ROYALTY BREAK EYED FOR U.S. DEEPWATER OIL, GAS

Sen. Bennett Johnston (D-La.) wants to amend the U.S. omnibus energy bill to waive initial royalties for deepwater production.

Johnston recently introduced the bill (OGJ, Aug. 10, p. 23) and is pressing for the Bush administration's support. He said, "There is just no industry interest in drilling and developing in deep water. They need some real incentives to drill out there."

He said the legislation could be added to the energy bill in conference committee but only if the Office of Management and Budget produces revenue estimates that support the bill.

"We need to show how this bill is not going to cost the country money," Johnston said.

Johnston's bill would defer federal oil and gas royalty on leases in 200 m or more of water until payout of development costs. Producers would pay full royalty if the price of oil topped $34/bbl for 6 months.

ADMINISTRATION VIEW

Administration officials supported the concept of the bill but objected to its details during a hearing.

John Easton, a Department of Energy assistant secretary, said, "We cannot fully quantify the benefits to the nation and the oil and gas industry of this bill." He said it might violate a new federal law that requires Congress to find funds for programs that deny the government revenue.

Scott Sewell, Minerals Management Service director, said the Johnston measure might encourage lessees to defer development until Congress passes the royalty wavier.

He said the $34/bbl cutoff is too generous and suggested $28-30/bbl.

MMS can grant case by case royalty relief for expensive projects but has done so only once.

Sewell said the bill could result in as many as 33-35 deepwater development projects and the opening of "quite significant reserves."

INDUSTRY SUPPORT

Robert Howard, Shell Oil Co. vice-president of operations, agreed: "The need for royalty relief exists in the deepwater Gulf of Mexico frontier despite development of some projects...with extremely large reserves."

He said the bill would not be a windfall to the oil companies. "The economics are such that most deepwater projects are barely above the margin anyway."

Howard recommended that Congress expand the bill to cover all investment costs incurred in a "phased" development program in which small platforms test reservoir performance before more structures are installed.

Howard also said the bill should apply to new projects on existing leases. "New three dimensional seismic technology has allowed industry to evaluate many known and producing Gulf of Mexico fields," he said. "New production horizons untapped by existing platforms and wells are being found."

Tom Fanning, Marathon Oil Co. vice-president of North and South America exploration, said his company calculates "any incremental project resulting from this bill will generate $15 in federal revenue for each dollar given up in royalty relief."

He said development of 260,000 bbl of new offshore production by 2000 would help the U.S. trade balance $2 billion/year, assuming an oil price of $20 bbl.

He said each $1 billion invested in deepwater development will add 11,000 oil industry jobs short term, and long term that would multiply to more than 60,000 private sector jobs for a capital infusion of $1.5 billion into the U.S. economy.