Little may come of it anytime soon, but Sen. Bennett Johnston (D-La.) has given the U.S. offshore oil industry one of its few encouraging moments of the past couple of years.
Johnston, Senate energy committee chairman, introduced a bill last week to reduce the federal royalty on new deepwater Outer Continental Shelf oil and gas production.
WHAT IT WOULD DO
Under the bill, operators would not have to pay royalty on production from leases in water depths of 200 m or more until they recover their capital investment costs related to development of the lease. Operators would pay full royalty in any calendar year when the price of oil exceeds $34/bbl for two consecutive quarters.
Currently, leases in 400 m of water or less are issued for 5 year terms and one-sixth royalty, those in 400-900 m for 8 years and one-eighth royalty, and those in water deeper than 900 m for 10 years and one-eighth royalty.
Johnston explained the bill was prompted by "the serious decline in oil and gas leasing and development activity in areas of the OCS, such as the Gulf of Mexico, where the program historically has been active."
He observed the OCS produces 10% of the nation's oil and 25% of its gas, and the central and western gulf account for 90% of OCS oil and 99% of OCS gas production.
Johnston pointed out the most recent gulf lease sale, held last May, saw the lowest bids in the past 20 years. Out of 5,213 tracts offered, only 151 received bids. A comparable sale last year had five times as many bids.
Johnston said the Interior Department estimates Gulf of Mexico waters deeper than 400 m contain 9.7 billion bbl of oil equivalent.
"At the same time," he said, "the costs of producing these resources are substantial and increase significantly with water depth, One industry estimate places capital investment for a conventional fixed leg platform in 900 ft of water at $360 million, compared with costs of nearly $1 billion for a conventional tension leg platform in 3,000 ft of water.
"This bill will provide a much needed jump start for the domestic industry. It also will yield much needed oil and gas resources for our nation at a time when imports continue unabated."
A hearing on the bill will get under way this week.
Johnston said Congress could consider other approaches, such as linking the deepwater royalty rate to the price of oil, or cutting it for the first few years of a lease.
ADMINISTRATION PROPOSAL?
The Minerals Management Service is believed to have proposed lower deepwater royalty in an incentive package for industry (OGJ, May 18, p. 33).
But that proposal is long overdue, obviously stalled by disagreement within the administration.
There probably is not enough time remaining in this congressional session to pass Johnston's bill, but it could force the administration to decide on its own program.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
