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Royalty Relief Provisions Axed in Bush Budget

Targeted by both Republicans and Democrats following record-high earnings by North American producers, royalty relief provisions for deepwater oil and natural gas exploration were cut from the fiscal 2008 budget President Bush submitted to Congress on Monday.

The Energy Policy Act of 2005 (EPAct), which Bush signed two years ago, extended and expanded the royalty relief provisions (see Daily GPI, Aug. 9, 2005). However, in January the House of Representatives passed energy legislation (HR 6) repealing tax breaks for oil and gas producers and eliminating royalty relief for ultra-deep production in the GOM (see Daily GPI, Jan. 19). The Senate is expected to take up a royalty bill in the near future, according to Sen Jeff Bingaman (D-NM) (see Daily GPI, Jan. 24).

Asked why the royalty relief provisions were not in the fiscal 2008 budget, Department of Interior (DOI) Deputy Secretary Lynn Scarlett said, "We don't believe incentives are necessary with current high energy prices." She noted "several changes" were proposed for the DOI budget this year, "some pertaining to royalty relief, others for BLM [the Bureau of Land Management] to operate."

Under the detailed Minerals Management Services (MMS) "Deep Gas and Deep Water Incentives" portion of the budget, the president proposes repealing Section 344 of the EPAct, which extended existing deep gas incentives in two ways. First, it mandated an increase in the royalty suspension volumes to 35 Bcf from 25 Bcf in a third drilling depth category (more than 20,000 feet subsea). Second, it directed incentives for all three drilling depth categories also be applied to leases in 200-400 meters of water. The new budget also proposes to repeal Section 345 of the EPAct, which provided additional mandatory royalty relief for some deepwater oil and gas extraction.

"Additional royalty relief for oil and gas exploration is unwarranted in today's price environment," the budget stated. "A legislative proposal will be transmitted to Congress to propose repeal."

DOI Secretary Dirk Kempthorne, who presided over the department's budget unveiling, said new areas in the Gulf of Mexico (GOM) that have been opened for leasing also are a major part of the new budget proposal (see Daily GPI, Jan. 10; Dec. 21, 2006). The new offshore areas, he said, "will potentially allow for new domestic production of 1 billion bbl of oil and 6 Tcf of natural gas, thereby reducing U.S. dependence on foreign oil and keeping down the costs of home heating and electricity."

In January, the MMS announced plans to increase the standard royalty rate for offshore oil and gas production from 12.5-16.7%, which Kempthorne said will ensure "the public is fairly compensated for the sale of the Outer Continental Shelf (OCS) mineral resources." Most federal oil and gas is leased at a 12.5% royalty rate both on- and offshore. However, the OCS Lands Act grants the DOI secretary discretion to establish a higher royalty rate.

The MMS also will publish new rules "to ensure that all future royalty relief for offshore leases is subject to appropriate price thresholds that, if exceeded, will result in the automatic termination of royalty relief," said Kempthorne.

Royalty incentives were established first under the Deep Water Royalty Relief Act of 1995 to encourage development of new energy supplies in the deepwater GOM. The provisions expired in 2001, and they were extended and expanded under EPAct, which was signed into law in August 2005. Since then, however, the royalty program has come under intense scrutiny and several measures, including one by Sen. Jon Kyl (R-AZ), have targeted royalty relief for repeal (see Daily GPI, Dec. 18, 2006; Sept. 11, 2006).

In the budget notes, the administration noted that the MMS is "witnessing a surge in exploration activity and development in the ultra-deepwater area of the GOM at water depths between 5,000 feet to about 10,000 feet. At the end of 2004, there were 2,300 active leases in ultra-deepwater, and in the five-year period 2001-2005, there were a total of 230 wells drilled, of which 148 were exploratory wells.

"This activity and the discoveries of oil and gas have now started to translate into development projects."

The 2008 budget provides $161.5 million total for MMS, an increase of $3.2 million over 2007. The budget increase of $5.3 million will facilitate deepwater development and the completion of National Environmental Policy Act analyses for the 2008 offshore lease sales. Included is $1.3 million to acquire the "expertise and resources" to manage MMS' OCS ultra-deepwater development. Another $820,000 is earmarked for GOM hurricane recovery efforts to address well abandonment and pollution prevention.

The budget also proposes to repeal other provisions in the EPAct, "including a last-minute addition to the bill that prohibited the administration from implementing new fees for oil and gas permit processing." According to the budget, the repeal will "generate at least $20 million per year beginning in 2008, thereby shifting these costs from taxpayers and allowing DOI to better process permit applications as demand increases."

In addition, the budget continues to support authorizing limited exploration and development in the Arctic National Wildlife Refuge (ANWR). DOI estimates ANWR holds between 5.7-16 billion bbl of recoverable reserves, or, at peak production, up to 1 million b/d of new domestic oil supply. This amount of daily production would be equivalent to nearly 10% of the nation's current daily imports, DOI noted.

"The 2008 budget will support necessary activities to begin ANWR leasing and fund continued leasing of the National Petroleum Reserve-Alaska," the budget proposal stated.

Funding to protect wildlife habitat while maintaining energy production through the Healthy Lands Initiative also is included in DOI's budget. This initiative seeks to transform decision making from a parcel-by-parcel approach to a "landscape" approach that preserves habitat and benefits wildlife, according to DOI. The initiative, said Assistant Secretary for Policy, Management and Budget Tom Weimer, will allow BLM, in partnership with leaseholders, private landowners, and government agencies, to meet domestic energy needs, while mitigating impacts on wildlife and preventing the listing of certain species.

"Wyoming is an excellent example of this," said Weimer. "Here, you have world-class resources underground, and you have world-class habitat above ground. These are not mutually exclusive."

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