IADC: MMS's Burton cites delay in deep-drilling royalty relief for existing offshore leases

Sept. 27, 2002
The royalty-relief incentives for new leases that the US Minerals Management Service had granted for Gulf of Mexico deep drilling have successfully spurred exploration and development drilling.

Mike Sumrow
Drilling Editor

SAN ANTONIO, Sept. 27 -- The royalty-relief incentives for new leases that US Minerals Management Service granted for deep drilling in the Gulf of Mexico have spurred new leasing and consequently increased exploration and development drilling in the deepwater gulf.

The agency's efforts to provide the same relief in the gulf's shallow-water areas for deep drilling on existing leases, however, have met with delay for further review of the proposed rule, according to MMS Director Rejane "Johnnie" Burton, speaking to the International Association of Drilling Contractors annual meeting yesterday.

Highlighting MMS efforts to work with the oil and gas industry in maximizing US domestic oil and gas production, she listed several agency initiatives, which are also outlined in the Bush administration's proposed national energy policy.

Burton also noted that the agency has approved the use of floating production, storeage, and offloading facilities in the Gulf of Mexico, approved a 5-year program for oil and natural gas lease sales on the Outer Continental Shelf, and is currently in the process of refilling the US Strategic Petroleum Reserve.

Royalty relief program
Burton claimed success for the agency's new-lease, volume-suspension royalty relief program. She said, "One of the things we're doing now is studying the incentives. We think it has been successful to offer incentives for deep drilling. We saw that as sales progressed in outer deep water."

Burton explained that MMS has been working on various incentives, citing discretionary relief as an example. If a company feels that it can continue producing an economically marginal field longer, with the aid of volume-suspension royalty relief, she said the MMS would allow that.

She added that MMS has agreed to extend lease terms for subsalt exploration on the shelf, to give operators additional time for cost recovery.

Burton said MMS had been trying to grant the same royalty relief for deep drilling in the shallow-water gulf for existing leases, with the objective of spurring deep exploration.

She explained that the existing-lease, shallow-water royalty-relief concept would have a tiered approach, with increasing volumes allowed at greater depths. The tiers would be set for TDs below 15,000 ft, 15,000-18,000 ft, and deeper than 18,000 ft. The operator would lose the royalty relief if increased commodity prices allowed for accelerated recovery of drilling and completion costs.

Viewing the issue as a continuation of an existing rule, Burton said she thinks the rule should have been published by now but noted that it is viewed as a major rule in the regulatory review process.

She said, "Since it is considered a major rule, then a lot more work needs to be done to satisfy the folks that watch over us. I'm still hopeful that the rule would be issued by the end of the year, but I wouldn't wager on it."

SPR fill
In accord with President Bush's energy policy, Burton said that MMS is using offshore oil production to fill the SPR. Explaining the indirect process, she said, "We take the oil and deliver it at a market center and give it to the (US) Department of Energy. The DOE then trades that for oil of proper grade for the SPR."

Burton said, "We started last April at a rate of about 50,000 bo/d. There is a planned rate increase to 100,000 bo/d in October 2002 and up to 130,000 bo/d by next April, with the plan of having the SPR filled by the end of 2005."

Lease sales
With approval of MMS's 5-year program for OCS oil and natural gas lease sales for 2002-07, Burton said that the Gulf of Mexico would have 12 sales and Alaska would have eight (OGJ Online, July 2, 2002).

Burton characterized the recent western Gulf of Mexico Lease Sale 184 as successful and said that Alaska has been preparing for its first offshore lease sale in a long time.

She explained that the two planned eastern Gulf of Mexico lease sales would offer only the acreage in the area of Sale 181 that had been cleared.

Responding to a question about the industry's disappointment over reducing the area offered for lease in the eastern Gulf of Mexico associated with Sale 181, she responded that the states have rights and that the Department of the Interior and MMS "cannot ride roughshod" over those rights.

Reviewing the case of companies holding oil and gas leases off Florida, Burton noted that 2 years of litigation resulted in the federal government buying the leases back from the companies. .

Similarily, She added, MMS is looking at what to do in the case of California, indicating that the agency could end up buying back leases there as well, given strong opposition to offshore drilling in that state. Removing land from exploration and production access doesn't help an energy policy advocating more US oil and gas production, sbe said.

Burton said she intends to visit the states and try to get someone to listen to logic. "Right now they're listening to emotion," she added.