BLM said, "This action is being taken to encourage operators of federal heavy oil leases to place marginal or uneconomical shut-in oil wells back in production, provide an economic incentive to implement enhanced oil recovery projects, and delay the plugging of these wells until the maximum amount of economically recoverable oil can be obtained from the reservoir or field."
It said the action should result in substantial additional revenue for states and the federal government and increase oil recovery.
Comments on the proposal are sought by May 30, and the final rule is to be issued several months after that.
BLM noted it currently can grant royalty reductions case by case, and there is an automatic royalty reduction for stripper wells producing less than 15 b/d.
CALIFORNIA EXAMPLE
BLM said relief is warranted for heavy oil wells due to their high production costs.
"As recently as last January, California producers of heavy crude were spending $9-10 to produce a barrel of crude oil that was $8.50-9/bbl.
"When depreciation, depletion, and amortization costs were considered, nearly 69% of the state's production was uneconomic, and more than 13,000 industry and industry related jobs were at risk."
BLM said oil prices have risen since then, but many heavy oil leases remain only marginally economic and are vulnerable to future drops in oil prices.
The Department of Energy modeled the proposed BLM royalty rate reduction and found it would be revenue neutral to all oil producing states except California, which has most of the nation's heavy oil reserves.
"Assuming a West Texas intermediate crude oil price of $20/bbl, a price consistent with recent oil markets, the proposal can be expected to increase recoverable reserves in California by around 72% to 228.5 million bbl from 132.8 million bbl.
"The increase in recoverable reserves will ultimately result in a 35% increase in federal revenues, royalties and individual and corporate taxes, and a 49% increase in California state revenues."
ROYALTY TERMS
The reduced royalty would not apply if the average WTI price were more than $28/bbl for 6 months.
The reduced rate applies to qualifying heavy oil leases rather than individual wells because production is not normally measured for individual wells and is based on the average gravity oil weighted by production of heavy oil from each well on the lease.
The proposed rule requires operators to calculate the average weighted gravity of the oil yearly to determine the appropriate royalty rate.
The royalty rate for years after the first 12 month period will be the lesser of the newly calculated royalty rate or the royalty rate determined for the first year.
BLM said, "This provision is necessary to avoid discouraging additional investment in enhanced recovery and workovers that may have the collateral effect of increasing the gravity of the oil produced from the property. In no case, however, would the royalty rate exceed the rate established by terms of the lease."
Copyright 1995 Oil & Gas Journal. All Rights Reserved.
