Deepwater rule changes

The 1995 Deep Water Royalty Relief Act surely has been the most constructive energy legislation the US has enacted in the past few years.

Aug 25th, 2000

The 1995 Deep Water Royalty Relief Act surely has been the most constructive energy legislation the US has enacted in the past few years.

The law allows Minerals Management Service to suspend royalties on 17.5 million bbl of oil for fields in 200-400 m of water in the Gulf of Mexico, 52.5 million bbl for fields in 400-800 m, and 87.5 million bbl for fields in water deeper than 800 m.

That law netted the government many millions of dollars more in lease bonuses and has fueled an exploration boom. Just last month, MMS said, a record 34 rigs were drilling in more than 1,000 ft of water.

But MMS apparently thinks the law has been too much of a good thing.

The legislation expires Nov. 28, and although MMS is authorized to continue some of the incentives administratively, it plans to limit them.

Royalty relief incentives are unlikely to be continued for shallower waters, where independents are most active and where fewer unleased tracts are available.

Questions

At a meeting last June in Houston, MMS Director Walt Rosenbusch asked industry to respond to a series of questions about the continued operation of the royalty relief program.

One of the things he asked was why industry isn't exploring and developing its tracts in 200-800 m of water at a faster rate.

Several oil associations formed a task force, which has responded to MMS.

It said, "We do not think it is surprising that industry is slow to drill or that companies are hesitant to lease additional blocks. In the last sale, there were not many blocks offered that were clearly prospective, as is evident in the small number of blocks that received multiple bids. Nevertheless, there was a significant amount of industry interest, with 28 companies bidding in water depths [less than] 6,000 ft."

The oil groups said that, before making any decisions, MMS needs an economic study comparing leasing in the 5 years before passage of the law, leasing in the past 5 years, and projections for the next 5—with and without the incentives.

New rule

In an interview, Rosenbusch said MMS soon will propose a rule reestablishing royalty relief for the Gulf of Mexico.

The rulemaking must begin soon, so that royalty relief is in place for the next central gulf sale in March.

Rosenbusch said the rule would allow MMS to use its existing powers for both across-the-board and case-specific relief, "so that we can continue to sustain the deepwater activity that everyone has seen."

Royalty suspension volumes would be set for 3-year periods. Rosensbusch said is continuing to talk with industry about what those volumes should be. "We haven't finalized our numbers yet.

"All options are on the table, but right now, we clearly see a need for royalty relief in water depths greater than 800 m." But MMS obviously questions relief for fields in shallower waters.

Although the law has been a success, Rosenbusch said its provisions weren't meant to continue unchanged beyond 5 years. "The original intent was to provide an impetus for the industry to invest in exploration. We believe it has met its objectives."

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