Federal Register / Vol. 60, No. 68 / Monday, April 10, 1995 / Proposed Rules 18081

feasible for a given substance, that

substance shall be administered either

by oral gavage, in the diet, or in

capsules.

* * * * *

(2) * * *

(i) * * *

(A) An oral 90–day subchronic

toxicity test shall be conducted with

chloroethane and 1,3,5-

trimethylbenzene in accordance with

§798.2650 of this chapter except for the

provisions in §798.2650(e)(3), (7)(i), and

(11)(v). The tests shall be performed

using drinking water. However, if, due

to poor stability or palatability, a

drinking water test is not feasible for a

given substance, that substance shall be

administered either by oral gavage, in

the diet, or in capsules.

* * * * *

(d) * * * (1) This section is

effective on December 27, 1993, except

for paragraphs (a)(1), (c)(1)(i)(A), and

(c)(2)(i)(A). Paragraphs (a)(1),

(c)(1)(i)(A), and (c)(2)(i)(A) are effective

(insert date 44 days after publication of

the final rule in the Federal Register).

* * * * *

[FR Doc. 95–8734 Filed 4–7–95; 8:45 am]

BILLING CODE 6560–50–F

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 June 9, 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.

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.

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 $24 per barrel for a period

of at least 6 consecutive months. This

provision is intended to ensure that
18082 Federal Register / Vol. 60, No. 68 / Monday, April 10, 1995 / Proposed Rules

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. 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, Fluids Group,

assisted by the Regulatory Management

Team, 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.

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.

On March 30, 1995, an outdated

version of this proposed rule was

published in the Federal Register (60

FR 16424) by mistake. That proposed

rule publication is hereby withdrawn,

and this version is published in its

place.

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 benefits

under paragraph (a) of this section 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
Federal Register / Vol. 60, No. 68 / Monday, April 10, 1995 / Proposed Rules 18083

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

Weighted Average API gravity for a property n n

n

1 1 2 2

1 2

( ) × + × ( ) + × ( )

+ + =

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

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 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 return to the rate in the

lease terms.

(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
18084 Federal Register / Vol. 60, No. 68 / Monday, April 10, 1995 / Proposed Rules

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 $24 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

effective in reducing the loss of

otherwise recoverable reserves. This

will be determined by evaluating the

expected versus the actual abandonment

rate, the number of enhanced recovery

projects, and the amount of operator

reinvestment that can be attributed to

this rule.

(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: April 4, 1995.

Bob Armstrong,

Assistant Secretary of the Interior.

[FR Doc. 95–8702 Filed 4–7–95; 8:45 am]

BILLING CODE 4310–84–P