WATCHING GOVERNMENT: Royalty relief

Jan. 27, 2003

The US District Court, Western District of Louisiana, ruled Jan. 8 that the US Department of the Interior's Minerals Management Service has been misinterpreting deepwater royalty relief rules.

Three producers, Devon Energy Corp., Ocean Energy Inc., and Santa Fe Snyder Corp. (now part of Devon) sued Interior in July 2000 when MMS tried to collect royalties from a Mississippi Canyon lease issued in 1997.

The companies argued that MMS ignored the intent of Congress by arbitrarily deciding that new production relief should be based on a field instead of a lease.

Producers also disputed MMS's claim that the disputed tract off Louisiana was an existing lease, rather than a new lease.

At stake is potentially millions of dollars, because the water depth on the lease (400-800 m) allows for 52.5 million boe of royalty-free oil or gas.

Judgment call

MMS told the court that the deepwater statute was ambiguous and that deference should be given to regulators to interpret the rule. The agency also argued that if royalty relief is granted without first determining whether an economic need exists, the goals of the statute would not be achieved.

The court called those arguments "unpersuasive."

Under the 1995 law, Congress made royalty relief for existing leases conditional. It limited royalty relief for leases operating before November 1995 to royalties generated from "new production."

But new leases issued from November 1995 through November 2000 are supposed to receive an automatic royalty holiday, the court said.

"DOI' s regulations negate Congress's unambiguously expressed intent by imposing a 'new production requirement' as a condition for royalty relief for new leases and by allocating royalty relief to fields rather than to individual leases," the court said.

MMS officials said the ruling potentially affects leases issued in the 10 central and western Gulf of Mexico lease sales held during 1996-2000, but it does not affect leases issued in 2001 and later. The decision also affects leases in >200 m of water, with 2,804 leases potentially impacted.

Government lawyers are studying the ruling, and it is not known yet when or if an appeal will be filed.

Industry reaction

The National Ocean Industries Association said that the ruling accurately interprets the law and makes available the full incentive that lessees signed up for when they purchased leases in the tremendously active sales of the mid-1990s.

"The difference in the interpretations of the act is significant. Now that the full incentive is likely to be administered, we expect to see a surge in productivity on all of those leases that will benefit the country for some time to come," said NOIA Pres. Tom Fry.

He predicted that because most of the disputed leases are not yet in production, the lowered up-front costs are likely to ease the obstacles to development for deepwater operations, which he says are still tremendously expensive.