We have, for example large acreages and reserves of coal deposits under lease that are not yet being developed. However, many of these deposits are the basis for the planning of large powerplants or gasification projects.

The Department has under consideration a variety of alternatives in management procedures that will aid the resource manager in coal lease and permit management decisions, including diligent development and minimum production requirements, advance royalty periods, lease term adjustment periods, escalating rentals, minimum development requirements, bidding procedures, sealed bidding versus oral auction, schedule of production plans, and criteria needed to define situations (1) when and where prospecting permits are needed, and (2) whether development, if desired, should be accomplished only through competitive leasing.

Question 9. In which cases, if any, do elements of the present system encourage speculative nonproducing holding of resources on the public lands? Consider particularly

(a) Noncompetitive leasing of onshore oil and gas;

(b) The system of prospecting permit and preference right leases for coal;

(c) The identifinite term and 20-year review of coal leases; and (d) The location-patent system for uranium ore.

Answer 9. (a) For onshore oil and gas leases, the lack of specific requirements to drill within a specified time could, in effect, encourage speculative nonproductive holding of the resource.

On the other hand, a noncompetitive oil and gas lease, by definition, is a speculative lease because the lands are not within a known geologic structure.

(b) The terms and conditions imposed in a coal prospecting permit specify certain exploration requirements within the 2-year life, with a 2-year renewal if justified, which effectively discourage long-term speculative holdings.

Under former preference right lease terms and conditions, the lack of minimum production requirements and sufficiently high escalating rentals encourage speculative nonproductive holding of the public land resources.

The net result was a low holding cost. The newer terms and conditions will specify high escalating rentals, and minimum production requirements are again under consideration.

(c) The new coal lease minimum production requirements and escalating rentals will discourage speculative nonproductive holdings of new or renewed leases regardless of the indefinite term and present 20-year renewal period.

The purpose of the renewal periods is to provide a timely adjustment of the terms and conditions. In the Department's proposal to reform the mineral leasing laws, a review at 10-year periods is proposed, after an initial term of 20 years.

The recent geothermal steam act authorizes the Secretary to adjust terms and conditions of the lease at not less than 10-year intervals beginning 10 years after the date geothermal steam is produced.

This, in effect, allows the lessee approximately 5 years to get into production with readjustment of terms every ten years thereafter. That arrangement could also be considered for coal.

(d) Although the mining law requires that the locator make a discovery of a valuable mineral deposit, it does not require production either before or after he proceeds to patent.

The administration's bill to reform the mining law would take positive steps to prevent the holding of mining claims for speculation. Question 10. Does the present system of leasing or disposal of each energy resource provide for receipt of fair market value by the Government for the resource?

Consider particularly the four instances named in question 9. In each instance where the Government generally receives less than fair market value, what benefit does the public receive from leasing or disposal programs in which receipt of fair market value is not a principal objective?

Answer 10. The present competitive system of cash bonus bidding for OCS leases is believed to provide a substantial safeguard for obtaining fair market value by the Government for offshore leases.

The receipt of fair market value is one of the principal objectives of all leasing or disposal programs. However, the law frustrates this objective in certain cases. Noncompetitive oil and gas leases are obtained without a bonus bid and at a minimal cost and, if a discovery is made, fair market value probably is not obtained. The royalty rate, for example, is less in most cases for a producing noncompetitive lease. I am sure you or the members of the committee will have some specific questions in that connection.

I think I will perhaps skip the rest of the answer on that question. Question 11. What is the experience to date with respect to classes of enterprise engaging in exploration and production operations involving energy minerals on public lands?

Does the present system of leasing or disposal for any of the major onshore and offshore energy resources unduly favor some classes of enterprise, for example, large integrated firms? What is the relationship between classes of enterprises presently engaged in development of energy resources on public lands and the rate of exploration and production with respect to the development of coal, oil shale, and geothermal energy?

Answer 11. Insofar as Outer Continental Shelf oil and gas leasing is concerned, the present system of cash bonus bidding, together with unlimited liability for pollution damage, favors the acquisition of leases by large integrated companies.

History shows that individual major companies have controlled 46 percent of the acreage and 63 percent of production; groups of majors hold 35 percent of the acreage and 34 percent of production, groups of independents have 17 percent of the acreage and 2 percent of production and individual independents control 2 percent of the acreage and 1 percent of production.

Most of the coal exploration and production operations on public lands are being accomplished by medium and large size firms. When large competitive coal leases are offered, the total bonus bids are generally very high and, therefore, tend to favor the large operator.

However, the small operator is not ruled cut because under the present system, he may request a small acreage offering. The system of disposal by prospecting permit favors no class of enterprise because permits, if issued, are granted to the first qualified applicant.

It should be noted that coal is a capital intensive industry, and deposit acquisition is only one of the major capital costs. Onshore oil and gas leases are available to the general public, and operations are conducted by small companies as well as large integrated companies. Federal leases for geothermal steam and oil shale have not been issued to date. Therefore, we have no experience with regard to those resources insofar as to whether one class of enterprise would be favored in the acquisition of leases nor with regard to the relationship between the classes of enterprises and development on public lands.

Current geothermal operations are being conducted on private land by both small and large firms. The Geysers area in California was first developed by a small firm but now is being developed by a large integrated firm.

Uranium exploration is conducted under the terms of the mining law. No class of enterprise is favored in that all classes can explore and develop uranium deposits on those lands subject to the mining laws. The amount and quality of exploration activities would, of course, be controlled in large part by available capital resources.

Question 12. What are the advantages and disadvantages, in terms of the criteria set forth below, as applied to OCS oil and gas leasing of a (1) cash bonus bid-fixed royalty system; (2) deferred bonus bidfixed royalty system, payments of one-third of the bonus bid successively upon aware of lease, discovery, and production; and (3) fixed bonus-royalty bid system?

(a) Competition;

(b) Incentive to rapid exploration and development;

(c) Conservation of energy resources for future use;

(d) Total amount of resources ultimately recovered under the lease;

(e) Efficiency of allocation;

(f) Possible bias toward any one class of lessees, ease of entry, et cetera;

(g) Timing and amount of revenue to Government;

(h) Problems of administration and levels of Government personnel required to administer the leasing system;

(2) Ability to implement within the authority of the act, that is, would it require amendment of the OCS Lands Act?

Answer 12.

A. Competition: The major competitive feature of the cash bonusfixed royalty system is the payment of a large bonus at the time of bidding for the areas offered.

The bonus reflects the bidder's estimate of the value of potential production over and above the amount to be paid overtime on fixed royalty production.

The system generally results in heavy competition among the major operators and/or groups of operators having sufficient capital to make these large initial investments and to finance the subsequent exploration and development activities.

Bidders must be financially capable of assuming the total risk associated with nondiscovery of recoverable oil or gas deposits. Accordingly, the size of the bonus bid creates an entry barrier for smaller firms.

Deferred bonus-fixed royalty bidding is a variant of the full cash bonus system. The scheduling of installment bonus payments reduces the amount of initial capital requirement. The option of lease termination at various exploration or development phases also results in a degree of risk sharing by the Government since the bidder would not be required to pay the additional installments beyond what was required as of the time of termination.

Such a system would lower the entry barrier thereby allowing some additional firms to compete. Capital requirements still would be large. There is the possibility that deferred payment and risk sharing factors could result in higher bids than might result under the full cash bonus system

Royalty bidding systems require the least initial capital requirements, with payments being made over the total life of production. Except to the extent that some amount of minimum or threshold bonus is required, the Government shares in the risk that otherwise is associated with bonus bidding systems.

Depending upon the size of the fixed bonus requirement, the need for operator capital is minimized which would permit greater participation in bidding by smaller operators. Since the total number of bidders would be increased, there would be a corresponding overall increase in competition.

B. Incentive to rapid exploration and development: The cash bonus bidding system provides maximum incentive for the operator to explore and develop the lease since the operator is anxious to get an early return on his investment, to amortize his investment over the maximum amount of production, or to decide to abandon the lease and recover part of his investment through tax deductions.

The deferred bonus bidding system similarly is conducive to rapid exploration and development. This system has the added incentive of the opportunity to prove reserves or abandon the lease before subsequent segments of the bonus payment are due.

Early exploration and development also may be encouraged because of the reduced initial capital outlay which frees capital for exploration and development.

However, there are some that feel this system could provide less incentive than the full cash bonus system to fully explore the lease as the operator has less "sunk" cost and he may elect to relinquish the lease without further exploration before subsequent bonus installment payments are due.

A royalty bidding system could make available large sums of capital for exploration and development that otherwise would be committed to bonus payments. However, there also is the probability that the low initial capital requirement would be conducive to leasing by operators at very little financial risk on a speculative basis with little or no incentive or intention of exploring and developing the tract.

This potential disadvantage could be minimized by use of fixed threshold bonus payments and diligence provisions but there still might be less incentive for early exploration and development than would exist under the bonus alternatives.

C. Conservation of energy resources for future use: Conservation of energy resources for future use primarily depends upon the scheduling

of OCS lease sales over an appropriate period of time rather than the bidding method used. However, there could be some difference in the rate of exploration, development, and depletion.

As previously indicated, the bonus bid system is conducive to rapid exploration and production. The subsequent fixed royalty is conducive to production at the maximum efficiency rate and to the greatest amount of total production to amortize the bonus investment over the largest possible economic recovery volume subject to the relatively low fixed royalty rate. Accordingly, the cash bonus system could be conducive to earlier production and/or greater and longer total production.

Development might occur nearly as rapidly under royalty bidding where the firm needs the additional production, however, the much higher royalty payment could be conducive to earlier abandonment of leases to the direct marginal production costs involved.

Accordingly, production could stop at an earlier date and a greater amount of oil could be lost in terms of future and total production. This potential loss could be mitigated by use of a declining royalty system which would permit continued production by virtue of reduced royalty payments.

Depending upon the relative overall unit production costs under either system, total production and length of production could be more or less depending upon the individual lease circumstances involved.

E. Efficiency of allocation: The cash bonus bidding system tends to limit leasing to technically proficient and financially strong operators. A deferred bonus system probably would have similar results since there still would be a substantial initial investment requirement. While the barrier threshold would be lower, bidding would still be limited to technically proficient and financially strong operators.

Royalty bidding could be conducive to leasing to less proficient and less financially capable operators. There also could be considerable potential for speculators having little or no intention of exploration and development.

The potential adverse consequences of such bidders could be mitigated by use of a fixed bonus of sufficient size to limit bidding to legitimate operators and by performance or diligence provisions that require timely exploration and development.

Royalty bidding also could result in marginal operators getting in beyond their capabilities with disastrous results to firms that otherwise might have been capable of producing from other less competitive areas.

Possible bias toward anyone class of lessees, I think that has been sufficiently discussed this morning.

Timing and amount of revenue to the Government.

The cash bonus bidding system provides for large initial revenues to the Government payable at the time of bidding with fixed royalty payments being made during the production life of the lease.

All discovery risk is assumed by the bidder with the Government retaining the full bonus payment regardless of production success or failure.

The deferred system would result in installment bonus payments over a period of time. The firm would have the option of abandon