05-2747. Oil and Gas and Sulphur Operations on the Outer Continental Shelf (OCS)-Suspension of Operations (SOO's) for Ultra-Deep Drilling

AGENCY:

Minerals Management Service (MMS), Interior.

ACTION:

Proposed rule.

SUMMARY:

The MMS proposes to modify its regulations at 30 CFR 250.175, which govern SOO's for oil and gas leases on the OCS. The proposed revision will allow MMS to grant SOO's to lessees or operators who plan to drill ultra-deep wells. MMS proposes this revision because of the added complexity and costs associated with planning and drilling an ultra-deep well. MMS expects that this revision will lead to increased drilling of ultra-deep wells and increased domestic production.

DATES:

MMS will consider all comments received by March 16, 2005. MMS may not fully consider comments received after March 16, 2005.

ADDRESSES:

You may submit comments on the rulemaking by any of the following methods listed below. Please use the RIN 1010-AD09 as an identifier in your message. See also Public Comment Policy under Procedural Matters.

• MMS's Public Connect on-line commenting system, https://ocsconnect.mms.gov. Follow the instructions on the Web site for submitting comments.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions on the Web site for submitting comments.
• E-mail MMS at [e-mail]. Use the RIN in the subject line.
• Fax: [phone]. Identify with RIN.
• 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 “Oil and Gas and Sulphur Operations on the Outer Continental Shelf (OCS)—Suspension of Operations (SOO's) for Ultra-deep Drilling— AD09” in your comments.

You may also send comments on the information collection aspects of this rule directly to the Office of Management and Budget (OMB) via: OMB e-mail: ([e-mail]); mail or hand carry to the Office of Information and Regulatory Affairs, OMB Attention: Desk Officer for the Department of the Interior (1010-AD09) or by fax [phone]. Please also send a copy to MMS.

FOR FURTHER INFORMATION CONTACT:

Amy C. White, Regulations and Standards Branch at [phone].

SUPPLEMENTARY INFORMATION:

Background

When an oil and gas lease is issued on the OCS, the lessee has flexibility to schedule activities during the primary term. At the end of the primary term, the lease can continue in force only by production, suspension, drilling, or well-reworking operations as approved by the Regional Supervisor. MMS regulations at 30 CFR 250.172, 250.173, and 250.175 authorize SOO's before the discovery of oil or gas only in limited circumstances.

Generally, when a lease reaches the end of the primary term, the lessee must be producing or conducting other leaseholding operations to extend the lease beyond its primary term. When leaseholding operations are not maintaining the lease at the end of the primary term, the operator may request a Suspension of Production (SOP) if oil or gas was discovered, and if there is a commitment to proceed to development and production.

Most leases have a primary term of 5 years, although a longer period (10 years) is provided in deep water. Some leases in intermediate depths have primary terms of 8 years, with a requirement to drill an initial well in the first 5 years. Under most circumstances, the primary lease term provides sufficient time to acquire and interpret geophysical information needed to determine the presence of oil or natural gas, drill a well, and for the operator to determine whether or not to continue with development and production. However, there are cases when a company recognizes that there is a potential hydrocarbon reservoir below 25,000 feet true vertical depth subsea (TVD SS). The high cost of drilling a well to such depths warrants completing additional data analysis before drilling.

In 2002, MMS amended the rules at 30 CFR 250.175 (67 FR 44357, July 2, 2002) to provide for an SOO if additional time is needed to allow a lessee to analyze areas beneath or adjacent to salt sheets. MMS adopted this provision in the belief that when a lessee conducts significant work, additional time may be warranted to allow the lessee to benefit from the work conducted. Lessees used the change to expand their exploration in deep areas affected by salt sheets. The rule included well-defined, specific criteria for determining when a lease is eligible for a suspension. In establishing the new provision for an SOO, there was some fear that the rule would be used as a means of avoiding diligence. Thus far, this has not been a problem—in large part due to the use of well-defined specific criteria for eligibility.

While the rule issued in 2002 encouraged drilling under salt sheets, that rule does not address situations where salt does not exist. Information from industry indicates that large accumulations of hydrocarbons may exist at depths greater than 25,000 feet TVD SS in water depths less than 800 meters. Many lessees are reluctant to spend the money to drill to these depths without sufficient data analysis.

The current regulations (see 30 CFR 250.175(b)) allow the lessee or operator to request an SOO if: (1) By the end of the third year of the primary term, geophysical information was gathered that indicated the presence of a salt sheet; (2) all or a portion of a hydrocarbon-bearing formation may lie beneath or adjacent to the salt sheet; and (3) the salt sheet interferes with identifying the potential hydrocarbon-bearing formation. In August 2004, MMS issued NTL No. 2004-G16, providing additional guidance for granting SOO's to lessees or operators who planned to drill an ultra-deep well beneath or adjacent to a salt sheet. The NTL allowed the lessee or operator planning to drill an ultra-deep well to request the SOO if this geologic information was gathered by the end of the fifth year of the primary term, instead of at the end of the third year. In addition, the operator had to submit a reasonable working schedule leading to the commencement of drilling. This proposed rule will replace the NTL, and also allow the lessee or operator to request an SOO in areas where a salt sheet does not exist.

Allowing a lessee additional time for this data analysis encourages companies to consider ultra-deep exploration. A successful development will generate more activity at lease sales and increase drilling on existing leases.

MMS recognizes that a lessee knows the length of the lease term when it obtains a lease. When a lease expires, another lessee can acquire a new lease of the same tract and receive a new 5-year term to explore. MMS considered these factors, and believes that the need to encourage drilling to significantly deeper depths warrants the proposed rule change. Successful wells benefit not only the companies that drilled the wells, but also the public by increasing domestic energy sources. In addition, the drilling of successful wells will encourage other companies to acquire leases and to pursue ultra-deep exploration in U.S. waters.

Proposed Regulation

MMS is proposing to amend the regulations that govern oil and gas leases to allow an SOO in limited situations to encourage drilling ultra-deep wells to depths of at least 25,000 feet TVD SS. This rule would allow lessees or operators to apply for SOO's under the following circumstances:

• The lease has either a 5-year primary term, or an 8-year primary term with a requirement to drill within the first 5 years;
• The lessee or operator has plans to drill an ultra-deep well (at least 25,000 feet TVD SS) on the lease;
• Before the end of the fifth year of the primary term, the lessee or operator must have acquired and interpreted geophysical information that indicates that all or a portion of a potential hydrocarbon-bearing formation is ultra-deep and includes full 3-D depth migration over the entire lease area.
• Before requesting the suspension, the lessee or operator has conducted, or is conducting, additional data processing or interpretation of the geophysical information with the objective of identifying a potential ultra-deep hydrocarbon-bearing formation.
• The lessee or operator demonstrates that additional time is necessary to complete current processing or interpretation of existing geophysical data or information; acquire, process, or interpret new geologic and/or geophysical data or information, that would impact the decision to drill the same geologic structure or stratigraphic trap; or drill into the potential hydrocarbon-bearing formation identified as a result of the activities conducted in previous paragraphs.

Leases issued with 10-year primary terms are not included in this proposed rule because MMS feels that 10 years is sufficient to explore and develop such deep prospects.

Other Possible Solutions

MMS considered using current regulations to grant suspensions for ultra-deep drilling. However, MMS determined that the current regulations regarding SOO's and SOP's are not adequate to address ultra-deep drilling in all situations. An SOP applies only when there is a commitment to produce proven reserves, as required by 30 CFR 250.171. An SOO may be requested under 30 CFR 250.175(a) for situations where a delay in lease holding operations occurs because of situations that are beyond the control of the company, such as weather and accidents. If the target depth for potential drilling is beneath or adjacent to a salt sheet, an SOO may be requested under 30 CFR 250.175(b). Also, pursuant to 30 CFR 250.180(e), NTL 2000-G22 provides for a lease term extension by allowing additional time beyond the 180-days between lease holding operations to refine subsalt imaging techniques and to process and interpret the imaging. None of these regulations addresses granting a suspension to allow for the additional time involved in the planning for drilling an ultra-deep well not associated with a salt sheet.

MMS also considered longer primary lease terms as a way to provide more time to companies that drill to deep depths. However, when leases are issued it is impossible to determine which ones may be suitable for ultra-deep drilling.

Questions

MMS is interested in comments on this proposed rule from any interested parties. The questions on which MMS seeks comments include:

• Is the proposed rule easy to read and understand?
• Is the proposed rule well organized?

You can send your responses to these questions and other comments to MMS by any of the methods described in the ADDRESSES paragraph.

Procedural Matters

Public Comment Policy: All submissions received must include the agency name and Regulation Identifier Number (RIN) for this rulemaking. Our practice is to make comments, including names and addresses of respondents, available for public review during regular business hours. Individual respondents may request that we withhold their address from the record, which we will honor to the extent allowable by law. There may be circumstances in which we 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, we will not consider anonymous comments. Except for proprietary information, we 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.

Regulatory Planning and Review (Executive Order 12866)

This document is not a significant rule as determined by the Office of Management and Budget (OMB) and is not subject to review under Executive Order 12866.

The major economic effect of the proposed rule would involve business decisions made by oil and gas producers. MMS expects that a project to drill an ultra-deep well will need to compete with other high risk projects in deep water or in other countries. By increasing the potential benefits resulting from drilling high risk, ultra-deep wells, lessees would be more likely to drill these wells in the U.S. instead of drilling in other high risk areas. These decisions are based on marginal cost and benefit differences among projects, and are driven by many factors. Whether this rule is issued is only one of the factors. Lessees or operators will not request a suspension unless it is in their financial interest. Therefore, this proposed rule change would not impose a cost on the lessee or operator.

There are other financial considerations that would result directly from this proposed rule. Drilling a well to 25,000 or more feet TVD SS is a significant occurrence, and MMS does not anticipate an immediate drastic increase in drilling to that depth. This proposed rule change, combined with any applicable deep-gas royalty relief, would be expected to increase drilling activities into areas deeper than 25,000 feet TVD SS. Ultra-deep drilling activity is expected to gradually increase in subsequent years. MMS estimates that this proposal would result in 10 suspension requests per year, averaged over the 5 years following the effective date of a final rule; and that most of the requests will be in water depths of less than 200 meters. MMS economic analysis assumes that a suspension will result, on average, in each suspended lease remaining active for 2 years longer than without the suspension.

Of the leases in water depths of less than 200 meters that expired in 2000, approximately half received new bids within 2 years, with an average high bid of approximately $556,000. The delayed expiration of the leases for which SOO's are requested under this proposed change will result in a delay in reoffering the tracts. If the anticipated 10 leases that would have expired without a suspension were to be offered in a lease sale, MMS estimates that five would receive bids at an average of $556,000 per lease, for a total of $2,780,000. This proposed rule is estimated to result in a 2-year delay in the receipt of that $2,780,000 in bonus revenues.

However, this delay in receiving re-leasing revenues would be partially offset by increased government revenue due to the continued collection of rents. The extra rent generated by the anticipated suspended leases will be $500,000 ($5.00 rent per acre × 5,000 acres × 10 leases × 2 years). The greater potential effect of this proposed rule is the additional royalties collected if large reservoirs of hydrocarbons are discovered in ultra-deep areas, as well as the effect of success on bonuses and rents in future lease sales.

The presently quantifiable effects of this proposed rule are small compared to the potential for an increase in energy production. There are more than 3,000 active leases in water depths less than 200 meters. In any given year, this change is expected to affect less than 0.35 percent of those leases. The main effect of this proposed rule would be the potential impact on energy and domestic production if a large reservoir of hydrocarbons is discovered.

(1) This proposed rule would not have an annual effect of $100 million or more on the economy. It would not adversely affect in a material way the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.

(2) This proposed rule would not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency. Issuance of a suspension for a lease does not interfere with the ability of other agencies to exercise their authority.

(3) This proposed rule would not alter the budgetary effects of entitlements, grants, user fees, or loan programs or the rights or obligations of their recipients. This change will have no effect on the rights of the recipients of entitlements, grants, user fees, or loan programs.

(4) This proposed rule would not raise novel legal or policy issues.

Regulatory Flexibility (RF) Act

The Department certifies that this proposed rule would not have a significant economic effect on a substantial number of small entities under the RF Act (5 U.S.C. 601 et seq.).

This proposed change would affect lessees and operators of leases in the OCS. This includes about 130 different companies. These companies are generally classified under the North American Industry Classification System (NAICS) code 211111, which includes companies that extract crude petroleum and natural gas. For this NAICS code classification, a small company is one with fewer than 500 employees. Based on these criteria, an estimated 70 percent of these companies are considered small. This proposed rule, therefore, would affect a substantial number of small entities.

This proposed rule would not create a cost to any small companies, since it provides a suspension only when one is requested. Small companies could be affected by the delay in the expiration of leases and the availability of the tract to be leased again. As discussed earlier, this would be a very small portion of the available leases. The proposed rule would not affect the ability of a small company to participate in OCS exploration, development, and production.

Comments are important. The Small Business and Agriculture Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about Federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities and rate each agency's responsiveness to small business. If you wish to comment on the actions of MMS, call 1-888-734-3247. You may comment to the Small Business Administration without fear of retaliation. Disciplinary action for retaliation by an MMS employee may include suspension or termination from employment with the Department of the Interior.

Small Business Regulatory Enforcement Fairness Act (SBREFA)

This is not a major rule under the SBREFA (5 U.S.C. 804(2)). This proposed rule:

(a) Would not have an annual effect on the economy of $100 million or more.

(b) Would not cause a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions.

(c) Would not have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-based enterprises.

This proposed rule is not expected to have a significant effect. As discussed under procedural matters, Regulatory Planning and Review (Executive Order 12866), each year this change is estimated to increase rental receipts by $500,000, offsetting a 2-year delay in receipt of $2,780,000 in bonus revenues. This amount is not a significant effect for companies that do business on the OCS.

Paperwork Reduction Act (PRA) of 1995

The PRA provides that an agency may not conduct or sponsor a collection of information unless it displays a currently valid OMB control number. Until OMB approves a collection of information and assigns a control number, you are not required to respond. The revisions to 30 CFR part 250 subpart A refer to, but do not change, information collection requirements in current regulations. OMB has approved the referenced information collection requirements under OMB control number 1010-0114, current expiration date of October 31, 2007. The proposed rule would impose no new paperwork requirement, and an OMB form 83-I submission to OMB under the PRA is not required.

Federalism (Executive Order 13132)

With respect to Executive Order 13132, the proposed rule would not have Federalism implications. It would not substantially and directly affect the relationship between the Federal and State governments. To the extent that State and local governments have a role in OCS activities, this proposed change would not affect that role.

Takings (Executive Order 12630)

With respect to Executive Order 12630, the proposed rule would not have significant Takings implications. A Takings Implication Assessment is not required. The rulemaking is not a governmental action capable of interfering with constitutionally protected property rights.

Energy Supply, Distribution, or Use (Executive Order 13211)

This is not a significant rule and is not subject to review by OMB under Executive Order 13211. The proposed rule may potentially increase energy supplies, but given the uncertainty associated with the drilling of successful wells, the effect on energy supply, distribution, or use is not considered to be significant at this time. Thus, a Statement of Energy Effects is not required.

Civil Justice Reform (Executive Order 12988)

With respect to Executive Order 12988, the Office of the Solicitor has determined that this proposed rule would not unduly burden the judicial system, and meets the requirements of sections 3(a) and 3(b)(2) of the Executive Order.

National Environmental Policy Act (NEPA) of 1969

MMS analyzed this proposed rule using the criteria of the NEPA and 516 Departmental Manual, Chapter 2, and concluded that the preparation of an environmental analysis which would result in the issuance of a FONSI or the preparation of an environmental impact statement would not be required.

Unfunded Mandate Reform Act (UMRA) of 1995 (Executive Order 12866)

This proposed rule would not impose an unfunded mandate on State, local, or tribal governments or the private sector of more than $100 million per year. The proposed rule would not have a significant or unique effect on State, local, or tribal governments or the private sector. A statement containing the information required by the UMRA (2 U.S.C. 1531 et seq.) is not required. This is because the proposal would not affect State, local, or tribal governments, and the effect on the private sector is small.

List of Subjects in 30 CFR Part 250

• Continental shelf
• Environmental impact statements
• Environmental protection
• Government contracts
• Investigations
• Mineral royalties
• Oil and gas development and production
• Oil and gas exploration
• Oil and gas reserves
• Penalties
• Pipelines
• Public lands—mineral resources
• Public lands—right-of-way
• Reporting and recordkeeping requirements
• Sulphur development and production
• Sulphur exploration
• Surety bonds

Dated: February 2, 2005.

Rebecca W. Watson,

Assistant Secretary—Land and Minerals Management.

For the reasons stated in the preamble, MMS proposes to amend 30 CFR 250 as follows:

PART 250—OIL AND GAS AND SULPHUR OPERATIONS IN THE OUTER CONTINENTAL SHELF

1. The authority citation for Part 250 continues to read as follows:

Authority: 43 U.S.C. 1331, et seq. 2. In § 250.175, add a new paragraph (c) to read as follows:

§ 250.175

When may the Regional Supervisor grant an SOO?

* * * * *

(c) The Regional Supervisor may grant an SOO for drilling below 25,000 feet true vertical depth, subsea (TVD SS), when all of the following conditions are met:

(1) The lease was issued with a primary lease term of:

(i) 5 years; or

(ii) 8 years with a requirement to drill within 5 years.

(2) Before the end of the fifth year of the primary term, you or your predecessor in interest must have acquired and interpreted geophysical information that:

(i) Indicates that all or a portion of a potential hydrocarbon-bearing formation lies below 25,000 feet TVD SS; and

(ii) Includes full 3-D depth migration over the entire lease area.

(3) Before requesting the suspension, you have conducted or are conducting additional data processing or interpretation of the geophysical information with the objective of identifying a potential hydrocarbon-bearing formation below 25,000 feet TVD SS.

(4) You demonstrate that additional time is necessary to:

(i) Complete current processing or interpretation of existing geophysical data or information;

(ii) Acquire, process, or interpret new geophysical and/or geological data or information that would impact the decision to drill the same geologic structure or stratigraphic trap, as determined by the Regional Supervisor, identified in paragraphs (c)(2) and (c)(3) of this section; or

(iii) Drill into the potential hydrocarbon-bearing formation identified as a result of the activities conducted in paragraphs (c)(2), (c)(3), and (c)(4) of this section.