Modifications to the Bid Adequacy Procedures, 62461-62463 [2014-24727]

Agencies

• DEPARTMENT OF THE INTERIOR
• Bureau of Ocean Energy Management

[Federal Register Volume 79, Number 201 (Friday, October 17, 2014)]
[Notices]
[Pages 62461-62463]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24727]


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DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

[Docket No. BOEM-2014-0069; MMAA104000]


Modifications to the Bid Adequacy Procedures

AGENCY: Bureau of Ocean Energy Management (BOEM), Interior.

ACTION: Notification of procedural change and clarification of 
definitions.

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SUMMARY: The Bureau of Ocean Energy Management (BOEM) is giving notice 
of its intent to change a criterion and to clarify selected definitions 
in its existing Bid Adequacy Procedures for ensuring receipt of Fair 
Market Value (FMV) on Outer Continental Shelf (OCS) oil and gas leases. 
In particular, BOEM proposes to remove the ``Number of Bids Rule'' that 
is currently applicable in Phase 1 of the Bid Adequacy Procedures. A 
copy of current procedures, ``Modifications to the Bid Adequacy 
Procedures,'' published at 64 FR 37560 on July 12, 1999, can be 
obtained from the BOEM Web site at https://www.boem.gov/Oil-and-Gas-Energy-Program/Leasing/Regional-Leasing/Gulf-of-Mexico-Region/Bid-Adequacy-Procedures.aspx. BOEM invites comments during a 45-day comment 
period following publication of this notice.

DATES: Comments can be submitted electronically through the Federal 
eRulemaking Portal at https://www.regulations.gov (Docket ID: BOEM-2014-
0069) or postmarked no later than December 1, 2014. All comments 
received or postmarked during the comment period will be made 
publically available in the docket. BOEM will consider all comments and 
intends to publish the revised Bid Adequacy Procedures prior to or in 
conjunction with the Central Gulf of Mexico Planning Area Lease Sale 
235 Final Notice of Sale.

ADDRESSES: You may submit comments, identified by the docket number, by 
any of the following methods:
     Federal rulemaking portal: https://www.regulations.gov. 
Follow the instruction for submitting comments.
     Mail: Department of the Interior, Bureau of Ocean Energy 
Management, Economics Division, Attention: Marshall Rose, 381 Elden 
Street, MS-3310, Herndon, Virginia 20170-4817.

Public Availability of Comments

    Before including your name, address, phone number, email address, 
or other personal identifying information in your comment, you should 
be aware that your entire comment--including your personal identifying 
information--may be made publicly available at any time. While you can 
ask us in your comment to withhold your personal identifying 
information from public review, we cannot guarantee that we will be 
able to do so.

FOR FURTHER INFORMATION CONTACT: Dr. Marshall Rose, Chief, Economics 
Division, at (703) 787-1536. The revised Bid Adequacy Procedures are 
described below.

SUPPLEMENTARY INFORMATION: In the first phase of its tract evaluation 
procedures for OCS oil and gas lease sales, BOEM considers the number 
and characteristics of bids received on a tract to help determine 
whether the tract's high bid can be accepted without further 
evaluation. BOEM is proposing to eliminate these factors of 
consideration from the initial part of the tract evaluation and bid 
acceptance process.

What is the regulatory authority for BOEM's procedures to accept or 
reject high bids on tracts?

    The FMV procedures used to determine the adequacy of the high bids 
received for OCS oil and gas leases clarify the steps involved in the 
authorized officer's decisions on bid awards set forth in BOEM 
regulations at 30 CFR 556.47.

What definitions apply to these procedures?

    BOEM is proposing to revise several bid adequacy definitions in its 
Bid Adequacy Procedures guidelines for clarity. These changes do not 
alter the fundamental meaning or application of these terms to the Bid 
Adequacy Procedures.
    Bid Adequacy Procedures are the guidelines followed by BOEM in 
determining which high bids to accept and reject following receipt and 
opening of bids in an OCS oil and gas lease sale.
    Number of Bids Rule is one of the criteria employed in Phase 1 of 
the Bid Adequacy Procedures to determine whether to accept a tract's 
high bid without a further BOEM evaluation in Phase 2. Under this rule, 
the high bid on Confirmed and Wildcat tracts receiving three-or-more 
Qualified Bids may be accepted as representative of FMV if: (1) The 
third highest Qualified Bid on a tract is within 50 percent of the 
tract's highest Qualified Bid, and (2) the tract's highest Qualified 
Bid per acre is within the top 75 percent of all high Qualified Bids 
per acre for all tracts receiving three-or-more Qualified Bids within 
the tract's designated water depth category. (See ``Modifications to 
the Bid Adequacy Procedures,'' Federal Register, Volume 64, No. 132, 
July 12, 1999, Pps. 37560-37562, at https://www.boem.gov/Oil-and-Gas-Energy-Program/Leasing/Regional-Leasing/Gulf-of-Mexico-Region/Bid-Adequacy-Procedures.aspx.)
    Mean Range of Values (MROV) is BOEM's estimate of the dollar 
measure of a tract's expected net present value, assuming that tract is 
leased in the current sale. It reflects the maximum amount a bidder 
could afford to pay as a cash bonus for the tract while expecting to 
earn a specified after-tax rate of return. The calculation of the MROV 
considers exploration and economic risk, sales value, exploration, 
development and production costs, royalties, and corporate income taxes 
allowing for depreciation of certain capital investments and depletion 
of the cash bonus as estimated by the MROV.
    Delay-adjusted Mean Range of Values (DMROV) is BOEM's estimate of 
the amount of a tract's high bonus bid needed in the current sale 
which, when added to the present value of anticipated royalties from 
accepting the tract's high bid and leasing the tract, equals the 
discounted sum of the tract's expected high bonus bid and present value 
of anticipated royalties in the next sale if the high bid is rejected 
and the tract re-offered and sold in that next sale. The MROV estimated 
by BOEM for the tract in the next sale is used as the proxy for the 
next sale's high bid on the tract, under projected economic, 
engineering and geologic conditions, including potential drainage. If 
the high bonus bid in the current sale exceeds the DMROV, then the 
present value of leasing receipts from selling the tract in the current 
sale are expected to be greater than those from rejecting the tract's 
high bid in the current sale and selling the tract in the next sale.
    Revised Arithmetic Measure (RAM) is BOEM's representation of the 
average ``bid'' on certain tracts, and includes in its calculation all 
Qualified Bids on the tract that are equal to at least 25 percent of 
the tract's high bid, as well as the MROV for the tract as estimated by 
BOEM.
    Unusual Bidding Patterns typically refers to a situation in which 
two or more companies bid on some tracts or subset of tracts far more 
often or less often than would normally be expected.

[[Page 62462]]

    Legal Bids are those bids that comply with the applicable 
regulations (30 CFR part 256) and the Notice of Sale, e.g., bids that, 
among other things, are at least equal to the specified minimum bid 
level. Any bids that fail to comply with the applicable regulations and 
Notice of Sale are returned to the bidder.
    Qualified Bids are ``Legal Bids'' that are not disqualified by BOEM 
for violating anti-competitive bidding practices.
    Confirmed Tract is a previously leased tract having a well(s) that 
encountered hydrocarbons and may have produced. It contains some oil 
and/or gas resources, the volume of which may or may not be known.
    Development Tract is a tract that has nearby productive (past or 
currently capable) wells with indicated hydrocarbons and that is not 
interpreted to have a productive reservoir extending under the tract. 
There should be evidence supporting the interpretation that at least 
part of the tract is on the same general structure as the proven 
productive well.
    Drainage Tract is a tract that (1) is currently being drained by a 
producing well on a nearby leased tract, or (2) could be drained by a 
currently-non-producing well that is capable of producing oil or gas on 
a nearby leased tract if the well were placed on production. The 
reservoir from which the nearby well is currently producing or capable 
of producing is interpreted to extend with producible hydrocarbon 
resources to the tract that is subject to drainage.
    Wildcat Tract is a tract that has neither nearby productive (past 
or currently capable) wells, nor is interpreted to have a productive 
reservoir extending under the tract. It has high geologic risk in 
addition to sparse well control.
    Water Depth Category is a classification of sea level depth, 
currently specified in the Gulf of Mexico for bid adequacy purposes as 
being either: (1) Less than 400 meters; or (2) 400 meters or more. If 
different classifications subsequently are used for a Gulf of Mexico 
sale, they will be described in the Final Notice of Sale. Tracts 
offered in a sale held outside the Gulf of Mexico will be considered to 
reside in the same, single water depth category encompassing the entire 
sale area, unless specified otherwise in the Final Notice of Sale.
    Viable Tract is a tract considered by BOEM to have the potential 
capability of being explored, developed and produced profitably. Viable 
Tracts are those located on a prospect for which the risk-weighted, 
most-probable resource size equals or exceeds that of nearby proxies 
that were deemed economic in the relevant cost regime and at similar 
anticipated future prices. The probability of success used in 
determining the risk-weighted, most-probable resource size is at or 
below the highest level anticipated for any economically positive tract 
or prospect that received a bid in the current sale, was evaluated by 
BOEM, and is located in the same cost regime.
    Non-viable Tract is a tract considered by BOEM not to have the 
potential capability of being explored, developed and produced 
profitably. Non-viable Tracts are: (1) Tracts that received bids but 
that are not associated with any discernible prospect or geophysical 
anomaly that might indicate hydrocarbon presence; or (2) tracts located 
over known prospects that are judged to offer sub-economic quantities 
of risked resources. The latter include tracts that are located on a 
prospect for which the most probable risked resource size is less than 
or equal to that of nearby proxies that were deemed uneconomic for the 
relevant cost regime and at similar anticipated future prices. 
Determination by BOEM of whether a tract is non-viable involves a 
rigorous assessment of whether or not the tract is likely to be 
profitable, but not a calculation of the tract's precise monetary 
value.
    Phase 1 is the first phase of the two-phased Bid Adequacy 
Procedures applied in each sale to ensure that the government receives 
the FMV for the offshore oil and gas lease rights that it sells. In 
Phase 1, a tract's high bid may be accepted as representative of FMV if 
the tract passes the Number of Bids Rule or if the tract is classified 
as Confirmed or Wildcat and judged to be non-viable by BOEM. If 
application of either of these criteria does not result in the tract's 
acceptance in Phase 1, the tract is passed to Phase 2 for further 
evaluation.
    Phase 2 is the second phase of the Bid Adequacy Procedures. In 
Phase 2, Viable Tracts and associated prospects are subjected to a 
complete geological review and economic evaluation for the purpose of 
establishing the FMV of received bids. BOEM conducts an individual 
economic evaluation of each tract that is passed to Phase 2, resulting 
in the generation of certain measures of tract value represented by the 
MROV, DMROV and RAM. The high bid typically is considered for 
acceptance if it exceeds any one of these three measures.

What procedural change is being proposed?

    BOEM is proposing that the Number of Bids Rule in Phase 1 would no 
longer apply under the revised Bid Adequacy Procedures. Instead, the 
high bid on a Confirmed or Wildcat Tract could be accepted in Phase 1 
only if BOEM judges the tract to be non-viable. Tracts not accepted in 
Phase 1, and hence subject to further evaluation in Phase 2, would 
include Confirmed and Wildcat Tracts that BOEM judges to be Viable, 
along with all Drainage and Development Tracts. Consistent with current 
practice, all tracts included in Phase 2 evaluations will be subject to 
a full-scale review for the purpose of determining bid adequacy. For a 
description of the current guidelines, see ``Modifications to the Bid 
Adequacy Procedures,'' Federal Register, Volume 64, No. 132, July 12, 
1999, Pps. 37560-37562, at https://www.boem.gov/Oil-and-Gas-Energy-Program/Leasing/Regional-Leasing/Gulf-of-Mexico-Region/Bid-Adequacy-Procedures.aspx.

What problem is being addressed by the proposed procedural change?

    Periodically, BOEM reviews its Bid Adequacy Procedures in light of 
its mandate to ensure receipt of FMV for the lease rights it sells. In 
a recent review of the performance of its Bid Adequacy Procedures, BOEM 
identified some potential weaknesses in one part of its procedures for 
determining whether to accept the high bid on certain tracts as being 
representative of FMV. Under its existing procedures, BOEM accepts the 
high bids on some Confirmed and Wildcat Tracts following application of 
the Number of Bids Rule. Consequently, the accepted tracts are not 
subject to further consideration of bid adequacy based on evaluation of 
their underlying tract values in comparison to the high bids. In such 
cases, BOEM does not have the opportunity to evaluate in Phase 1 
whether the accepted tracts have the potential to be economically 
profitable, or to determine based on its own individual tract 
evaluation in Phase 2 whether the high bids adequately reflect the 
economic value of these tracts. As a result, the early bid acceptance 
of certain tracts in Phase 1, based solely on bidding information, 
precludes BOEM from conducting specific, in-depth evaluations of tracts 
that might have substantial economic value, potentially in excess of 
the accepted high bid.
    This situation is exacerbated when BOEM has in its possession 
substantial geologic, engineering and economic information that could 
facilitate

[[Page 62463]]

estimation of the underlying economic value of these tracts. In such 
cases, the resulting economic value determined by BOEM could be 
sufficient to lead to a decision to reject the high bid. In a subset of 
these cases, the resulting rejection and subsequent reoffering of the 
tract in the next sale might produce a considerable increase in lease 
revenues.
    Once a tract is accepted under the Number of Bids Rule, BOEM does 
not commonly conduct an economic evaluation of that tract, so it cannot 
know with certainty whether such an evaluation would have led to the 
rejection of the high bid. Additionally, since the tract is not 
rejected, BOEM does not have empirical data revealing what a subsequent 
high bid would have been if the tract's original high bid had been 
rejected and the tract reoffered in the next sale.
    Nevertheless, BOEM identified several recent instances where the 
Number of Bids Rule fell slightly short of accepting the high bid, and 
the affected tracts were subsequently rejected after BOEM conducted its 
economic evaluations and applied its Bid Adequacy Procedures in Phase 
2. In a few of these cases, BOEM found that upon reoffering, the high 
bids on the actual previously rejected tracts rose substantially. But, 
had the nature of the actual bidding varied only slightly among 
competing bidders, BOEM might have accepted the original high bids 
under the Number of Bids Rule, and by doing so would have thereby 
inadvertently forgone the additional cash bonus bid amounts it received 
upon the actual reoffering of those tracts with rejected high bids. 
Ensuring that the American taxpayer receives fair and appropriate value 
is an important goal of the proposed procedural change.

What concerns may exist about possibly removing the Number of Bids 
Rule?

    The removal of the Number of Bids Rule eliminates reliance by BOEM 
on certain competitive market forces in the determination of FMV in 
Phase 1. However, BOEM will continue to consider competitive market 
forces in making bid adequacy determinations through application of the 
RAM in Phase 2. Beginning in 2000, BOEM has accepted through 
application of the RAM criterion, approximately two-thirds of both the 
number and high bid amounts of Confirmed and Wildcat Tracts with the 
following characteristics: Received three or more Qualified Bids, were 
passed to Phase 2, and, had high bids less than the applicable tract's 
MROV. This finding confirms that even without the Number of Bids Rule, 
BOEM will continue to capture the effects of competitive market forces 
in its Bid Adequacy Procedures because the RAM is retained as part of 
those revised procedures. The RAM is an effective means for 
incorporating market forces in BOEM's Bid Adequacy Procedures and is 
unaffected by the proposed change in those procedures.

How would this proposed procedural change affect the content of phase 1 
& phase 2 of the Bid Adequacy Procedures?

    Under current procedures, certain tracts may have their high bids 
accepted in Phase 1 if they are (1) subjected to and pass the Number of 
Bids Rule, or (2) determined to be non-viable by BOEM. All other tracts 
are sent to Phase 2 for further evaluation. Removing the Number of Bids 
Rule will eliminate category (1) above. Henceforth, only the high bids 
on Confirmed and Wildcat Tracts determined by BOEM to be non-viable may 
be accepted in Phase 1. Moreover, elimination of the Number of Bids 
Rule will not affect any existing evaluation procedures and criteria 
employed in Phase 2.
    BOEM does not intend to make any other substantive changes to the 
Bid Adequacy Procedures at this time. If the proposed change in 
procedures or some variation thereof is adopted, BOEM intends to 
publish the complete and revised Bid Adequacy Procedures prior to, or 
in conjunction with, the Central Gulf of Mexico Planning Area Lease 
Sale 235 Final Notice of Sale in early 2015.

Questions for Respondents

    1. Will removing the Number of Bids Rule alter your typical bidding 
behavior?
    2. What adverse effects do you envision from removing the Number of 
Bids Rule?
    3. Can you offer any alternatives or refinements for ensuring 
receipt of FMV that you deem superior to removing the Number of Bids 
Rule?

    Dated: October 14, 2014.
Walter D. Cruickshank,
Acting Director, Bureau of Ocean Energy Management.
[FR Doc. 2014-24727 Filed 10-16-14; 8:45 am]
BILLING CODE 4310-MR-P