16424 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Proposed Rules

bring together private parties with

widely disparate views, not all

rulemakings are appropriate for use of

this process The report accompanying

the National Performance Review

identifies the following limits on use of

the negotiated rulemaking process:

(1) The number of distinct interests

concerned with the proposed rule,

including any relevant government

agencies, must be small enough so that

they can be fairly represented by not

more than 20 to 25 negotiators;

(2) There should be a number of

diverse issues that participants can rank

according to their own priorities, so that

there will be room for compromise on

some of the issues as an agreement is

sought;

(3) It is essential that the issues to be

negotiated not require compromise of

principles so fundamental to the parties

that productive negotiations are

unrealistic;

(4) Parties must be willing to negotiate

in good faith, and no single interest

should be able to dominate the

negotiations; and

(5) The parties cannot have an

incentive to stall; therefore, they must

believe that the agency itself will issue

a rule if consensus is not reached. A

statutory requirement that the agency

issue some type of rule is often helpful.

The Coast Guard is interested in

suggestions for use of negotiated

rulemaking to make changes to existing

regulations, or where regulations

currently under development may be

converted to negotiated rulemakings.

The Coast Guard is also interested in

suggestions of alternative techniques

that may facilitate consensual

rulemaking where a formal negotiated

rulemaking is not appropriate.

The Coast Guard recently undertook a

comprehensive review of its regulatory

process and has now promulgated a new

internal rulemaking instruction. The

new instruction embodies certain

reforms that are designed to make the

Coast Guard’s rulemaking process more

responsive to public need and more

timely.

The Coast Guard has been using

expanded opportunities for early public

participation before issuing a proposed

rule. The Coast Guard has held

numerous public meetings on issues of

concern that might result in regulations.

The purpose of the meetings is to solicit

public participation on a wide range of

issues such as: (1) Possible nonregulatory alternatives; (2) is a

regulatory solution technologically

feasible; (3) what regulatory alternatives

are available; (4) what are the probable

benefits; and (5) what are the probable

costs?

The Coast Guard has also been

making extensive use of its advisory

committees early in the rulemaking

process. The advisory committees have

a particular expertise and are able to

advise the Coast Guard on impacts to

the industry and the environment,

technological feasibility, alternatives,

existence of industry standards, and so

on.

Although the resulting rules are not

precisely consensual, they result in

broad public participation in the

rulemaking process. Interested parties

discuss concerns and issues with each

other and the Coast Guard at informal

meetings and workshops where there is

considerable give and take among the

participants. The Coast Guard has found

that this early identification and

discussion of issues results in a better

crafted proposed rule that is subject to

less adverse comment.

The Coast Guard is also being

responsive to the public’s demand for

more timely rulemaking by increasing

personnel accountability. Once

timelines for major milestones have

been approved by the Coast Guard’s

Marine Safety Council, progress on the

rulemaking is closely monitored and

delays must be explained. This

justification and review process also

keeps senior management informed

concerning the progress of developing

rules. Also, management must review

existing resource commitments and

agree to provide adequate resources to

develop a rule before initiating one.

The public is invited to comment

with regard to the use of the negotiated

rulemaking process for current Coast

Guard rulemaking projects. Comments

are also invited on the Coast Guard’s

participatory rulemaking process.

Attendance at the April 20 meeting is

open to the public. Members of the

public may make oral presentations

during the meeting. Persons wishing to

make oral presentations should notify

the person listed above under FOR

FURTHER INFORMATION CONTACT no later

than the day before the meeting. Written

material may be submitted prior to,

during, or after the meeting.

Dated: March 23, 1995.

A.E. Henn,

Vice Admiral, U.S. Coast Guard, Acting

Commandant.

[FR Doc. 95–7736 Filed 3–29–95; 8:45 am]

BILLING CODE 4910–14–M

DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Part 3100

[WO–610–00–4110–2411]

RIN 1004–AC26

Promotion of Development, Reduction

of Royalty on Heavy Oil

AGENCY: Bureau of Land Management,

Interior.

ACTION: Proposed rule.

SUMMARY: The Bureau of Land

Management (BLM) is issuing this

proposed rule to amend the regulations

relating to the waiver, suspension, or

reduction of rental, royalty, or minimum

royalty. This amendment would

establish the conditions under which

the operators of properties that produce

‘‘heavy oil’’ (crude oil with a gravity of

less than 20 degrees) can obtain a

reduction in the royalty rate. This action

is being taken to encourage the

operators of Federal heavy oil leases to

place marginal or uneconomical shut-in

oil wells back in production, provide an

economic incentive to implement

enhanced oil recovery projects, and

delay the plugging of these wells until

the maximum amount of economically

recoverable oil can be obtained from the

reservoir or field. The BLM believes that

this amendment will result in

substantial additional revenue for the

States and Federal Government,

increase the cumulative amount of

domestic oil production from existing

wells, increase the percentage of oil

recovery from presently developed

reservoirs, minimize the necessity of

drilling new wells with their additional

environmental impacts, assist in

reducing the national balance of trade

deficit, and help promote stability in the

jobs and services related to the domestic

oil industry.

DATES: Comments should be submitted

by May 30, 1995. Comments postmarked

after this date may not be considered as

part of the decisionmaking process in

issuance of a final rule.

ADDRESSES: Comments should be sent

to: Director (140), Bureau of Land

Management, Room 5555, Main Interior

Building, 1849 C Street, N.W.,

Washington, D.C. 20240. Comments will

be available for public review in Room

5555 at the above address during regular

business hours (7:45 a.m. to 4:15 p.m.),

Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Dr.

John W. Bebout, Bureau of Land

Management, (202) 452–0340.
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Proposed Rules 16425

SUPPLEMENTARY INFORMATION: Existing

section 3103.4–1 of Title 43, Code of

Federal Regulations, provides two forms

of Federal oil and gas royalty reduction:

on a case-by-case basis upon

application, and for stripper wells. In

order to encourage the greatest ultimate

recovery of oil or gas and in the interest

of conservation, the Secretary, upon a

determination that it is necessary to

promote development, or that a lease

cannot be successfully operated under

the terms provided therein, may reduce

the royalty on an entire leasehold or any

portion thereof. The provision

concerning stripper well properties

allows royalty reduction for properties

that produce an average of less than 15

barrels of oil per eligible well per wellday.

The Bureau of Land Management

(BLM) has reason to believe that

additional royalty relief for producers of

heavy crude oil may be necessary to

maintain current levels of development,

promote investment in enhanced

recovery efforts, and encourage

maximum recovery of the resource, thus

warranting royalty reduction under

Section 39 of the Mineral Leasing Act

(30 U.S.C. 209).

Fluctuating oil prices, combined with

high production costs, have resulted in

an uncertain economic future for

producers of low gravity crude oil. As

recently as last January, California

producers of heavy crude were spending

between $9 and $10 to produce a barrel

of crude oil that was typically selling for

between $8.50 and $9 per barrel (from

data provided by the Conservation

Commission of California Oil and Gas

Producers). When depreciation,

depletion, and amortization costs were

considered, nearly 69% of the state’s

production was uneconomic and more

than 13,000 industry and industryrelated jobs were at risk (California

Independent Petroleum Association).

Heavy crude oil prices have recently

risen to the point that the immediate

crisis in California has passed. Many of

the heavy oil properties remain only

marginally economic, however, and are

vulnerable to future down-turns in oil

prices. As many as two-thirds of the

marginal properties could be lost during

a period of sustained low oil prices

(National Petroleum Council Committee

on Marginal Wells/Executive

Summary—Draft). The danger in losing

these wells is that, although production

from individual wells may be small,

their collective loss would be

significant. The United States would

lose the opportunity to take advantage

of new technologies being developed by

the Department of Energy (DOE) and

industry, and the remaining recoverable

reserves would be lost.

This proposed rule would preserve

the contribution of marginal producers

of heavy crude oil to the national

reserve base. As a result of this relief,

more wells should stay on line (even in

periods of depressed oil prices), fewer

recoverable reserves should be lost, and

there will be less adverse economic

impact on States and local communities.

The DOE has modeled the BLM’s

proposed royalty rate reduction for

heavy crude oil. It is DOE’s conclusion

that the proposal will benefit all

producers of heavy oil while remaining

revenue neutral to all oil producing

States except California (California

contains the majority of the nation’s

heavy oil reserves). Assuming a West

Texas Intermediate Crude oil price of

$20 per barrel—a price consistent with

recent oil markets—the proposal can be

expected to increase recoverable

reserves in California by around 72

percent, from 132.8 million barrels to

228.5 million barrels. The increase in

recoverable reserves will ultimately

result in a 35 percent increase in

Federal revenues (royalties and

individual and corporate taxes) and a 49

percent increase in California State

revenues.

A provision of the proposed rule

provides for the termination of

individual royalty reductions should the

average price of West Texas

Intermediate Crude oil rise to a level

greater than $28 per barrel for a period

of at least 6 consecutive months. This

provision is intended to ensure that

royalty relief is only provided during

periods of low market prices.

The proposed rule establishes a

sliding scale royalty rate for qualifying

heavy-oil-producing properties. The

sliding scale is intended to somewhat

offset the reduced prices paid for oil as

oil gravity decreases. The reduced

royalty rate applies to qualifying heavy

oil properties rather than individual

wells, because production is normally

not measured for individual oil wells,

and is based on the average gravity of

the oil weighted by the production of

heavy oil from each well within the

property. A weighted average gravity is

used to prevent gravity manipulation by

selectively producing wells on a

property with heavier gravity crude.

Using a weighted average of oil gravity

encourages maximum recovery from all

wells within a property by removing the

economic advantage of selective

production.

The rule provides that either the

operator (as defined at 43 CFR 3100.0–

5) or the payor (as defined at 30 CFR

208.2) must calculate the weighted

average gravity of the oil—measured on

the American Petroleum Institute (API)

scale—produced from a property every

12 months to determine the appropriate

royalty rate. The royalty rate for years

subsequent to the initial 12 month

period will be the lesser of the newly

calculated royalty rate or the royalty rate

determined for the initial year. This

provision is necessary to avoid

discouraging additional investment in

enhanced recovery and workovers that

may have the collateral effect of

increasing the gravity of the oil

produced from the property. In no case,

however, would the royalty rate exceed

the rate established by the terms of the

lease.

The section amended by this

proposed rule also provides for royalty

rate reductions for stripper oil wells.

Many provisions of this proposed rule

are essentially the same as the

provisions of the existing regulations

that pertain to stripper wells, except

that references to ‘‘stripper well’’ have

been replaced with ‘‘heavy oil well.’’

The similarity between the existing

provisions pertaining to stripper wells

and the provisions of this proposed rule

could allow for some restructuring of

section 43 CFR 3103.4–1 to reduce the

overall regulatory text and to increase

clarity. The public is invited to

comment on whether reorganizing 43

CFR 3103.4–1 should be considered in

preparing the final heavy oil royalty

reduction rule.

The principal author of this proposed

rule is Dr. John W. Bebout, Senior

Technical Specialist, Division of Fluid

Minerals, assisted by the staff of the

Division of Legislation and Regulatory

Management, Bureau of Land

Management.

It is hereby determined that this rule

does not constitute a major Federal

action significantly affecting the quality

of the human environment and that no

detailed statement pursuant to Section

102 (2)(C) of the National

Environmental Policy Act of 1969 (42

U.S.C. 4332(2)(C)) is required.

This rule has been reviewed under

Executive Order 12866.

The BLM has determined that this

rule will not have a significant

economic effect on a substantial number

of small entities under the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.).

This is because the proposed royalty

rate reduction is voluntary, requires no

additional paperwork, and applies to all

operators regardless of size.

Additionally the BLM has determined,

under Executive Order 12630, that the

rulemaking will not cause a taking of

private property.
16426 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Proposed Rules

The BLM has certified that these

regulations meet the applicable

standards provided in sections 2(a) and

2(b)(2) of Executive Order 12778.

The information collection

requirements of this rule have been

approved by the Office of Management

and Budget under 44 U.S.C. 3501 et seq.

and assigned clearance numbers 1010–

0090 and 1004–0145.

List of Subjects for 43 CFR Part 3100

Land Management Bureau, Public

Lands—mineral resources, Oil and gas

production, Mineral royalties.

For the reasons stated in the

preamble, and under the authorities

cited below, Part 3100, Group 3100,

Subchapter C, Chapter II of Title 43 of

the Code of Federal Regulations is

proposed to be amended as set forth

below:

PART 3100—OIL AND GAS LEASING

1. The authority citation for part 3100

continues to read as follows:

Authority: 30 U.S.C. 181, et seq., 30 U.S.C.

351–359.

Subpart 3103—Fees, Rentals and

Royalty

2. Section 3103.4–1 is amended by

revising paragraph (b)(1), redesignating

paragraph (e) as paragraph (g), and

adding new paragraphs (e) and (f) to

read as follows:

§ 3103.4–1 Waiver, suspension, or

reduction of rental, royalty or minimum

royalty.

* * * * *

(b)(1) An application for the above

benefits on other than stripper oil well

leases or heavy oil properties must be

filed by the operator/payor in the proper

BLM office. It must contain the serial

number of the leases, the names of the

record title holders, operating rights

owners (sublessees), and operators for

each lease, the description of lands by

legal subdivision and a description of

the relief requested.

* * * * *

(e)(1) A heavy oil well property is any

Federal lease or portion thereof

segregated for royalty purposes, a

communitization area, or a unit

participating area, operated by the same

operator, that produces crude oil with a

weighted average gravity of less than 20

degrees as measured on the American

Petroleum Institute (API) scale.

(2) An oil completion is a completion

from which the energy equivalent of the

oil produced exceeds the energy

equivalent of the gas produced

(including the entrained liquefiable

hydrocarbons) or any completion

producing oil and less than 60 MCF of

gas per day.

(f) Heavy oil well property royalty rate

reductions will be administered

according to the following requirements

and procedures.

(1) The Bureau of Land Management

requires no specific application form for

the benefits under paragraph (a) of this

section for heavy oil well properties.

However, the operator/payor must

notify, in writing, the proper BLM office

that it is seeking a heavy oil royalty rate

reduction. The letter must contain the

serial number of the affected leases (or,

as appropriate, the communitization

agreement number or the unit agreement

name); the names of the operators for

each lease; the calculated new royalty

rate as determined under paragraph

(f)(2) of this section; and copies of the

Purchaser’s Statements (sales receipts)

to document the weighted average API

gravity for a property.

(2) The operator must determine the

weighted average API gravity for a

property by averaging (adjusted to rate

of production) the API gravities reported

on the operator’s Purchaser’s Statement

for the last 3 calendar months preceding

the operator’s written notice of intent to

seek a royalty rate reduction, during

each of which at least one sale was held.

This is shown in the following 3

illustrations:

(i) If a property has oil sales every

month prior to requesting the royalty

rate reduction in October of 1994, the

operator must submit Purchaser’s

Statements for July, August, and

September of 1994;

(ii) If a property has sales only every

6 months, during the months of March

and September, prior to requesting the

rate reduction in October of 1994, the

operator must submit Purchaser’s

Statements for the months of September

1993, and March and September 1994;

and

(iii) If a property has multiple sales

each month, the operator must submit

Purchaser’s Statements for every sale for

the 3 entire calendar months

immediately preceding the request for a

rate reduction.

(3) The following equation must be

used by the operator/ payor for

calculating the weighted average API

gravity for a heavy oil well property:

V G V G V G

V V V

n n

n

1 1 2 2

1 2

( ) × + × ( ) + × ( )

+ + = Weighted Average API gravity for a property

Where:

V1=Average Production (bbls) of Well #1

over the last 3 calendar months of

sales

V2=Average Production (bbls) of Well #2

over the last 3 calendar months of

sales

Vn=Average Production (bbls) of each

additional well (V3, V4, etc.) over

the last 3 calendar months of sales

G1=Average Gravity (degrees) of oil

produced from Well #1 over the last

3 calendar months of sales

G2=Average Gravity (degrees) of oil

produced from Well #2 over the last

3 calendar months of sales

Gn=Average Gravity (degrees) of each

additional well (G3, G4, etc.) over

the last 3 calendar months of sales

Example: Lease ‘‘A’’ has 3 wells producing

at the following average rates over 3 sales

months with the following associated average

gravities: Well #1, 4,000 bbls, 13° API; Well

#2, 6000 bbls, 21° API; Well #3, 2,000 bbls,

14° API. Using the equation above—

( , ) ( , ) ( , )

( , , , )

4 000 13 6 000 21 2 000 14

4 000 6 000 2 000

× + × + ×

+ + = 17.2 Weighted Average

API gravity for property

(4) For those properties subject to a

communitization agreement or a unit

participating area, the weighted average

API oil gravity for the lands dedicated

to that specific communitization

agreement or unit participating area

must be determined in the manner

prescribed in paragraph (f)(3) of this

section and assigned to all property
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Proposed Rules 16427

subject to Federal royalties in the

communitization agreement or unit

participating area.

(5) The operator/payor must use the

following procedures in order to obtain

a royalty rate reduction under this

section:

(i) Qualifying royalty rate

determination.

(A) The operator/payor must calculate

the weighted average API gravity for the

property proposed for the royalty rate

reduction in order to verify that the

property qualifies as a heavy oil well

property.

(B) Properties that have removed or

sold oil less than 3 times in their

productive life may still qualify for this

royalty rate reduction. However, no

further reductions will be granted until

the property has a sales history of at

least 3 production months (see

paragraph (f)(5)(iii) of this section).

(ii) Calculating the qualifying royalty

rate. If the Federal leases or portions

thereof (e.g., communitization or unit

agreements) qualify as heavy oil

property, the operator/payor must use

the weighted average API gravity

rounded down to the nearest whole

degree (e.g., 11.7 degrees API becomes

11 degrees), and determine the

appropriate royalty rate from the

following table:

ROYALTY RATE REDUCTION FOR

HEAVY OIL

Weighted average API gravity

(degrees)

Royalty rate

(percent)

6 ................................................ 0.5

7 ................................................ 1.4

8 ................................................ 2.2

9 ................................................ 3.1

10 .............................................. 3.9

11 .............................................. 4.8

12 .............................................. 5.6

13 .............................................. 6.5

14 .............................................. 7.4

15 .............................................. 8.2

16 .............................................. 9.1

17 .............................................. 9.9

18 .............................................. 10.8

19 .............................................. 11.6

20 .............................................. 12.5

(iii) New royalty rate effective date.

The new royalty rate will be effective on

the first day of production 2 months

after BLM receives notification by the

operator/payor. The rate will apply to

all oil production from the property for

the next 12 months. If the API oil

gravity is 20 degrees or greater, the

royalty rate will be the rate in the lease

terms.

(iv) Royalty rate determinations in

subsequent years.

(A) At the end of each 12-month

period, beginning on the first day of the

calendar month the royalty rate

reduction went into effect, the operator/

payor must determine the weighted

average API oil gravity for the property

for that period. The operator/payor must

then determine the royalty rate for the

following year using the table in

paragraph (f)(5)(ii) of this section.

(B) The operator/payor must compare

the newly determined royalty rate to the

initial qualifying royalty rate. The

operator/payor must notify BLM of its

determinations under this paragraph

and paragraph (A) of this § 3103.1–

4(f)(5)(iv). The lower of the two rates

will be used for the new 12-month

period. The new royalty rate will not

become effective until the first day of

the second month after BLM receives

notification, and will remain effective

for 12 calendar months. Notification

must include copies of the Purchaser’s

Statements (sales receipts) and be

mailed to the proper BLM office. If the

operator does not notify the BLM of the

new royalty rate within 60 days after the

end of the subject 12-month period, the

royalty rate for the heavy oil well

property will remain at the previous

royalty rate until the next 12-month

anniversary.

(C) The royalty rate will never exceed

the heavy oil property royalty rate

calculated during the first qualifying

period unless and until BLM terminates

all heavy oil royalty rate reductions

under paragraph (f)(6) (i) or (ii) of this

section.

(v) Prohibition. Any heavy oil

property reporting an API average oil

gravity determined by BLM to have

resulted from any manipulation of

normal production or adulteration of oil

sold from the property will not receive

the benefit of a royalty rate reduction

under this paragraph (f).

(vi) Certification. The operator/payor

must use the applicable royalty rate

when submitting the required royalty

reports/payments to the Minerals

Management Service (MMS). In

submitting royalty reports/payments

using a royalty rate reduction

authorized by this paragraph (f), the

operator/payor must certify that the API

oil gravity for the initial and subsequent

12-month periods was not subject to

manipulation or adulteration and the

royalty rate was determined in

accordance with the requirements and

procedures of this paragraph (f).

(vii) Agency action. If an operator/

payor incorrectly calculates the royalty

rate, the BLM will determine the correct

rate and notify the operator/payor in

writing. Any additional royalties due

are payable immediately upon receipt of

this notice. The BLM will assess late

payment or underpayment charges in

accordance with 30 CFR 218.102. The

BLM will terminate a royalty rate

reduction for a property if BLM

determines that the API oil gravity was

manipulated or adulterated by the

operator/payor. Terminations of royalty

rate reductions for individual properties

will be effective on the effective date of

the royalty rate reduction resulting from

a manipulated or adulterated API oil

gravity so that the termination will be

retroactive to the effective date of the

improper reduction. The operator/payor

must pay the difference in royalty

resulting from the retroactive

application of the non-manipulated rate.

The BLM will assess late payment or

underpayment charges in accordance

with 30 CFR 218.102.

(6) The BLM may suspend or

terminate all royalty reductions granted

under this paragraph (f) upon 6 month’s

notice in the Federal Register when

BLM determines that—

(i) The average oil price remains

above $28 per barrel over a period of 6

consecutive months (based on the West

Texas Intermediate Crude average

posted prices and adjusted for inflation

using the implicit price deflator for

gross national product with 1991 as the

base year), or

(ii) After September 10, 1997, the

royalty rate reductions authorized by

this paragraph (f) have not been not

effective in reducing the loss of

otherwise recoverable reserves resulting

from wells being shut in or abandoned.

(7) The heavy oil well property

royalty rate reduction applies to all

Federal oil produced from a heavy oil

property.

(8) If the lease royalty rate is lower

than the benefits provided in this heavy

oil well property royalty rate reduction

program, the lease rate prevails.

(9) If the property qualifies for a

stripper well property royalty rate

reduction, as well as a heavy oil well

property reduction, the lower of the two

rates applies.

(10) The operator/payor must

separately calculate the royalty for gas

production (including condensate

produced in association with gas) for oil

completions using the lease royalty rate.

(11) The minimum royalty provisions

of § 3103.3–2 will continue to apply.

* * * * *

Dated: October 11, 1994.

Bob Armstrong,

Assistant Secretary of the Interior.

[FR Doc. 95–7794 Filed 3–29–95; 8:45 am]

BILLING CODE 4310–84–P