The US Department of the Interior this year will take a closer look at its heavy oil and stripper well royalty relief programs to see if they are stimulating domestic production in a cost-effective manner, department officials said May 16.
"We will be taking a careful look at these programs and others to see what works and what doesn't," a DOI official told OGJ.
California state officials recently criticized the two programs, saying that the department should not be extending royalty reductions when oil prices are high enough to encourage drilling (OGJ Online, Apr. 23, 2003). Producers meanwhile argue that regulators should consider relaxing most royalty rates on federal lands as a matter of public policy to boost declining domestic oil and gas production.
A pending National Petroleum Council study due this fall is expected to warn that domestic drilling rates are reaching dangerously low levels, making consumers more dependent on foreign sources of energy.
Interior officials plan to study the heavy oil and stripper royalty policy as part of a larger interagency review of production incentives outlined in the White House's May 2001 energy blueprint.
The US Minerals Management Service and the Bureau of Land Management will be leading the effort.
Congress meanwhile is contemplating making its own changes to federal royalty rules.
Pending proposals in the House and Senate would dramatically expand royalty relief in the Gulf of Mexico, for example, and encourage more royalty-in-kind collections both onshore and offshore. Pending tax relief measures for marginal properties are also in the legislative pipeline.
Heavy oil
BLM officials recently defended the heavy and stripper oil royalty reduction programs. During a May 8 seminar held for federal oil and gas operators in Bakersfield, Calif., BLM officials noted that the heavy oil program has provided more than "$130 million in relief for California producers over the past 7 years." The agency further noted that a joint study between the agency and the Department of Energy to measure the program's effectiveness in preserving domestic production was "currently on hold."
The study began in 2000, and critics of the heavy oil program say DOI has not been diligent about getting data to support the continuation of the program. Under the June 1996 regulations all properties with an API oil gravity of less than 20° are eligible. Royalty rates vary based on gravity, ranging from 12.5% for 20° API down to 0.5% for 6° API. Producers do not go through an approval process; they merely notify BLM they are taking a royalty reduction, which applies regardless of production rate.
DOI may terminate the program with 6 months' notice if the WTI price for 6 consecutive months is above $24/bbl, plus inflation, with 1991 as the base year. BLM officials earlier this month said that to evaluate whether the program is effective, industry input is "critical."
Stripper program
Stripper wells are also available for relief, although the program is less popular than the heavy oil scheme. BLM officials told producers that in California alone there are 200 BLM properties in which leaseholders have applied for stripper property royalty relief.
But there are numerous cases where operators have not provided timely follow-up information, BLM said. There are also cases where the operator never applied for relief.
Under the program requirements, to be eligible a well must produce or inject less than 15 b/d for 15 or more days in a month. As with the heavy oil program, BLM does not require approval, only notification. Royalty rate is based on production rate, varying from 0.5% for less than 1 b/d/well to 12.5% for over 15 b/d/well. And like the heavy oil program, the royalty functions as a countercyclical incentive.
DOI has the option to terminate the program if the West Texas Intermediate crude oil price for 6 consecutive months is above $28/bbl, plus inflation, with 1991 as the base year. BLM said that in 1998 DOE and the agency found the program increased stripper production.
California state officials, however, allege that subsequent audits by DOI's inspector general found further interagency studies on the issue "insufficient." State officials say Interior officials have been giving oil companies a tax break that was never intended to be given when oil prices are above the market thresholds cited in the regulations.