MMS sets terms for Mar. 28 Central Gulf of Mexico lease sale

The US Minerals Management Service Friday announced terms and conditions for the Mar. 28 Central Gulf of Mexico lease sale to be held in New Orleans. The sale, No. 178, will offer 4,391 blocks covering 23 million acres off Louisiana, Mississippi, and Alabama. MMS also set deep water royalty incentives for the sale.


By the OGJ Online Staff


HOUSTON, Feb. 23
�The US Minerals Management Service Friday announced terms and conditions for the Mar. 28 Central Gulf of Mexico lease sale to be held in New Orleans.

The sale, No. 178, will offer 4,391 blocks covering 23 million acres off Louisiana, Mississippi, and Alabama. The tracts are in 4 to more than 3,425 m of water from 3 to 200 miles offshore. MMS said resource estimates for the area range from 150 to 440 million bbl of oil and 1.53 to 4.39 tcf of gas.

MMS also issued a final rule for deep water royalty relief that will provide a framework for Sale 178 and future gulf sales.


lncentives

Interior Sec. Gale Norton said the sale terms would provide an appropriate mix of incentives to ensure exploration and development continues in ultra deep waters without loss of momentum.

Tom Kitsos, acting MMS director, said, �Lease Sale 178 will provide the first ever incentives for high cost, high risk exploration for natural gas targets deep below the ocean floor. These prospects hold great potential to increase domestic natural gas production from deep horizons and below subsalt formations.�

MMS also said deepwater royalty relief will be applied to tracts in waters deeper than 800 m, within the framework of the new rule. It would allow relief for individual leases (not fields as in the Deep Water Royalty Relief Act) designated at the time of the final notice of sale.

It said royalty "suspension volumes" for Sale 178 range from 9 million boe in waters of 800 to 1,599 m up to 12 million boe in waters deeper than 1,600 m. Lessees would be allowed to produce those volumes of oil and gas before any royalties are due the federal government.

MMS said in addition to the fixed up-front royalty suspension volumes, it can allow additional relief if lessees meet criteria in the deep water royalty relief rule. The supplemental royalty relief is not available to leases sold during 1996-2000.

MMS said offered two initiatives to spur gas production. One was an incentive to drill for deep gas in the shallow-water gulf by providing royalty suspension on the first 20 bcf from a well drilled below 15,000 ft sea level.

The other applies to gas found beneath thick subsalt layers. Lessees may be entitled to an extension of the 5-year primary lease term when an operator has drilled a first subsalt well and needs additional time to image the subsurface data to determine the next drilling target. MMS said that would avoid premature lease expiration and the consequent delay in exploration.

Kitsos said, "We have determined that this package of incentives provides the right balance to encourage domestic exploration while also ensuring the public a fair return for resources leased. Although the level of up-front suspension volume relief is less than that mandated for the first 5 years of the Deep Water Royalty Relief Act, the first-time provision of discretionary relief gives us the tool to adjust the amount of relief to the specific circumstances of each venture.�


Details

The lease terms for Sale 178 tracts are 5 years for 1,380 blocks in waters less than 400 m, 8 years for 141 blocks in 400 to 800 m, and 10 years for 2,870 blocks in more than 800 m.

The tracts in less than 400 m will carry a 16 2/3% royalty and the rest a 12.5% royalty.

MMS said 1,306 blocks are eligible for the deep gas incentive. It applies to all new leases in up to 199 m of water. Only the first 20 bcf of production from more than 15,000 ft would quality. It would not apply to oil production and would end if gas prices exceeded $3.50/Mmbtu (2000 $).

Deepwater royalty relief would not be available automatically for 215 blocks. But 410 blocks in 800 to 1,599 m of water would be royalty free on the fist 9 million boe. And 2,460 blocks in 1,600 m or greater would not pay royalties on the first 12 million boe.

Royalty relief would be provided on a lease basis. If a new lease from Sale 178 is combined with a field under the 1995 law, it could qualify for either 9 or 12 Million boe of relief.

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