The US Bureau of Ocean Energy Management lowered the shallow-water royalty rate for proposed Outer Continental Shelf Lease Sale 249 in the Gulf of Mexico to 12.5% from the original 18.75%. The new rate, which is the same as the one for federal onshore oil and gas royalties, would apply in water less than 200 m, the US Department of the Interior agency reported on July 7 after completing an analysis of its royalty rates.
"The purpose of this change is to adjust the royalty rate to reflect recent market conditions, thereby encouraging competition and continuing to receive a fair and equitable return on oil and gas resources. The royalty rate in 200 m of water and deeper will remain at 18.75% as in the proposed notice of sale," BOEM said.
The decision reflects consideration of market conditions; available resources; leasing, drilling, and production trends; and comparable international fiscal systems, it said.
"In particular, hydrocarbon price conditions and the marginal nature of remaining [gulf] shelf resources suggest a royalty rate reduction is an appropriate and timely action. The shallow-water royalty rate reduction targets the [gulf] shelf where exploration, development, and production are in decline and where critical infrastructure already exists," BOEM said.
If Lease Sale 249-tentatively slated for Aug. 16-takes place, royalty rates and other lease terms will be announced in a final notice at least 30 days before. The sale will be the first under the 2017-22 US OCS Oil and Gas Leasing Program as well as the first in the gulf that encompasses all available acreage in the western, central, and eastern planning areas.
The agency said it also is analyzing a price-based royalty system and will seek comments on this idea later this year. "BOEM's concept of a price-based royalty system would provide an incentive to lessees through lower royalty rates in times of lower oil prices while also ensuring the federal government receives a greater return for OCS resources when prices are high," it said. A price-based royalty system would not be in place for Lease Sale 249, it added.
National Ocean Industries Association Pres. Randall B. Luthi immediately applauded the agency's move. "BOEM's decision to lower the shallow-water royalty rate for the August sale will provide a welcome financial incentive to hard hit operators on the [gulf] shelf. Extended low commodity prices and increased regulatory burden over the past few years have rendered exploration in shallow waters nearly extinct," he said.
"Operators now can calculate a lower royalty rate as they prepare their bids, and we think this will generate more interest in the upcoming sale," Luthi said. "The move is a good deal for the US taxpayer because the alternative would be fewer leases sold and fewer resources developed. A 12.5% royalty rate is far better than a 0% royalty rate, which is what the government receives if there are no bids."
