MMS EYES LEASE SALE CHANGES

Patrick Crow Energy Policies Editor The Minerals Management Service plans to explore ways in which to change offshore lease sales on the U.S. Outer Continental Shelf. MMS Director Tom Fry told Oil & Gas Journal a reevaluation is warranted because the climate for offshore sales has changed since current leasing policies were set and because the Clinton administration is concerned about getting fair value for mineral resources. Fry said MMS will open a dialogue with industry, issuing a request

Dec. 13, 1993

7 min read

Patrick Crow
Energy Policies Editor

The Minerals Management Service plans to explore ways in which to change offshore lease sales on the U.S. Outer Continental Shelf.

MMS Director Tom Fry told Oil & Gas Journal a reevaluation is warranted because the climate for offshore sales has changed since current leasing policies were set and because the Clinton administration is concerned about getting fair value for mineral resources. Fry said MMS will open a dialogue with industry, issuing a request for public comments.

In a Houston speech he hinted at such a review and said, "Some people thought that meant we would be interested in going back to the old lease nominating process. That is not what we are interested in doing."

He said, "Quite a bit has changed since current policies went into place, We don't have near as many tracts being leased or bids per tract as we used to have.

"Meanwhile, MMS is starting to develop the capability of being able to review bids in a more sophisticated way, through 3D seismic."

He pointed out that operators have 2 years to prepare bids for a sale, but regulations give MMS only 90 days to review bids if there are not three bids for the same tract.

POSSIBLE CHANGES

Fry said in order to ensure the federal government is getting fair market value for tracts, it might make sense to have smaller sales more frequently, dividing the Gulf of Mexico into five or six areas, including a deepwater region.

"That would allow us to evaluate tracts year round, rather than twice a year in a very short time frame.

"One of the things people have talked about is for MMS to ask companies to tell us in advance what they are going to bid on. If we know 60 days beforehand what they're going to bid on and nobody else has the right to bid on that tract once that advance notice is given, maybe that would give us time to make some decisions on whether we're getting fair value.

"There are all sorts of questions we would like to have a dialogue on. We want to make sure whatever policy we have is fair to the taxpayer and the industry. Our interest is in no way to do anything to harm any person, to let competition continue to lead the way people do their bidding.

"And, opposed to asking people to tell us what's right with the old system or what's wrong with it-people can do that if they want to-what we really want is for them to tell us how they do their work. We'll talk about how we do our work and then decide on a program or system that will work best for all of us.

"It's a friendly debate. It's going to be wide open. We can talk about anything. And we're not trying to get anywhere in particular, other than to get people to talk to us."

He stressed industry should not "get in a panic about this. We don't plan to go to a system that's not fair. We want a dialogue and to resolve it as quickly as possible. But there may not be anything to resolve."

GAS VALUATION

MMS is proceeding with a review of the way it values natural gas production for royalty purposes. It has set up an advisory team, which has met with representatives of oil and gas accounting firms.

"We don't know enough about how gas markets are operating today," Fry said. "We're putting together a group of very noted industry people to talk with us about how markets are operating and how we might come up with a system that makes more sense for those who have to make and for those who receive payments.

"I think everybody agrees the gas valuation system we have is too complicated, and it's going to be stretched even further as the Federal Energy Regulatory Commission's Order 636 takes effect.

"The system is based on sales at the wellhead, but we don't have many sales at the wellhead any more. It runs the risk of getting worse rather than better."

He said the gas valuation group is trying to make sure everyone understands how the system works. It then will make recommendations for changes next spring. If warranted, MMS might propose a change in the royalty valuation rules next year.

SPILL LIABILITY

Another major issue is how much insurance offshore operators should carry in the case of major oil spills.

The 1990 Oil Pollution Act (OPA) requires operators to carry $150 million of insurance, a level industry says is not feasible (OGJ, Nov. 15, p. 26).

Fry stressed MMS has not yet reached that conclusion. It has asked the public to comment on a proposed rule. And in an action that is "somewhat unusual," it will share those comments directly with congressional staff members.

"We are trying to find out what everybody thinks and what ways we might deal with any problem," Fry said. "Then we'll see what Congress and the administration want to do about it.

"The administration feels very strongly about the underlying tenets of the OPA and wants to make sure there is adequate financial responsibility to cover an oil spill, but some sort of adjustments may be appropriate."

Whatever happens, Fry said, it is unlikely MMS will propose a final rule until 1995.

LEASING ISSUES

Fry said the Clinton administration has no plans to alter the Bush administration's 5 year leasing schedule.

"Interior Sec. Bruce Babbitt right now is taking a look at the 5 year plan," he said. "But what he's already said is that we will look at each one of the sale areas as they come up, case by case. When it comes up on the radar, we will see what kind of science we've done, then decide what we should do.

"We had a (leasing) program that got out in front of the will of the American people. And to the extent we're going to have a program, we're going to have to deal with states and local communities about that program."

MMS will consult with state and local governments, "as opposed to the federal government coming in and saying, 'We're going to have a leasing program, we're sorry.'

"We have to work much more closely with all the affected interest holders to make sure we have a program in some areas, and it is proper ecologically and economically, and has as little negative impact as possible on any community. As a part of that, we're going to have to recognize that a certain portion of this country's energy needs comes from the federal offshore, so we have to have a viable program that continues to search for natural gas to replenish the reserves of this country."

MMS continues to work with the Senate energy committee, headed by Sen. Bennett Johnston (D-La.), to develop a bill to relax royalties on deepwater production.

Fry said, "We would encourage legislation that would allow the department, case by case, to grant some royalty relief to encourage activity that otherwise would not take place...We want to make sure we don't create a scheme that benefits people who would develop leases anyway."