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
"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
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.
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