (see Federal Register, Volume 69, Number 84, page 24055).

4. Regulations pertaining to price thresholds include 30 CFR 203.47, 203.54, 203.78, 260.110, and 260.122.

Dated: May 22, 2007.

Chris C. Oynes,

Associate Director for Offshore Minerals Management.