Outer Continental Shelf operations: Gulf of Mexico OCS Nonproducing leases royalty relief; discretionary authority,
[Federal Register: April 27, 1998 (Volume 63, Number 80)]
[Notices]
[Page 20644-20645]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ap98-93]
DEPARTMENT OF THE INTERIOR
Minerals Management Service
Discretionary Authority for Royalty Relief on Nonproducing Leases on the Outer Continental Shelf
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Notice.
SUMMARY: The Deep Water Royalty Relief Act of 1995 (Act) granted the Secretary of the Interior (Secretary) the authority to reduce or eliminate royalties on producing or nonproducing leases in the Central and Western Gulf of Western Gulf of Mexico. On January 24, 1997, MMS published a Notice (62 FR 3714) seeking public input on whether and how MMS should implement that authority for nonproducing leases. This Notice summarizes comments received and presents the MMS decision not to implement the authority at this time.
FOR FURTHER INFORMATION CONTACT: Larry Maloney, Department of the Interior, Minerals Management Service; Mail Stop 4230; 1849 C Street NW; Washington, DC 20240; telephone number, (202) 208-5461; E-mail address, larry.maloney@mms.gov.
SUPPLEMENTARY INFORMATION:
Background
The Act (Pub. L. 104-58) authorized the Secretary to modify the royalty terms of certain exiting leases and to offer new leases subject to royalty suspension volumes in water depths of 200 meters or more in parts of the Gulf of Mexico. Most of the Act addresses mandatory royalty relief programs for leases in water depths of 200 meters or more. We implemented these provisions in rules covering new leases (63 FR 2626, January 16, 1998) and existing leases (63 FR 2605, January 16, 1998). The latter rule also established a royalty relief program for producing leases in all water depths and in all OCS areas.
The Act also provides for a discretionary royalty relief program. In part, section 302 of the Act amends section 8(a) of the OCS Lands Act by adding subparagraph (3)(B), which applies to all leases in the Gulf of Mexico west of 87 degrees, 30 minutes West longitude (i.e., the Central and Western Gulf of Mexico Planning Areas and the portion of the Eastern Gulf of Mexico Planning Area lying offshore Alabama). In this area, the Secretary may reduce or eliminate any royalty or net profit share in order to promote development, increase production, or encourage production of marginal resources on producing or nonproducing leases. This provision applies to active leases, not to the terms under which new leases are offered.
On January 24, 1997, MMS published a Notice seeking public input on whether and how MMS should implement that authority for nonproducing leases. We requested specific proposals, including information on the types of situations warranting royalty relief that cannot be addressed through existing programs; what criteria should be used in evaluating proposals; and, for any relief program recommended, specific information on its expected effects, including levels and costs of exploration, development, and production, and the volume of additional resources that may be recovered.
Comments Received
The following briefly summarizes the main points in comments submitted by the nine respondents to the January 24, 1997 Federal Register Notice.
‹bullet› Five respondents (one oil and gas firm, one offshore service firm and three trade associations) strongly supported a program of royalty relief for nonproducing leases in the Central and Western Gulf, but did not offer comments on how MMS should implement such a program.
‹bullet› One oil and gas firm supported the concept of royalty relief for OCS nonproducing leases. They believed that application of royalty relief should be based upon such factors as drill depth, pressure, and subsalt. The firm also stated that certainty of royalty relief early in the life of a project, before investment decisions are made, decreases the risk associated with evaluating business alternatives and increases the likelihood that the intent of the Deep Water Royalty Relief Act will be carried out.
‹bullet› One trade association supported royalty relief for nonproducing leases. The association recommended that tracts not leased after initially being placed on the indicated hydrocarbon list be offered with a reduced royalty rate (i.e., from one-sixth to one-eighth the next time MMS offered the tracts for leasing.
‹bullet› One oil and gas firm indicated that any royalty relief program established under this authority should grant relief only on a case-by-case basis using the same basic methodology established under the earlier program of royalty relief for existing deep water leases.
‹bullet› Another trade association said that it might be wiser if MMS developed its thinking as to how such a program should be structured but defer implementation until market conditions signal a need for stimulative incentives. The association noted that conditions in the Gulf of Mexico are very robust and healthy and that the level of activity is so high that the infrastructure of tools, equipment, and trained personnel cannot meet all the demands placed on it.
Decision
After carefully considering public input and other information, we have decided not to implement, at this time, the statutory authority to reduce royalty rates on nonproducing leases in the Central and Western Gulf of Mexico. Our decision is based primarily on the fact that, in spite of lower oil prices, the oil and gas industry in the Gulf of Mexico is healthy and in little need of financial incentives at the present time.
Industry interest in acquiring relinquished leases is high. More than 50 percent of relinquished leases in the Gulf are re-leased within 3 years. In total, more than 80 percent of leases
[[Page 20645]]
relinquished have been re-leased. Thus, leases that may be uneconomic at today's oil and gas prices can be re-leased and developed later as economic, geologic, or technological conditions changes. In this case, allowing market conditions and future discoveries to determine the best time to explore and develop tracts is preferable to offering financial incentives for current development.
In addition, we considered other issues that would have impacts on implementing a sound program of royalty relief for nonproducing leases.
Auction and Tract Evaluation Process Impacts
Reducing royalties on nonproducing leases could distort the auction process because some losing bidders may have submitted higher bids had they known that lease royalty rates could be reduced. Also, the program would complicate fair market value determinations because lease stipulated royalty rates could change before the start of production.
Workload Impacts
The potential workload associated with a relief program could become burdensome and drain MMS resources from other important jobs. Even a program of categorical relief (i.e., one based on predetermined qualifying criteria such as drill depth or pressure) could create a significant new workload. Although certain criteria may have substantial impact on project costs, many factors ultimately determine a project's economic viability. The effort to develop comprehensive qualifying criteria and keep them up to date may actually create more of a workload for MMS than accepting applications on a case-by-case basis.
Revenue Impacts
We considered the proposal to offer certain relinquished tracts at a lower royalty rate. However, the relinquishment of a tract, even if it is on the indicated hydrocarbons list, and its failure to be re- leased at the next lease sale, are not absolute determinants of its current or future economic viability. Tracts in the Central and Western Gulf may be offered time and again. As noted earlier, tracts that are uneconomic at one time may be re-leased and developed with changes in oil and gas prices or advances in technology that reduce drilling and production costs or enhance ultimate resource recovery. In these cases, the government would receive royalties at the regular royalty rate plus any bonus received on re-leasing.
In summary, the economic climate for the oil and gas industry in the Gulf of Mexico does not warrant taking action at this time. We will continue to monitor activities in the Central and Western Gulf and will move to exercise the authority if changed conditions require it.
We welcome all comments on issues related to this Notice and will consider them in determining the nature and timing of future actions.
Dated: April 21, 1998. Walter Cruickshank, Associate Director for Policy and Management Improvement.
[FR Doc. 98-11012Filed4-24-98; 8:45 am]
BILLING CODE 4310-MR-M
