Promotion of Development, Reduction of Royalty on Heavy Oil

DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Part 3100

[WO-310-00-1310-2411]

RIN 1004-AC26

Promotion of Development, Reduction of Royalty on Heavy Oil

AGENCY: Bureau of Land Management, Interior.

ACTION: Final rule.

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SUMMARY: The Bureau of Land Management is issuing this final rule to

amend the regulations relating to the waiver, suspension, or reduction

of rental, royalty, or minimum royalty. This action is being taken to

promote the production of heavy oil. The amendment establishes the

conditions under which the operators of properties that produce ``heavy

oil'' (crude oil with a gravity of less than 20 degrees) can obtain a

reduction in the royalty rate. The amendment should encourage the

operators of Federal heavy oil leases to place marginal or uneconomical

shut-in oil wells back in production, provide an economic incentive to

implement enhanced oil recovery projects, and delay the plugging of

these wells until the maximum amount of economically recoverable oil

can be obtained from the reservoir or field.

DATES: This rule will be effective March 11, 1996.

ADDRESSES: Inquiries should be sent to: Director (140), Bureau of Land

Management, Room 5558, Main Interior Building, 1849 C Street, N.W.,

Washington, D.C. 20240.

FOR FURTHER INFORMATION CONTACT: Dr. John W. Bebout, Bureau of Land

Management, (202) 452-0340.

SUPPLEMENTARY INFORMATION:

I. Introduction

II. Summary of Rule Adopted

III. Responses to Public Comments

IV. Procedural Matters

V. Regulatory Text

I. Introduction

A proposed rule to provide royalty relief for producers of heavy

oil was published in the Federal Register notice of April 10, 1995 (60

FR 18081) with the comment period ending June 9, 1995. The comment

period was reopened June 16, 1995 (60 FR 31663) and closed July 17,

1995.

On March 30, 1995, an outdated version of this proposed rule was

published in the Federal Register (60 FR 16424) by mistake. That

proposed rule publication was withdrawn, and the Federal Register

notice of April 10, 1995 (60 FR 18081) was published in its place as

the proposed rule.

The following are questions and answers designed to provide an

introduction to this rule.

When does the Department of the Interior (Department) consider

granting royalty relief?

In order to encourage the greatest ultimate recovery of oil and in

the interest of conservation, the Secretary, upon a determination that

it is necessary to promote development, may reduce the royalty on an

entire leasehold or any portion thereof (Section 39 of the Mineral

Leasing Act, 30 U.S.C. 209).

Existing section 3103.4-1 of Title 43, Code of Federal Regulations,

provides two forms of Federal oil and gas royalty reduction--on a case-

by-case basis upon application and for stripper wells. The provision

concerning stripper well properties allows royalty reduction for

properties that produce an average of less than 15 barrels of oil per

eligible well per well-day.

The Bureau of Land Management (BLM) believes that royalty relief

for producers of heavy crude oil is needed to promote the development

of heavy oil.

Why is heavy oil royalty relief needed?

Above all, this royalty relief is needed to promote the development

of heavy oil. Eliminating all royalties would be the most effective way

to promote development, but that would jeopardize the Department's

efforts in securing a fair return for public land resources. Royalty

relief has to be considered in light of all the Department's

responsibilities and objectives. The balance this rule strikes is to

have a royalty rate that promotes development while ensuring the public

receives reasonable compensation.

Cyclical swings in the price for crude oil are common. BLM believes

that future price decreases are possible, or even likely. The effect of

this rule will provide a buffer against these decreases for heavy oil

produced from Federal land. As many as two-thirds of all marginal

properties (including non-heavy oil properties) could be lost during a

period of sustained low oil prices (Marginal Wells, A Report of the

National Petroleum Council, 1994, p. 3). The danger in losing the

marginal wells is that, although production from individual wells may

be small, their collective production is significant, accounting for

one-third of lower-48 State onshore domestic production. Heavy oil

production, from both Federal and non-Federal lands, makes up almost

one-half of this third (Marginal Wells, A Report of the National

Petroleum Council, 1994, p. 50). Heavy oil wells typically incur higher

production costs, thus increasing their vulnerability. Were these heavy

oil wells abandoned, the United States would lose this significant

portion of domestic production.

What will happen as a result of this rule?

This rule should encourage the operators of Federal heavy oil

leases to place marginal or uneconomical shut-in oil wells back in

production, provide an economic incentive to implement enhanced oil

recovery projects, and delay the plugging of these wells until the

maximum amount of economically recoverable oil can be obtained from the

reservoir or field.

According to a Department of Energy (DOE) analysis of its TORIS

(Tertiary Oil Recovery Information System) data, the size of

economically recoverable reserves from Federal lands will be

significantly enhanced by this amendment. For instance, at a West Texas

Intermediate (WTI) crude oil price of $16 a barrel, DOE projects that

this rule will increase recoverable reserves of about 54 million

barrels to about 87 million barrels for the State of California. At $18

a barrel, DOE projects that this rule will increase recoverable

reserves of about 103 million barrels to about 130 million barrels for

the State of California. At $20 a barrel, DOE projects that this rule

will increase recoverable reserves of about 133 million barrels to

about 229 million barrels for the State of California. A

proportionately larger increase in recoverable reserves is anticipated

when oil prices range toward $20 a barrel because major recovery

projects may

[[Page 4749]]

become economically feasible. Were this rule not promulgated, DOE

projects these increases in recoverable reserves would most likely not

occur.

Since the State of California produces almost 91 percent of lower-

48 State onshore heavy oil production, the vast majority of recoverable

reserve increases stemming from this royalty relief will most likely

come from this State. Significant recoverable reserve increases are not

anticipated in the other States since fewer properties will qualify for

the relief.

When will this rule apply?

The rule will take effect March 11, 1996. However, the BLM may

suspend or terminate all royalty reductions granted under this rule and

terminate the availability of further relief under this rule--

(1) upon 6 month's notice in the Federal Register when BLM

determines that the average WTI oil price has remained above $24 per

barrel over a period of 6 consecutive months or

(2) after September 10, 1999, if the royalty rate reductions

authorized by this rule have not been effective in reducing the loss of

otherwise recoverable reserves.

How will this royalty relief affect royalties and revenues?

According to the DOE TORIS analysis, although oil royalties may

decline in some instances, the effects to overall Federal and State

revenues should be largely neutral except in the State of California.

(Revenues include all forms of income including royalties.) Slight

decreases in overall revenue could be possible at some oil prices for

States with moderate levels of heavy oil production. In California, the

DOE analysis projects small decreases or sizable increases in State

revenues depending on the price of oil (Letter Report from Department

of Energy dated July 29, 1994).

II. Summary of Rule Adopted

The final rule establishes a sliding scale royalty rate for

qualifying heavy-oil-producing properties. The sliding scale is

intended to somewhat offset the reduced prices paid for oil as oil

gravity decreases. The reduced royalty rate applies to qualifying heavy

oil properties rather than individual wells, because production is

normally not reported for individual oil wells, and is based on the

average gravity of the oil weighted by the production of heavy oil from

each well within the property. A weighted average gravity is used to

prevent gravity manipulation by selectively producing wells on a

property with heavier gravity crude. Using a weighted average of oil

gravity encourages maximum recovery from all wells within a property by

removing the economic advantage of selective production.

The rule provides that either the operator (as defined at 43 CFR

3100.0-5) or the payor (as defined at 30 CFR 208.2) must calculate the

weighted average gravity of the oil--measured on the American Petroleum

Institute (API) scale--produced from a property every 12 months to

determine the appropriate royalty rate. In no case, however, would the

royalty rate exceed the rate established by the terms of the lease.

The section amended by this rule also provides for royalty rate

reductions for stripper oil wells. Some provisions of this final rule

are similar to the provisions of the existing regulations that pertain

to stripper wells.

The final rule was modified in response to comments and for

clarification. Section 3103.4 was redesigned to aid the reader in

distinguishing the various forms of royalty reduction and accompanying

provisions. Separate sections were established for the stripper oil and

heavy oil royalty reduction provisions. The discussion of royalty rate

determinations in Sec. 3103.4-3(b)(5) was modified by adding two

examples and clarifying the text. Section 3103.4-3(b)(6) was modified

to extend the review period until 1999. Cross references were modified

where appropriate throughout Part 3100 to reflect the redesign of

Sec. 3103.4.

III. Responses to Public Comments

A total of 209 comments were received on the proposed rule. An

overwhelming majority supported the proposed rule. A few commenters

recommended changes.

Comments suggested that the review period be extended for a period

of 4 or 5 years rather than the 2 years stated in the proposed rule. It

was always the BLM's intention that the rule be in place at least 4

years before it was evaluated. Unanticipated delays in the rulemaking

process, however, have rendered the original 1997 deadline unreasonably

short. Therefore, the BLM concurs with this suggestion and the rule has

been modified to extend the review period until 1999.

A comment stated that the $24 trigger for rule suspension was too

high while another comment stated that $24 was too low. Based on data

developed from DOE's TORIS database, the BLM believes that $24 is an

appropriate trigger to suspend the rule. The data indicate that State

and Federal Royalty reductions are offset by increased recoverable

reserves up until the point that WTI crude oil prices reach

approximately $24/bbl. Past that point, recoverable reserve increases

appear to taper off. In addition, the TORIS data show that when WTI

prices climb above $24/bbl the royalty reduction is no longer a

determining factor for decisions regarding investments in enhanced oil

recovery techniques.

Comments suggested that the CFR 3103.4-1 regulations be revised for

clarity and simplicity. The BLM agrees and has revised the section for

clarity.

A comment suggested that the qualifying period for a heavy oil

royalty rate reduction coincide with the one established for a stripper

oil property royalty reduction. While the BLM agrees that there is

value in making the stripper and heavy oil royalty rate reduction

processes as similar as possible, this is not always practicable. The

heavy oil rule qualifying period was made flexible in order to

acknowledge the fact that many qualifying, low-production properties

may not remove or sell oil every month even if their production is

continuous. Thus, many properties may require even more than a calendar

year (the stripper property qualifying period) to accumulate 3 months

of sales or oil removal.

One comment requested that the notification period for requesting a

reduced royalty rate be extended beyond the proposed 60 days. The BLM

believes that 60 days is sufficient time for an operator to notify the

BLM of a new royalty rate. The stripper property royalty reduction

program has a similar notification period which appears to be working

well.

Some comments stated that a greater royalty rate reduction was

necessary. They suggested that this be accomplished by using a power

curve rather than a straight line to calculate royalty rates. The BLM

considered calculating royalty rates by both power curves and straight-

line methods. The DOE's TORIS data, however, indicated that neither

method was clearly advantageous over the other in terms of increasing

recoverable reserves except within a narrow range of WTI crude oil

prices. Because it is not possible to predict future oil prices, the

BLM has chosen to remain with a straight-line royalty reduction for

purposes of simplicity as well as to parallel the stripper property

royalty reduction rule.

Some comments stated that the rule should use 25 degrees as a

``heavy oil'' cutoff (rather than the 20 degrees proposed) in order to

maximize the rule's effects and to provide the rule's benefits to as

many operators as possible. Although there is no single accepted

definition for ``heavy oil,''

[[Page 4750]]

standard academic and industry practice is to reserve the term for

crude oils of less than 20 degrees API. The U.S. tax code also uses a

20 degree definition.

One comment stated that BLM should evaluate the stripper oil

royalty reduction before granting heavy oil royalty relief. The BLM is

in the process of evaluating the stripper well provisions. The stripper

well provisions have not been in place long enough to make a

substantive assessment.

One comment strongly opposed heavy oil royalty relief, stating that

the BLM has no data which demonstrate that the leases eligible for the

relief cannot be operated successfully under the lease terms or that

the continued operation of each heavy crude lease is in serious,

unavoidable jeopardy. Although this is an important consideration, this

is not the criterion for relief that is serving as the basis of this

determination. The Secretary, acting through the Assistant Secretary--

Land and Minerals Management, concludes, based on the DOE analysis

cited in the introduction, that this rule is necessary to promote the

development of heavy oil. Recoverable reserves are projected to be

significantly less in the absence of the royalty relief provided by

this rule.

One comment stated that this rule will provide insufficient relief

on leases in true jeopardy and windfalls for those without need. The

BLM believes that there are enough similarities in terms of the

economic pressures on producers of heavy oil that any such relative

disparities in levels of relief should be inconsequential. Furthermore,

the rule is sensitive to the particular gravity of the heavy oil being

produced, so that producers of less valuable heavy oil receive a higher

proportion of royalty relief.

One comment stated that even if State revenues increase, royalty

reductions will hurt State services. (Revenues include all forms of

income including royalties.) According to the DOE analysis, the effects

to Federal and State revenues should be largely neutral. Slight royalty

decreases could be possible at some oil prices for States with moderate

levels of heavy oil production.

In California, where almost 91 percent of the heavy oil production

takes place, the DOE analysis generally projects small to moderate

decreases in royalties. For instance, at $16 a barrel (WTI), DOE

projects that this rule will decrease California royalties by about

$3.5 million, while increasing California public sector revenue by

about $15 million. At $18 a barrel (WTI), DOE projects that this rule

will decrease California royalties by about $24 million, while

decreasing California public sector revenue by about $1 million. At $20

a barrel (WTI), DOE projects that this rule will increase California

royalties by about $1 million, while increasing California public

sector revenue by about $104 million. The wide variations in

sensitivity to the price of oil are due to numerous variables,

including the propensity for oil companies to invest in major recovery

projects at certain oil prices. (Letter Report from Department of

Energy dated July 29, 1994.)

IV. Procedural Matters

This rule is not a major Federal action significantly affecting the

quality of the human environment and that no detailed statement

pursuant to Section 102 (2)(C) of the National Environmental Policy Act

of 1969 (42 U.S.C. 4332(2)(C)) is required.

This rule has been reviewed under Executive Order 12866.

The BLM has determined that this final rule will not have a

significant economic impact on a substantial number of small entities

under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The BLM

has prepared a regulatory flexibility analysis. It is available upon

request from the address listed at the beginning of this rule.

Additionally the BLM has determined, under Executive Order 12630, that

the rulemaking will not cause a taking of private property.

The BLM has certified that these regulations meet the applicable

standards provided in sections 2(a) and 2(b)(2) of Executive Order

12778.

The information collection requirements of this rule have been

approved by the Office of Management and Budget under 44 U.S.C. 3501 et

seq. and assigned clearance numbers 1010-0090 and 1004-0145.

The principal author of this final rule is Dr. John W. Bebout,

Senior Technical Specialist, Fluids Group, assisted by Charles Hunt of

the Regulatory Management Team, Bureau of Land Management.

List of Subjects for 43 CFR Part 3100

Land Management Bureau, Public Lands--mineral resources, Oil and

gas production, Mineral royalties.

For the reasons stated in the preamble, and under the authorities

cited below, Part 3100, Group 3100, Subchapter C, Chapter II of Title

43 of the Code of Federal Regulations is amended as set forth below:

V. Regulatory Text

PART 3100--OIL AND GAS LEASING

1. The authority citation for part 3100 continues to read as

follows:

Authority: 30 U.S.C. 181, et seq., 30 U.S.C. 351-359.

Subpart 3103--Fees, Rentals and Royalty

Sec. 3103.2-2 [Amended]

2.-3. Section Sec. 3103.2-2 is amended by removing the cross

reference ``Sec. 3103.4-2(d)'' in the introductory text and adding in

its place the cross reference ``Sec. 3103.4-4(d).''

4. Sec. 3103.4 is amended by revising the heading to read as

follows:

Sec. 3103.4 Production incentives.

Sec. 3103.4-2 [Redesignated as Sec. 3103.4-4]

5. Section 3103.4-2 is redesignated as Sec. 3103.4-4.

6. Section 3103.4-1 is amended by redesignating paragraphs (c) and

(d) as paragraphs (a) and (b) of a new Sec. 3103.4-2, ``Stripper well

royalty reductions.'' Section 3103.4-1 is further amended by

redesignating paragraph (e) as (c), and revising the section heading

and paragraph (b)(1) to read as follows:

Sec. 3103.4-1 Royalty reductions.

* * * * *

(b)(1) An application for the benefits under paragraph (a) of this

section on other than stripper oil well leases or heavy oil properties

must be filed by the operator/payor in the proper BLM office. (Royalty

reductions specifically for stripper oil well leases or heavy oil

properties are discussed in Sec. 3103.4-2 and Sec. 3103.4-3

respectively.) The application must contain the serial number of the

leases, the names of the record title holders, operating rights owners

(sublessees), and operators for each lease, the description of lands by

legal subdivision and a description of the relief requested.

7. Newly designated Sec. 3103.4-2, paragraph (b)(3)(iii)(A) is

amended by removing the cross reference ``(d)(3)(ii)'' and adding in

its place the cross reference ``(b)(3)(ii).''

8. A new Sec. 3103.4-3 is added to read as follows:

Sec. 3103.4-3 Heavy oil royalty reductions.

(a)(1) A heavy oil well property is any Federal lease or portion

thereof segregated for royalty purposes, a communitization area, or a

unit participating area, operated by the same operator, that produces

crude oil with a weighted average gravity of less than 20 degrees as

measured on the American Petroleum Institute (API) scale.

[[Page 4751]]

(2) An oil completion is a completion from which the energy

equivalent of the oil produced exceeds the energy equivalent of the gas

produced (including the entrained liquefiable hydrocarbons) or any

completion producing oil and less than 60 MCF of gas per day.

(b) Heavy oil well property royalty rate reductions will be

administered according to the following requirements and procedures:

(1) The Bureau of Land Management requires no specific application

form for the benefits under paragraph (a) of this section for heavy oil

well properties. However, the operator/payor must notify, in writing,

the proper BLM office that it is seeking a heavy oil royalty rate

reduction. The letter must contain the serial number of the affected

leases (or, as appropriate, the communitization agreement number or the

unit agreement name); the names of the operators for each lease; the

calculated new royalty rate as determined under paragraph (b)(2) of

this section; and copies of the Purchaser's Statements (sales receipts)

to document the weighted average API gravity for a property.

(2) The operator must determine the weighted average API gravity

for a property by averaging (adjusted to rate of production) the API

gravities reported on the operator's Purchaser's Statement for the last

3 calendar months preceding the operator's written notice of intent to

seek a royalty rate reduction, during each of which at least one sale

was held. This is shown in the following 3 illustrations:

(i) If a property has oil sales every month prior to requesting the

royalty rate reduction in October of 1996, the operator must submit

Purchaser's Statements for July, August, and September of 1996;

(ii) If a property has sales only every 6 months, during the months

of March and September, prior to requesting the rate reduction in

October of 1996, the operator must submit Purchaser's Statements for

the months of September 1995, and March and September 1996; and

(iii) If a property has multiple sales each month, the operator

must submit Purchaser's Statements for every sale for the 3 entire

calendar months immediately preceding the request for a rate reduction.

(3) The following equation must be used by the operator/payor for

calculating the weighted average API gravity for a heavy oil well

property:

[GRAPHIC] [TIFF OMMITTED] TR08FE96.000

Where:

V1=Average Production (bbls) of Well #1 over the last 3

calendar months of sales

V2=Average Production (bbls) of Well #2 over the last 3

calendar months of sales

Vn=Average Production (bbls) of each additional well (V3,

V4, etc.) over the last 3 calendar months of sales

G1=Average Gravity (degrees) of oil produced from Well #1 over

the last 3 calendar months of sales

G2=Average Gravity (degrees) of oil produced from Well #2 over

the last 3 calendar months of sales

Gn=Average Gravity (degrees) of each additional well (G3,

G4, etc.) over the last 3 calendar months of sales

Example: Lease ``A'' has 3 wells producing at the following

average rates over 3 sales months with the following associated

average gravities: Well #1, 4,000 bbls, 13 deg. API; Well #2, 6000

bbls, 21 deg. API; Well #3, 2,000 bbls, 14 deg. API. Using the

equation above--

[GRAPHIC] [TIFF OMMITTED] TR08FE96.001

(4) For those properties subject to a communitization agreement

or a unit participating area, the weighted average API oil gravity

for the lands dedicated to that specific communitization agreement

or unit participating area must be determined in the manner

prescribed in paragraph (b)(3) of this section and assigned to all

property subject to Federal royalties in the communitization

agreement or unit participating area.

(5) The operator/payor must use the following procedures in

order to obtain a royalty rate reduction under this section:

(i) Qualifying royalty rate determination.

(A) The operator/payor must calculate the weighted average API

gravity for the property proposed for the royalty rate reduction in

order to verify that the property qualifies as a heavy oil well

property.

(B) Properties that have removed or sold oil less than 3 times

in their productive life may still qualify for this royalty rate

reduction. However, no additional royalty reductions will be granted

until the property has a sales history of at least 3 production

months (see paragraph (b)(2) of this section).

(ii) Calculating the qualifying royalty rate. If the Federal

leases or portions thereof (e.g., communitization or unit

agreements) qualify as heavy oil property, the operator/payor must

use the weighted average API gravity rounded down to the next whole

degree (e.g., 11.7 degrees API becomes 11 degrees), and determine

the appropriate royalty rate from the following table:

Royalty Rate Reduction for Heavy Oil

------------------------------------------------------------------------

Royalty Rate

Weighted average API gravity (degrees) (percent)

------------------------------------------------------------------------

6....................................................... 0.5

7....................................................... 1.4

8....................................................... 2.2

9....................................................... 3.1

10...................................................... 3.9

11...................................................... 4.8

12...................................................... 5.6

13...................................................... 6.5

14...................................................... 7.4

15...................................................... 8.2

16...................................................... 9.1

17...................................................... 9.9

18...................................................... 10.8

19...................................................... 11.6

20...................................................... 12.5

------------------------------------------------------------------------

(iii) New royalty rate effective date. The new royalty rate will be

effective on the first day of production 2 months after BLM receives

notification by the operator/payor. The rate will apply to all oil

production from the property for the next 12 months (plus the 2

calendar month grace period during which the next 12 months' royalty

rate is determined in the next year). If the API oil gravity is 20

degrees or greater, the royalty rate will be the rate in the lease

terms.

Example: BLM receives notification from an operator on June 8,

1996. There is a two month period before new royalty rate is

[[Page 4752]]

effective--July and August. New royalty rate is effective September 1,

1996.

(iv) Royalty rate determinations in subsequent years.

(A) At the end of each 12-month period, beginning on the first day

of the calendar month the royalty rate reduction went into effect, the

operator/payor must determine the weighted average API oil gravity for

the property for that period. The operator/payor must then determine

the royalty rate for the following year using the table in paragraph

(b)(5)(ii) of this section.

(B) The operator/payor must notify BLM of its determinations under

this paragraph and paragraph (b)(5)(iv)(A) of this section. The new

royalty rate (effective for the next 12 month period) will become

effective the first day of the third month after the prior 12 month

period comes to a close, and will remain effective for 12 calendar

months (plus the 2 calendar month grace period during which the next 12

months' royalty rate is determined in the next year). Notification must

include copies of the Purchaser's Statements (sales receipts) and be

mailed to the proper BLM office. If the operator does not notify the

BLM of the new royalty rate within 60 days after the end of the subject

12-month period, the royalty rate for the heavy oil well property will

return to the rate in the lease terms.

Example: On September 30, 1997, at the end of a 12-month royalty

reduction period, the operator/payor determines what the weighted

average API oil gravity for the property for that period has been.

The operator/payor then determines the new royalty rate for the next

12 month using the table in paragraph (b)(5)(ii) of this section.

Given that there is a 2-month delay period for the operator/payor to

calculate the new royalty rate, the new royalty rate would be

effective December 1, 1997 through November 30, 1998 (plus the 2

calendar month grace period during which the next 12 months' royalty

rate is determined--December 1, 1998 through January 31, 1999).

(v) Prohibition. Any heavy oil property reporting an API average

oil gravity determined by BLM to have resulted from any manipulation of

normal production or adulteration of oil sold from the property will

not receive the benefit of a royalty rate reduction under this

paragraph (b).

(vi) Certification. The operator/payor must use the applicable

royalty rate when submitting the required royalty reports/payments to

the Minerals Management Service (MMS). In submitting royalty reports/

payments using a royalty rate reduction authorized by this paragraph

(b), the operator/payor must certify that the API oil gravity for the

initial and subsequent 12-month periods was not subject to manipulation

or adulteration and the royalty rate was determined in accordance with

the requirements and procedures of this paragraph (b).

(vii) Agency action. If an operator/payor incorrectly calculates

the royalty rate, the BLM will determine the correct rate and notify

the operator/payor in writing. Any additional royalties due are payable

to MMS immediately upon receipt of this notice. Late payment or

underpayment charges will be assessed in accordance with 30 CFR

218.102. The BLM will terminate a royalty rate reduction for a property

if BLM determines that the API oil gravity was manipulated or

adulterated by the operator/payor. Terminations of royalty rate

reductions for individual properties will be effective on the effective

date of the royalty rate reduction resulting from a manipulated or

adulterated API oil gravity so that the termination will be retroactive

to the effective date of the improper reduction. The operator/payor

must pay the difference in royalty resulting from the retroactive

application of the non-manipulated rate. The late payment or

underpayment charges will assessed in accordance with 30 CFR 218.102.

(6) The BLM may suspend or terminate all royalty reductions granted

under this paragraph (b) and terminate the availability of further

heavy oil royalty relief under this section--

(i) Upon 6 month's notice in the Federal Register when BLM

determines that the average oil price has remained above $24 per barrel

over a period of 6 consecutive months (based on the WTI Crude average

posted prices and adjusted for inflation using the implicit price

deflator for gross national product with 1991 as the base year), or

(ii) After September 10, 1999, if the Secretary determines the

royalty rate reductions authorized by this paragraph (b) have not been

effective in reducing the loss of otherwise recoverable reserves. This

will be determined by evaluating the expected versus the actual

abandonment rate, the number of enhanced recovery projects, and the

amount of operator reinvestment in heavy oil production that can be

attributed to this rule.

(7) The heavy oil well property royalty rate reduction applies to

all Federal oil produced from a heavy oil property.

(8) If the lease royalty rate is lower than the benefits provided

in this heavy oil well property royalty rate reduction program, the

lease rate prevails.

(9) If the property qualifies for a stripper well property royalty

rate reduction, as well as a heavy oil well property reduction, the

lower of the two rates applies.

(10) The operator/payor must separately calculate the royalty for

gas production (including condensate produced in association with gas)

from oil completions using the lease royalty rate.

(11) The minimum royalty provisions of Sec. 3103.3-2 will continue

to apply.

Sec. 3140.1-4 [Amended]

9. Section Sec. 3140.1-4(c)(3) is amended by removing the cross

reference ``Sec. 3103.4-1'' and adding in its place the cross reference

``Sec. 3103.4.''

Sec. 3165.1 [Amended]

10. Section Sec. 3165.1(b) is amended by removing the cross

reference ``Sec. 3103.4-2'' and adding in its place the cross reference

``Sec. 3103.4-4.''

Dated: November 8, 1995.

Bob Armstrong,

Assistant Secretary of the Interior.

[FR Doc. 96-2433 Filed 2-7-96; 8:45 am]

BILLING CODE 4310-84-P