[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Notices]
[Pages 37070-37072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17673]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
Announcement of Minerals Management Service Workshops on Expanded
Use of Royalty-In-Kind Procedures
AGENCY: Minerals Management Service, Interior.
ACTION: Notice of workshops.
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SUMMARY: The Minerals Management Service (MMS) will hold a series of
one-day workshops to discuss ways to expand the ongoing pilot program
for collecting Federal royalties-in-kind rather than in value. The
workshops will be held as follows:
Houston, TX: August 22, 1995
Denver, CO: August 24, 1995
New Orleans, LA: September 15, 1995.
The workshops will commence at 9:30 a.m. on these respective dates
and should end by 2:30 p.m. Information on locations is given at the
end of this notice.
FOR FURTHER INFORMATION CONTACT:Mr. Hugh Hilliard, Minerals Management
Service, Mail Stop 4013, 1849 C St. NW., Washington, DC 20240,
telephone number (202) 208-3398, facsimile number (202) 208-4891; or,
contact Mr. John Bratland at the same address, telephone number (202)
208-3979, facsimile number (202) 208-3118.
SUPPLEMENTARY INFORMATION: On January 1, 1995, MMS initiated a Royalty
Gas Marketing Pilot in the Gulf of Mexico. In the pilot, gas royalties
are collected on an in-kind basis and sold directly to gas marketing
companies. This gas is taken at or near the lease and sold to
competitively chosen gas marketing companies with whom MMS has
contracts.
The MMS has two objectives in conducting this pilot: (1) To find
processes for streamlining royalty collections in a manner that
reflects changes that have occurred in the gas market, and (2) to test
a process of royalty collection which promises increased efficiency and
greater certainty in valuation. The MMS plans to evaluate the pilot
results and issue an interim report in September 1995 and a final
report by June 30, 1996.
Preliminary assessment of the pilot indicates that it will be a
successful effort and suggests that MMS should undertake additional
pilots employing similar in-kind collection procedures. As a first step
in pursuing this expansion, MMS will conduct a series of workshops in
an effort to explore new ideas and to constructively address issues
which have arisen in the current pilot.
Issues
Some of the issues that MMS would like to discuss at the workshops
are presented below. The listing of issues is not necessarily complete
nor do the comments necessarily reflect an established policy on the
part of the Federal government.
1. Prospects for In-Kind Collection of Oil Royalties
The MMS has been exploring the feasibility and possible benefits of
collecting in-kind oil royalties in a manner similar to that employed
in the pilot program for gas royalties. This approach would be
significantly different from the long-standing program of collecting
oil royalties-in-kind for sale to small refiners. In the case of oil,
the net benefits of in-kind royalties are much less certain than in the
case of natural gas, particularly because MMS and industry encounter
fewer administrative problems in the payment of oil royalties. MMS is
especially interested in exploring differences between the oil and gas
[[Page 37071]]
markets which may suggest the need for differences in the design of a
royalty-in-kind program.
2. Selection of Areas for Future Royalty-In-Kind Pilot(s)
Since the current pilot program is limited to offshore leases in
the Gulf of Mexico, MMS is interested in exploring the possibility of
conducting a future pilot program in an area with onshore Federal
leases. Any implementation of an on-shore pilot will require close
cooperation with the Bureau of Land Management and the affected states.
The MMS is seeking views on what areas should be considered in future
royalty-in-kind projects. Relevant considerations would include the
availability of price indices, the volumes of oil or gas available, the
level of market competition, special valuation issues, transportation
market structure, and the views of the respective states in which the
leases are located.
3. Non-Jurisdictional Pipelines in Taking Royalty Gas
Gas marketing companies taking Federal royalty gas will, in some
cases, be charged for the services of non-jurisdictional pipelines.
Non-jurisdictional pipelines are not regulated by the Federal Energy
Regulatory Commission (FERC), which means that the owner is able to
charge what the market will bear. The services of these pipelines are
critical in transporting the gas from the lease or gathering point to a
main pipeline inlet. The problem which arises for MMS is that, in many
cases, there appears to be no effective competition in the provision of
these services. In the absence of any realistic prospect that competing
pipelines would be built, there is no competitive pressure imposed on
the owners in pricing the services of these pipelines. This lack of
competition can be reflected in a lower bid price for the in-kind
royalty gas.
This issue will be examined by MMS in planning future pilots.
Alternative courses of action are open to MMS in dealing with the issue
of non-jurisdictional pipelines. These could include the following:
a. Eliminate from future pilots any leases in which non-
jurisdictional pipeline fees will be imposed on gas marketers;
b. Employ bid evaluation criteria to determine whether the
transportation adjustment to the bid reflects unusually high pipeline
costs and reject bids if the costs are ``too high;'' and
c. Require lessees to deliver gas to the inlet of the
jurisdictional pipeline and provide an allowance for the reasonable
costs of transportation.
These alternatives are not ideal solutions. First, eliminating
leases from future pilots because of non-jurisdictional pipelines
essentially avoids an issue which must be addressed if in-kind royalty
collection is to be applied more broadly in the future. Also, such a
procedure may unnecessarily exclude leases prior to any evidence that a
``pricing problem'' exists for pipeline services. Second, bid
evaluation criteria are effective in imputing value for pipeline
services when competition exists or when transportation tariffs are
regulated and clearly promulgated. However, the task of establishing
reasonable cost for the services of non-jurisdictional pipelines could
involve considerable conjecture on the part of the MMS. Third, a
requirement that the lessee deliver gas to the inlet of the major
pipeline would raise administrative costs since MMS would need to grant
an allowance to cover the expenses of additional transportation.
4. Aggregation of Leases and the Use of Alternate Bid Procedures
In the current gas marketing pilot, leases were aggregated into
groups of various sizes. These groupings were based on location and
pipeline proximity. However, a view has been expressed that MMS should
have used larger aggregations of leases which would mean a smaller
total number of groups. One possible rationale for larger aggregations
is that the sale price of gas received by marketers is sensitive to
volumes; that is, larger volumes can be sold at a higher price per
MMBtu.
The current pilot included a bidding feature designed to
accommodate marketers desiring to market larger volumes of gas. The
alternate bid procedure allowed bids on an aggregation of groups. Such
bids would win the gas in the aggregation if the alternate bid were to
exceed the total value of the next highest bids for the groups in the
aggregation. The MMS was surprised by the apparent lack of interest in
the alternate bid procedure. One possible explanation is that the
preparation of alternate bids is more complex and time-consuming.
Prospective bidders were given a relatively brief period in which to
prepare bids after the issuance of the Invitation for Bids (IFB).
5. Lessee Responsibilities in Providing Federal In-Kind Gas Royalties
A long-standing and sometimes controversial element of the Federal
royalty collection process has been the requirement that the lessee
place the product in ``marketable condition'' at no cost to the lessor.
The current pilot largely conforms to these traditional procedures by
specifying that the lessee is required to place the royalty gas in
marketable condition (pipeline condition, i.e., after any necessary
dehydration, sweetening, and compression) before it is taken by the
purchaser of MMS royalty gas. Lessees have often argued that the
marketable condition rule imposes a royalty on value added by the
lessee, rather than simply on the value of the produced mineral. It has
also been argued that this policy can negatively affect the efficient
management and ultimate recovery of the resource.
In the current pilot, MMS indirectly shares in the costs of
marketing, to the extent that marketers pass those costs on through the
bid price. In evaluating the pilot, MMS will be looking at the effect
that different procedures may have on Federal revenues. The MMS would
welcome views at the workshop on how responsibilities can best be
shared between the lessor and the lessee in order to ensure efficient
management of the resource, a market-based royalty collection system
that is less costly to administer, and receipt of fair market value by
the Government for its royalty share of production.
6. Appropriate Index Prices in Gas Royalty In-Kind
In the current pilot, a single price index (Inside FERC) was used
as the basis for the bidding and subsequent royalty payment. The use of
the Inside FERC indices was a convenient and familiar alternative
during a period in which the MMS was trying to quickly design and
implement the pilot for the 1994-95 winter season. However, the view
has been expressed that MMS should employ several published indices in
future pilots or expansions of in-kind royalty collection. Possible
approaches could involve the use of a composite index based on all of
the published prices for gas in a particular area or allowing the
bidder to choose which index to use.
The MMS also is open to alternative bidding procedures which are
not necessarily tied to published index prices. Conceivably some other
price could serve as the basis upon which bids could be formulated.
Also, in exploring alternative bidding procedures, MMS is examining the
feasibility of including transportation rates in the bids.
[[Page 37072]]
7. Alternative Contract Terms
In the current pilot, the contract with the gas marketer is for one
year. However, the one year contract may not be ideal for all marketing
firms. There may be a net advantage to be gained from contracts of
either longer or shorter duration. None the less, there are trade-offs
associated with different contract lengths. Since the bid price
(expressed in terms of monthly index price, plus or minus adjustment)
is binding for the entire term of the contract, prospective contractors
may perceive greater risk in being committed for a longer term.
Possible changes in transportation tariffs during the contract term
have been noted as one source of uncertainty. But one trade-off arises
in the possibility that a contractor may derive some benefit from a
longer term sales commitment and thus be able to market in-kind royalty
gas for a higher price. This trade-off may affect different marketers
in different ways. The workshops will provide an opportunity to discuss
issues surrounding contracts of different durations.
In addition, MMS would be interested in views on whether to explore
contracts other than simply selling wet gas at the lease. For example,
certain types of processing contracts (e.g., keep-whole contracts)
could be considered.
8. Audit Rights in Contracts With Gas Marketers, Agreements With
Lessees
In the current pilot, MMS retained the right to audit gas
marketers' records and imposed various data reporting and record
retention requirements on the marketers. Since the only elements
required for calculating the payments due by the marketers are the bid
price and the quantity and quality of gas sold, it is anticipated that
MMS' audit needs will be substantially less than those required for
ensuring that lessees paying royalties in value have paid the proper
amount. The MMS is interested in additional views on the proper amount
of data reporting, record retention, and audit rights to incorporate in
future royalty-in-kind pilot programs.
With regard to the lessees, MMS will verify that the volumes
delivered satisfy the royalty obligation. In addition, the lessees in
the pilot agreed to provide raw data on the sales of their shares of
production. The MMS requested this information to use in the evaluation
of the pilot.
9. Gas Sales Contract and Volunteer Agreement (VA) as the Basis for RIK
Regulations
If MMS is to move ahead with more extensive application of in-kind
collection procedures, regulations may need to be drafted. In the
current pilot, the two documents which define procedural compliance for
gas marketers and volunteer lessees are the gas sales contract and the
VA. These documents would need to be the basis for the drafting of
regulatory language. Clearly some changes would need to be made as some
of the above issues are addressed and as the current pilot is
evaluated. However, some of these considerations can be addressed now
in the context of a workshop. Participants in the workshops can suggest
which requirements should or should not be codified in regulations.
They also can provide input on any requirements that they found either
helpful or overly restrictive.
10. Conditions on Auction Participation and Structure
Some type of procedure must be used in future pilots to establish
or determine bidder qualification. The IFB issued for the current pilot
employed a self-certification for bidders. This self-certification was
a signed statement that the prospective bidder had marketed a certain
volume of gas over a specified period of time. Another procedure which
MMS will consider is the use of performance bonds. The respective
merits and disadvantages of these approaches should be addressed in one
of the workshop sessions.
Also, in designing future pilots, MMS must consider the needs of
firms which may encounter some competitive disadvantage in the
marketing of gas. A future pilot could address means for encouraging
participation of such firms while at the same time ensuring that the
Government receives fair market value for the royalty oil or gas. A
workshop can address these needs.
Information on Participation and Panels
The workshops are open to the public. The one-day workshops will
include an introduction followed by four panel presentations and
discussions. Each of the panels will be composed of representatives
from industry and MMS. A draft agenda follows:
Introduction, overview of the current pilot, goals and
format for workshops;
Requirements placed on lessees (e.g., marketable
condition, data submitted to MMS, coordination with purchasers,
possible requirement to deliver gas at a point away from the lease);
Requirements placed on purchasers (e.g., transportation of
product away from the lease, data required by MMS, coordination with
lessees, balancing, contract provisions concerning breach, payment
terms, flexibility);
Auction procedures and other contract terms (e.g.,
aggregation of leases, use of price indices, contract length,
participation by small and disadvantaged firms); and
Suggestions for future pilots (e.g., location, products,
format, timing).
Addresses
The workshops will be held at the following locations:
Minerals Management Service, Gulf of Mexico Regional Office, Elmwood
Towers Building, Conference Rooms 111-115, 1201 Elmwood Park Boulevard,
Jefferson, Louisiana 70123
Minerals Management Service, Houston Area Audit Office, 4141 N. Sam
Houston Parkway, Houston, TX 77032-3843
Denver Federal Center, 6th & Kipling, U.S.G.S., Building 25, Lecture
Halls A and B, (Rooms 1252 and 1254), Lakewood, Colorado 80215
Registration
Since seating will be limited, those wishing to attend any of the
workshops should register in advance, no later than August 4, 1995.
Registration should be made by phone (202) 208-3398, (202) 208-3822,
facsimile (202) 208-3118 or mail to Ms. Ruby Minor or Ms. LaVerne
Gailliard, Minerals Management Service, Mail Stop 4013, 1849 C St. NW.,
Washington, DC 20240. Copies of the Invitation for Bids and the
Volunteer Agreement will be available to registrants on request.
Comments
Written comments on the workshops or the panels should be addressed
to Mr. Hugh Hilliard at the address given above or sent by facsimile c/
o Mr. Hilliard to the number given.
Dated: July 13, 1995.
Lucy Querques,
Associate Director, Policy and Management Improvement.
[FR Doc. 95-17673 Filed 7-18-95; 8:45 am]
BILLING CODE 4310-MR-M
