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BOEM Suggests Lower Shallow Water Royalties, Eyes Price-Based Rates

The Bureau of Ocean Energy Management (BOEM) is proposing to reduce the royalty rate for Gulf of Mexico (GOM) oil and natural gas leases sold during the August federal sale to 12.5% from 18.75%.

The reduced royalty rates for Lease Sale 249 would affect leases in water less than 200 meters deep. The revisions follow a review by the Department of Interior agency.

GOM Sale 249 is the first scheduled lease sale for the Trump administration’s 2017-2022 Outer Continental Shelf Oil and Gas Leasing Program. It also would be the first scheduled region-wide GOM lease sale to encompass all available acreage in the Western, Central and Eastern planning areas.

Seventy-three million acres offshore Alabama, Florida, Louisiana, Mississippi and Texas are to be auctioned in August and include about 13,725 unleased blocks from three to 230 miles offshore in water depths of nine to more than 11,115 feet (three to 3,400 meters).

The proposed sale notice in March had indicated an 18.75% royalty rate for all leases sold, but the adjustment for shallow water leases reflects “recent market conditions, thereby encouraging competition and continuing to receive a fair and equitable return on oil and gas resources,” BOEM officials said.

The royalty rate for leases in water 200 meters and deeper would remain at 18.75%.

“BOEM has made this decision after careful consideration of market conditions, available resources, leasing, drilling, and production trends, along with comparable international fiscal systems,” officials said. “In particular, hydrocarbon price conditions and the marginal nature of remaining GOM Shelf resources suggest a royalty rate reduction is an appropriate and timely action”

Reducing the shallow water royalty rate “targets the GOM Shelf where exploration, development and production are in decline and where critical infrastructure already exists.”

If BOEM were to proceed with the sale, the royalty rates and other lease terms would be announced formally in the final notice at least 30 days before the scheduled Aug. 16 sales date.

BOEM officials also are analyzing a “price-based royalty system and will be engaging stakeholders on this concept later this year.” The system would not be in place for Sale 249.

The concept of a price-based royalty system “would provide an incentive to lessees through lower royalty rates in times of lower oil prices, while also ensuring the federal government receives a greater return for Outer Continental Shelf resources when prices are high.”

BOEM expects to provide more information and provide an opportunity for stakeholder input in the coming months.

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