[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)]
[Notices]
[Pages 31520-31521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15283]



[[Page 31520]]

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DEPARTMENT OF THE INTERIOR

Minerals Management Service


Mid-term Assessment of the New Leases Provision in the Outer 
Continental Shelf (OCS) Deep Water Royalty Relief Act

AGENCY: Office of the Assistant Secretary, Land and Minerals 
Management.

ACTION: Notice of Workshop to discuss an assessment of the new leases 
provision of the OCS Deep Water Royalty Relief Act.

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SUMMARY: Implementation of section 304 of the OCS Deep Water Royalty 
Relief Act (DWRRA), the provision related to OCS lease sales in the 
Gulf of Mexico (GOM) held after the date of enactment, is about at the 
half way point in its 5 year authorized period. The Assistant Secretary 
for Land and Minerals Management (ASLM) is the official responsible for 
administering and overseeing the offshore oil and gas program for the 
Secretary of the Interior (Secretary). The ASLM is interested in 
assessing the contribution that the new lease provision has made to the 
levels of bidding activity observed in the deep water areas of the GOM. 
Taken in conjunction with recent changes in technological development, 
market conditions, and a number of other factors prevalent in current 
deep water operations, the ASLM would like to determine whether 
modifications in the terms and conditions of deep water leases issued 
in 1999 and 2000 may be warranted. Additionally, the ASLM is interested 
in assessing whether the new lease provision should be continued beyond 
the current 5-year period, and if so, in what form. A public workshop 
will be held to discuss these issues.

DATES: Assistant Secretary Robert Armstrong will chair the workshop 
which will be held on Monday, June 29, 1998, from 1:00 p.m. to 5:30 
p.m. Written comments received within 60 days after the workshop is 
held will be considered and made part of the record.

ADDRESSES: The workshop will be held at the Sheraton Crown Hotel & 
Conference Center, 15700 John F. Kennedy Blvd., Houston, Texas 77032. 
The telephone number is (281) 442-5100. Mail or hand carry comments to 
the Department of the Interior; Minerals Management Service; [Mail Stop 
5114; 1201 Elmwood Park Blvd., New Orleans, Louisiana 70123; Attention: 
Thierry M. De Cort, Supervisor, Resource and Economic Analysis Unit, or 
send comments via e-mail to <a href="/cdn-cgi/l/email-protection#3d495554584f4f441359585e524f497d50504e135a524b"><span class="__cf_email__" data-cfemail="cabea2a3afb8b8b3e4aeafa9a5b8be8aa7a7b9e4ada5bc">[email protected]</span></a> or Fax to (504)736-
2905.]

FOR FURTHER INFORMATION CONTACT: Thomas R. Kitsos, Staff Assistant, 
Office of ASLM, at (202) 208-5220, e-mail to <a href="/cdn-cgi/l/email-protection#45312d2a2824366b2e2c31362a36052828366b222a33"><span class="__cf_email__" data-cfemail="c6b2aea9aba7b5e8adafb2b5a9b586ababb5e8a1a9b0">[email protected]</span></a>, or 
Fax to (202) 208-3144 or (202) 208-6243.

Background

    On November 28, 1995, President Clinton signed Public Law 104-58, 
which included the DWRRA. The new law carries a number of discretionary 
and mandatory provisions related to the granting, by the Secretary, of 
royalty relief on existing and new deep water leases in the GOM, west 
of 87 degrees, 30 minutes west longitude. Section 304 of the DWRRA 
provides that all such leases offered in water at least 200 meters deep 
within 5 years of the date of enactment must be offered under a new 
bidding system established in section 303 (bonus bids with royalty 
suspensions for a period, volume, or value determined by the Secretary) 
and with mandatory minimum suspension royalty volumes of: 17.5 million 
barrels of oil equivalent (MMBOE) for leases in 200-400 meters of 
water; 52.5 MMBOE for leases in 400-800 meters; and 87.5 MMBOE for 
leases in more than 800 meters. The MMS issued an interim rule for new 
lease sales on March 25, 1996, and published a final rule on January 
16, 1998.
    As little as 5 years ago, technology for developing deep water 
projects was still in its infancy. At that time, there were only two 
platforms producing in water depths greater than 400 meters and 
development costs were expected easily to exceed $1 billion per 
project. The facility design and construction phase was expected to 
take two or three times that needed in shallow water and the 
hydrocarbon recovery period was expected to be much longer in deeper 
waters.
    Since that time, and particularly in the 2\1/2\ years since 
enactment of the DWRRA, there have been dramatic changes in deep water 
exploration, development, and production. Industry has demonstrated 
that production rates can be high, improved technologies can reduce the 
costs of floating production systems, projects can get on line quickly, 
and geologic risk can be reduced primarily because of improved seismic 
imaging and processing tools.
    Additionally, five extremely active OCS sales in which a number of 
leasing records were broken have been held since enactment of the 
DWRRA, and the experience and technological advances by the oil and gas 
industry in deep water operations in the GOM continue to grow.
    On the other hand, the robust activity in the GOM which has led to 
many of these unanticipated and very positive developments also has 
resulted in some added costs. It appears, for example, that there has 
been a steep rise in the day rates for drilling rigs, crew and supply 
boats, and pipeline lay barges. Also, there is an apparent shortage of 
skilled, experienced personnel which is driving up the costs in the 
deep water and there is some recent indication that certain 
technological approaches may have run into costly problems. Finally, 
the price of oil, about one third lower than a year ago, adds to the 
uncertainties in deep water development.
    The mandatory minimum royalty relief provided to newly leased 
fields under section 304 of the DWRRA can be substantial. For example, 
ultra deep water fields at 800 meters or deeper are entitled to royalty 
free production of a minimum of 87.5 million barrels. Assuming a well-
head price (gross price minus transportation and processing costs for 
some gas) of $16 per barrel of oil ($2.15 per mcf of gas), the 
operators of an oil field at that depth would be able to produce about 
$1.4 billion in gross value of energy ($1.1 billion for a gas field) 
without paying royalty to the Federal Government. The standard       1/
8th royalty rate for development at this depth would result in a 
royalty payment of some $175 million for an oil field ($138 million for 
a gas field), which represents the amount of royalty not paid under the 
terms of the DWRRA.
    In view of these developments, deep water production may be more 
economic than first anticipated. Consequently, deep water fields leased 
since enactment of the DWRRA may be benefitting from royalty relief 
beyond simply the recoupment of capital costs, which was the original 
intent of the Act. The ASLM wants to assess this situation as decisions 
are made on terms and conditions for future lease sales and in 
anticipation of the end of the 5-year period of mandatory relief for 
new leases.
    Under the OCS Lands Act (OCSLA), the Secretary is directed to carry 
out an offshore energy development program that, among many goals, 
assures ``receipt of fair market value for the lands leased and the 
rights conveyed by the Federal Government.''
    A concern of the ASLM is whether bidders, particularly those 
bidding at or near the per acre minimum for deep water tracts, are 
acquiring large amounts of acreage to ``bank'' them as options rather 
than for near term exploration and development. Such a strategy, if 
being practiced, may be at odds with the

[[Page 31521]]

Secretary's responsibility to assure receipt of fair market value, 
increases the post sale tract evaluation workload on MMS, precludes 
other companies from acquiring and possibly exploring the tract for 
many years, and fails to result in expeditious development.
    Given this mix of policy concerns regarding deep water leasing 
issues, the ASLM believes that a workshop held with industry at the 
half-way point of the new lease provision is desirable. This workshop 
will review, among other factors, the state of knowledge about deep 
water exploration and production profitability today in comparison with 
what was anticipated at the time the suspension volumes were developed. 
In particular, industry and MMS will participate in a series of 
presentations addressing the following issues:
--General economic parameters (e.g., well rates, average finding and 
other costs, production times, rates of return) in the GOM; and
--Technological developments (e.g., seismic acquisition and processing, 
production facility design, subsea completions).

    Moreover, through these presentations, the ASLM is seeking 
information that will allow him to answer the following questions:

--To what extent has section 304 of the DWRRA contributed to the 
increased bidding activity observed for the last five lease sales?
--What refinements, if any, should be made in lease terms and 
conditions for the remainder of the 5-year new lease provision?
--At the end of the five year authorization period for section 304, 
should MMS continue to offer leases with royalty suspensions and why--
or why not? If yes, should the terms of the suspension (period, volume 
or value) or other financial terms be modified at that time?
--To what extent, if any, is option bidding occurring on deep water 
tracts?
--If some option bidding is occurring, is it having a beneficial or 
adverse impact on the Secretary's ability to assure a fair return to 
the public for its resources, on energy markets, and on the national 
economy?
--With respect to leasing in the deep water of the GOM, to what extent, 
if any, should MMS modify its lease terms to assure a fair return to 
the public for its resources and to lessen any adverse impacts that 
option bidding may be having on the economy?
--How does the deep water of the GOM currently compare in the global 
market to other areas, both offshore and onshore, with respect to its 
attractiveness for investment?

Additional Information

    1. An agenda of scheduled workshop presentations and times will be 
available through the Minerals Management Service on the MMS homepage 
approximately 1 week before the workshop.
    2. The next Western Gulf of Mexico sale, Lease Sale 171, scheduled 
for August 26, 1998, in New Orleans, will not be affected in any way by 
the workshop.

    Dated: June 3, 1998.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
[FR Doc. 98-15283 Filed 6-8-98; 8:45 am]
BILLING CODE 4310-MR-P


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