MMS Offers Incentives to Spur Offshore Production

The Interior Department's Minerals Management Service (MMS) has announced that the OCS Lease Sale 178 planned for the central Gulf of Mexico will offer producers a mix of incentives to encourage ultra-deep-water exploration and development for both natural gas and crude oil.

Lease Sale 178, which is scheduled for March 28 in New Orleans, will offer producers two forms of royalty relief: one is strictly for gas drilled in deep waters in certain blocks in the central Gulf, while the second will apply to both gas and oil drilled in deep waters. A final rulemaking on deep-water royalty relief, which was issued Feb. 25, will provide a framework for the lease sale, the MMS said.

The sale "will provide the first ever incentives for high cost/high risk exploration for natural gas targets deep below the ocean floor," said Acting MMS Director Tom Kitsos. "These prospects hold great potential to increase domestic natural gas production from deep horizons and below subsalt formations."

Specifically, the deep-gas incentives being offered would allow producers to produce up to 20 Bcf of natural gas royalty-free, provided it's at depths of greater than 15,000 feet, according to MMS. It noted that 1,306 blocks in the central Gulf would be subject to this relief.

In addition, the agency said deep-water royalty relief would be applied to tracts in water depths greater than 800 meters. The relief will be provided for both gas and oil production. The first 9 million barrels of oil equivalent (MMBOE) of production will be royalty free from leases in water depths between 800 and 1,599 meters, while the first 12 MMBOE of production will be royalty free for leases in 1,600 meters or more of water, the agency said. This suspension of the royalty obligation will be granted only to individual leases, not to fields.

The MMS said 410 blocks in the central Gulf will receive the 9 MMBOE royalty relief, while 2,460 blocks will be subject to the 12 MMBOE relief.

Another initiative being offered applies to natural gas found beneath thick subsalt domes, MMS said. Under this, lessees may be entitled to an extension of the five-year primary lease term when an operator has drilled a first subsalt and needs additional time to image the subsurface data to determine the appropriate next drilling target. This would avoid premature lease expiration and the consequent delay in exploration, it noted.

"We have determined that this package of incentives provides the right balance to encourage domestic explorations while also ensuring the public a fair return for resources leases," Kitsos said.

Sale 178 encompasses about 4,391 available blocks in the central Gulf Outer Continental Shelf (OCS) planning area offshore Louisiana, Mississippi and Alabama. The area covers about 23.19 million acres. Blocks up for sale are located from three to 200 miles offshore in water depths ranging from four to more than 3,425 meters. The agency estimates that 1.53 Tcf to 4.39 Tcf of gas and 150-440 barrels of oil will be produced from the sale.

Susan Parker

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