[Federal Register: May 18, 2007 (Volume 72, Number 96)] [Proposed Rules] [Page 28395-28423] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr18my07-23] [[Page 28395]] ----------------------------------------------------------------------- Part III Department of the Interior ----------------------------------------------------------------------- Minerals Management Service ----------------------------------------------------------------------- 30 CFR Parts 203 and 260 Oil and Gas and Sulphur Operations in the Outer Continental Shelf (OCS)--Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on OCS Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS Leases Offshore of Alaska; Proposed Rule [[Page 28396]] ----------------------------------------------------------------------- DEPARTMENT OF THE INTERIOR Minerals Management Service 30 CFR Parts 203 and 260 RIN 1010-AD33 Oil and Gas and Sulphur Operations in the Outer Continental Shelf (OCS)--Royalty Relief--Ultra-Deep Gas Wells and Deep Gas Wells on OCS Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS Leases Offshore of Alaska AGENCY: Minerals Management Service (MMS), Interior ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: MMS is proposing to amend its deep gas royalty relief regulations to incorporate statutory changes enacted in the Energy Policy Act of 2005. This proposed rule would provide additional royalty relief for certain wells on the Outer Continental Shelf (OCS) leases in the Gulf of Mexico (GOM). It would also extend the applicability of existing deep gas royalty relief regulatory provisions to more OCS leases. MMS is also proposing amendments to discretionary royalty relief provisions and associated definitions to extend the applicability of certain royalty relief to leases offshore of Alaska. DATES: Submit comments by July 17, 2007. MMS may not consider comments received after this date. Submit comments to the Office of Management and Budget on the information collection burden in this rule by June 18, 2007. FOR FURTHER INFORMATION CONTACT: Marshall Rose, Chief, Economics Division, at (703) 787-1536 or marshall.rose@mms.gov. ADDRESSES: You may submit comments on the proposed rulemaking by any of the following methods. Please use the Regulation Identifier Number (RIN) 1010-AD33 as an identifier in your message. See also Public Availability of Comments under Procedural Matters. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions on the Web site for submitting comments. E-mail MMS at rules.comments@mms.gov. Use the RIN 1010- AD33 in the subject line. Fax: 703-787-1546. Identify with the RIN, 1010-AD33. Mail or hand-carry comments to the Department of the Interior; Minerals Management Service; Attention: Regulations and Standards Branch (RSB); 381 Elden Street, MS-4024; Herndon, Virginia 20170-4817. Please reference ``Royalty Relief--Ultra-Deep Gas Wells on OCS Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS Leases Offshore of Alaska, 1010-AD33'' in your comments and include your name and return address. Send comments on the information collection in this rule to: Interior Desk Officer 1010-AD33, Office of Management and Budget; 202-395-6566 (fax); e-mail: oira_docket@omb.eop.gov. Please also send a copy to MMS. SUPPLEMENTARY INFORMATION: A. Background and Summary of the Proposed Rule Section 344 of the Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594, 702 (codified at 42 U.S.C. 15904) (referred to hereinafter as ``section 344''), enacted on August 8, 2005, provides incentives to producers in the form of royalty relief for production of certain deep gas from offshore federal oil and gas leases in the shallow waters of the GOM wholly west of 87 degrees, 30 minutes West longitude. This statutorily-mandated relief supplements royalty relief MMS previously provided by regulation. On January 26, 2004 (69 FR 3510), MMS adopted regulations at 30 CFR Sec. Sec. 203.40-203.48 to provide royalty relief incentives for deep gas production from GOM leases in less than 200 meters of water that lie wholly west of 87 degrees, 30 minutes West longitude (the rule was effective for wells spudded on or after the date of the proposed rule, March 26, 2003). These rules, subject to certain limitations, provide a royalty suspension volume (RSV) for two basic categories of deep gas production: 15 billion cubic feet (BCF) of RSV is provided for qualifying wells with a perforated interval the top of which is between 15,000 and 18,000 feet true vertical depth subsea (TVD SS); and 25 BCF of RSV is provided for qualifying wells completed at least 18,000 feet TVD SS. The rules also provide lesser amounts of royalty relief for deep sidetracks and for drilling certain unsuccessful deep wells. Section 344 requires MMS to adopt regulations providing for additional categories of deep gas royalty relief for GOM leases wholly west of 87 degrees, 30 minutes West longitude. First, section 344(a) provides that for certain ultra-deep wells in less than 400 meters of water (defined in section 344(a)(3)(A) as wells with a perforated interval the top of which is at least 20,000 feet TVD SS), the agency shall issue regulations granting an RSV of not less than 35 BCF. This requires adding a new well depth category and new RSV amount to the existing deep gas royalty relief rule. Second, section 344(b) requires MMS to promulgate regulations granting royalty relief suspension volumes for gas produced from deep wells on leases in waters more than 200 meters but less than 400 meters deep. In calculating the suspension volumes, section 344(b) requires MMS to use the same methodology used to calculate suspension volumes for deep wells in shallower waters. This requires adding a new water depth category to the existing deep gas royalty relief rule. These proposed regulations implement these two statutory directives. In addition, section 346 of the Energy Policy Act, 119 Stat. 704, amended section 8(a)(3)(B) of the OCS Lands Act (OCSLA), 43 U.S.C. 1337(a)(3)(B), to extend the Secretary's discretionary authority to grant royalty relief to leases offshore of Alaska. This proposed rule also implements this provision. However, neither the existing deep gas royalty relief rule nor the additional deep gas royalty relief granted in section 344 applies to leases offshore of Alaska. Both subsections (a) and (b) of section 344 provide that any final rule that the Secretary adopts will be retroactive to the date of this proposed rule. Therefore, production from any wells that earn royalty relief under section 344 drilled on or after the publication date of the proposed rule would qualify for the relief provided for in the final rule, if the well meets the requirements of the final rule. Of course, MMS may modify the rule between this proposed rule and the final rule, so lessees should not assume that the proposed rules would apply. With respect to ultra-deep wells on leases located wholly west of 87 degrees, 30 minutes West longitude in the GOM in shallow waters less than 400 meters deep, section 344(a)(1) provides: [T]he Secretary shall issue regulations granting royalty relief suspension volumes of not less than 35 BCF with respect to the production of natural gas from ultra deep wells on leases issued in shallow waters less than 400 meters deep located in the Gulf of Mexico wholly west of 87 degrees, 30 minutes west longitude. While this statutory language does not specify how the rulemaking should allocate or grant the 35 or greater BCF ``with respect to the production of natural gas from ultra deep wells on leases,'' Congress certainly intended an incentive to drill and produce ultra-deep wells beyond what MMS rules currently provide. Section 344(a)(2) further grants the Secretary considerable discretion when an ultra-deep well is not an original well or if there has been [[Page 28397]] previous deep gas production on the lease. Section 344(a)(2) provides: (2) Suspension Volumes.--The Secretary may grant suspension volumes of not less than 35 billion cubic feet in any case in which-- (A) The ultra deep well is a sidetrack; or (B) The lease has previously produced from wells with a perforated interval the top of which is at least 15,000 feet true vertical depth below the datum at mean sea level. (Emphasis added.) Therefore, section 344 requires that an ultra-deep well drilled on a lease receive an RSV of at least 35 BCF except for (1) an ultra-deep well that is a sidetrack, or (2) an ultra-deep well on a lease that has previously produced from a well with a perforated interval the top of which is at least 15,000 feet TVD SS. The combined effect of these provisions is that only the first ultra-deep original well on a lease with no prior production from a deep well is entitled to the 35 BCF RSV. Thus, while Congress directed generally that the first ultra-deep well on a lease drilled after the date of the proposed rule receive 35 BCF or more of RSV, Congress' use of the term ``may'' in section 344(a)(2) gives the Secretary discretion to decide whether any sidetracks completed to depths below 20,000 feet TVD SS or the first ultra-deep well completed after production from any deep well (including a second ultra-deep well on a lease) should be granted an additional 35 BCF or more of royalty relief. One objective of this proposed rulemaking is to determine whether MMS should grant RSVs of not less than 35 BCF for ultra-deep sidetracks and subsequent ultra- deep wells. Because of the statutory language, MMS cannot use section 344's authority to grant an RSV of between 0 and 35 BCF. Since the royalty relief is available only upon the ``production of natural gas from ultra-deep wells on leases,'' Congress intended to supplement the existing rules that were promulgated with the objective of reducing the cost of producing domestic natural gas from deep formations in the shallow waters of the GOM. MMS intends to adopt an approach that is consistent with the statute. In general, with only limited exceptions, MMS is proposing to give no more relief than section 344 compels. Therefore, MMS seeks comments on its proposal to grant royalty relief only for the first ultra-deep well. Subject to the receipt and analysis of requested comments regarding those discretionary provisions, for any lease that has never produced from any deep well, MMS is proposing to grant 35 BCF of RSV for the first producing ultra-deep original well or sidetrack with a sidetrack measured depth (i.e., length) of at least 20,000 feet drilled after the date of this proposed rule. (One exception is discussed below.) MMS is not proposing to grant an RSV for subsequent ultra-deep wells or shorter sidetracks on a lease. Because section 344 is not retroactive, it does not provide for additional royalty relief for ultra-deep wells drilled before the publication date of this proposed rule. However, an ultra-deep well drilled before the publication date of this proposed rule would, if it met the other requirements of the existing rule, earn the same royalty relief as a deep well with a perforated interval the top of which is 18,000 feet TVD SS or deeper. Thus, MMS is proposing to treat ultra- deep wells drilled before the publication date of this proposed rule in the same manner as any other deep well in the 18,000-feet-or-deeper depth range. MMS is not proposing to grant an RSV of 35 BCF under section 344 for an ultra-deep well that is a sidetrack that has a measured depth of less than 20,000 feet. Treatment of such a well for purposes of royalty relief under this proposed rule, as explained further below, depends on when the well begins producing. For purposes of clarity, MMS proposes to revise the definitions in the existing rule to segregate a ``deep well'' (a well with a perforated interval the top of which is at least 15,000 feet and less than 20,000 feet TVD SS) from an ``ultra-deep well'' (a well with a perforated interval the top of which is at or below 20,000 feet TVD SS) for all purposes. This is also consistent with section 344(a)(3)(A)'s definition of ``ultra-deep well.'' Trying to use the term ``deep well'' to include an ultra-deep well in some contexts but not in others carries a high potential for confusion. The changes in definitions necessitate revisions to several provisions of the existing rule to accommodate the change in terminology. These changes do not change the substance of the existing rule with regard to deep wells or ultra-deep wells drilled before the publication date of this proposed rule. Section 344(a) provides no time limit on the relief it grants for ultra-deep wells (a ``sunset'' provision). MMS therefore is not proposing one in this rulemaking. The sunset provision in the existing deep gas rule is contained in the definition of ``qualifying well'' in the current Sec. 203.0, which limits qualifying deep wells to those that produce gas before May 3, 2009. That date is 5 years after the effective date of the final rule currently in force and 6 years (plus a few weeks) after the publication date of the original proposed deep gas rule (March 26, 2003). Because section 344(b) requires that MMS use the same methodology in calculating RSVs for deep wells in 200-400 meters of water that is used to calculate RSVs for deep wells in shallower water, MMS is proposing a sunset provision for deep wells in 200-400 meters of water of May 3, 2013, which is exactly 4 years after the sunset date for relief for gas produced from deep wells in 200 meters of water or less, and about 6 years from the publication date of this proposed rule. Section 344(c) provides that ``[t]he Secretary may place limitations on the royalty relief granted under this section based on market price.'' Therefore, as explained more fully below, MMS is proposing price thresholds that, if exceeded, would require the lessee to pay royalty on production that otherwise would be royalty-free. The concept underlying the price threshold terms proposed here is that to the extent ultra-deep gas and deep gas royalty relief granted under the proposed provisions would have been granted under the existing rule for existing leases, the existing rule's price threshold ($9.88 per MMBtu, adjusted annually for inflation after 2006) would apply. For all deep gas and ultra-deep gas royalty relief that results from section 344's new provisions, and for deep gas royalty relief for leases issued after the effective date of the final rule that are located partly or entirely in less than 200 meters of water, a different price threshold of $4.47 per MMBtu, adjusted annually for inflation after 2006, would apply. MMS is requesting comment, data, information, and other input on this proposed threshold or why a threshold other than $4.47 per MMBtu might be more appropriate for section 344 royalty relief. Section 344(c) also provides that ``The royalty relief granted under this section shall not apply to a lease for which deep water royalty relief is available.'' The proposed rule reflects this limitation. The existing regulations at Sec. 203.44 provide royalty relief in the form of a royalty suspension supplement (RSS) of up to 5 BCF for certain unsuccessful wells drilled to a depth below 18,000 feet TVD SS. MMS is not proposing any additional relief for unsuccessful wells simply because an unsuccessful well or sidetrack was drilled to a depth below 20,000 feet TVD SS. Unsuccessful wells drilled to a depth below 20,000 feet TVD SS would continue to be treated the same as unsuccessful wells drilled [[Page 28398]] to a depth between 18,000-20,000 feet TVD SS. The fact that section 344 is not retroactive also means that the extension of deep gas royalty relief to leases in the 200-400 meter water depth range does not apply to deep or ultra-deep wells drilled on such leases before the publication date of this proposed rule. B. Section-by-Section Analysis The discussion in part A of this preamble summarized the principal concepts of this proposed rule. This section-by-section analysis will describe the more significant proposed changes in additional detail. What definitions apply to this part? (Sec. 203.0) MMS proposes changes to some definitions in the existing rule and some new definitions to implement section 344's requirements. MMS proposes to revise the definition of ``deep well'' to mean a well with a perforated interval the top of which is at least 15,000 feet and less than 20,000 feet TVD SS, and to add a definition of ``ultra-deep well'' to mean a well with a perforated interval the top of which is 20,000 feet TVD SS or deeper. Under the existing rule, the term ``deep well'' includes all wells deeper than 15,000 feet TVD SS. Because section 344 adds a new water depth category (leases located in more than 200 meters and less than 400 meters of water) to deep gas royalty relief, the coverage of these definitions extends beyond the existing rule, which applies only to leases in 200 meters of water or less. Further, the existing rule does not cover all leases located in water entirely or partly less than 200 meters deep. At the end of October 2006, about 70 leases in that water depth range are subject to deep gas RSV's, conditions, and requirements specified in the lease instruments because their lessees did not opt to convert to the deep gas royalty relief terms in the existing regulations. To accommodate section 344 requirements for these leases, MMS proposes to add a definition of ``non-converted lease'' in Sec. 203.0. This category of leases must be separated from leases in the 0-200 meter water depth category that are covered by the existing rule because their deep gas wells have different timing and reservoir conditions for qualification, earn different RSV's, and are subject to different price thresholds. In addition to distinguishing between deep wells and ultra-deep wells, MMS further proposes to add definitions for the terms ``phase 1 ultra-deep well,'' ``phase 2 ultra-deep well,'' and ``phase 3 ultra- deep well.'' The proposed royalty relief treatment of ultra-deep wells depends first on whether an ultra-deep well was drilled before or after the date of publication of this proposed rule. Wells drilled before the date of publication of the proposed rule are phase 1 ultra-deep wells. A phase 1 ultra-deep well would be an ultra-deep well on a lease that is located in water entirely or partly less than 200 meters deep for which drilling began before the date of publication of this proposed rule. In other words, these are wells that would continue to be treated the same as they are under the provisions of the existing rule for deep wells of more than 18,000 feet TVD SS. Phase 1 ultra-deep wells would not be eligible for the higher RSVs prescribed in section 344. A phase 2 ultra-deep well would be an ultra-deep well for which drilling began on or after the publication date of this proposed rule and that falls into one of the three following categories: (1) The ultra-deep well begins gas production before May 3, 2009, on a lease that is located in water partly or entirely less than 200 meters deep that is not a non-converted lease; (2) the ultra-deep well begins gas production within the primary term of a non-converted lease; or (3) the ultra-deep well begins production before May 3, 2013, on a lease that is located in water entirely more than 200 meters and entirely less than 400 meters deep. A phase 3 ultra-deep well would be an ultra-deep well for which drilling began on or after the publication date of this proposed rule and that begins gas production on or after the dates prescribed for production from a phase 2 ultra-deep well. Only phase 2 ultra-deep wells and phase 3 ultra-deep wells would be eligible to earn the higher 35 BCF RSV prescribed in section 344. Because MMS also proposes to differentiate the treatment of ultra- deep wells that are sidetracks with a sidetrack measured depth of 20,000 feet or more from sidetracks with a sidetrack measured depth of less than 20,000 feet, MMS also proposes to add a definition of ``ultra-deep short sidetrack'' to mean ultra-deep wells that are sidetracks with a sidetrack measured depth of less than 20,000 feet. The reasons for distinguishing between phase 2 and phase 3 ultra- deep wells relate to both the proposed royalty relief treatment of ultra-deep short sidetracks and the proposed price threshold provisions. Both of these matters are addressed in detail below. Under the existing rule, the term ``qualified well'' means a deep well for which drilling begins on or after March 26, 2003, the date the original deep gas proposed rule was published, and which meets other applicable requirements. Qualified wells are wells to whose gas production an RSV may be applied. The fact that a well is a qualified well does not mean that it earns an RSV. A well must be a qualified well to earn an RSV, but it also must meet other requirements. Wells that earn an RSV are a subset of qualified wells. But RSVs also are applied to gas production from qualified wells that do not themselves earn an RSV. MMS proposes to amend the definition of ``qualified well'' and add definitions for ``qualified deep well'' and ``qualified ultra- deep well,'' to address all four categories of deep gas royalty relief that exist after enactment of section 344--namely, deep gas wells on leases located in less than 200 meters of water that are covered by the existing rule, deep gas wells on non-converted leases (all of which are in less than 200 meters of water), deep gas wells on leases located in 200-400 meters of water, and ultra-deep gas wells on leases in all water depths less than 400 meters. MMS also proposes to revise the definition of ``certified unsuccessful well'' in Sec. 203.0, used in the royalty suspension supplement provisions in re-designated Sec. Sec. 203.45 and 203.46 (Sec. Sec. 203.44 and 203.45 in the existing rule), to add the new 200-400 meter water depth category. In the definition of ``expansion project,'' MMS proposes to specify that reservoirs to whose production an RSV would be applied under Sec. Sec. 203.30 through 203.36 and 203.40 through 203.48 cannot be included as part of an expansion project. MMS also proposes amendments to certain of the part 203 provisions to include leases offshore of Alaska under section 346 of the Energy Policy Act. These amendments would involve modifying the definitions of ``development project'' and ``expansion project'' and the royalty relief provisions for development projects and expansion projects in Sec. 203.2. In addition, references to a lease location or water depth in Sec. Sec. 203.60, 203.69, and 203.78, mention of a specific MMS Regional office in Sec. Sec. 203.62, 203.70, 203.77, 203.81, and 203.90, and the associated price threshold provisions in Sec. 203.78 would be revised to accommodate leases offshore of Alaska. [[Page 28399]] Royalty Relief for Drilling Ultra-Deep Gas Wells on Leases Not Subject to Deep Water Royalty Relief (Sec. Sec. 203.30 through 203.36) For the most part, the new proposed ultra-deep gas provisions in Sec. Sec. 203.30 through 203.36 follow the structure of the existing deep gas rule at Sec. Sec. 203.40 through 203.48, and many of the provisions are similar. MMS is also proposing changes in Sec. Sec. 203.40 through 203.48 to accommodate the new ultra-deep gas provisions in Sec. Sec. 203.30 through 203.36. Which leases are eligible for royalty relief as a result of drilling an ultra-deep well? (Sec. 203.30) Proposed Sec. 203.30 prescribes the basic criteria for a lease to be eligible for deep gas royalty relief. Paragraph (a) of this proposed section follows the statutory requirement in section 344(a) and (b) that the lease must be located in the GOM wholly west of 87 degrees, 30 minutes West longitude. Paragraph (c) of this proposed section implements the requirement of section 344(c) that deep gas royalty relief shall not apply to a lease for which deep water royalty relief is available. (In this context, ``available'' means either provided for in the lease terms or granted in response to an application.) This issue arises because section 344(b) requires the Secretary to extend deep gas royalty relief to leases located in more than 200 but less than 400 meters of water. Deep water royalty relief applied to leases in that water depth range under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, Pub. L. No. 104-58, Title III, 109 Stat. 563 (DWRRA). Thus, to be eligible for deep gas royalty relief, a lease located in more than 200 but less than 400 meters of water had to have been issued either before November 28, 1995 (the date of enactment of the DWRRA), or after November 28, 2000. Leases issued between those dates (i.e., in the first 5 years after the DWRRA's enactment) were issued under the mandatory deep water royalty relief provisions of DWRRA section 304. All the leases issued under section 304 provide for deep water royalty relief and therefore are not eligible for deep gas royalty relief. A lease issued before November 28, 1995, would not be eligible for deep gas royalty relief if MMS had granted deep water royalty relief under section 302 of the DWRRA (adding 43 U.S.C. 1337(a)(3)(C)). A lease issued after November 28, 2000, would not be eligible for deep gas royalty relief if MMS had granted deep water royalty relief under 30 CFR 203.60 through 203.79. The royalty suspension (RS) provisions in 30 CFR 260.120 through 260.124 that apply to post- November 2000 leases do not themselves grant deep water royalty relief and refer back to the specific lease terms. There are no RS leases in the 200-400 meter water depth interval--in other words, there is no lease issued in a lease sale held after November 28, 2000, in the 200- 400 meter water depth interval that provides for any royalty relief in the lease terms. Therefore, the only leases issued in lease sales held after November 28, 2000, that are excluded from deep gas royalty relief are those that have applied for and been granted deep water relief under Sec. Sec. 203.60 through 203.79. Paragraph (b) of this proposed section reflects MMS' general proposal, under section 344(a)(2)(B), not to grant deep gas royalty relief if the lease has previously produced gas or oil from a deep well or an ultra-deep well. Proposed section 203.31(b) contains an exception. If I have a qualified phase 2 or phase 3 ultra-deep well, what royalty relief would my lease earn? (Sec. 203.31) In proposed Sec. 230.31(a), the text preceding the table and the table reflect the interpretation of the statute described above that the first qualifying original phase 2 or phase 3 ultra-deep well on a lease that meets the requirements of proposed Sec. 203.30 would earn an RSV of 35 BCF. The table in Sec. 230.31(a) shows that if a sidetrack drilled after the publication date of this proposed rule is completed to a depth below 20,000 feet TVD SS and has a length (measured depth) of at least 20,000 feet, i.e., a length equivalent to that of an original ultra-deep well, the sidetrack would earn an RSV of 35 BCF if there has been no gas production from a deep well or an ultra-deep well on the lease. As a practical matter, MMS believes that the only sidetracks that are likely to have a sidetrack measured depth of 20,000 feet or more are sidetracks drilled from a platform slot reclaimed from a previously drilled well. (See the inclusion in the definition of ``sidetrack'' in section 344(a)(3)(B)(ii)(I).) These wells are new wells and are the functional equivalent of original wells. (MMS does not believe that a 20,000-foot-long sidetrack drilled to a new objective bottom-hole location by leaving a previously drilled well-- see section 344(a)(3)(B)(i)--is a practical likelihood.) As stated above, in light of the fact that section 344 requires MMS to grant either a 35 BCF RSV or 0 BCF RSV, MMS does not believe it is appropriate or consistent with statutory objectives or congressional intent to grant a 35 BCF RSV for a relatively short sidetrack simply because it was completed at a depth below 20,000 feet TVD SS. (An example would be a 6,000-foot-long sidetrack that left the main wellbore at 14,700 feet and was completed at 20,100 feet TVD SS.) It would appear that under such a circumstance, granting a 35 BCF RSV would be disproportionate to the costs and risks of drilling the sidetrack and to the degree of relief that would encourage ultra-deep production. At the same time, in view of the general congressional policy underlying section 344, it is difficult to believe that Congress intended to compel MMS to grant either a disproportionate RSV or no RSV at all for a sidetrack drilled to an ultra-deep depth from an existing wellbore (if there has been no production from any deep or ultra-deep well) simply because the sidetrack was completed to a depth below 20,000 feet TVD SS, even though the statutory phraseology could be read to permit no other result. Therefore, MMS proposes to treat sidetracks of lengths less than an original ultra-deep well but completed to ultra-deep depths (i.e., ultra-deep short sidetracks) in the same manner as they are treated under the existing rule, to more fully effectuate what appears to be the overall intent of Congress. Under the proposed Sec. 203.31(a), such a sidetrack would earn an RSV of 4 BCF plus 600 MCF times the sidetrack measured depth. Likewise, the same sunset dates would apply to these sidetracks that apply to sidetracks under the existing rule (and as the existing rule is proposed to be amended to add leases in the 200-400 meter water depth range under section 344(b)). In other words, the ultra-deep short sidetrack would have to be a phase 2 ultra-deep well. If an ultra-deep short sidetrack would not have earned an RSV under the existing rule (as it is proposed to be amended to add leases in the 200-400 meter water depth range), MMS proposes to grant no RSV to it here. MMS specifically requests comments regarding the adequacy of its authority to prescribe this RSV. If MMS concludes that the proposed provision is not supported by adequate statutory authority, MMS' alternative proposal would be to grant no RSV to an ultra-deep short sidetrack, and not to grant an RSV of 35 BCF. Proposed Sec. 203.31(b) contains an exception from the requirement that the lease not have produced previously from any deep well or ultra-deep well. Some background explanation is necessary to explain the reasons for the [[Page 28400]] proposed exception. Under the existing rule, in cases where a deep well completed at a depth between 15,000 feet and 18,000 feet TVD SS has produced and earned an RSV of 15 BCF, a subsequent well completed at a depth greater than 18,000 feet TVD SS may earn an additional RSV of 10 BCF. But under the proposed rule, if the subsequent well is an ultra- deep well (completed at a depth greater than 20,000 feet TVD SS), it would earn no additional RSV. Thus, if a lessee has produced from a deep well that earned an RSV of 15 BCF and then drills an ultra-deep well, the lease would get less royalty relief than under the existing rule and less royalty relief than if the lessee had drilled a deep well to a depth between 18,000 and 20,000 feet TVD SS. Section 344, however, allows that result. (MMS anticipates that the number of cases in which this scenario might occur before deep gas royalty relief under the existing rule expires in May 2009 would be very small.) Similarly, consistent with the proposed policy explained above, MMS proposes to grant no RSV for a sidetrack completed at a depth of 20,000 feet or more if there has been production from any deep well, regardless of the length of the sidetrack. This proposal would result in the possibility of a similar scenario arising in which a lessee drills a sidetrack to an ultra-deep depth after the lease has earned an RSV of 15 BCF from a well completed at a depth between 15,000 feet and 18,000 feet TVD SS. Under the proposed rule, the sidetrack would earn no additional RSV, while under the existing rule it would earn an RSV of 4 BCF plus 600 MCF times the sidetrack measured depth, up to a maximum of an additional 10 BCF. Under such a scenario, the lease would receive less royalty relief than under the existing rule and less than if the lessee had completed the sidetrack at a depth between 18,000 feet and 20,000 feet TVD SS. The exception proposed in Sec. 203.31(b) arises because all leases issued in water depths of 200 meters or less during 2004 and 2005, that is in lease sales 190, 192, 194, and 196, specifically cite the existing deep gas rule in the lease terms--unlike leases issued before 2004 or after 2005. Although deep gas royalty relief under the existing rule was effective for wells drilled after publication of the proposed rule (March 26, 2003), that relief did not become effective until the final rule. The final rule initially had an effective date of March 1, 2004, but an administrative oversight led to the effective date of the final rule being delayed until May 3, 2004. The lease sales held in 2004 were all after the initial effective date, and the terms of the leases issued in those sales referred to royalty relief terms in the existing rule. While MMS does not believe that a reference to the citation of the existing rule makes the terms of the rule as they existed on that date a fixed property right, MMS also doubts that Congress would have intended to reduce potential royalty relief that existing leases already had under the rules on the date of enactment of the Energy Policy Act if the lease instrument itself referred to the rule. Leases issued before 2004, which preceded the effective date of the existing rule, do not refer to the rule in their terms. For these leases, the existing rule, including the opportunity for a deep well to earn relief after the lease already has production from a deep well, was a benefit that MMS granted on its own initiative after the lease was already in force. MMS may change, or even entirely eliminate, that benefit prospectively through a subsequent rulemaking should it choose to do so. In this rulemaking, MMS proposes to do just that--eliminate the additional relief these pre-2004 leases could have earned for drilling a well deeper than 20,000 feet TVS SS after producing from a well completed between 15,000 and 18,000 feet TVD SS. However, to avoid potential future conflict regarding the terms of leases issued in the four Gulf of Mexico sales held in 2004 and 2005, i.e., Sales 190, 192, 194, and 196, MMS proposes to allow the additional relief associated with drilling an ultra-deep well after producing from a well completed between 15,000 and 18,000 feet TVD SS provided for in the existing rule for these leases. MMS specifically requests comments on this proposed exception. MMS further notes that the issue discussed in the preceding paragraph does not arise in the context of leases issued between January 1, 2001 and January 1, 2004, that contain deep gas royalty relief in their lease terms and for which the lessee exercised the option in Sec. 203.48, re-designated Sec. 203.49 in this proposed rule, to convert to the rule. The lessees filed a form with an election to go under the rule. The intent was to treat these leases identically to pre-2001 leases. Nor does the issue discussed above arise in the context of leases issued after January 1, 2001, that are located partly in water less than 200 meters deep (and, therefore, partly in water more than 200 meters deep) that are covered by the existing rule because no deep water royalty relief terms in statutes or lease terms apply (see the existing Sec. 203.40(a)(2) and (3)). These leases also are in a situation that is functionally identical to pre-2001 leases, and for which there is no question that MMS may change the rule prospectively. Therefore, MMS does not propose to include leases in these two categories within the exception proposed in Sec. 203.31(b). Proposed Sec. 203.31(c) specifies that all gas production from qualified wells (i.e., qualified deep and qualified ultra-deep wells) on the lease, including gas production that is not subject to royalty, counts toward the RSV earned by a qualified deep well or qualified ultra-deep well on the lease, in the manner required under proposed Sec. Sec. 203.32 and 203.36. For example, assume that the lessee drills and produces from a qualified 22,000-foot phase 2 ultra-deep well that earns an RSV of 35 BCF. Further assume that the lessee then drills and produces from two qualified deep wells (completed at 16,500 feet TVD SS and 17,200 feet TVD SS, respectively), neither of which earns an RSV. In this circumstance, the 35 BCF RSV earned by the first well applies to the earliest production from all 3 wells until the 35 BCF of RSV is used. Proposed Sec. 203.31(d) would provide that lessees may recoup any royalties paid on production from a qualified phase 2 or phase 3 ultra- deep well that occurs before 30 days after the date of publication of the final rule. This provision is necessary because of the provisions in subsections (a) and (b) of section 344 that ``[r]egulations issued under this subsection shall be retroactive to the date that the notice of proposed rulemaking is published in the Federal Register.'' Those provisions make royalty relief applicable to gas produced after the date of the proposed rule and before the final rule. A lessee may begin producing gas from a qualified phase 2 or phase 3 ultra-deep well after the date of this proposed rule, but would not be able to claim royalty relief under this proposed rule for any of that production unless and until a final rule is promulgated and becomes effective. (However, royalty relief may be available under existing regulations.) The lessee therefore might have to pay royalty on production occurring before a final rule becomes effective. Because the royalty relief provided for under section 344 would then be retroactive to the proposed rule's publication date, the lessee would have to recoup or seek a refund of the royalties paid in the meantime. Proposed paragraph (d) would clarify that the lessee could do so. Proposed Sec. 203.31(e) includes several examples of how the proposed provisions would work in various circumstances. Example 1 illustrates a [[Page 28401]] situation in which a lessee drills and produces from a qualified ultra- deep well after the date of this proposed rule (in this example, a phase 2 ultra-deep well), and earns a 35 BCF RSV. The lessee then drills a second qualified ultra-deep well on the lease. Under the proposed rule, the second ultra-deep well would not earn any additional RSV. (The 35 BCF RSV would be applied to gas production from both wells.) MMS bases this proposal on section 344(a)(2), which expressly grants the Secretary discretion whether to provide royalty relief for ultra-deep wells if the lease has previously produced from a well with a perforated interval the top of which is at least 15,000 feet TVD SS (i.e., any deep well under the existing rule). As discussed previously, section 344 does not command the Secretary to grant 35 BCF of royalty relief for each and every ultra-deep well drilled and produced on a lease simply because a well is an ultra-deep well. To accomplish the statutory objective of encouraging exploration for and production from ultra-deep wells, and at the same time to avoid excessive reductions in royalty payments that would not further that objective, MMS proposes to limit the 35 BCF in royalty relief to the first producing ultra-deep well on the lease that was drilled after the publication date of the proposed rule, with the condition that there has been no production from any other deep wells or ultra-deep wells on the lease. The same rationale would apply to situations where more than one ultra-deep well is drilled after the date of this proposed rule. MMS proposes that the first ultra-deep well drilled after the publication date of this proposed rule that produces from a lease that has not previously produced from a deep well or an ultra-deep well would earn a 35 BCF RSV, but subsequent ultra-deep wells on the same lease would not earn additional RSVs. MMS believes that this is clearly within the discretion granted to the Secretary in section 344(a)(2), which permits the Secretary to disallow royalty relief if there has been prior production from any deep well. Example 2 illustrates a situation in which a lessee has produced gas from an ultra-deep well drilled on the lease before the effective date of the ultra-deep provisions as specified in section 344(a), i.e., the date of publication of this proposed rule. Under the proposed definitions, this would be a phase 1 ultra-deep well. In Example 2, the ultra-deep well was drilled before the publication date of this proposed rule but after March 26, 2003. In this circumstance, any ultra-deep well drilled after the publication date of this proposed rule (the second ultra-deep well on the lease) would not earn an RSV. However, in Example 2 the ultra-deep well drilled after March 26, 2003, is also a qualified deep well under the existing rule and may qualify for an RSV of 25 BCF under its provisions. If the first ultra-deep well had earned 25 BCF under the current rule, the lease would keep that relief. However, drilling an additional ultra-deep well after the publication of this proposed rule would not earn the lease any additional royalty relief. Example 3 illustrates a situation in which a deep well was drilled and produced before the existing deep gas rule became effective. The deep well therefore did not earn an RSV for the lease. The lessee then drilled a phase 2 ultra-deep well after the publication date of the proposed rule. Under the proposed rule, the ultra-deep well would not earn an RSV. In Example 4, a lessee drills and produces gas from a qualified phase 2 ultra-deep well and earns an RSV of 35 BCF on a lease located in water 300 meters deep. Subsequently, the lessee drills a deep well that is not an ultra-deep well. Under the existing regulations at Sec. 203.41(e), the later well would not earn any RSV because the lease has already produced from a deep well with a perforated interval the top of which is 18,000 feet TVD SS or deeper. However, any remaining RSV earned by the ultra-deep well would be applied to production from the new deep well, as well as production from the ultra-deep well that earned the RSV, because the new deep well is also a qualified well under the hypothetical facts stated. In contrast, if the new deep well hypothesized in this example (for which drilling begins in 2010) begins production on or after May 3, 2013 (or if the new deep well were on a lease located in water less than 200 meters deep), the new deep well would not be a qualified well. In that event, the lessee would have to pay royalty on all production from that well notwithstanding the RSV earned by the phase 2 ultra-deep well. In Example 5, a lessee drills and produces from a qualified deep well completed at a depth between 15,000 and 18,000 feet TVD SS that earns an RSV of 15 BCF for the lease under the existing Sec. 203.41. The lessee then later drills and produces from a qualified phase 2 or phase 3 ultra-deep well (depending on the water depth of the lease) on the same lease. The ultra-deep well would earn no additional RSV under the proposed rule, but the 15 BCF RSV earned by the deep well would be applied to production from both the deep well and the ultra-deep well. Example 7 illustrates an exception to this case. Example 6 illustrates the proposed difference in consequences between drilling sidetracks of different lengths to ultra-deep depths. Section 344(a)(2) provides discretion whether to grant royalty relief if the ultra-deep well is a sidetrack. To be consistent with the statutory objectives, and to avoid granting excessive amounts of royalty relief for sidetracks that are shorter than the length necessary for an original well from the surface to earn royalty relief as an ultra-deep well, MMS proposes to grant a 35 BCF RSV if the sidetrack measured depth (i.e., the length of the sidetrack) is at least 20,000 feet and the sidetrack has a perforated interval the top of which is at least 20,000 feet TVD SS (and otherwise is a qualified phase 2 or phase 3 ultra-deep well). However, MMS would not grant additional royalty relief under the section 344 ultra-deep provisions if the sidetrack measured depth is less than 20,000 feet. A sidetrack of less than 20,000 feet measured depth may qualify for a lesser RSV that is equivalent to the relief granted under the deep well provisions if it is a phase 2 ultra-deep well, i.e, one that begins production before the applicable sunset date for royalty relief for deep wells. Example 7 illustrates the exception proposed in Sec. 203.31(b). In this example, the lease was issued after the initial effective date of the existing rule and before the enactment of the Energy Policy Act, and its terms specifically referred to the existing rule. In this example, the lessee completed a deep well in the 15,000-18,000 feet TVD SS water depth range that earned a 15 BCF RSV before enactment of the Energy Policy Act. The lessee then drilled and completed a phase 2 ultra-deep well. Under the proposed Sec. 203.31(b) exception, the ultra-deep well would earn an additional 10 BCF RSV. What other requirements or restrictions apply to royalty relief for a qualified phase 2 or phase 3 ultra-deep well? (Sec. 203.32) This section addresses various further requirements and some restrictions that would apply to RSVs earned by ultra-deep wells. These are self-explanatory. To which production do I apply the RSV earned by qualified phase 2 and phase 3 ultra-deep wells on my lease? (Sec. 203.33) Proposed Sec. 203.33(a), which applies to leases that are not within an MMS-approved unit, has a structure similar to [[Page 28402]] the existing deep well provision at Sec. 203.42(a), re-designated Sec. 203.43(a) in this proposed rule. This paragraph specifies that an RSV earned by a qualified phase 2 or phase 3 ultra-deep well applies to all gas produced from all qualified wells (i.e., all qualified deep and qualified ultra-deep wells) on the lease. Proposed Sec. 203.32(f) also reflects this principle. Proposed Sec. 203.33(b), which applies to leases within a unit, follows the same structure for ultra-deep wells that the existing Sec. 203.42(b), re-designated Sec. 203.43(b) in this proposed rule, has for deep wells. An RSV earned by a qualified phase 2 or phase 3 ultra-deep well would be applied to production from all qualified wells on non- unitized areas of the lease on which the ultra-deep well is located and to production allocated to the lease, under the approved unit agreement, from qualified wells on unitized areas of the lease and on other leases in the unit. The allocation of production from qualified wells on other leases in the unit would not increase the RSV for your lease. Proposed paragraph (c) of this section is similar to Sec. 203.42(e) of the existing rule, re-designated Sec. 203.43(c) in this proposed rule and specifies that the lessee would have to pay royalties on all production when the cumulative production from all qualified wells on the lease reaches the applicable RSV. To which production may an RSV earned by qualified phase 2 and phase 3 ultra-deep wells on my lease not be applied? (Sec. 203.34) This proposed provision is analogous to the existing Sec. 203.42(d) for deep wells, re-designated Sec. 203.43(d) in this proposed rule, with changes to reflect section 344's addition of leases in the 200-400 meter water depth range. What administrative steps must I take to use the RSV earned by a qualified phase 2 or phase 3 ultra-deep well? (Sec. 203.35) This proposed section is analogous, with one exception, to the existing Sec. 203.43 that applies to deep wells, re-designated Sec. 203.44 in this proposed rule. That exception deals with the temporary extension of the deadline by which production must start to qualify a well for relief. There is no deadline by which production must start for most ultra-deep wells to qualify for relief, so no such extension is needed. The analogous temporary extension is provided for ultra-deep short sidetracks which do face a deadline. Do I keep royalty relief if prices rise significantly? (Sec. 203.36) As explained above, the concept underlying the proposed price threshold terms is that to the extent ultra-deep gas and deep gas royalty relief granted under the proposed provisions would have been granted under the existing rule for existing leases (as of the date the final rule becomes effective), the existing rule's price threshold ($9.88 per MMBtu, adjusted annually for inflation after calendar year 2006) would apply. The value $9.88 per MMBtu in 2006 dollars is equivalent to the value $9.34 per MMBtu in 2004 dollars as stated in the existing rule. The inflation adjustment is described in the existing Sec. 203.47 (redesignated Sec. 203.48 in this proposed rule). The MMS webpage at http://www.mms.gov/econ/DWRRAPrice1.htm shows results from applying that adjustment. Excepted where noted, all price threshold values discussed in this proposed rule are stated in 2006 dollars. Hence, those values are adjusted for inflation after 2006. For all deep gas and ultra-deep gas royalty relief that results from section 344's new provisions, and for deep gas and ultra-deep gas royalty relief for leases issued after the effective date of the final rule, a different price threshold of $4.47 per MMBtu, adjusted annually for inflation after calendar year 2006, would apply. Lessees would have to pay royalty on all gas production to which an RSV otherwise would be applied under the proposed ultra-deep well provisions for any calendar year in which the average daily closing New York Mercantile Exchange (NYMEX) natural gas price exceeds $4.47 per MMBtu (adjusted for inflation after 2006). The RSVs specified for ultra-deep wells in proposed Sec. 203.31 for existing leases (and any future leases issued before the effective date of the final rule) are a consequence of section 344, with three exceptions. The first exception is the first 25 BCF of RSV earned under proposed Sec. 203.31(a) by a phase 2 ultra-deep well on a lease located in water partly or entirely less than 200 meters deep (i.e., a well drilled after the publication of this proposed rule that begins production before May 3, 2009). Such a well would also earn a 25 BCF RSV under the existing rule, so this RSV would be subject to the same price threshold as in the existing rule--$9.88 per MMBtu, adjusted annually after calendar year 2006 for inflation. The second exception is an RSV of up to 10 BCF earned by a phase 2 ultra-deep well under proposed Sec. 203.31(b)'s exception for leases issued after the initial effective date of the existing rule and before enactment of the Energy Policy Act that specifically refer to the existing rule in the lease terms. Such a well would earn the RSV specified in proposed Sec. 203.31(b) under the existing rule. Therefore, paragraph (a) of this proposed provision would apply the same price threshold as in the existing rule to this RSV of 10 BCF, i.e., $9.88 per MMBtu, adjusted annually after calendar year 2006 for inflation. The third exception is the first 20 BCF of the 35 BCF RSV earned by a phase 2 ultra-deep well on a non-converted lease that begins production before 5 years after the date the lease was issued. Parallel to the situation with the RSV under proposed Sec. 203.31(a), paragraph (b) of proposed Sec. 203.36 would apply the price threshold specified in the lease terms to this RSV. For non-converted leases issued in the central GOM lease sale in 2001 (Sale 178), that price threshold originally was $3.50 per MMBtu, adjusted annually after calendar year 2000 for inflation. For non-converted leases issued in the western GOM sale in 2001 and the central and western GOM sales in 2002 and 2003 (Sales 180, 182, 182, 185, and 187), that price threshold originally was $5.00 per MMBtu, adjusted annually after calendar year 2000 for inflation. Inflation between 2000 and 2006 raised these price thresholds to $4.00 and $5.72 per MMBtu, respectively, as of 2006. The proposed Sec. 203.36(a)(3) and (4) therefore express the price thresholds at those levels, and they would be adjusted annually after calendar year 2006 for inflation in the same manner as all the other price thresholds. Paragraph (a)(2) of this proposed section addresses the RSVs earned by ultra deep wells that result from section 344 or that are earned by wells on leases issued after the effective date of the final rule that are located party or entirely in less than 200 meters of water. These RSVs include (1) the last 10 BCF (in the case of a non-converted lease, the last 15 BCF) of the 35 BCF of RSV earned under Sec. 203.31(a) by a phase 2 ultra-deep well on a lease that is located in water partly or entirely less than 200 meters deep issued before the effective date of the final rule; (2) any RSV earned under Sec. 203.31(a) by a phase 2 ultra-deep well on a lease that is located in water partly or entirely less than 200 meters deep issued after the effective date of the final rule; (3) any RSV earned under Sec. 203.31(a) by a phase 2 ultra-deep well on a lease that is located in water entirely more than 200 meters and entirely less than 400 meters deep; and [[Page 28403]] (4) any RSV earned under Sec. 203.31(a) by a phase 3 ultra-deep well. MMS proposes to apply a lower price threshold to the RSV that results from section 344 than the $9.88 per MMBtu (adjusted for inflation after 2006) level in the existing rule. Three factors drive this decision. First, the absence of a sunset date for ultra-deep well relief risks generating in perpetuity a fiscally expensive program that may prove unnecessary or ineffective. A lower price threshold will mitigate the likelihood of such an outcome when the program is least necessary, that is, when prices are higher than expected. Second, results to date show a weaker than expected lessee reaction to the deep drilling incentive in the existing rule. This experience demonstrates the prudence of imposing tighter fiscal controls on the statutorily mandated expansion of that program. Third, this price threshold would apply when the deep drilling incentive would likely be less important, e.g., when other sources of natural gas have become more available and when current long range forecasts indicate natural gas prices will have retreated significantly from current levels. MMS analyzed several different price thresholds taking into consideration predicted gas prices, volatility of gas prices, and expected economics for deep and ultra-deep wells covered by the Energy Policy Act. The economic analysis that accompanies this rulemaking provides estimates of the effects of each option on measures of social welfare such as consumer and producer surplus, production and royalty revenues. MMS has chosen to propose $4.47 per MMBtu, adjusted annually for inflation after calendar year 2006, for incentives covered by the Energy Policy Act for several reasons. First, it simplifies the gas price threshold structure across royalty relief programs, because $4.47 per MMBtu (adjusted for inflation after 2006) is the same gas price threshold that applies to all leases covered by the DWRRA. That means both congressionally mandated royalty relief programs provide the same balance between the incentive to explore and produce in a frontier area and the fiscal risk of offering that categorical incentive. Second, this choice recognizes that gas produced from deepwater leases and gas produced from deep wells on leases in shallower waters sells in the same market. The RSV in each program is the policy variable tailored to the costs and risks specific to the different frontier areas that produce that product. Third, though recent gas market conditions led MMS to use price thresholds above $4.47 per MMBtu (adjusted for inflation after 2006), those higher price thresholds are used where bonus bids or sunset provisions provide added controls against incurring unnecessary fiscal costs. Finally, given the typical time frame between the decision to drill and the potential emergence of deep gas production, the ever-present risk exists that future events will prove the assumptions and forecasts used to justify the proposed additional RSV incentives inaccurate. This observation suggests the need for a conservative policy for selecting the appropriate deep gas price threshold level. Also, Sec. 203.36(a) includes a default price threshold of $4.47 per MMBtu (adjusted for inflation after 2006) for ultra-deep wells on future leases should their lease terms fail to provide for a different price threshold. Proposed Sec. 203.36(c) sets out several examples that clarify how the price thresholds would work. Example 1 assumes that a lessee drills and begins producing from a qualified phase 2 ultra-deep well in 2008 on a lease issued in 2004 in less than 200 meters of water. The ultra- deep well earns the lease an RSV of 35 BCF. The well produces a total of 18 BCF by the end of 2009. In both 2008 and 2009, the average daily NYMEX closing natural gas price is less than $9.88 per MMBtu (adjusted for inflation after 2006). In 2010, the well produces another 13 BCF. In that year, the average daily closing NYMEX natural gas price is greater than $4.47 per MMBtu (adjusted for inflation after 2006), but less than $9.88 per MMBtu (adjusted for inflation after 2006). Under these circumstances, the first 7 BCF produced in 2010 will exhaust the first 25 BCF of the 35 BCF RSV that the well earned that is subject to the $9.88 per MMBtu (adjusted for inflation after 2006) threshold. The lessee must pay royalty on the remaining 6 BCF produced in 2010, which is subject to the $4.47 per MMBtu threshold (adjusted for inflation after 2006) that was exceeded. Example 2 addresses a situation in which a lessee in 2008 drills and produces from Well No.1, a qualified deep well, to a depth of 15,500 feet TVD SS that earns a 15 BCF RSV for the lease under Sec. 203.41, which would be subject to a price threshold of $9.88 per MMBtu (adjusted for inflation after 2006). Later in 2008, the lessee drills and produces from Well No. 2, a second qualified deep well to a depth of 17,000 feet TVD SS that earns no additional RSV. Then in 2013, the lessee drills and produces from Well No. 3, a qualified phase 3 ultra- deep well that earns no additional RSV. Further assume that in 2013, the average daily closing NYMEX natural gas price exceeds the $4.47 per MMBtu (adjusted for inflation after 2006) but does not exceed $9.88 per MMBtu (adjusted for inflation after 2006). In 2013, any remaining RSV earned by Well No. 1 (which would have been applied to production from Well Nos. 1 and 2 in the intervening years), would be applied to production from all three qualified wells. Because the price threshold applicable to that RSV was not exceeded, the production from all three qualified wells would be royalty-free until the 15 BCF RSV earned by Well No. 1 is exhausted. Example 3 assumes the same initial facts regarding the 3 wells as in Example 2. Further assume that Well No. 1 stopped producing in 2011 after it had produced 8 BCF, and that Well No. 2 stopped producing in 2012 after it had produced 5 BCF. Two BCF of the RSV earned by Well No. 1 remain. That RSV would be applied to production from Well No. 3 until it is exhausted, and the lessee therefore would not pay royalty, because the $9.88 per MMBtu (adjusted for inflation after 2006) price threshold is not exceeded. In example 4, assume that in February 2010 a lessee completes and begins producing from an ultra-deep well (at a depth of 21,500 feet TVD SS) on a lease located in 325 meters of water with no prior production from any deep well and no deep water royalty relief. The ultra-deep well would be a phase 2 ultra-deep well, and would earn the lease an RSV of 35 BCF. Further assume that during 2010, the average daily closing NYMEX natural gas price exceeds $4.47 per MMBtu (adjusted for inflation after 2006) but does not exceed $9.88 per MMBtu (adjusted for inflation after 2006). Because the lease is located in more than 200 but less than 400 meters of water, the price threshold of $4.47 per MMBtu (adjusted for inflation after 2006) applies to all of the RSV, and the lessee will owe royalty on all gas produced from the ultra-deep well in 2010. The volume of gas produced from the ultra-deep well in 2010 counts against the RSV, as provided in proposed paragraph (e). The same principles would apply when a lessee applies RSVs to production allocated to a lease from qualified wells on other leases under an MMS-approved unit agreement. The price threshold associated with the RSV determines whether royalty is suspended on the production volume allocated to the lease. Proposed Sec. 203.36(d) provides that in the event the price threshold is exceeded in any calendar year, royalties [[Page 28404]] on production would be due by March 31 of the following year. The purpose of this proposed provision would be to allow the lessee a reasonable time to compute and pay royalties for the year for which they were due. If royalties were not paid by that date, late payment interest would accrue beginning April 1 until paid. MMS is also proposing a corresponding change to the late payment interest provision in the existing deep gas rule at Sec. 203.47 (proposed to be redesignated as Sec. 203.48). Finally, paragraph (e) of this proposed section specifies that production volumes on which a lessee must pay royalty as a result of the applicable price threshold being exceeded would count against the RSV. Which leases are eligible for royalty relief as a result of drilling a deep well or a phase 1 ultra-deep well? (Sec. 203.40) MMS is proposing to expand the existing deep well eligibility provision at Sec. 203.40(b) to require that the lease be located in the GOM wholly west of 87 degrees, 30 minutes West longitude in water depths entirely less than 400 meters deep to implement section 344(b). MMS also proposes other amendments to reflect the addition of leases in the 200-400 meter water depth range, and proposes to change the wording of the section heading to reflect the change in the definition of ``deep well'' and the addition of the definition of ``phase 1 ultra- deep well.'' If I have a qualified deep well or a qualified phase 1 ultra-deep well, what royalty relief would my lease earn? (Sec. 203.41) MMS proposes to modify the tables at existing Sec. 203.41(a) and (c), other parts of the text of the section, and the wording of the section heading to reflect the new ultra-deep well category of royalty relief and the changes in the definition of terms. The proposed revision adds a new paragraph (a) to emphasize the pivotal role that prior deep production plays in the incentive. Also, the proposal changes the existing paragraph (a) to paragraph (b), and combines the content of the existing paragraphs (b) and (d) into a new paragraph (d), and divides that content into numbered subparagraphs. The expanded coverage of this section and the proposed new paragraph (e) result from section 344's extension of royalty relief for deep wells to leases located in the 200-400 meter water depth interval. The extent of and requirements for deep gas royalty relief would not change, except that (1) there is a later proposed sunset date for deep gas royalty relief for leases in the 200-400 meter water depth range, and (2) lessees may recoup royalties paid before the effective date of the final rule on volumes that are subject to an RSV for leases in that water depth range, as explained immediately below. Proposed new paragraph (e) of this section is analogous to proposed Sec. 203.31(d) for ultra-deep wells to allow lessees to recoup any royalties paid on production from a qualified deep well on a lease located in the 200-400 meter water depth range that occurs before 30 days after the date of publication of the final rule which is subject to an RSV earned by either a deep well or an ultra-deep well. As explained previously, this provision is part of implementing section 344's retroactivity provisions. MMS proposes to move the examples in paragraphs (b) and (d) of the existing rule to a new paragraph (f). Example 5 in this new paragraph (Example 2 in the existing paragraph (d)) also would be revised to reflect the effect of the new proposed ultra-deep gas provisions. What conditions and limitations apply to royalty relief for deep wells and phase 1 ultra-deep wells? (Sec. 203.42) This new proposed section corresponds to paragraphs (e) through (k) of the existing Sec. 203.41. Paragraph (c) of the existing Sec. 203.42 is transferred to paragraph (h) of this proposed section. The proposed revisions to Sec. 203.42, as well as proposed revisions to other sections of the existing rule, also include minor wording changes for precision and consistency with usage throughout the proposed rule. MMS proposes to redesignate the existing Sec. Sec. 203.42 through 203.48 as Sec. Sec. 203.43 through 203.49. To which production do I apply the RSV earned from qualified deep wells or qualified phase 1 ultra-deep wells on my lease? (Sec. 203.43) MMS proposes changes to this re-numbered section to implement section 344's extension of royalty relief for deep wells to leases in the 200-400 meter water depth interval and to reflect the proposed changes in defined terms. MMS also proposes to revise the examples to improve the illustration of how this section operates. Paragraph (e) of the existing Sec. 203.42