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MMS Proposes 25% Base Rent Increase for Gulf Leases, Sliding Scale Escalator

March 7, 2005
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The president's budget for fiscal year 2006 calls for the Minerals Management Service (MMS) to increase base rentals by about 25-27% for leases in the Gulf of Mexico due to inflation since the base rates were set in the mid 1990s. The agency said last Wednesday in a Federal Register notice that it is taking comments through April 1 on the base rate hike and a proposed sliding scale escalator, which it says is designed to encourage more deepwater exploration.

Since the Deep Water Royalty Relief Act (DWRRA) was implemented in 1996, leasing has been about twice as high as the increase in the pace of deepwater exploration, MMS said. The agency is considering the use of a sliding scale rental system in future lease sales that does not increase rates until the sixth year of the lease in order to encourage an increase in exploration drilling in deepwater areas earlier in the lease term.

According to the sliding scale proposal, annual rentals would escalate gradually beginning with the sixth year of the initial lease term period except under certain conditions. If a lease is drilled within the first five years of its initial period, escalating rentals can be avoided either through a discovery, at which time the rental rate would stay the same until the start of royalty-bearing production, or, as might occur in the case of unsuccessful exploration, through relinquishment. If a discovery is made after the first five years of the primary term of the lease, the rental rates would return to the level that prevailed during the first five-year period.

The MMS budget calls for an increase in the base level for rentals to $9.50 per acre from $7.50 for deepwater blocks (deeper than 200 meters) and to $6.25 per acre from $5 for leases in water depths less than 200 meters. The increased rental rates mostly reflect inflationary adjustments from the last time rentals were revised in 1993 (shallow water) and 1996 (deep water), MMS said.

For deepwater leases at water depths greater than 400 meters, the sliding scale plan would increase the rate to $10.50 per acre in the sixth year and to $17.50 per acre by the tenth year.

However, deepwater blocks have provisions of royalty suspension and longer primary terms unlike shallow water blocks, MMS noted.

The agency said it would like to receive comments about both the base rate increase and the structure of the escalating rental rates it is considering for water depths 400 meters or greater and their possible effects on acquisition and exploration decisions.

"Would fewer tracts receive bids? Would the amount of the individual bids change? Would escalating rentals at the rate specified above have any effect on the timing of exploration?" MMS asked. "Depending on upcoming sale results, changing market conditions, responses to this notice, and revisions in future projections, a sliding scale rental structure also might have to be adjusted."

To make comments on the proposed changes go to MMS's "public connect" online commenting system at http://ocsconnect.mms.gov.

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ISSN © 2577-9877 | ISSN © 1532-1266
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