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Interior to Suspend Royalties for Deep Gas from Existing, Shallow-Water Leases

Interior to Suspend Royalties for Deep Gas from Existing, Shallow-Water Leases

In an attempt to eke out more natural gas production to meet rising consumption, Interior Secretary Gale Norton announced Friday the agency will give producers a break on royalties for drilling deep below existing leases that are located in the shallow waters off the coasts of Texas, Louisiana, Mississippi and Alabama.

Interior's Minerals Management Service (MMS) estimates there are 55 Tcf of undiscovered natural gas reserves in this band of water in the Gulf of Mexico, which Norton said was enough to help feed the gas appetite of U.S. consumers for the next five year. The MMS further projects that the additional gas would help to lower costs to U.S. gas consumers by $570 million a year, or by more than $5 billion over the next decade.

Specifically, Interior is targeting an existing 2,400 shallow-water (limit is 656 feet), near-shore leases in the Gulf where there already is infrastructure (platforms and pipelines) in place as the "single best way" to boost gas production and deliveries in the near term. "This is production that might not take place for many, many years" without Interior providing royalty relief to offset the high drilling costs, Norton said during a teleconference with reporters..

MMS said its geologists estimate that approximately 60% of the natural gas in the deep play underlies these leases. It further projects that production from the deep gas play could reach 10-15 Tcf over the next decade or so, with the targeted existing leases accounting fro 4.5 Tcf.

The MMS believes there is a "substantial...accumulation of gas" that is located much deeper than in the areas that currently are being drilled in the Gulf, said MMS Director Johnnie Burton.

In a final rule to be published in the Federal Register Monday (Jan. 26), Interior says it will relieve holders of existing shallow-water leases of their royalty obligation for the first 15 Bcf of natural gas produced from depths greater than 15,000 feet and less than 18,000 feet, or for the first 25 Bcf produced from 18,000 feet or deeper. The royalty suspension would be available for five years after the MMS rule takes effect, and when market prices for gas are at $9.34/Mcf or below, the agency said.

The royalty suspension would offset approximately one-third of the cost of a deeper well, which the MMS estimates on average would amount to $20 million. As a further incentive, if a producer should hit a dry hole after drilling to 18,000 feet, the MMS said it would suspend royalties for 5 Bcf of other production from that lease.

"We really think that this is an incentive that will give industry some pause, and will cause them to assess the plays and invest money here that they may invest in West Africa and Indonesia," said Burton. "If we increase the supply and stabilize the supply, we will hopefully stabilize the cost" of natural gas to benefit industry and U.S. consumers.

Norton stressed that the new royalty incentives for existing leases differ from other production incentives offered by the MMS in the past. Those, she explained, primarily applied to new leases and deepwater production.

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