Modifications to the Bid Adequacy Procedures

[Federal Register Volume 64, Number 132 (Monday, July 12, 1999)]
[Notices]
[Pages 37560-37562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17662]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service


Modifications to the Bid Adequacy Procedures

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Notification of procedural change.

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SUMMARY: The Minerals Management Service (MMS) has changed a criterion 
in its existing bid adequacy procedures for ensuring receipt of fair 
market value on Outer Continental Shelf (OCS) oil and gas leases. The 
change ensures consistency in the evaluation of tracts.

DATES: This modification is effective July 1, 1999.

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

What Definitions Apply to These Procedures?

    The MROV is a dollar measure of a tract's expected net present 
value, if that tract is leased in the current sale. The calculation of 
the MROV allows for exploration and economic risk, and includes tax 
consequences, e.g., depletion of the cash bonus.
    The delayed MROV (DMROV) is a measure used to determine the size of 
the high bid needed in the current sale to equalize it with the 
discounted sum of the bonus and royalties expected in the next sale, 
less the foregone royalties from the current sale. The bonus for the 
next sale is computed as the MROV associated with the delay in leasing 
under the projected economic, engineering, and geological leasing 
receipts conditions, including drainage. If the high bid exceeds the 
DMROV, then the leasing receipts from the current sale are expected to 
be greater than those from the next sale, even in cases in which the 
MROV exceeds the high bid.
    The Adjusted Delayed Value (ADV) is the minimum of the MROV and the 
DMROV.
    The RAM is the revised arithmetic average measure of the MROV and 
all qualified bids on a tract that are equal to at least 25 percent of 
the high bid.
    Anomalous bids are all but the highest bid submitted for a tract by 
the same company (bidding alone or jointly with another company), 
parent, or subsidiary. These bids are excluded when applying the number 
of bids rule or any other bid adequacy measure.
    Legal bids are those bids which comply with the MMS regulations (30 
CFR 256) and the Notice of Sale, e.g., equal or exceed the specified 
minimum bid. Any illegal bid will be returned to the bidder.
    Qualified bids are those bids that are legal and not anomalous.
    MONTCAR is a probabilistic, cash flow computer simulation model 
used to conduct a resource-economic evaluation that results in an 
estimate of the expected net present value of a tract (or prospect).
    Nonviable tracts or prospects are those geographic or geologic 
configurations of hydrocarbons that are estimated to be uneconomic to 
produce with the costs and anticipated future prices used in the 
analysis.
    Within the context of our bid adequacy procedures, the term 
``unusual bidding patterns'' typically refers to a situation in which 
two or more companies bid against each other more often than would 
normally be expected. Companies could agree to bid against each other 
on certain sets of tracts in a sale so that the number of bids rule 
would apply for bid acceptance. Other forms of unusual bidding patterns 
exist as well, and generally involve anti-competitive practices, e.g., 
if it appears that companies are attempting to avoid bidding against 
each other in a sale on a set of prospective tracts.
    A confirmed tract is a previously leased tract having a well(s) 
which encountered hydrocarbons and may have produced. It contains some 
oil and/or gas resources whose volume may or may not be known.
    A development tract is a tract which has nearby productive (past or 
currently capable) wells with indicated hydrocarbons and which 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.
    A drainage tract is a tract which has a nearby well which is 
capable of producing oil or gas, and the tract could incur drainage if 
and when such a well is placed on production. The reservoir, from which 
the nearby well is capable of producing, is interpreted to extend under 
the drainage tract to some extent.
    A wildcat tract is a tract which has neither nearby productive 
(past or currently capable) wells, nor is interpreted to have a 
productive reservoir extending under the tract. It has high risk in 
addition to sparse well control.
    Water depth categories for bid adequacy purposes in the Gulf of 
Mexico are designated as (1) less than 800 meters and (2) 800 meters or 
more.

[[Page 37561]]

If different water depth categories are used for a Gulf of Mexico sale, 
they will be specified in the sale's final notice. For areas other than 
the Gulf of Mexico, all tracts will be considered to be in the same 
water depth category, unless an alternative is specified in the final 
notice of sale.

What Problem Is Addressed by the Change?

    In any OCS lease sale, a limited number of tracts may be 
reclassified from drainage or development (DD) in Phase 1 of the bid 
evaluation process to confirmed or wildcat (CW) in Phase 2. (The MMS 
reclassifies a tract if additional Phase 2 analysis supports a 
classification different than the one assigned the tract in Phase 1 of 
the evaluation.) However, under the old bid adequacy procedures, a 
tract classified as CW in Phase 1 was evaluated under different 
criteria than a tract that was reclassified as CW in Phase 2. This 
change ensures the consistent treatment of similarly classified tracts 
whether they are evaluated in Phase 1 or Phase 2.

What Change Is Being Made?

    In Phase 1 of the bid adequacy procedures, the MMS classifies 
tracts as either CW or DD based on information available at the time of 
sale. Under the old (February 10, 1999) guidelines, tracts within 
designated water depth categories that were reclassified from DD to CW 
in Phase 2 only had to have a third largest bid within 50 percent of 
the high bid to be accepted. Now, DD tracts reclassified as CW tracts 
must satisfy the same criteria for acceptance that would have had to 
been met if they were classified as CW in Phase 1.
    To ensure consistency in evaluations, the following change is being 
made. In Phase 1, for CW tracts receiving three-or-more qualified bids, 
acceptance under the number of bids rule will apply only if the third 
largest bid is within 50 percent of the high bid, and if the high bid 
is in the top 75 percent of high bids on a per acre basis for all 
three-or-more-bid tracts within designated water depth categories. In 
Phase 2 of the bid evaluation process, DD tracts that have been 
reclassified as CW will be subject to the same screening criteria that 
the CW tracts with three-or-more bids had to meet in Phase 1.

How Are Bids Evaluated?

    During the bid review process, we conduct evaluations in a two-
phased procedure for bid adequacy determination. We also review bids to 
ensure that they are for at least the minimum amount specified in the 
notice of sale and that unusual bidding patterns are not present.

What Happens in Phase 1 of the Bid Adequacy Procedures?

    In Phase 1, we partition the tracts receiving bids into three 
general categories:
    1. Those tracts with three-or-more bids, on which competitive 
market forces can be used to assure fair market value;
    2. Those tracts which we identify as being nonviable based on 
adequate data and maps; and
    3. Those tracts which we identify as being viable and on which we 
have the most detailed and reliable data, including tracts classified 
as DD.

What Phase 1 Rules Are Applied to All Tracts Receiving Bids?

    Six Phase 1 rules are applied to all tracts receiving bids:
    1. We accept the highest qualified bid on viable CW tracts 
receiving three-or-more qualified bids if the third largest bid on the 
tract is at least 50 percent of the highest qualified bid and if the 
high bid per acre ranks in the top 75 percent of high bids for all 
three-or-more-bid tracts within a specified water depth category.
    2. We accept the highest qualified bid on CW tracts that we 
determine to be nonviable.
    3. We pass to Phase 2 all tracts that require additional 
information to make a determination on viability or tract type.
    4. We pass to Phase 2 all viable CW tracts receiving one or two 
qualified bids.
    5. We pass to Phase 2 all viable CW tracts receiving three-or-more 
qualified bids if either the third largest such bid is less than 50 
percent of the highest qualified bid or if the high bid per acre ranks 
in the lowest 25 percent of high bids for all three-or-more-bid tracts 
in the specified water depth category.
    6. We pass to Phase 2 all DD tracts.

How is the Percentile Ranking of a Tract's High Bid Calculated?

    The percentile ranking of a tract's high bid is calculated by 
multiplying 100 times the ratio of the numerical ordering of the three-
or-more-bid tract's high bid to the total number of all three-or-more-
bid tracts in the designated water depth. For example, suppose there 
are 21 total tracts identified in Phase 1 as receiving three-or-more-
bids in the designated water depth category of at least 800 meters. All 
tracts in this set having a high bid among the top 15 high bids would 
satisfy the 75 percent requirement; the 15th ranked high bid would 
represent the 71st percentile, i.e., (100*(15/21)=71).

Can any Other Procedures be Used in Phase 1 to Ensure the Receipt 
of Fair Market Value?

    In ensuring the integrity of the bidding process, the Regional 
Director may identify an unusual bidding pattern at any time during the 
bid review process, but before a tract's high bid is accepted. If the 
finding is documented, the Regional Director has discretionary 
authority, after consultation with the Solicitor, to pass those 
identified tracts to Phase 2 for further analysis. The Regional 
Director may eliminate all but the largest of the unusual bids from 
consideration when applying any bid adequacy rule, may choose not to 
apply a bid adequacy rule, or may reject the tract's highest qualified 
bid.

How Long Does it Take To Complete the Phase 1 Procedures?

    These procedures are generally completed within 3 weeks of the bid 
opening. All the leases that will be awarded as a result of the Phase 1 
analysis are announced at the end of this period.

How Long do the Phase 2 Procedures Take?

    The Phase 2 bid adequacy determinations are normally completed 
sequentially over a period ranging between 21 and 90 days after the 
sale. Leases are awarded as the analysis of bids is completed over this 
time period. The total evaluation period can be extended, if needed, at 
the Regional Director's discretion (61 FR 34730, July 3, 1996).

What are the Initial Steps of the Bid Adequacy Process that are 
Followed in Phase 2?

    Activities to assess bids are undertaken by analyzing, 
partitioning, and evaluating tracts in two steps:
    1. Further mapping and/or analysis is performed to review, modify, 
and finalize viability determinations and tract classifications.
    2. Tracts we identify as being viable must undergo an evaluation to 
determine if fair market value has been received.

What Decision Rules are Applied in Phase 2 of the Bid Evaluation 
Process?

    After completing the initial two steps, a series of rules and 
procedures are followed.
    1. We accept the highest qualified bid on newly classified CW 
tracts having three-or-more qualified bids if its third

[[Page 37562]]

largest bid is at least 50 percent of the highest qualified bid and if 
its high bid per acre ranks in the top 75 percent of high bids for all 
three-or-more-bid tracts that reside within its specified water depth 
category.
    2. We accept the highest qualified bid on all tracts determined to 
be nonviable.
    3. We determine whether any categorical fair market evaluation 
technique(s) will be used.
    If so we:
    A. Evaluate, define, and identify the appropriate threshold 
measure(s) for bid acceptance.
    B. Accept all tracts whose individual measures of bid adequacy 
satisfy the threshold categorical requirements.
    4. We conduct a full-scale evaluation, which could include the use 
of MONTCAR, on all remaining tracts passed to Phase 2 and still 
awaiting an acceptance or rejection decision.

What Subset of Tracts Comprise the ``Remaining Tracts'' That Still 
Need a Phase 2 Acceptance or Rejection Decision?

    The remaining tracts include tracts not accepted by a categorical 
rule that we classify as:
    1. DD tracts, or
    2. CW tracts that are viable and received:
    A. One or two qualified bids, or
    B. Three-or-more qualified bids, if either its third largest bid is 
less than 50 percent of the highest qualified bid or the high bid is in 
the bottom 25 percent of all three-or-more-bid CW tracts within a 
designated water depth category.

What Procedures are Followed for Evaluating the Adequacy of Bids on 
These Tracts?

    For these tracts we:
    1. Accept the highest qualified bid, if it equals or exceeds the 
tract's ADV.
    2. Reject the highest qualified bid on DD tracts receiving three-
or-more qualified bids, if the high bid is less than one-sixth of the 
tract's MROV.
    3. Reject the highest qualified bid on DD tracts receiving one or 
two qualified bids and on CW tracts receiving only one qualified bid, 
if the high bid is less than the tract's ADV.

What Happens Next to the Tracts Still Awaiting an Acceptance or 
Rejection Decision?

    At this stage of the process, the tracts still awaiting a decision 
consist of those having a highest qualified bid that is less than the 
ADV that are either:
    1. DD tracts receiving three-or-more qualified bids with the 
highest bid exceeding one-sixth of the tract's MROV or
    2. Viable CW tracts that receive two-or-more qualified bids.
    From these tracts, we select the following:
    A. DD tracts having three-or-more qualified bids with the third 
largest bid being at least 25 percent of the highest qualified bid, and
    B. CW tracts having two-or-more qualified bids with the second 
largest bid being at least 25 percent of the highest qualified bid.
    We then compare the highest qualified bid on each of these selected 
tracts to the tract's RAM. For all these tracts, we:
    1. Accept the highest qualified bid, if the high bid equals or 
exceeds the tract's RAM, or
    2. Reject the highest qualified bid, if the high bid is less than 
the tract's RAM.
    Finally, we identify those tracts that are still awaiting a 
decision, but did not meet the requirements for comparison to the RAM 
and we reject the high bid on these tracts.
    At this point, the acceptance or rejection decisions are made on 
all the high bids in the sale. The successful bidders are notified and 
their leases are awarded after the full payment of the high bid is 
received. The unsuccessful bidders are notified as well and their bid 
deposits are returned. Unsuccessful bidders may appeal a bid rejection 
decision as described in 30 CFR 256.47(e)(3).

    Dated: July 1, 1999.
Carolita U. Kallaur,
Associate Director for Offshore Minerals Management.
[FR Doc. 99-17662 Filed 7-9-99; 8:45 am]
BILLING CODE 4310-MR-P