To encourage drilling of marginal deep-water wells (200 metersand greater) in the Gulf of Mexico, the Minerals Management Service(MMS) has proposed a new rule expanding discretionary royaltyrelief for properties that would otherwise be considereduneconomic.

The proposed amendments to increase discretionary relief follow onrule changes proposed in September to extend relief on an individuallease basis beyond the cut-off date at the end of this month (seeDaily GPI, Sept. 14). The final rule onthe earlier proposal is expected to be issued late this month or earlyin December. Also, the parameters (volumes and threshold prices) to beapplied in the GOM Lease Sale 178 coming up in March will be announcedsoon.

The latest proposal from the Interior Department’s MMS wouldextend discretionary relief beyond that specified at the time ofthe lease sale if leaseholders can prove it is necessary todevelopment of the prospect. Also, leases that did not have royaltyrelief attached at the time of sale, can apply for relief, based onproof of need. Leaseholders also may apply for royalty relief todevelop new projects on old leases acquired prior to 1996.

Under the proposed new rule projects that are approved fordiscretionary relief will be able to produce royalty-free a minimumof 10% of the most likely recoverable resource. Those that alreadyhave a specified royalty relief volume, could add 10% to theoriginal number. Besides being tied to volumes, the royalty reliefwill only operate up to certain price thresholds, for instance theaverage of the previous year’s prices. The rationale is that whileroyalty relief will encourage production at low prices, with higherprices it will not be necessary.

The rule, designed to be both targeted and flexible, is complex,an MMS spokesman said, and the agency is planning meetings inDecember (tentatively the 12th & 14th) at the MMS regionaloffice in New Orleans and at the Sheraton Airport Hotel in Houston.Tentative plans call for the morning session to discuss theupcoming lease sale with afternoon discussions of the new royaltyrelief rules.

Comments will be accepted through Dec. 18 by the Dept. ofInterior’s MMS; Mail Stop 4024; 381 Elden St.; Herndon, VA20170-4817. Questions may be addressed to Marshall Rose at (703)787-1536. You may browse for the proposed MMS rule, posted Nov. 16in the Federal Register here.

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