The Independent Petroleum Association of America (IPAA), which represents the nation’s independent gas and oil producers, is urging the Interior Department to do away with the current price thresholds that cut off royalty incentives for deepwater gas and oil production when prices get to a certain level. IPAA also wants the department to take a closer look at the potential impact on Gulf of Mexico leasing from siting LNG terminals offshore.

In an April 30 letter to Interior Secretary Gale Norton, IPAA President Barry Russell and Charles D. Davidson, chairman of IPAA’s offshore committee, also expressed concern about the impact of the Coastal Zone Management Act (CZMA) on oil and gas development. The CZMA has been used to block E&P projects offshore North Carolina and in other areas. More recently it has been used to prevent major gas pipelines from being constructed in the Northeast (see related story on Islander East).

The producers lauded the agency’s rule providing temporary royalty incentives for deep gas wells on existing leases in the Gulf of Mexico. “As the nation’s demand for natural gas continues to increase, it is important for the federal government to take steps that encourage new natural gas supplies,” they said. “The rule will help reduce the economic risks associated with drilling new wells in the Gulf, while increasing the country’s supply of natural gas.

“Similarly, we believe that the royalty incentives to encourage deep water oil and natural gas production have been an integral part of the robust efforts to develop these important national resources… We urge the continuation of these incentives and recommend that the policy be crafted so it is clearly known well before a lease sale to improve the planning processes.”

However, the producers said they do not believe the current price trigger terminating deepwater incentives is the best approach because it “can significantly reduce the effective price. The cap can also be applied retroactively and force producers to pay royalties on oil and natural gas produced before the trigger threshold was met,” they said.

“We urge MMS to review this matter and to work with producers and the public to develop a new deepwater royalty threshold that would help correct these problems.”

Secondly, they expressed concern about the likelihood that construction of offshore LNG terminals could warrant the removal of certain tracts from future lease sales in order to provide shipping lanes for LNG traffic. “Although we certainly understand that our nation needs a variety of sources for natural gas, including LNG, the possibility of withdrawing OCS lease sale blocks in the Gulf of Mexico to accommodate LNG facilities is troubling.”

They said the MMS should work with the Department of Homeland Security to “ensure that any proposal to withdraw lease sale tracts in the Gulf of Mexico is fully disclosed and the existing leaseholders and the public be given the opportunity to comment on such a request.”

Russell and Davidson also requested that Interior work with the Department of Commerce and the National Oceanic and Atmospheric Administration to limit the impact of the CZMA rule on offshore producers.

“The current CZMA process is not working and we ask that your agency make every effort to ensure the final rule provides greater clarity, transparency and predictability. Although the CZMA was designed to ensure greater coordination and simplification of procedures to expedite governmental decision making for managing coastal resources, the current system is failing to achieve these important policy goals.”

The CZMA has been used by states to block offshore drilling projects and the construction of pipelines, such as the Millennium pipeline in New York and the Islander East project in Connecticut. If states determine that projects would be environmentally or commercially detrimental to their coastal areas, they can block the projects. Project sponsors have to appeal a state ruling to the Commerce Department which oversees the CZMA.

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