**Minerals Management Service**

**Interim Policy Document**

**Effective Date**: September 20, 2007 **IPD No: 07-09**

**Program:** Offshore Minerals Management (OMM)

**Title**: Internal Procedures and Responsibilities for Ensuring Receipt
of Fair Market Value (FMV) for Outer Continental Shelf (OCS) Oil and Gas
Leases

**Originating Office**: Resource Evaluation Division (RED), OMM

**1. Purpose.** This Interim Policy Document (IPD) establishes
procedures and responsibilities for implementing the FMV process and bid
adequacy procedures for OCS oil and gas lease sales.

**2. Objectives.** The objective of the FMV process and bid adequacy
procedures is to ensure that the public receives a fair return for OCS
oil and gas leases, as well as assuring that available Minerals
Management Service (MMS) resources are used efficiently in performing
this function.

**3. Authorities.** OCS Lands Act, as amended (43 U.S.C. 1331-1356).

**4. References.**

A. Modifications to the Bid Adequacy Procedures ([Federal]{.underline}
[Register]{.underline}, Volume 64, Number 132, MMS, July 12, 1999).

B. Instructional Memorandum for Fair Market Value (FMV) Process and Bid
Adequacy Procedures (Associate Director for OMM, August 20, 2007).

**5. Definitions.**

A. Adjusted Delayed Value (ADV) is the minimum of the Mean Range of
Values and the Delayed Mean Range of Values.

B. Delayed Mean Range of Values (DMROV) is a measure that is used to
determine whether the high bid received plus royalty receipts expected
in the current sale is at least equal to the

discounted sum of the bonus and royalties expected on the tract in the
next 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 conditions, including drainage.

C. Fair Market Value (FMV) is the amount in cash, or on terms reasonably
equivalent to cash, for which in all probability the property would be
sold by a knowledgeable owner willing but not obligated to sell to a
knowledgeable purchaser who desired but is not obligated to buy. This
market value which is sought is not merely theoretical or hypothetical
but it represents, insofar as it is possible to estimate it, the actual
selling price.

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D. Mean Range of Values (MROV) is a dollar measure of the MMS estimate
of a tract's expected net present private value, given that the tract is
leased in the current sale.

E. Nonviable Tract/Prospect is a geographic/geologic configuration of
hydrocarbons whose risk-weighted, most probable resource size is below
the minimum economic field size (MEFS) for the relevant cost regime and
anticipated future prices. The level of geologic risk used in this
analysis is below the lowest level anticipated for any tract or prospect
in the same cost regime.

F. Qualified Bids are the legal, non-anomalous bids received on a tract.

G. Revised Arithmetic Average Measure (RAM) is the arithmetic average of
the MROV and all

qualified bids on the tract that are equal to at least 25 percent of the
high bid.

H. Viable Tract/Prospect is a tract or prospect that has not been
determined to be nonviable. A tract or prospect is presumed viable until
an appropriate analysis has demonstrated that it meets the nonviable
criteria.

**6. Responsibilities.**

A. Director, MMS is responsible for making a final decision on company
appeals for reconsideration of rejected high bids.

B. Chief, RED is responsible for developing and executing a National
Geological and Geophysical (G&G) Data Acquisition Plan for each fiscal
year; providing guidance related to implementation of the FMV
procedures; and appointing representation on any bid appeal review team
that may be necessary.

C. Chief, Economics Division (ED) is responsible for developing
sale-specific economic parameters and price thresholds for use in the
MONTCAR resource economic evaluation modeling software; assisting
Resource Evaluation (RE) Regional Supervisors with the identification
and treatment of anomalous bidding patterns; providing guidance related
to implementation of the FMV procedures; and appointing representation
on any bid appeal review team that may be necessary.

D. Regional Directors are responsible for identifying any illegal or
unusual bidding patterns and accepting or rejecting the qualified high
bids received on tracts offered for lease.

E. RE Regional Supervisors are responsible for prioritizing potential
G&G data acquisitions for inclusion in the National G&G Data Acquisition
Plan; preparing appropriate memoranda and supporting documentation to
the Regional Director recommending the acceptance or rejection of high
bids received on tracts offered for sale.

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F. Chief, Resource Evaluation Methodologies (REM) Branch is responsible
for coordinating the modification, testing, training, documentation and
release of the official version of MONTCAR

modeling software that conforms with appropriate statutes, regulations
and policies; and reviewing draft sale-specific economic parameters and
price threshold memoranda.

G. Regional G&G Section Chiefs and Resource & Economic Analysis
Section/Unit Chiefs are responsible for conducting presale lookback
studies; evaluating potential newly available tracts for upcoming lease
sales; updating presale Geographic Information System (GIS) database(s);
reviewing draft sale-specific economic parameters and price threshold
memoranda; validating oil and gas drilling and development costs and
activity schedule assumptions; developing appropriate estimates of MEFS
(Gulf of Mexico Region only); running postsale reports and identifying
tracts subject to the appropriate number-of-bids rule; evaluating the
adequacy of available seismic information and alternative sources for
this information; identifying unusual (including anomalous) bidding
patterns; completing the Phase 1 evaluation of all high bids; completing
the Phase 2 determinations of bid adequacy; providing appropriate
supporting material to the RE Regional Supervisor for the preparation of
bid acceptance/rejection recommendations memoranda; and distributing and
archiving official MONTCAR modeling software input and output files.

7.  **Procedures.**

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A.  The bid evaluation process consists of two phases designed to
    distinguish those bids that

reflect market forces and which can be relied upon to assure receipt of
fair market value and those bids that require further detailed analysis.
These procedures consider both market-oriented evaluation criteria and
an independent Government determination of tract value. The procedures
are included as Reference Document A: Modifications to the Bid Adequacy
Procedures ([Federal]{.underline} [Register]{.underline} Volume 64,
Number 132, MMS, July 12, 1999).

B. In addition to the two phase evaluation of bids, the FMV process
requires the completion of a number of additional tasks, including the
identification and treatment of unusual bidding patterns. A summary of
each task is itemized below. The responsible office for each task is
listed above in the Responsibilities paragraph. The complete procedures
and responsibilities are detailed in Reference Document B: Instructional
Memorandum for Fair Market Value (FMV) Process and Bid Adequacy
Procedures (Associate Director for OMM, August 20, 2007).

C. Instructions

**[(1) Presale Instructions]{.underline}**

\(a\) [Perform Presale Lookback Study]{.underline} -- to identify
long-term industry trends and highlight opportunities to refine or
improve MMS evaluations and decisions. Completed prior to a subsequent
sale in the same program area.

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\(b\) [Identify Potential Newly Available Tracts for Upcoming Lease
Sales]{.underline} -- that were recently returned to inventory and are
available for leasing. Completed prior to a subsequent sale in the
program area, if adequate time is available between sales.

\(c\) [Update Presale GIS Database]{.underline} -- to generate
probability distributions for geologic and engineering input parameters
used in MEFS analysis and MONTCAR modeling software. Updated no later
than 30 days prior to a sale in program area.

\(d\) [Develop a National G&G Data Acquisition Plan]{.underline} -- to
prioritize G&G data acquisitions necessary to support FMV
determinations, resource assessment activities, reserve inventory
studies, and other special projects and studies. Submitted prior to the
start of each fiscal year and ongoing throughout.

\(e\) [Coordinate Modifying, Testing, and Release of the Official
Version of MONTCAR Modeling Software]{.underline} -- to ensure
conformance with current decision theory, statistical and evaluation
techniques, and appropriate statutes, regulations and policies; and to
ensure satisfactory operational performance of the model. Released to
OCS Regions no later than

60 days prior to a scheduled sale date.

\(f\) [Develop Sale-Specific Economic Parameters and Price
Thresholds]{.underline} -- for use in MONTCAR modeling software. Draft
documentation submitted 45 days prior to a sale; final documentation
submitted 30 days prior to a sale.

\(g\) [Validate Oil and Gas Drilling and Development Costs and Activity
Schedule Assumptions]{.underline} -- against industry publications,
reports from other Government agencies, internal MMS records, and
additional sources for use in MONTCAR modeling software. Ongoing
throughout the year.

\(h\) [Develop Estimates of MEFS for Viability
Determinations]{.underline} (GOMR only) -- for use in Phases 1 and 2 of
the sale for tract viability analysis. Analysis begins upon receipt of
final economic parameters memorandum, no later than 30 days prior to a
sale; final MEFS analysis completed by sale date.

**[(2) Postsale Instructions]{.underline}**

\(a\) [Run Postsale Reports and Determine the Number of Qualified
Bids]{.underline} -- to identify tracts subject to the number-of-bids
rule and those meeting requirements for comparison to the RAM. Performed
2 days after a sale.

\(b\) [Coordinate and Monitor the Submission, Inspection, and Selection
of Geophysical Data and Information Collected on Tracts Receiving Bids
and Processed or Reprocessed by a Permittee or a Third
Party]{.underline} -- to assess the adequacy of available information to
identify and delineate potential prospects. Ongoing through the postsale
period.

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\(c\) [Identify Any Unusual (Anomalous) Bidding Patterns]{.underline} --
that may occur on any set of tracts, and after consultation with the
Solicitor, determine if the affected tracts should be passed to Phase 2
for further evaluation. Identification must be completed prior to the
acceptance of any high bid in Phase 1. Any affected tracts passed to
Phase 2 will be evaluated as part of the Phase 2 determinations,
generally completed within 90 days of the sale date.

\(d\) [Complete the Phase 1 Evaluation of All Blocks Receiving
Bids]{.underline} -- and document Phase 1 bid acceptance
recommendations, tract-specific FMV determination data, and viability
information

in the Technical Information Management System (TIMS). Recommendation
from RE Regional Supervisor to Regional Director completed within 14
days after the sale date; Regional Director decision within 21 days
after the sale date.

\(e\) [Complete Phase 2 Determinations of Bid Adequacy]{.underline} --
performing G&G evaluations as deemed appropriate. Perform a MONTCAR
discounted cash flow analysis on potentially viable prospects. Tracts
identified as having no economically viable prospect are recommended for
award to the high bidder. Generally completed within 90 days after the
sale date.

\(f\) [Prepare Phase 2 Acceptance/Rejection Recommendations
Memoranda]{.underline} -- along with appropriate supporting material.
After review, the RE Regional Supervisor prepares a memoranda to the
Regional Director recommending acceptance or rejection of the high bids.
Upon final approval by the Regional Director, acceptance letters and
rejection notifications are prepared and distributed to the bidders.
Completed periodically 21 to 90 days after the sale.

\(g\) [Appoint a Review Team to Evaluate Company Appeals for
Reconsideration of Rejected High Bids]{.underline} -- and to prepare a
recommendation and record of decision for the Director, MMS. Final
decisions are not bound by a specific time frame.

\(h\) [Distribute and Archive MONTCAR Input and Output
Files]{.underline} -- for documentation of the evaluations and future
reference. All files are compiled and distributed to RED for archival.
Completed after all Phase 2 decisions and the bid appeal processes have
been completed.

**8. Cancellation**. This IPD will remain in effect until incorporated
into the MMS Manual, cancelled, or superseded with another IPD.

Chris C. Oynes

Associate Director for

Offshore Minerals Management

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