[Federal Register Volume 64, Number 132 (Monday, July 12, 1999)]
[Notices]
[Pages 37560-37562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17662]
-----------------------------------------------------------------------
DEPARTMENT OF THE INTERIOR
Minerals Management Service
Modifications to the Bid Adequacy Procedures
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Notification of procedural change.
-----------------------------------------------------------------------
SUMMARY: The Minerals Management Service (MMS) has changed a criterion
in its existing bid adequacy procedures for ensuring receipt of fair
market value on Outer Continental Shelf (OCS) oil and gas leases. The
change ensures consistency in the evaluation of tracts.
DATES: This modification is effective July 1, 1999.
FOR FURTHER INFORMATION CONTACT: Dr. Marshall Rose, Chief, Economics
Division, at (703) 787-1536. The revised bid adequacy procedures are
described below.
What Definitions Apply to These Procedures?
The MROV is a dollar measure of a tract's expected net present
value, if that tract is leased in the current sale. The calculation of
the MROV allows for exploration and economic risk, and includes tax
consequences, e.g., depletion of the cash bonus.
The delayed MROV (DMROV) is a measure used to determine the size of
the high bid needed in the current sale to equalize it with the
discounted sum of the bonus and royalties expected in the next sale,
less the foregone royalties from the current sale. The bonus for the
next sale is computed as the MROV associated with the delay in leasing
under the projected economic, engineering, and geological leasing
receipts conditions, including drainage. If the high bid exceeds the
DMROV, then the leasing receipts from the current sale are expected to
be greater than those from the next sale, even in cases in which the
MROV exceeds the high bid.
The Adjusted Delayed Value (ADV) is the minimum of the MROV and the
DMROV.
The RAM is the revised arithmetic average measure of the MROV and
all qualified bids on a tract that are equal to at least 25 percent of
the high bid.
Anomalous bids are all but the highest bid submitted for a tract by
the same company (bidding alone or jointly with another company),
parent, or subsidiary. These bids are excluded when applying the number
of bids rule or any other bid adequacy measure.
Legal bids are those bids which comply with the MMS regulations (30
CFR 256) and the Notice of Sale, e.g., equal or exceed the specified
minimum bid. Any illegal bid will be returned to the bidder.
Qualified bids are those bids that are legal and not anomalous.
MONTCAR is a probabilistic, cash flow computer simulation model
used to conduct a resource-economic evaluation that results in an
estimate of the expected net present value of a tract (or prospect).
Nonviable tracts or prospects are those geographic or geologic
configurations of hydrocarbons that are estimated to be uneconomic to
produce with the costs and anticipated future prices used in the
analysis.
Within the context of our bid adequacy procedures, the term
``unusual bidding patterns'' typically refers to a situation in which
two or more companies bid against each other more often than would
normally be expected. Companies could agree to bid against each other
on certain sets of tracts in a sale so that the number of bids rule
would apply for bid acceptance. Other forms of unusual bidding patterns
exist as well, and generally involve anti-competitive practices, e.g.,
if it appears that companies are attempting to avoid bidding against
each other in a sale on a set of prospective tracts.
A confirmed tract is a previously leased tract having a well(s)
which encountered hydrocarbons and may have produced. It contains some
oil and/or gas resources whose volume may or may not be known.
A development tract is a tract which has nearby productive (past or
currently capable) wells with indicated hydrocarbons and which is not
interpreted to have a productive reservoir extending under the tract.
There should be evidence supporting the interpretation that at least
part of the tract is on the same general structure as the proven
productive well.
A drainage tract is a tract which has a nearby well which is
capable of producing oil or gas, and the tract could incur drainage if
and when such a well is placed on production. The reservoir, from which
the nearby well is capable of producing, is interpreted to extend under
the drainage tract to some extent.
A wildcat tract is a tract which has neither nearby productive
(past or currently capable) wells, nor is interpreted to have a
productive reservoir extending under the tract. It has high risk in
addition to sparse well control.
Water depth categories for bid adequacy purposes in the Gulf of
Mexico are designated as (1) less than 800 meters and (2) 800 meters or
more.
[[Page 37561]]
If different water depth categories are used for a Gulf of Mexico sale,
they will be specified in the sale's final notice. For areas other than
the Gulf of Mexico, all tracts will be considered to be in the same
water depth category, unless an alternative is specified in the final
notice of sale.
What Problem Is Addressed by the Change?
In any OCS lease sale, a limited number of tracts may be
reclassified from drainage or development (DD) in Phase 1 of the bid
evaluation process to confirmed or wildcat (CW) in Phase 2. (The MMS
reclassifies a tract if additional Phase 2 analysis supports a
classification different than the one assigned the tract in Phase 1 of
the evaluation.) However, under the old bid adequacy procedures, a
tract classified as CW in Phase 1 was evaluated under different
criteria than a tract that was reclassified as CW in Phase 2. This
change ensures the consistent treatment of similarly classified tracts
whether they are evaluated in Phase 1 or Phase 2.
What Change Is Being Made?
In Phase 1 of the bid adequacy procedures, the MMS classifies
tracts as either CW or DD based on information available at the time of
sale. Under the old (February 10, 1999) guidelines, tracts within
designated water depth categories that were reclassified from DD to CW
in Phase 2 only had to have a third largest bid within 50 percent of
the high bid to be accepted. Now, DD tracts reclassified as CW tracts
must satisfy the same criteria for acceptance that would have had to
been met if they were classified as CW in Phase 1.
To ensure consistency in evaluations, the following change is being
made. In Phase 1, for CW tracts receiving three-or-more qualified bids,
acceptance under the number of bids rule will apply only if the third
largest bid is within 50 percent of the high bid, and if the high bid
is in the top 75 percent of high bids on a per acre basis for all
three-or-more-bid tracts within designated water depth categories. In
Phase 2 of the bid evaluation process, DD tracts that have been
reclassified as CW will be subject to the same screening criteria that
the CW tracts with three-or-more bids had to meet in Phase 1.
How Are Bids Evaluated?
During the bid review process, we conduct evaluations in a two-
phased procedure for bid adequacy determination. We also review bids to
ensure that they are for at least the minimum amount specified in the
notice of sale and that unusual bidding patterns are not present.
What Happens in Phase 1 of the Bid Adequacy Procedures?
In Phase 1, we partition the tracts receiving bids into three
general categories:
1. Those tracts with three-or-more bids, on which competitive
market forces can be used to assure fair market value;
2. Those tracts which we identify as being nonviable based on
adequate data and maps; and
3. Those tracts which we identify as being viable and on which we
have the most detailed and reliable data, including tracts classified
as DD.
What Phase 1 Rules Are Applied to All Tracts Receiving Bids?
Six Phase 1 rules are applied to all tracts receiving bids:
1. We accept the highest qualified bid on viable CW tracts
receiving three-or-more qualified bids if the third largest bid on the
tract is at least 50 percent of the highest qualified bid and if the
high bid per acre ranks in the top 75 percent of high bids for all
three-or-more-bid tracts within a specified water depth category.
2. We accept the highest qualified bid on CW tracts that we
determine to be nonviable.
3. We pass to Phase 2 all tracts that require additional
information to make a determination on viability or tract type.
4. We pass to Phase 2 all viable CW tracts receiving one or two
qualified bids.
5. We pass to Phase 2 all viable CW tracts receiving three-or-more
qualified bids if either the third largest such bid is less than 50
percent of the highest qualified bid or if the high bid per acre ranks
in the lowest 25 percent of high bids for all three-or-more-bid tracts
in the specified water depth category.
6. We pass to Phase 2 all DD tracts.
How is the Percentile Ranking of a Tract's High Bid Calculated?
The percentile ranking of a tract's high bid is calculated by
multiplying 100 times the ratio of the numerical ordering of the three-
or-more-bid tract's high bid to the total number of all three-or-more-
bid tracts in the designated water depth. For example, suppose there
are 21 total tracts identified in Phase 1 as receiving three-or-more-
bids in the designated water depth category of at least 800 meters. All
tracts in this set having a high bid among the top 15 high bids would
satisfy the 75 percent requirement; the 15th ranked high bid would
represent the 71st percentile, i.e., (100*(15/21)=71).
Can any Other Procedures be Used in Phase 1 to Ensure the Receipt
of Fair Market Value?
In ensuring the integrity of the bidding process, the Regional
Director may identify an unusual bidding pattern at any time during the
bid review process, but before a tract's high bid is accepted. If the
finding is documented, the Regional Director has discretionary
authority, after consultation with the Solicitor, to pass those
identified tracts to Phase 2 for further analysis. The Regional
Director may eliminate all but the largest of the unusual bids from
consideration when applying any bid adequacy rule, may choose not to
apply a bid adequacy rule, or may reject the tract's highest qualified
bid.
How Long Does it Take To Complete the Phase 1 Procedures?
These procedures are generally completed within 3 weeks of the bid
opening. All the leases that will be awarded as a result of the Phase 1
analysis are announced at the end of this period.
How Long do the Phase 2 Procedures Take?
The Phase 2 bid adequacy determinations are normally completed
sequentially over a period ranging between 21 and 90 days after the
sale. Leases are awarded as the analysis of bids is completed over this
time period. The total evaluation period can be extended, if needed, at
the Regional Director's discretion (61 FR 34730, July 3, 1996).
What are the Initial Steps of the Bid Adequacy Process that are
Followed in Phase 2?
Activities to assess bids are undertaken by analyzing,
partitioning, and evaluating tracts in two steps:
1. Further mapping and/or analysis is performed to review, modify,
and finalize viability determinations and tract classifications.
2. Tracts we identify as being viable must undergo an evaluation to
determine if fair market value has been received.
What Decision Rules are Applied in Phase 2 of the Bid Evaluation
Process?
After completing the initial two steps, a series of rules and
procedures are followed.
1. We accept the highest qualified bid on newly classified CW
tracts having three-or-more qualified bids if its third
[[Page 37562]]
largest bid is at least 50 percent of the highest qualified bid and if
its high bid per acre ranks in the top 75 percent of high bids for all
three-or-more-bid tracts that reside within its specified water depth
category.
2. We accept the highest qualified bid on all tracts determined to
be nonviable.
3. We determine whether any categorical fair market evaluation
technique(s) will be used.
If so we:
A. Evaluate, define, and identify the appropriate threshold
measure(s) for bid acceptance.
B. Accept all tracts whose individual measures of bid adequacy
satisfy the threshold categorical requirements.
4. We conduct a full-scale evaluation, which could include the use
of MONTCAR, on all remaining tracts passed to Phase 2 and still
awaiting an acceptance or rejection decision.
What Subset of Tracts Comprise the ``Remaining Tracts'' That Still
Need a Phase 2 Acceptance or Rejection Decision?
The remaining tracts include tracts not accepted by a categorical
rule that we classify as:
1. DD tracts, or
2. CW tracts that are viable and received:
A. One or two qualified bids, or
B. Three-or-more qualified bids, if either its third largest bid is
less than 50 percent of the highest qualified bid or the high bid is in
the bottom 25 percent of all three-or-more-bid CW tracts within a
designated water depth category.
What Procedures are Followed for Evaluating the Adequacy of Bids on
These Tracts?
For these tracts we:
1. Accept the highest qualified bid, if it equals or exceeds the
tract's ADV.
2. Reject the highest qualified bid on DD tracts receiving three-
or-more qualified bids, if the high bid is less than one-sixth of the
tract's MROV.
3. Reject the highest qualified bid on DD tracts receiving one or
two qualified bids and on CW tracts receiving only one qualified bid,
if the high bid is less than the tract's ADV.
What Happens Next to the Tracts Still Awaiting an Acceptance or
Rejection Decision?
At this stage of the process, the tracts still awaiting a decision
consist of those having a highest qualified bid that is less than the
ADV that are either:
1. DD tracts receiving three-or-more qualified bids with the
highest bid exceeding one-sixth of the tract's MROV or
2. Viable CW tracts that receive two-or-more qualified bids.
From these tracts, we select the following:
A. DD tracts having three-or-more qualified bids with the third
largest bid being at least 25 percent of the highest qualified bid, and
B. CW tracts having two-or-more qualified bids with the second
largest bid being at least 25 percent of the highest qualified bid.
We then compare the highest qualified bid on each of these selected
tracts to the tract's RAM. For all these tracts, we:
1. Accept the highest qualified bid, if the high bid equals or
exceeds the tract's RAM, or
2. Reject the highest qualified bid, if the high bid is less than
the tract's RAM.
Finally, we identify those tracts that are still awaiting a
decision, but did not meet the requirements for comparison to the RAM
and we reject the high bid on these tracts.
At this point, the acceptance or rejection decisions are made on
all the high bids in the sale. The successful bidders are notified and
their leases are awarded after the full payment of the high bid is
received. The unsuccessful bidders are notified as well and their bid
deposits are returned. Unsuccessful bidders may appeal a bid rejection
decision as described in 30 CFR 256.47(e)(3).
Dated: July 1, 1999.
Carolita U. Kallaur,
Associate Director for Offshore Minerals Management.
[FR Doc. 99-17662 Filed 7-9-99; 8:45 am]
BILLING CODE 4310-MR-P
