U.S. DEPARTMENT OF THE INTERIOR,

OFFICE OF THE SECRETARY, Washington, D.C., February 27, 1973.

Hon. HENRY M. JACKSON,

Chairman, Committee on Interior and Insular Affairs,

U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: Enclosed are the answers to the questions in attachment "B" to your letter of May 17, 1972 relating to leasing and disposal policies for energy resources on the public lands. We are preparing a separate set of responses for Indian lands and will forward them as soon as possible.

Sincerely yours,

KEN M. BROWN, Legislative Counsel. (Subsequently, a response was received for Indian lands which appears on p. 651.)

ANSWERS TO QUESTIONS SUBMITTED BY HENRY M. JACKSON, CHAIRMAN, COMMITTEE ON INTERIOR AND INSULAR AFFAIRS TO THE DEPARTMENT OF THE INTERIOR ON ENERGY LEASING AND DISPOSAL AND POLICY ISSUES (ATTACHMENT "B")

PART I-A. LEGAL AND MANAGEMENT REGIMES

Describe briefly the legal and management regime governing the development of energy resources on U.S. public lands (including acquired lands and Indian lands). The responses should include, but not necessarily be limited to, answers to questions:

Question 1. What constitutes the principal legal authority under which each resource is developed?

Answer 1. (a) The Outer Continental Shelf Lands Act of August 7, 1953 (67 Stat. 462; 43 U.S.C. Secs. 1331-1343), constitutes the legal authority under which the mineral resources of the OCS may be developed.

(b) The Mineral Leasing Act of February 25, 1920, as amended and supplemented (30 U.S.C. Secs. 181-287) and the Aequired Lands Leasing Act of August 7, 1947 (30 U.S.C. Secs. 351-359) constitute the principal legal authority under which onshore oil and gas, coal and lignite, oil shale and tar sands may be developed.

(e) The Geothermal Steam Act of 1970 (30 U.S.C. Secs. 10011025) constitutes the legal authority under which geothermal resources may be developed.

(d) The Mining Law of 1872 (30 U.S.C. Secs. 21-54) constitutes the legal authority under which uranium on public domain lands may be developed. Uranim on AEC withdrawn lands may be leased by the Atomic Energy Commission under the Atomic Energy Act of 1954 as amended (42 U.S.C. 2097). Uranium deposits on certain acquired lands may generally be leased by the Department with the consent of the surface management agency.

Question 2. What are the principal goals and objectives of the ernment with respect to the management of each resource?

(a) To what extent is each goal or objective specifically set out in law, or adopted at the discretion of the Department?

(b) To what extent is each goal or objective compatible with other objectives for the management of individual resources (For example, how are encouragement of current development, conservation of supplies for future use and maximization of government revenues reconciled?)

(c) What is the basis for any difference in goals or objectives with respect to different energy resources?

(d) To what extent do the goals and objectives of the principal legal authorities under which individual energy resources are managed require review and amendment to make them consistent with today's energy requirements?

Answer 2. The Department of the Interior's major goals and objectives with respect to the management of the publicly owned mineral resources are:

(1) To assure orderly and timely resource development; (2) To protect the environment;

(3) To insure the public a fair market value return on the disposition of its resources.

(a) The above goals and objectives are based on the consideration of all the terms and conditions of relevant laws including:

(1) The Outer Continental Shelf Lands Act of August 7, 1953 (43 U.S.C. §§ 1331-1343);

(2) The Mineral Leasing Act of February 25, 1920, as amended and supplemented (30 U.S.C. §§ 181-287);

(3) The Acquired Lands Leasing Act of August 7, 1947 (30 U.S.C. 88 351-359);

(4) Geothermal Steam Act of 1970 (30 U.S.C. §§ 1001-1025): (5) The Mining and Minerals Policy Act of 1970 (30 U.S.C. §§ 21a):

(6) The National Environmental Policy Act of 1969 (42 U.S.C. 4321-4347); and

(7) The fair and equitable return requirements of Title 31 U.S.C. 483 (a).

(b) The three major goals and objectives as applied in the Department's mineral programs are not mutually incompatible. The Department strives to achieve an optimum balance among the three: the objective is to encourage orderly and timely exploration, development and production, and at the same time protect the environment and assure the public a fair market value return for the resource.

(c) There are no basic differences in goals or objectives with respect to different energy resources. Our goals apply equally to all of the various energy resources. They are the basis for the declaration of policy in the Administration's proposed revision of the Mineral Leasing Act submitted in 1971. (S. 2726, 92d Congress)

(d) The OCS Lands Act should probably be reviewed periodically to determine whether the Department, under its provisions, can exercise, in the development of mineral resources, proper multiple-use responsibilities as those responsibilities change with the times.

The mining and leasing act require amendment to eliminate limitations on our ability to assure the Department's goals and objectives. Proper provisions are included in the Administration's proposed Mineral Leasing Act revision (S. 2726, the Mined Area Protection Act

(S. 993), BLM Organic Act (National Resource Land Management Act) (S. 2401), and the Mining Law Reform Act (S. 2727).

Question 3. To the extent that receipt of "fair market value" is an objective of management policy for any resource, how is each such resource evaluated before lease or sale, when reviewing bids, when reviewing a lease for renewal or other purposes, and when determining royalty obligations? For each resource, and in each instance:

(a) Who makes the evaluation?

(b) What is net public resource value, and how is it measured and how is it used in evaluation?

(c) What is fair market value, and how is it measured and how does it relate to the evaluation?

(d) Distinguish, if possible, between fair market value and maximization of government revenue.

(e) Is a discounted cash flow analysis used in leasing evaluations? If so, how?

(f) How is fair market value determined in isolated, non-industrialized areas?

Answer 3.

OCS

(a) The Geological Survey makes pre-sale estimates of OCS tracts offered for lease in cooperation with the BLM, which performs an audit and review function. Discussion of our evaluation procedures is found in the answer to question 50 (a).

Rentals and royalties are fixed at the time tracts are offered under the OCS cash bonus bidding system. The estimated bonus serves as an indication of fair market value.

The judgment whether a high bid represents fair market value, includes a post-sale review of the following factors: (1) the relationship of the high bid to the pre-sale tract evaluations provided by the GS, (2) sale competition, and (3) the competitive bidding performance of high bids for adjoining and nearby tracts. Discussion of the post-sale analysis is given to the answer to question 40 (a).

(b) Net public resource value is calculated as the value that operation of the lease is expected to yield given certain assumptions as to value and character of the resource after allowance for development and operating costs, taxes, fees and royalties, assumed profit, and risks. It is measured prior to the sale in the manner discussed in first paragraph of item (a) above. It represents a pre-sale evaluation and vides the Department with one indicator of whether the high bid received on a tract represents fair market value.

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(c) Fair market value is the price that would be paid by a willing buyer and a willing seller each knowing all the facts at a given time in a perfectly competitive market. Fair market value is assessed as described in (a) above.

(d) Fair market value and maximization of government revenues are not necessarily related. Discussion is in the answer to question 40 (c).

(e) A discounted cash flow analysis normally is used in the calculation of net public resource value.

(f) Not applicable to the OCS.

Onshore-Coal, Onshore oil and gas, Oil shale (and other hydrocar bons, tar sands, etc.), Coal, Geothermal energy, and Uranium An evaluation is made before each onshore lease sale, when reviewing bids, reviewing leases for renewal, and when determining royalty obligations, however, the Department's onshore evaluation systems for all mineral leases are continually being revised to adopt the best concepts of mineral evaluation applicable to the particular evaluations being made in order to achieve the goal of the receipt of fair market value.

(a) The Geological Survey makes the evaluation, and the resultant recommendations and summary report are submited to the BLM for review and a decision.

(b) The net public resource value definition for onshore minerals is the same as described for the OCS. The net resource value is used in the evaluation of the leases as an indicator of whether the high bid received represents fair market value.

(c) Fair market value definition for onshore minerals is also covered in the answer to 40 (c).

(d) The distinction between fair market value and maximization of government revenue for onshore minerals is the same as described for the OCS.

(e) In the onshore leasing evaluation system, a discounted cash flow analysis will be used when the degree of sensitivity of the DCF figure is within acceptable limits relative to input parameter (e.g. estimates of reserves) and the level of uncertainty.

Where the DCF method cannot be used a multiple regression-correlation model may be used to estimate acceptable minimum bonus bids from past comparable sales.

(f) The net public resource value will be estimated as outlined in 3(b) above, and will be used as an indicator of fair market value. In isolated, nonindustrialized areas, the discounted cash flow analysis or other method used will consider additional transportation costs and other additional costs. In those instances where a market is absent, judgment factors based on previous sales of like resources will be employed to determine if the bonus bid is adequate to insure that fair market value is obtained. Minimum production requirements in the lease will also help insure the receipt of fair market value.

Question 4. Describe briefly the system (location, competitive lease, lease to first applicant, prospecting permit with preference right, negotiated sale, etc.) used to make each resource available for private development.

Answer 4. (a) Outer Continental Shelf mineral leases may be issued only on a competitive bidding basis as follows:

Oil and Gas-Sealed bids on the basis of highest cash bonus with fixed royalty; or sealed bids on the basis of highest royalty with a fixed cash bonus.

Other OCS Minerals.-Sealed or oral bids on a high cash bonus basis.

(b) Coal-Federal coal deposits are available for private development in the discretion of the Secretary either through competitive leasing or by prospecting permits with a preferential right to lease. Lands containing known workable deposits of coal can be leased only by competitive leasing. Other lands may be leased for private development through the prospecting permit-preference right lease system.