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criteria for use of bidding systems to accomplish the necessary purposes and policies (paragraph 5), and which allow adequate congressional oversight by requiring periodic reports as to use, benefits and deficiencies of bidding systems and by requiring a statement describing systems to be used in any upcoming year.
Rulemaking Paragraph (4) of subsection (a) specifically requires adequate rulemaking procedures prior to use of any bidding system not allowable prior to the 1977 amendments, and to allow Congress to review these procedures, and inferentially, use of any new system.
All regulations, rules, orders, or other administrative decrees establishing the procedures for any of the new bidding systems, including any nonenumerated system, and any modifications of those procedures, shall first be published as proposed regulations, then followed by public hearings and finally promulgated as a rule. The language of the original OCS Act of 1953, as readopted by the 1977 amendments, require that the awarding of leases, include use of bidding systems, must be pursuant to "regulations promulgated in advance.” The purpose and intent of this paragraph is to make it clear, that, at least as to new bidding systems, notice and public hearings are required prior to final promulgation of a regulation and any modification. Such regulation would, of course, be necessary, for example, as to use of work commitment bids, and net profits bidding options, involving rules as to calculation of net profits.
This paragraph also requires the submission of any rule or regulation as to new bidding systems to Congress at least 30 days prior to its final promulgation. Paragraph (5) (D) requires the Secretary, in an annual report, to tell Congress of any plans to use new bidding systems in an upcoming year and to evaluate the expected benefits or costs of any new system. This paragraph would provide that, in addition, prior to final promulgation of any regulation, Congress will have another look at the new system and the
procedures to be used for implementation of those systems.
Of course, as provided in amended section 5 of this Act, any proposed regulations must be forwarded to the Attorney General and the Federal Trade Commission for their views as to their competitive impact. Similarly, they should be prepared after adequate consultation with other affected Federal agencies and with affected States.
Mandated use of new bidding systems Under existing law the Secretary is permitted to offer oil and gas leases on the basis of either (1) a cash bonus bid with a royalty fixed at no less than 1212 percent of the gross revenue from the lease, or (2) on the basis of a royalty rate bid with a fixed cash bonus. Since the OCS Lands Act was approved in 1953, virtually all OCS leases have been offered for cash bonus bids with a royalty rate fixed at 1623 of the gross value of production.
The Department of the Interior held a small scale test of royalty bidding in September 1974.
Witnesses before the committee indicated that the high front-end bonus bids may have created a barrier to the entry of small and medium-sized oil firms as well as other potential exploiters, to the OCS activity, and that these types of bids do not, after the completion of exploitation of a lease area, provide a fair return to the Government.
Others, including representatives from some of the larger oil companies, indicated their satisfaction with the present front-end bonus system in that it provides for rapid exploration and recovery of resources and has worked so as to provide maximum revenue with no risk to Government, and with ample opportunity for all to participate.
As indicated earlier, the 1977 amendments authorizes new bidding options. The basic thrust of all these new options is to reduce the reliance on large front-end cash bonuses as the means of obtaining a fair price for the public's property. The committee wants to authorize lease allocation systems that would encourage the widest possible participation in competitive lease sales consistent with receipt by the public of fair market value for its resources. The committee believes that arrangements can be effective in shifting new Government revenue away from initial bonuses and into deferred payments made out of a leaseholder's profits based on actual production of oil or gas.
In order to assure that these new bidding alternatives are used, the 1977 amendments limit the Secretary's authority to use the cash bonus—fixed royalty system, which has been the historical method of OCS bidding. The Secretary would have to use one of the new bidding systems in at least 50 percent of the total area offered for lease each year during the next 5 years, in frontier areas. However, if during the first year after enactment, the Secretary finds that compliance with this limitation would unduly delay OCS development, he may exceed the limit after reporting to Congress his findings and reasons. After the first year, the Secretary can only exceed the limitation if he demonstrates to Congress, in a report with specific findings and detailed reasons, that using new systems in 50 percent of the lease area offered would unduly delay efficient development, result in less than a fair return to the Federal Government, or result in a reduction of competition. Congress would have thirty (30) days to review the report and could disapprove and thereby, nullify the request to exceed the limitation by a resolution of either House.
It was the intention of the committee that there be a clear mandate given to the Secretary to require him to use bidding systems other than the cash bonus bid. However, it did provide the two limited "escape hatches” in recognition that there could be administrative problems involved in implementing new concepts and procedures.
Finally, the committee desired not to give preference to any class or type of bidders for any lease tracts. Some witnesses were concerned that use of bonus bid systems or nonbonus bid systems by the Secretary in any particular area might effectively bar aggressive competition.
By selecting the “best tracts” for offering under bonus bid systems, or for offering under nonbonus bid systems, he could limit the ability of some companies to participate in lease sales for these “best tracts.” To avoid such a possibility, the committee, in paragraph (6) required that, generally, he randomly select those areas to be offered under a bonus bid system and those which would be offered under a nonbonus
tion * * *
bid system. The random selection method is to be used only to select which tracts are bonus bid tracts and which are not bonus bid tracts. Once nonbonus bid tracts are identified, there is no requirement or random selection as to which of the alternative systems are to be used.50
To implement this provision, paragraph (6) requires, after nominations, and before selection of tracts, to publicly close, after adequate notice, the tracts under a random selection method. Of course, the random selection method to be used must also be described in advance of selection. Following such selection, the results are also to be published.
The committee was aware that certain circumstances might necessitate a straight, rather than random selection. The Secretary is therefore given the authority to withdraw any particular tract or tracts from use of the random selection technique and offer it or them under a bidding system he designates. However, exercise of this discretion would be carefully monitored as the Secretary could only exclude a tract if he makes a specific finding that random selection would "unduly delay or hinder exploration, development and produc
* * or prevent the receipt of fair return *** *."
Review of alternate lease systems The obvious intention of the committee in revising the procedures for use of new bidding systems is to determine what system or systems, in what situations, provide the best means to lease our federal resources in the Outer Continental Shelf. Subsection (a) is intended to provide procedures to answer this question. In addition to mandating use of new systems, to insure they are tested and studied, and to providing for random selection, to insure fair tests and studies, this subsection details four additional techniques to insure use of the best systems in the best places.
First, standards to be applied by the Secretary in selecting bidding alternatives are provided. The standards include providing fair return to the Federal Government, increasing competition, insuring safe operations, avoiding undue speculation, avoiding unnecessary delays in exploitation, discovering and developing resources in an efficient and timely manner, and limiting administrative burdens on both Government and industry.
Second, to secure as much information as possible as to the effect and value of alternative leasing systems, the Secretary is permitted to require bids to be submitted under more than one bidding system.
Third, the Secretary is authorized to require each bidder to submit bids in accordance with more than one bidding alternative, and then is authorized to select the bid that best satisfies the standards to be applied. Unlike the first multiple bid procedure, which is to be for statistical purposes, this multiple bid procedure would be to obtain the best bid.
50 For example, if the Secretary determines that one hundred tracts are to be offered in the upcoming sale, he then decides, in accordance with his annual mandate of use of new systems, how many are to be offered under the bonus bid option and how many under other options. If he decides on a 50-50 split, the 50 to be offered under each is determined by random selection. Those chosen for use of bonus bids will be offered under that system. Those chosen for use on non-bonus bids can be offered under any one or more of the alternatives as the Secretary in his discretion determines.
Finally, the Secretary is to annually report to Congress as to his use of the various bidding options. In addition to listing all previous and anticipated lease sales, he is to evaluate the benefits and costs associated with conducting lease sales using the various systems, to explain why any particular bidding system is not or will not be used, to explain if bidding systems other than the front-end and cash bonus bid were not actually used in areas actually leased, and to analyze the capability of each bidding system to accomplish the standards for bidding.
Joint bidding restrictions While there is no provision in the OCS Act of 1953 as to limiting joint bidding, the Secretary has prohibited, by regulation, any joint bid, where more than one of the joint bidders controls, directly or indirectly, an average daily production of 1.6 million barrels or more of oil or its equivalent. The recently enacted Energy Policy and Conservation Act, Public Law 94–163, 89 Stat. 871, 42 U.S.C. 6213, requires the Secretary of the Interior to preclude joint bids on OCS leases when more than one of the joint bidders is chargeable with production of 1.6 million barrels, or more, of crude oil or its equivalent, per day. However, the Energy Policy and Conservation Act allows the Secretary of the Interior to exempt any joint bidding prohibition for leases in frontier high risk, or high cost areas.
Most future Outer Continental Shelf activities will be in frontier areas. Moreover, the more risk in the lease area as to finding resources, the lower, rather than higher, the bid would be, and thus the less, rather than more, there will be a need for capital from more than one large company. The committee was concerned that the Energy Policy and Conservation Act might be construed, improperly, in light of the intention of Congress, to eliminate the present prohibition of joint bids in appropriate circumstances. To clarify and enact into positive law the intent of the committee, paragraph 7 of subsection (a) provides that the Secretary is to establish regulations permitting joint bids in appropriate circumstances. The regulations, however, cannot allow joint bids where more than one of the joint bidders controls directly or indirectly an average daily production of 1.6 million barrels a day in crude oil or its equivalent. To encourage competition, a larger company is permitted to combine with any number of smaller companies, but is to be precluded from combining with another large oil company in bidding on a lease. What is a large company, for these purposes, is left to the discretion of the Secretary. The Secretary has recently adopted the 1.6 million barrel per day standard, and the value of this standard in promoting competition has not been adequately tested. Thus, the committee set this figure as to the maximum amount to be used to determine what is a large company. However, as more information is obtained, the Secretary is given the discretion to set a lower barrel per day standard, by regulation.
Lease terms Subsection (b) of the amended section 8 provides for the terms of a lease. Under the original OCS Lands Act of 1953, a lease was to be for 5,760 acres. However, the committee learned in its testimony that acquiring leases for that amount of acreage might lead to inefficient exploration and development, and possible administrative burdens to both the Government and potential lessees. In some situations, structures or geological traps containing reserves of oil and natural gas or compact, concrete parts of such structures or traps, should be explored, developed, and produced as an entity, thus providing the most efficient exploitation. However, some structures or traps might be so large that only a few companies would be able to afford to bid and develop such leases, and thus, competition would be minimized. Finally, leasing of overly-large areas might avoid more than one exploration strategy, and thus preclude discovery and the efficient development of resources. To resolve these problems, paragraph (1) of subsection (b) eliminates the prior absolute limitation of 5,760 acres and provides that a lease can cover any larger area designated by the Secretary, when he finds such larger area makes a reasonable economic production unit. Any tract offered, whether 5,760 acres or more, must be compact, consisting of contiguous areas.
The present OCS Lands Act provides that a lease is for a period of 5 years, and then as long thereafter, as there is production or approved drilling operations. Concern was raised at the hearings of the committee that in some areas of unusually deep water or adverse weather conditions it might not be possible to complete exploration, even if the lessee was duly diligent, within the 5-year period. Paragraph 2 of subsection (b) provides that a lease is to be for 5 years, or 10 years when necessary to encourage exploration and development in areas of unusually deep water or adverse weather conditions. Such longer period might be necessary, for example, to allow careful exploration and mobilization of new technology if needed for such exploration or for further activities in event of a discovery. As in the original provision, a lease is to continue beyond the initial period, as long as oil and gas is produced or approved drilling operations are conducted.
As described in detail in the analysis of the new definition of "lease”, the 1977 amendments also allows leases to be for: (1) exploration alone; (2) development and production alone; (3) exploration, development and production; or (4) exploration and then development and production of part of a lease area. A lease not providing for a right to explore, develop and produce is subject to disapproval by a joint resolution of Congress.
The committee intends that competition be encouraged not only in the leasing and bidding states itself, but all along the OCS resource management process. Particularly, the committee desired to insure that the present competitive nature of the oil and gas refining procedures be encouraged. Assuring adequate supplies to small and independent refiners would, in addition, encourage competition in the marketing phase as many, if not most of the independent marketers receive a major portion of their supplies from small and independent refiners. Thus, in section 27, procedures are established for royalty or net profit share oil to go to such refiners. In addition, in this section, the Secretary is required to include as a lease term, a mandate that a lessee offer small and independent refiners twenty per centum of the crude oil, condensate and natural gas liquids produced from a lease. This is intended to be a "set aside” only. The price would be the market value. If these small or independent refiners do not claim the