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MMS Moves to Extend Royalty Relief for Deepwater

MMS Moves to Extend Royalty Relief for Deepwater

Responding to projected shortages in natural gas and oil supplies, the Minerals Management Service (MMS) has announced proposed new rules to selectively extend deep-water royalty relief in the Gulf of Mexico past the Nov. 28 expiration of the current relief program.

"These new regulations will provide the framework to ensure the continuation of royalty relief that may be needed as an incentive in the deepwater areas of the Gulf of Mexico," said MMS Director Walt Rosenbusch. "The ability to continue some form of selective royalty relief is important for maintaining the momentum created by the Deep Water Royalty Relief Act, avoiding abrupt changes to our ongoing leasing system and stimulating technological advances and expansion of infrastructure into deeper waters." The relief act was passed in 1995 and has been credited with increasing lease sales and Gulf production, since the suspension of royalties on initial volumes allows producers to recover the high cost of deepwater drilling faster.

The proposed rules published in the Federal Register will provide royalty relief "as needed" for new leases issued after November 2000. The amount of automatic royalty relief (or the initial production volumes on which producers will not pay royalty) and the oil and gas price thresholds above which relief would not apply will be specified and posted prior to each lease sale. This is different from the current program, which set relief volumes, price thresholds and water depths to apply to all leases.

"Once established, the royalty suspension volumes are expected to be in place for about three years," the MMS announcement said. "Relief volumes, if provided, will be issued to the individual leases, not fields, and these volumes would not be affected by the status of the fields to which the leases may be assigned. New leases will be issued with an extended 'rental fee' provision that applies during the period of royalty suspension."

The rules will include "an application process that will allow lessees to apply for additional relief (project relief) on new leases when they believe the automatic royalty suspension is insufficient to justify development."

"Some may question the need to continue leasing incentives when oil and gas prices are now unusually high," Rosenbusch commented. "However, given that oil and gas prices are highly volatile, we think it is prudent to have the means or the framework established in regulations that will enable us to offer incentives that are both targeted and flexible. This will help ensure that deepwater development can move forward in all market conditions."

The comment period for the proposed new rules ends Oct. 16.

Ellen Beswick

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