MMS outlines royalty relief proposals

US Minerals Management Service officials outlined 12 proposals Thursday at a workshop in Houston to amend the recently expired 1995 Deepwater Royalty Relief Act.

Unlike the previous act, which expired Nov. 28, a new policy for deepwater royalty relief in the Gulf of Mexico would automatically give relief to new applications for ultradeepwater fields and shallow natural gas plays in less than 200 m of water, but not to leases in 200-800 m of water.

"We feel that the infrastructure exists for producers in this area so that they can produce oil and gas economically," MMS spokeswoman Caryl Fagot said. Producers of all new leases, including those issued with an automatic suspension volume, can apply for more relief.

As a result of DWRRA, which granted automatic relief for 200-800 m depth properties, more than 55% of all tracts in up to 800 m of water are now under lease, compared to 41% in more than 800 m of water. Automatic relief would be granted for ultradeepwater projects due to the lack of infrastructure in the deep water, while relief for shallow gas prospects addresses the need to develop more gas resources to feed growing US demand.

Under DWRRA, 3,404 leases have been issued since 1995 in the Gulf of Mexico, with $3.1 billion paid for those leases. Royalty-free production from the five leases approved so far totaled 25 bcf of gas and no oil.

Eight applications have been taken for deepwater royalty relief since 1996, seven for nonproducing fields and one for an expansion project. They also included five proposed subsea tiebacks and three proposed platforms. In addition to the five approved applications, one was rejected and two are under review. One of the approved applicants is currently in production.

A new proposal would allow new leases�even those that automatically receive suspension volumes�to apply for additional relief. MMS expects this to increase production from fields that are still uneconomic despite automatic suspension volumes. Royalty relief also will be granted on an individual lease basis rather than field basis.

Under the new proposals, relief would be granted to the first 9 million bbl produced in fields in 800-1,599 m of water, and to the first 12 million bbl in fields in 1,600 m or more. Companies can apply for additional relief if the initial amount is inadequate. MMS also is proposing to allow companies a 2-year extension beyond the 5-year primary term if a subsalt well has been drilled.

Other changes cover cost estimate corrections for new and existing leases. Under one new proposal, if actual preproduction costs turn out to be less than 80% of estimate in an application, the applicant retains only half of the smaller estimate of the originally granted volume suspension or most likely production. One benefit of the new rule is that large and small fields and projects will be treated more equally, officials said. It also creates a penalty for a substantial overestimate of cost, they claimed.

Other proposals include a change in the discount rate, which would affect new and existing leases. One proposal would lower the discount rate used for economic evaluation without royalties or sunk costs, with the applicant choosing the discount rate only for evaluation with royalties and sunk cost. MMS said it believes this will expand the range of prospective circumstances under which producers could drill, increasing the number of applicants that qualify for relief. Under the old rule, the same discount rate was used for economic evaluation with and without royalties and sunk cost, with the applicant choosing a single discount rate from the range that MMS specifies.

Another proposal for new leases only also would allow sunk costs of discovery wells, drilled in new reservoirs as part of expansions projects, to be counted for relief qualification. For new and existing leases, MMS also proposes expanding the amount of time after which relief is forfeited unless continuous fabrication of a development system begins to 18 months from one year. This will allow producers more flexibility in negotiating the cost and delivery of approved production systems, MMS said.

The deadline to submit public comments on the proposals has been extended to Jan. 9 from Dec. 18.

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