BLM continues stripper well royalty break

The U.S. Bureau of Land Management is extending for 5 years a program that allows federal "stripper" oil production at a reduced royalty rate.

Bob Armstrong, assistant Interior secretary, said "BLM's royalty rate reduction has proven itself since 1992, when the agency put its stripper property rule into effect. And that's why we are going to continue it.

"Given the recent dramatic downturn in oil prices, continuing this royalty rate reduction will keep many stripper oil wells producing that might otherwise be shut in."

Rate reduction

The rule establishes the conditions under which an operator or owner of a federal stripper oil property can obtain a reduction from the normal 12.5% royalty rate. The rule defines a stripper well as one producing an average of less than 15 b/d of oil.

BLM said the regulations provide an incentive for operators to maintain or restart production of marginal or uneconomic wells. The goal is to increase recovery of reserves.

BLM Director Pat Shea said, "After conducting a review of the rule's impact, the (Interior) department and BLM have concluded that the lower royalty rate for stripper properties is working as intended.

"This financial incentive maximizes production from existing wells, which not only helps the economy but also advances this administration's efforts to reduce U.S. dependence on imported oil from foreign sources by fostering the responsible development of our domestic oil reserves."

BLM's review concluded that the rule is reaching its goal of promoting additional production from stripper properties based on an Energy Department analysis of the rule's impact in New Mexico, public comments on the rule, and BLM and Minerals Management Service stripper well data.

"Based on the DOE analysis of 603 stripper oil properties in New Mexico, wells existing before 1993 had additional production of 4.27 million bbl of oil, attributable in large part to the royalty rate reduction, during the period of October 1992 through December 1996," Shea said. "This represents a 23.7% increase over estimated cumulative production, had royalty reductions not been granted."

Shea said BLM's findings did not consider significant "downstream" economic benefits.

He said a 1996 Interstate Oil and Gas Compact Commission report estimated that 9.3 jobs are dependent on every $1 million of stripper oil and gas production.

IPAA supportive

George Yates, chairman of the Independent Petroleum Association of America, said, "Success of the stripper well royalty rate reduction program is evident.

"Continuation of this program for a definitive period of time will enable oil and gas producers to drill new wells, initiate new enhanced oil recovery projects, extend the life of marginally economic operations on federal leases, and increase the future recovery of our domestic reserves."

He said last year IPAA and the National Stripper Well Association surveyed 20 companies and found that the federal program had prevented 271 wells from being shut in, or 27% of the 1,014 wells the companies operated. Shutting in the wells would have resulted in the loss of 2.8 million bbl of reserves.

The survey found that elimination of the royalty rate reduction program would have prompted the companies to abandon 234 stripper wells, resulting in the loss of 1.6 million bbl of oil reserves.

For the 20 companies surveyed, ending the program would cost the loss of 24 oil field jobs and as much as $5 million in royalties and taxes for states and the federal government.