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Interior to Maintain Deepwater Oil, Gas Royalties Rate at 18.75%

Interior Secretary Ryan Zinke has put the kibosh -- at least for now -- on plans to reduce deepwater royalty rates by almost 33%.

The Department of Interior’s Royalty Policy Committee in February had advised slashing rates for production from waters 200 meters or deeper to 12.5% from 18.75%. However, Zinke on Tuesday said he would not “at this time” follow through with the recommendation.

"The pilot light of American energy has been re-lit by President Trump, and the president's energy dominance strategy is paying off," he said. "Right now, we can maintain higher royalties from our offshore waters without compromising the record production and record exports our nation is experiencing. The administration is grateful for the committee's hard work on these significant energy issues."

Whether tepid interest in Gulf of Mexico (GOM) region-wide lease sales had anything to do with the decision was not noted. An auction held in March, which Zinke had said would be a “bellwether” about future offshore exploration, barely managed to surpass results from one held last year, even though this year’s sale included every available unleased block in the GOM, with some offered at a lower royalty rate.

The decision to hold royalty rates at a higher level “reflects the oil and gas industry's improving market conditions for safe and responsible development of our abundant energy resources," said royalty panel Chairman Vincent DeVito, who is an Interior energy adviser. "The committee will continue to study ways to improve our programs, including recommendations to improve market conditions for other forms of energy like coal and offshore wind."

Interior’s Bureau of Ocean Energy Management (BOEM) still plans to charge a 12.5% rate on shallow-water leases, a reduction that was implemented last year. Federal officials are authorized to set royalty rates on a sale-by-sale basis but they must charge at least 12.5%. The deepwater royalty rate actually was raised to 18.75% from 16.67% during the George W. Bush administration.

Interior plans to follow through on other royalty committee proposals, including a study to compare the domestic offshore industry to operations in other countries. The committee is set to meet at least two more times.

Zinke last month told the Senate Committee on Energy and Natural Resources that the draft proposed program (DPP) of the administration's proposal to open more than 90% of the Outer Continental Shelf (OCS) to exploration would be released this fall. Areas with "enormous opposition" to drilling are to be removed from the OCS Oil and Gas Leasing Program for 2019-2024, which is overseen by BOEM. As of last month Interior had received more than 630,000 public comments on the DPP, according to regulations.gov.

Because he did not say definitively that rates would remain at 18.75% for deepwater drilling, Zinke left the door open to implement a rate reduction at some point, according to the National Ocean Industries Association (NOIA).

"NOIA has little doubt that increased study will show that continued competition and a challenging economic environment may further reinforce the notion that the U.S. needs to revisit the royalty issue in the months and years to come," said spokesperson Nicolette Nye.

There also was pushback, including by the Wilderness Society, about the makeup of the royalty committee, which includes several representatives of big offshore producers. "The secretary pointed to the Royalty Policy Committee as an excuse to rescind a rule aimed at more fairly valuing the public's oil, gas and coal," said senior energy adviser Pam Eaton.

"But as with this offshore royalty rate recommendation that has been rejected by the secretary, he should not put the fox in charge of the hen house for any rules governing how much the oil, gas and coal industries should pay for the public's energy resources."

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