MMS plans gas drilling initiatives for 2001 Central Gulf sale

The US Minerals Management Service is proposing natural gas drilling incentives for the federal lease sale in the Gulf of Mexico next March that officials say could increase domestic gas production by 1 tcf within 6 years.

MMS proposes to suspend royalty payments on the first 20 bcf of gas produced from deep wells drilled 15,000 feet below sea level in the gas-prone shallow-water shelf area of the gulf.

It also proposes a 2-year extension of the 5-year primary lease if an operator needs more time to process and interpret 3D seismic data after drilling a first subsalt well. Giving operators more time to pick their next drilling targets in such complicated geology would prevent premature lease expirations and the consequent delay in exploration, MMS officials said Wednesday.

The proposed programs represent "strong initiatives on the part of the MMS to deal with the large projected increase in gas demand for the nation," said Walt Rosenbusch, director.

Noting the National Petroleum Council's earlier forecast that US demand for gas would grown to 29 tcf by 2010 from 22 tcf currently, Rosenbusch said, "These incentives may contribute additional gas production in the range of 500 bcf to 1 tcf/year in 2004-2006."

Meanwhile, at the Arthur Andersen energy conference in Houston, Mark G. Papa, CEO of EOG Resources Inc., one of the largest independent US gas producers, said the industry "can't ramp up production enough" to meet the projected 2010 demand growth without an annual average price above $2.75/Mcf.

Moreover, Rosenbusch said, "There are predictions of serious shortages of natural gas this winter, including the Northeast US. There have already been several brownouts across the country this year because of demands on electrical production."

The federal outer continental shelf�primarily the relatively shallow waters of the Gulf of Mexico�has long been the largest one source for US gas, supplying 27% of current domestic gas production. Nonassociated gas accounts for 55% of total production from the gulf OCS.

The gulf is estimated to hold 80% of undiscovered but economically recoverable US gas resources�some 72.5 tcf, MMS officials said.

But earlier MMS studies indicate that the gulf's share of total US gas production could drop to 20% within the next 20 years without some major improvements.

MMS officials also propose to modify deepwater initiatives that have helped stimulate gulf drilling activity since passage of the 1995 OCS Deep Water Royalty Relief Act. Of the 7,600 active federal leases in the gulf, 48% are in deep waters, up from only 27% of 5,600 leases in 1992.

To replace expiring provisions of that legislation, the MMS proposes suspension of royalty payments on the first 9 million bbl of oil equivalent for qualifying wells in water depths of 800-1,599 m and for the first 12 million boe in water depths of 1,600 m or more.

In addition, MMS officials propose to give operators an opportunity to apply for additional "discretionary" royalty relief, subject to certain conditions and pursuant to new rulemaking.

MMS officials have scheduled two public workshops next month to discuss the proposed royalty relief incentives and the proposed Sale 178, encompassing 4,366 federal blocks and more than 23 million acres in the central gulf off Louisiana, Mississippi and Alabama.

The first day-long workshop is scheduled Dec. 12 at the regional MMS office at 1201 Elmwood Park Boulevard in New Orleans. The second workshop will be Dec. 14 at the Sheraton North Houston Hotel at 15700 John F. Kennedy Boulevard in Houston.

Provisions of the lease sale will be discussed during the morning sessions at each workshop, while the proposed discretionary royalty relief rule will be addressed during afternoon sessions.

The proposed rules were published Nov. 16 in the Federal Register.