if cancellation is to be imposed, they are entitled to the fair value of their rights. Lessees who obtain their rights after enactment of the 1977 Act would have specific notice of the possibility of cancellation and could thus include this risk in calculating their bids. Any expenses or costs, not matched by revenues derived from the lease interests, would be totally compensated. The value of the resources remaining in the lease tract, unless less than the uncompensated costs and thus part of the risk undertaken by the lessee at the time of his bid, would not be.

Finally, the committee determined that if any lease, old or new, is canceled for national security or defense reasons, this is a decision by the Federal Government to assume responsibility for that lease tract and the lessee is entitled to fair value rather than restitution.

Clean air requirements

The committee was concerned about the effects of OCS activities on the quality of air above the leasing areas of the Shelf and on the quality of air above adjacent on-shore coastal areas. It, therefore, adopted provisions requiring the Secretary to promulgate regulations to insure adequate air quality. Such regulations deal with two specific air quality issues.

Under the Clean Air Act, 42 U.S.C. 1857, States maintain primary responsibility for assuring air quality within their jurisdiction. Such responsibility is undertaken by the establishment of an implementation plan to achieve, maintain, and enforce air quality standards. The 1977 amendments require the Secretary to promulgate regulations, and to be responsible, for control of the impacts of emissions occurring on the OCS which affect on-shore ambient air quality. In promulgating these regulations, the Secretary should seek to insure that OCS activities do not prevent the attainment of air standards in adjacent States or hinder the programs established by States by their implementation plans. It is not the purpose of this provision to extend the present coverage of the Clean Air Act (requiring, for example the establishment of primary classifications). It is intended that in establishing procedures and standards for OCS activities under this provision, the Secretary would consult with the proper federal, state and local officials and would take into consideration standards established by the Clean Air Act and any applicable state implementation plan.

Secondly, the committee requires the Secretary to promulgate regulations to insure air quality above OCS areas. While reference can be made to standards and guidelines established by the Clean Air Act, it is not intended that the Secretary be bound by the Clean Air Act, but rather that he promulgate, after consultation with other appropriate Federal officials, his own regulations as to OCS operations and their effect on the quality of the air above the OCS.

To insure adequate consideration of air quality regulations, provisions have been included in section 25, on development and production plans to require modifications or disapprovals for failure to comply with clean air requirements.

Rights of way

The committee revised section 5(e) of the OCS Lands Act of 1953 to give the Secretary of Interior, and where appropriate, the Depart

ment of Transportation, broadened authority over the granting of pipeline rights-of-way on the Outer Continental Shelf. Specifically, the limitation on the authority regarding pipelines to matters pertaining to the survey, width and location has been eliminated and the Secretary's general regulatory authority under section 5(a)(1), to regulate off-shore pipelines in the interest of conservation and for the prevention of waste, is made explicit. In addition, the subsection has been revised to assure maximum environmental protections as to pipeline placement and safety. Among other things, the subsection now requires use of the best available and safest technology.

The committee intends that this requirement refer to technology actually available.

It is the committee's express intent that the Secretary of Transportation maintain his present authority, pursuant to his responsibilities under the Natural Gas Pipeline Safety Act of 1968, and otherwise through the Office of Pipeline Safety, as to off-shore pipelines. The committee is aware of the memorandum of understanding between the Department of Transportation and the Department of Interior and intends that the jurisdictional responsibilities under that memorandum be maintained.

Rates of production

Subsection (f) provides for application of provisions as to the rate of production of oil and gas on a lease. It should read in light of section 506 of this 1977 Act which requires the Secretary to make an independent determination of such rates and their validity. The Energy Policy and Conservation Act, Public Law 94-163, 89 Stat. 871, section 106, 42 U.S.C. 6214, allows the President to require crude oil and mineral gas or both to be produced from fields on Federal land, including the Outer Continental Shelf, at maximum efficient rates of production, and at temporary emergency production rates during a severe energy supply interruption. Paragraph (1) of subsection (f) provides that if any such rule or order is issued by the President, under the Energy Policy and Conservation Act, or any other provision of law, the lessee is to produce at rates consistent with such rule or order. Paragraph (2), however, provides that if no rule or order is established by the President, the Secretary is to promulgate regulations to insure the maximum rate of production and that the lessee is to produce oil or gas, or both, at rates consistent with any such regulation.

This subsection essentially adopts the language of section_106 (e)(1) of the Energy Policy and Conservation Act (Public Law 94-163) in defining the maximum efficient rate of production and is similar to the language used in section 7420 (6) of the Naval Petroleum Reserves Production Act of 1976 (Public Law 94-258). This subsection recognizes that engineering, technological, economic and safety factors must be considered in setting such a rate.

The Secretary is granted the discretion, after such rate is established, to permit variances when necessary. Industry would have the right to comment on any proposed regulations, as would any other interested citizen, prior to the promulgation of a final and effective regulation.

Other provisions

Subsection (a) also specifically instructs the Secretary of the Interior to promulgate regulations for assignment or relinquishment of leases; unitization, pooling and drilling agreements; subsurface storage of oil and gas, drilling arrangements, and for the prompt and efficient exploration and development of a lease area.

Subsection (b) makes it explicit that the issuance, extension or continuance of any lease is conditioned upon compliance by the lessee with the regulations issued under the Act. They are to be considered part of the lease terms. Any regulation promulgated after the issuance of a lease, if reasonable, would have retroactive application.

Subsections (c) and (d) readopt into section 5 former paragraphs (b) (1) and (b) (2), respectively.

Subsection (c) provides for the cancellation of any non-producing lease for failure to comply with the Act, the lease terms, or applicable regulations. The holder of such non-producing lease which is cancelled may secure review of that decision in the U.S. district court, as provided in section 23 (b).

Subsection (d) provides for cancellation of any producing lease for failure to comply with the Act, lease terms, or applicable regulations. Such a cancellation can only occur after a proceeding in the appropriate U.S. district court, as provided in section 23(b).

Subsection (h) provides that after the date of enactment of the 1977 Act, no lessee can flare natural gas from any well, unless the Secretary of the Interior makes a specific finding that such a prohibition is not practicable. Practicable includes economic and efficiency considerations. Section 501 of the 1977 Act requires an annual report as to any wells that the Secretary permits to flare natural gas. Section 205.-Revision of Bidding and Lease Administration

Section 205 amends section 8 of the OCS Lands Act by providing new bidding options and procedures.

The original OCS Lands Act of 1953 provided that leases were to be awarded to the highest responsible qualified bidder, through competitive and sealed bidding procedures on the basis of a cash bonus, with a fixed royalty of no less than 122 per centum, or on the basis of a royalty, at no less than 121/2 per centum, and a fixed bonus. Subsection (a) of section 8 is amended to still require competitive, sealed bidding procedures and to still authorize bonus and royalty bids, but now also to specifically authorize eight (8) new bidding systems and to generally authorize any other new bidding system: (1) A fixed cash bonus bid with a diminishing or sliding royalty; (2) a cash bonus bid with a fixed share of the net profits of not less than 30 per centum; (3) a net profit share bid with a fixed cash bonus; (4) a cash bonus bid with a fixed royalty of no less than 122 per centum and a fixed net profit share of no less than 30 per centum; (5) a fixed cash bonus determined by acreage of not less than $62 per hectare with a "work commitment" in dollar amounts as the bid variable; (6) a fixed royalty of no less than 1211⁄2 per centum or a fixed share of the net profits of not less than 30 per centum with a "work commitment" in dollar amounts as the bid variable; (7) a fixed cash bonus determined by acreage, of not less

than sixty-two dollars ($62.00) per hectare, with a fixed royalty of not less than 1212 per centum or a fixed share of the net profits of not less than 30 per centum, and with a "work commitment" in dollar amounts as the bid variable; and (8) any other system of bid variables, terms and conditions in the Secretary's discretion.

Detailed procedures are also included in this subsection for the quantification of bids and the holding of lease sales using the various systems.

Several options provide for minimum royalties and net profit share. It might become uneconomic during later phases of production to exploit resources because of these minimums. Therefore, in paragraph (3) of the subsection, the Secretary is given the authority, after production has commenced, to reduce or eliminate any royalty of net profit shares so as to encourage complete exploitation of the re

sources in a lease area.

One problem of the present front-end bonus system is the need for a potential lessee to secure large amounts of capital for the payment of the front-end bonus immediately after a winning bid is accepted. Paragraph (2) of subsection (a) would permit the Secretary to possibly alleviate this problem by announcing, prior to a lease sale, that a cash bonus may be paid in installments according to a schedule, and specifically detailing the schedule. While the Secretary retains the discretion to determine the number of installments, the amounts or percentages to be paid in each installment, and the date of completion of payment, he cannot defer total payment for more than 5 years from the date of the lease sale.

Work commitment bids

Subparagraphs (G), (H), and (I) of paragraph (1) of subsection (a) specifically authorize use of a "work commitment” bid.

Representatives of small and middle-sized energy companies suggested that competition would be enhanced if "work commitment bidding" was authorized. In addition, this system would encourage rapid and extensive exploration and development of our off-shore resources. With more funds committed to exploration, it could reasonably be expected that the discovery rate and production time schedules will be substantially accelerated.

To insure that only responsible parties will obtain leases and to provide a financial return to the government, the Secretary must first set a minimum cash bonus, a minimum royalty, a minimum net profit share, or a minimum bonus and minimum royalty or net profit share. He would then offer a lease tract on the basis of the highest dollar amount promise to conduct activities on a tract area.

The "work commitment" would not merely be a general or even specific description of promised activities. Rather, it would be an actual amount to be spent in dollars. The committee adopted this "work commitment" procedure for three reasons. First, without a dollar amount as the bid variable, a work commitment bid would grant too much discretion to the Secretary in choosing the successful bidder. Under the 1977 amendments, while he retains the power to reject any insufficient bid or a bid from an unqualified bidder, whether under this or any other alternative, he can only accept the highest bid, based

on dollar amounts, under the work commitment alternative. Second, without a dollar amount as the variable, the selection of a successful bidder could lead to administrative conflicts as to a "best bid". Third, the committee was concerned that an unstructured work commitment bid might lead to unnecessary activity. To avoid this result, paragraph (5) makes it explicit that this dollar amount bid is a fixed promise to the Government. The Secretary is to carefully monitor activities to insure that unnecessary activity is not undertaken. In addition, the successful bidder has to pay to the Government the difference between the dollar amounts stated in the work commitment bid and the amounts actually spent. Of course, the lessee is free to spend more than the amounts provided in the bid.

Paragraph (5) also details other requirements to assure responsible activities pursuant to a work commitment bid. The lessee must, upon issuance of the lease, submit either a cash deposit, performance bond, or other guarantee. The amounts of such deposit, bond or guaranty can be reduced, as exploration activities continue, in light of the remaining obligation under the bid.

This deposit, bond, or guaranty is an assurance of diligence. It is forfeited if the Secretary determines that work is not being satisfactorily and faithfully undertaken. The lessee must submit periodic reports as to his activities. The Secretary is to review the reports and through this and other inspection techniques, insure proper action. He has the power to terminate activities if he determines that additional work would be unnecessary or cumulative. At the completion of activities, whether as determined by the lessee or by the Secretary when the initial lease period, including extensions, is over or when he finds additional work unnecessary or cumulative, any unspent amounts in the original bidded amount are to be paid to the Secretary. Finally, this paragraph details what costs are to be included as being valid expenditures towards a work commitment amount.

Nonenumerated bidding alternatives

The Secretary is specifically given the authority to use any other bidding system which he "determines to be useful to accomplish the purposes and policies" of the 1977 amendments. Two examples of possible alternatives are the "percentage leasing option," 48 commonly called the Phillips Plan and the "dual leasing option" described earlier in this analysis.49

In using any bidding system not specifically described in the bill, the Secretary, of course, is bound by the provisions of this section which require rulemaking prior to use of any bidding option other than front-end bonus or royalty (paragraph (4)), which detail the

48 S. 521, as passed by both the House and Senate, in the 94th Congress, specifically authorized use of percentage leasing systems which allows a group of companies to secure individual working interests in a lease area and to proceed to jointly explore and develop the lease area. Detailed provisions provided for the awarding of leases, the establishment of a joint working group and that the Government would be a nonvoting party to any such group. The committee, in light of testimony received during the 95th Congress that the system could be unworkable, deleted these provisions from the 1977 amendments. The committee did not, in any way, intend to bar the Secretary from using this system, of course, in accord with requirements for adequate regulations, for compliance with the purposes of use of new systems, and for providing reports to Congress on use, effectiveness and problems.

49 As described in the analysis as to the definition of the term, "lease", special rules apply as to use of a dual leasing system, including the submission of a report to Congress prior to its use.