The Industrial Energy Consumers of America (IECA) believes the Office of Management and Budget (OMB), which assists the president in overseeing the federal budget, has been dragging its feet on an important proposed rule that is designed to stimulate more natural gas production from deep gas wells in the shallow waters of the Gulf of Mexico.

IECA, a non-profit association of major industrial firms that represents Alcoa, Bayer, Dow Chemical and others, criticized OMB for wasting time while Americans are spending billions more than they should be spending on natural gas.

In a letter to OMB Monday, IECA Executive Director Paul Cicio said industrial gas consumers are “both alarmed and dismayed that this [royalty relief] rule is languishing within the federal government and this agency.”

Under the proposal, the Interior Department’s Minerals Management Service (MMS) would provide royalty suspension incentives when companies take the risk of exploring and developing deep gas deposits in shallow-water areas they have already leased. Lessees would be eligible for royalty relief on their existing leases if they are willing to drill for new and deeper prospects more than 15,000 feet below sea level. There are about 2,400 existing leases in the area targeted for relief in the proposed rule.

“The natural gas crisis is now in its 42nd month and has cost consumers over $111 billion, countless jobs and economic pain for both residential and industrial consumers,” Cicio said. “We strongly urge you to immediately authorize the publication of the rule without a price threshold… The winter heating season is just starting and the price of natural gas is already at $7/MMBtu. The most immediate opportunity to increase supply is to extract more natural gas from existing shallow wells that are already attached to the production and supply infrastructure.”

Although natural gas from the OCS currently provides about 25% of domestic production, the contribution from the shallow water area has been declining precipitously over the past five years. While the shallow waters of the Gulf have been actively explored, relatively few wells have penetrated depths below 15,000 feet due to the high cost and risk associated with such wells. Since infrastructure is already in place, in terms of platforms and pipelines, MMS anticipates that production could come on line relatively quickly.

The proposed incentive program provides the following: A royalty suspension on the first 15 Bcf of gas produced from a well drilled and completed between 15,000 feet to less than 18,000 feet below sea level or on the first 25 Bcf from a well drilled and completed 18,000 feet or deeper below sea level; and a royalty suspension supplement of 5 Bcf applied to future production of gas or oil from any drilling depth on the lease is allowed for an unsuccessful well drilled to a target reservoir 18,000 feet or deeper. This dry hole incentive is aimed at helping to offset the high risk associated with drilling that deep.

“This rule must provide a significant financial incentive to allow exploration and production companies to drill existing shallow wells to a level of over 15,000 feet,” said Cicio.

“As industrial energy consumers and employers, we are very disheartened by the seeming lack of urgency with which the federal government is approaching the needs of the American public regarding this rule,” he added. “We are reminded that this rule had been in development at the Department of Interior for over two years when the OMB informed the agency that the rule was a ‘significant rule’ and would require substantial additional information and process. Two years ago we were already engulfed in the natural gas crisis. We understand that the DOI complied with the numerous requirements and the rule was re-submitted to the OMB in February 2003 as a draft that would require a comment period and the issuance of a final rule. The final rule was submitted to OMB on Oct. 8, 2003 and three months later we are still waiting.”

The letter also was sent to MMS Director Gale Norton, Secretary of Energy Spencer Abraham; Reps. Billy Tauzin (R-LA) and Richard Pombo (R-CA) and Sen. Pete Domenici (R-NM).

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