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Burton: MMS Plans RIK Expansion, Royalty Deductions for Transportation Costs

Burton: MMS Plans RIK Expansion, Royalty Deductions for Transportation Costs

While there are few new initiatives to boost domestic gas supply in the Bush Administration's $2.4 trillion budget for 2005, other than the highly contentious issue of opening up the Arctic National Wildlife Refuge (ANWR) to oil and gas drilling, Minerals Management Service (MMS) Director Johnnie Burton believes existing and proposed plans by her agency could provide a significant drilling incentive for producers.

The total amount set aside for MMS in the new budget is $282.4 million, which includes an increase of about $12 million over 2004. The MMS budget includes $178.7 million in appropriations and $103.7 million in offsetting collections from Outer Continental Shelf (OCS) rents and cost recovery fees, reflecting respective increases of $8.4 million and $3.5 million over the 2004 budget.

It includes funds for a new online information delivery system called OCS Connect, a funding increase of $1.9 million for new digital geologic interpretive tools -- including a 3-D seismic room -- and an Indian trust initiative of $941,000 to support additional work with tribal cooperative audit partners.

"The budget does not directly address the [natural gas supply situation]," Burton admitted in an interview with NGI Tuesday. "What addresses that issue is mostly a rule that we just issued last week, the deep gas [royalty relief] rule, which is an incentive for a company to drill very deep on the Shelf to reach areas of what we think are deposits of natural gas that have been untapped up to now except for a couple of discoveries."

A notice last week in the Federal Register stated that on March 1 MMS will implement a rule that should lead to about 4.4 Tcf of additional gas supply on the market over the next 16 years.

The rule will provide a royalty suspension in the Gulf of Mexico on the first 15 Bcf of deep Shelf gas produced from depths greater than 15,000 feet and less than 18,000 feet or on the first 25 Bcf produced from 18,000 feet or deeper. Among other provisions, it also will grant a royalty suspension on the first 25 Bcf of gas from a second well that is 18,000 feet or deeper. In addition, it will provide a royalty suspension supplement of 5 Bcf to future lease production of gas and oil from any depth, for drilling a qualifying dry hole at 18,000 feet or deeper.

"I think it has been extremely well received by industry," said Burton. "In fact, today a company was telling us that they are revisiting their older leases -- because that rule is applicable to existing leases -- and trying to figure out where they could drill deeper to tap those gas resources. We felt this was the best way to get gas to market, the fastest way, because the pipeline system is in place and they can tap into it very quickly." The rule targets about 2,400 existing leases in the Gulf of Mexico.

Burton also touted plans to amend royalty rules to be "more generous" to gas producers when it comes to royalty deductions for pipeline transportation. In addition, she said MMS expects a significant expansion over the next few years of its natural gas royalty in-kind program, which will make it easier for producers to give the federal government its share of production from federal lands.

Burton said streamlining existing MMS programs actually could serve the industry better than adding new ones. "We don't need more money to do that. What we do need more money for is to evaluate the resources that are potentially reachable by industry and for that we are getting more money in our budget."

The administration has set aside an extra couple million dollars that will be targeted specifically for interpretive tools. "That means money so that we can have more well logs digitized, money to train our people in new technologies and building a 3-D visualization room to interpret seismic so that we can stay on top of what's happening technically in the Gulf and then adjust our rules and our processes to make sure industry can access these new resources," said Burton.

She said the amendments on existing royalty rules should allow MMS to be "a little more generous" to producers when it comes to royalty deductions of costs of "known arms-length transactions and particularly transportation" costs. "We are amending the rule for valuation of oil produced on federal lands and then we are also working on an amendment on natural gas production from federal lands."

"Right now in the Rockies with gas we have a deficiency of take-away capacity and so we need to encourage the building of pipelines," she said. "We are trying to revise our rules to tell industry specifically what they can deduct and cannot deduct. In looking at what they can deduct in known arms length transactions, we are giving them a little bit more of a return of investment."

She said the MMS was working on the "first draft" of the proposed amendment on gas transportation royalty deductions and does not anticipate having the amendment out until later this year. The proposed amendments apply only to royalties paid on gas produced from federal lands, not Indian lands.

Burton said the MMS also is putting together a five-year business plan for an expansion of the natural gas royalty in-kind program, which allows producers to pay their royalties in gas rather than in dollars. "We hope to have that ready in another couple of months. On a limited scale, that program has been very successful so I was interested in expanding it...

"We intend to expand it with offshore production, possibly even the production that we have and share with the states, the 8(g) band -- in fact Louisiana recently signed a memorandum of understanding with MMS for production of oil in the 8(g) band to go through a royalty in-kind program. We also would like to expand that [program] with other states onshore."

Burton noted that MMS faired better than most Interior Department agencies in the administration's budget plans for 2005. MMS is increasing its budget a little more than 3%. The Interior Department is expected to see an increase of about 2.3% compared to 2004.

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