The Minerals Management Service published final rules implementing provisions of the Deep Water Royalty Relief Act of 1995 in the Federal Register Jan. 16. The act mandates volumes of royalty-free production from fields in water depths exceeding 200 meters, both for new leases (after Nov. 28, 1996) and for existing leases if production from those existing leases would not be economic without royalty relief. The act, which was enacted Nov. 28, 1995, has led to a surge of activity along the Offshore Continental Shelf of the Gulf of Mexico.

“Deep water royalty relief for new leases has contributed to the record breaking lease sales in the Central and Western Gulf of Mexico over the last two years; a clear signal that the Gulf of Mexico is now one of the world’s leading oil and natural gas plays,” said MMS Acting Director Carolita Kallaur.

The final rules set the terms for royalty suspensions on new oil and natural gas leases in the Outer Continental Shelf and on existing leases that have never been produced other than for testing and would not be economic without royalty relief. “After reviewing all of the comments received from industry, we believe this rule strikes a proper balance between the desire for simple procedure and the protection of the public interest,” Kallaur said.

Modifications in the final rules for new leases include allowing leasees to appeal an MMS decision designating their lease as part of a field, the agency said. They also clarify that royalty suspension shall continue to the end of the month if cumulative production from the eligible leases in the field reaches the royalty suspension volume. The latter change avoids the complications that would arise for royalty payors if the royalty rate changed in the middle of the month, MMS said.

Changes in the rule for existing leases include elimination of the requirement to certify that production would not occur without relief. MMS also will allow earlier applications by replacing the need for an approved development plan with reduced time to start construction and stricter redetermination conditions. MMS also relaxed the application requirements on CPA certification and number of development scenarios. For leases nearing the end of their economic life, the final rules reduce the information requirements in the relief application, ease relief qualification requirements and replace net revenue share relief terms with a reduced, fixed royalty rate.

Rocco Canonica

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