BLM PLANS TO CUT ROYALTY RATES FOR ONSHORE STRIPPER OIL WELLS

The U.S. Bureau of Land Management will cut royalty rates for 15,000 stripper oil wells on federal land effective Jan. 1. The 12.5% royalty for wells producing less than 15 b/d will be reduced on a sliding scale (see table). The reduction is to be applied by lease, based on production for the previous year. Injection wells are to be counted in determining average production/well/lease. Even if operators increase production on the lease, royalties will remain at the new reduced rate for 5

Nov. 11, 1991

3 min read

The U.S. Bureau of Land Management will cut royalty rates for 15,000 stripper oil wells on federal land effective Jan. 1.

The 12.5% royalty for wells producing less than 15 b/d will be reduced on a sliding scale (see table). The reduction is to be applied by lease, based on production for the previous year. Injection wells are to be counted in determining average production/well/lease.

Even if operators increase production on the lease, royalties will remain at the new reduced rate for 5 years.

BLM said the policy is designed to give operators economic incentives not to abandon wells, to work over wells, begin enhanced oil recovery projects, and return shutin wells to production.

The agency has been working on the planned reduction for several months (OGJ, Aug. 26, p. 24).

EXPECTED RESULTS

The action is expected to save oil producers $6 million/year in royalty payments and boost onshore stripper oil production to 27.5 million bbl/year from the current 22.8 million bbl/year.

Cy Jamison, BLM director, said, "This will give a good shot in the arm to an industry that's been hard hit."

The 15,000 onshore stripper oil wells on federal land make up 67% of total wells but produce only 18.8% of the 121.1 million bbl/year from onshore federal land.

Jamison said the action, which does not require congressional approval, will reduce royalty payments but not overall revenue to the federal government and western states.

BLM shares half of its royalty income from federal land with the states where the land is located. Most of the stripper leases are in Colorado, New Mexico, Wyoming, and Utah, with lesser numbers in California, Montana, and North Dakota.

BLM and the Office of Management and Budget estimate that the loss in royalty revenues will be offset by larger federal revenue from royalties, income taxes, and excise taxes on increased production.

BLM said the same will be true for the states involved, which also will benefit from increased employment and investment.

Jamison has explained the program to western governors and said they have given it "a good reception" so far "because they want to see something positive in the industry." Wyoming expects a positive cash flow from the royalty reduction.

Jamison said, "We hope this will encourage independents to go back in and work over wells."

BLM said 80% of the 6,000 shutin wells on federal leases could be returned to production or used as service wells, depending on economics. And it said 20% of shutin wells could be used in enhanced oil recovery projects.

After 5 years BLM will review the program and continue, change, or end it. And it will cancel the program if West Texas intermediate oil price remains at more than $28/bbl, indexed for inflation, for 6 months.

BLM estimated 75% or 4,757 of the 6,354 oil producing leases on federal land will qualify for the reduced royalty rate. There are 22,500 wells on those leases, and 15,000 or 67% will qualify.

BLM said 570 wells were abandoned in 1990. The average abandonment rate has been 683/year the past 5 years.