[Federal Register Volume 60, Number 68 (Monday, April 10, 1995)]
[Proposed Rules]
[Pages 18081-18084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8702]
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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.
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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 well-day.
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 industry-related 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 [[Page 18082]] 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:
Sec. 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 [[Page 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:
[GRAPHIC][TIFF OMITTED]TP10AP95.005
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 deg. API; Well #2, 6000 bbls,
21 deg. API; Well #3, 2,000 bbls, 14 deg. API. Using the equation
above--
[GRAPHIC][TIFF OMITTED]TP10AP95.004
(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 Sec. 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
[[Page 18084]] 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 Sec. 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