By OGJ editors
WASHINGTON, DC, Jan. 26 -- The US Department of the Interior's Minerals Management Service Monday expanded offshore royalty relief to existing US Outer Continental Shelf (OCS) production that comes from deep wells in shallow water depths.
"Since infrastructure and lease-specific facilities are already in place, the [OCS] is one of the best available sources for additional near-term domestic natural gas supply to meet the nation's needs," said Johnnie Burton, MMS director. "We believe the incentives offered in this rule will spur industry to explore and produce these deep, undiscovered resources."
MMS estimates 2,400 wells are eligible for the royalty break.
MMS said it will give lease holders a royalty suspension on the first 15 bcf of natural gas produced from depths greater than 15,000 ft and less than 18,000 ft or on the first 25 bcf of gas produced from 18,000 ft or deeper. A royalty suspension volume of 15 bcf of gas can be increased to 25 bcf from a second successful well to 18,000 ft or deeper. Gas production from all qualified wells on a lease participates in the full royalty suspension volume earned by the lease, she said.
Additionally, the agency will offer a royalty suspension supplement of 5 bcfe, applied to future lease production of gas and oil from any depth, for drilling a qualifying dry hole (unsuccessful well) at 18,000 ft or deeper. Two royalty suspension supplements are available per lease prior to production from a deep well. The maximum relief the lease can earn from drilling unsuccessful and successful deep wells is 35 bcf.
Changes from proposed rule
The agency made two industry-supported revisions to its earlier proposed rule. It extended royalty suspensions to sidetrack wells; royalty suspensions are pegged to drilling depth and sidetrack length. The agency also dramatically raised the price threshold that discontinues royalty relief from $5/Mcf to $9.34/Mcf.
Other provisions in the final rule include an option for qualifying lessees to replace existing deep gas royalty relief lease provisions with the deep gas royalty incentive terms in this final rule. Drilling of qualified wells must have started on or after Mar. 26, 2003, and production must begin within 5 years of the effective date of the final rule. However, any royalty suspension volume or supplement earned must be applied only to production occurring after the effective date of the final rule, even if the production actually started between the proposed and final rule.
Industry reactions
Producers generally endorsed the rule although they say MMS could do more.
"In all, we see this as an important plus for the nation's energy supply. Scientists estimate that there is a lot of deep natural gas down out there, but without royalty relief, only certain companies could explore for it due to the prohibitive up-front costs," said a spokesman for the National Ocean Industries Association. "This kind of targeted royalty relief enhances competitiveness, getting more companies producing natural gas, and getting more energy supplies to US consumers and businesses.
Independent Petroleum Association of America President Barry Russell said, "It's important to note that this rule does not open new portions or acreage of offshore waters to development. This rule deals only with existing, approved leases. Therefore, this rule is a 'win-win-win' scenario for natural gas producers, the government, and consumers," he continued.
"First, it reduces the economic risks associated with drilling costly new wells. Second, it allows the government to get new wells pumping so that new royalties are paid to the federal treasury. And third, it will increase the country's supply of natural gas utilizing the best technologies in areas that have already been deemed appropriate for development. Obviously, it is in the best interest of all parties involved," Russel noted.
Producers had asked MMS to extend its 5 year time limit for production to begin; the agency declined to do so, but did allow a 1 year extension in authorized cases.
Future plans
MMS also is studying an industry proposal that would expand royalty relief to "ultradeep" wells drilled in excess of 20,000 ft. "It's important to industry because the differences in the temperatures and pressures at 18,000 ft and at 22,000 ft are extreme—and the economic risks all the greater," NOIA said.
A pending energy bill addresses the issue although MMS if it chooses could pursue the action independently.
