MMS Highlights Drilling Incentives in Two Lease Sales

The U.S. Minerals Management Service (MMS) last week highlighted the economic incentives for deep gas exploration in its final notice for the Western Gulf of Mexico (GOM) Lease Sale 180 and Sale 178, Part 2, to be held concurrently on Aug. 22 in New Orleans. The sales include an incentive to drill for deep gas deposits located in the shallow water shelf area of the Gulf.

MMS will provide royalty suspension for the first 20 Bcf of production from a well drilled below 15,000 feet subsea. The incentive was modified to address MMS' reassessment of economic factors by raising the threshold price at which the royalty suspension would end from $3.50/MMBtu to $5/MMBtu.

"This ensures that the incentive is not pulled back prematurely by wildly fluctuating gas prices," Tom Kitsos, MMS' acting director. "[It] will stay in place during periods of modestly high natural gas prices but end when the price remains at sustained high levels, over a period of a year. This incentive at this level is necessary to stimulate industry's willingness to invest in this high cost, high risk, and operationally difficult area."

He said the incentives are the same as those instituted for Central Gulf Lease Sale 178, Part 1 held last March, and said that next month's sale "will provide incentives for high cost/high risk exploration for natural gas targets deep below the ocean floor, in addition to providing an appropriate mix of incentives to ensure that exploration and development continues in ultra-deep waters with the same momentum as in the past."

Deepwater royalty relief will be applied to tracts in water depths of more than 800 meters. The specific terms of royalty relief will be granted to individual leases rather than fields. For Sale 180, the royalty "suspension volumes" range from 9 MMboe in water depths of 800-1,599 meters to 12 MMboe of relief in depths of more than 1,600 meters. Lessees will be allowed to produce these volumes of oil and gas before any royalty obligations are due the federal government.

The 180 lease sale encompasses 4,114 unleased blocks, totaling about 22.37 million acres, in the Western GOM Outer Continental Shelf planning area offshore Texas and in deeper waters offshore Louisiana. The blocks are located from nine to 250 miles offshore in water from eight meters to more than 3,000 meters. Estimates of undiscovered recoverable hydrocarbons are expected to be between 10-90 MMboe and 0.57-1.93 Tcf. There are 1,951 blocks in water deeper than 800 meters. Included in the 180 lease sale are 258 blocks in the area formerly known as the Western Gap, part of the new U.S-Mexico boundary agreement. MMS's 178, Part 2 sale includes 53 unleased blocks or about 250,788 acres.

To learn more about the sales, visit the web site at www.mms.gov.

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