[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Notices]
[Pages 6677-6678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3228]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
Modifications to the Bid Adequacy Procedures
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Notification of procedural changes.
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SUMMARY: The Minerals Management Service (MMS) is modifying one element
of its existing bid adequacy procedures for ensuring receipt of fair
market value on Outer Continental Shelf (OCS) oil and gas leases. The
modification establishes a new criterion for acceptance under the
number of bids rule for selected tracts in Phase 1. Specifically, for
viable confirmed and wildcat (C&W) tracts receiving three or more
qualified bids, where the third largest bid is within 50 percent of the
high bid, acceptance under the number of bids rule will apply only to
those viable C&W tracts having high bids that are in the top 75 percent
of high bids on a per acre basis for all three-or-more-bid C&W tracts
within designated water depth categories. Unless stated otherwise,
usually in the final notice of sale, the designated categories in the
Gulf of Mexico are: water depths of less than 800 meters and water
depths of 800 meters or more.
This change has been made following a review of bidding activity in
recent OCS sales. The new criterion for the number of bids rule was
developed in part because in these sales a disproportionately large
number of the three-bid confirmed and wildcat tracts with relatively
low high bids were accepted in Phase 1, while tracts of this type with
much larger high bids tended to be passed to Phase 2 in the evaluation
process. Yet, in sales held without a number of bids rule for Phase 1
acceptance, it was found that of the set of tracts receiving three or
more bids, the ones that tended to get rejected were those receiving
relatively small high bids. Thus, this new criterion will allow the MMS
to better ensure receipt of fair market value through more efficient
targeting of its tract evaluation resources.
Another reason for the change is that the previous three-bid rule
provided an incentive to submit lower bids. By doing so, a bidder could
raise the chance that if it was the high bidder, the third largest bid
would fall within the required 50 percent of its high bid. Under the
proposed change, bidders would be discouraged from adopting this
strategy because attempts to implement it would likely cause the
potential high bid to fall below the new requirement that an acceptable
high bid in Phase 1 must be in the top 75 percent of all high bids in
the tract's class. Indeed, the 75 percent parameter was chosen, in
part, because in recent sales, there were no cases in which a high
bidder could have successfully implemented this strategy with the
proposed change in the rule in place.
DATES: This modification is effective February 4, 1999.
FOR FURTHER INFORMATION CONTACT: Dr. Marshall Rose, Chief, Economics
Division, at (703) 787-1536.
SUPPLEMENTARY INFORMATION: The following set of bid adequacy procedures
incorporates the most recent changes. During the bid review process,
MMS conducts evaluations in a two-phased process for bid adequacy
determination. We also review the bid for legal sufficiency \1\ and
anomalies \2\ to establish the set of qualified bids \3\ to be
evaluated.
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\1\ Legal bids are those bids which comply with MMS regulations
(30 CFR 256) and the Notice of Sale. Any illegal high bid will be
returned to the bidder.
\2\ Anomalous bids include all but the highest bid submitted for
a tract by the same company, parent or subsidiary (bidding alone or
jointly). Such bids are excluded when applying the number of bids
rule or any bid adequacy measure.
\3\ Qualified bids are those bids which are legal and not
anomalous.
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Phase 1
The tracts receiving bids are partitioned into four general
categories:
--Those tracts where competitive market forces can be relied upon to
assure fair market value;
--Those tracts which the MMS identifies as being nonviable \4\ based on
adequate data and maps;
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\4\ Nonviable tracts or prospects are those geographic or
geologic configurations of hydrocarbons whose risk weighted most
probable resource size is below the minimum economic field size for
the relevant cost regime and anticipated future prices. The risk
used is below the lowest level anticipated for any tract or prospect
in the same cost regime.
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--Those tracts where the Government has the most detailed and reliable
data;
--Those tracts where opportunities are greatest for strategic
underbidding, information asymmetry, collusion, and other
noncompetitive practices.
Based on these categories, six Phase 1 rules are applied to all
tracts receiving bids:
--Accept the highest qualified bid on viable confirmed and wildcat
tracts receiving three or more qualified bids where the third largest
such bid on the tract is at least 50 percent of the highest qualified
bid and where the high bid per acre ranks in the top 75 percent of high
bids for all three-or-more-bid confirmed and wildcat tracts that reside
within a specified water depth category.\5\
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\5\ The water depth categories usually will be specified in the
final notice of sale.
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--Accept the highest qualified bid on confirmed and wildcat tracts
determined to be nonviable.
--Pass to Phase 2 all tracts that require additional information to
make a determination on viability or tract type.
--Pass to Phase 2 all viable confirmed and wildcat tracts receiving one
or two qualified bids.
--Pass to Phase 2 all viable confirmed and wildcat tracts receiving
three or more qualified bids where either the third largest such bid is
less than 50 percent of the highest qualified bid or where the high bid
per acre ranks in the lowest 25 percent of high bids for all three-or-
more-bid confirmed and wildcat tracts in the specified water depth
category.
--Pass to Phase 2 all drainage and development tracts.
The percentile ranking of a tract's high bid is calculated by
multiplying 100 times the ratio of the numerical ordering of the three-
or-more-bid confirmed and wildcat tract's high bid to the total number
of all viable and nonviable three-or-more-bid confirmed and wildcat
tracts in the designated water depth. For example, suppose there are 21
total confirmed and wildcat tracts identified in Phase 1 as receiving
three-or-more-bids in the designated water depth category of at least
800 meters. All viable tracts in this set having a high bid among the
top 15 high bids would satisfy the 75% requirement; the 15th ranked
high bid would represent the 71st percentile.
In ensuring the integrity of the bidding process, the Regional
Director (RD) may identify an unusual bidding pattern \6\ at any time
during the bid
[[Page 6678]]
review process, but before a tract is accepted. If the finding is
documented, the RD has discretionary authority, after consultation with
the Solicitor, to pass those tracts so identified to Phase 2 for
further analysis. The RD may eliminate all but the largest of the
unusual bids from consideration when applying any bid adequacy rule,
may choose not to apply a bid adequacy rule, or may reject the tract's
highest qualified bid.
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\6\ Within the context of our bid adequacy procedures, the term
``unusual bidding patterns'' typically refers to a situation in
which there is an excessive amount of coincident bidding by
different companies on a set of tracts in a sale. Other forms of
unusual bidding patterns exist as well, and generally involve anti-
competitive practices, e.g., when there is an uncommon absence of
competition among companies active in a sale on a set of prospective
tracts.
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All of these procedures are generally completed within 3 weeks of
the bid opening, and the results are announced simultaneously at the
end of this period.
Phase 2
The Phase 2 bid adequacy determinations are normally completed
sequentially over a period ranging between 21 and 90 days after the
sale. The total evaluation period can be extended, if needed, at the
RD's discretion (61 FR 34730, July 3, 1996).
Activities designed to resolve bid adequacy assessments are
undertaken by analyzing, partitioning, and evaluating tracts in two
steps:
--Further mapping and/or analysis is done to review, modify, and
finalize viability determinations and tract classifications.
--Tracts identified as being viable must undergo an evaluation to
determine if fair market value has been received.
After completing these two steps, a series of rules and procedures
are followed.
--Accept newly classified confirmed and wildcat tracts having three or
more qualified bids if the third largest such bid is at least 50
percent of the highest qualified bid.
--Accept the highest qualified bid on all tracts determined to be
nonviable.
--Determine whether any categorical fair market evaluation technique(s)
will be used. If so:
--Evaluate, define, and identify the appropriate threshold measure(s).
--Accept all tracts whose individual measures of bid adequacy satisfy
the threshold categorical requirements.
--Conduct a full-scale evaluation, which could include the use of
MONTCAR,\7\ on all remaining tracts \8\ passed to Phase 2 and still
awaiting an acceptance or rejection decision.
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\7\ MONTCAR is a probabilistic, cash flow computer simulation
model designed to conduct a resource-economic evaluation that
results in an estimate of the expected net present value of a tract
(or prospect) along with other measures.
\8\ These include tracts not accepted by a categorical rule that
are classified as drainage and development tracts and those
classified as confirmed and wildcat tracts that are viable and
received (a) one or two qualified bids, or (b) three or more
qualified bids where either the third largest such bid is less than
50 percent of the highest qualified bid or the high bid is in the
bottom quartile of all three-or-more-bid confirmed and wildcat
tracts for a designated water depth category.
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-Compare the highest qualified bid on each of these remaining
tracts to two measures of bid adequacy: the Mean Range of Values (MROV)
\9\ and the Adjusted Delayed Value (ADV) \10\.
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\9\ The MROV is a dollar measure of a tract's expected net
present private value, given that the tract is leased in the current
sale, allowing for exploration and economic risk, and including tax
consequences including depletion of the cash bonus.
\10\ The ADV is the minimum of the MROV and the Delayed MROV
(DMROV). The DMROV is a measure used to determine the size of the
high bid needed in the current sale to equalize it with the
discounted sum of the bonus and royalties expected in the next sale,
less the foregone royalties from the current 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
leasing receipts conditions, including drainage. If the high bid
exceeds the DMROV, then the leasing receipts from the current sale
are expected to be greater than those from the next sale, even in
cases where the MROV exceeds the high bid.
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-Accept the highest qualified bid for those tracts where such a bid
equals or exceeds the tract's ADV.
-Reject the highest qualified bid on drainage and development
tracts receiving three or more qualified bids where such a bid is less
than one-sixth of the tract's MROV.
-Reject the highest qualified bid on drainage and development
tracts receiving one or two qualified bids and on confirmed and wildcat
tracts receiving only one qualified bid where the high bid is less than
the tract's ADV.
At this stage of the process, the outstanding tracts consist of
those having a highest qualified bid that is less than the MROV of the
ADV, and are either (a) drainage or development tracts receiving three
or more qualified bids with the highest such bid exceeding one-sixth of
the tract's MROV, or (b) viable confirmed and wildcat tracts that
receive two or more qualified bids.
From these outstanding tracts, MMS selects the following ones:
-Drainage and development tracts having three or more qualified
bids with the third largest such bid being at least 25 percent of the
highest qualified bid;
-Confirmed and wildcat tracts having two or more qualified bids
with the second largest such bid being at least 25 percent of the
highest qualified bid.
The MMS then compares the highest qualified bid on each of these
selected, outstanding tracts to the tract's Revised Arithmetic Average
Measure (RAM).\11\ For all these tracts:
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\11\ The 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.
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-Accept the highest qualified bid where such a bid equals or
exceeds the tract's RAM.
-Reject the highest qualified bid where such a bid is less than the
tract's RAM.
Finally, the MMS identifies those tracts that were in the
``outstanding'' set above but not selected for comparison to the RAM.
-Reject the high bid on all of these leftover tracts.
Dated: February 4, 1999.
Thomas A. Readinger,
Acting Associate Director for Offshore Minerals Management.
[FR Doc. 99-3228 Filed 2-9-99; 8:45 am]
BILLING CODE 4310-MR-M