Responding to projected shortages in natural gas and oilsupplies, the Minerals Management Service (MMS) has announcedproposed new rules to selectively extend deep-water royalty reliefin the Gulf of Mexico past the Nov. 28 expiration of the currentrelief program.

“These new regulations will provide the framework to ensure thecontinuation of royalty relief that may be needed as an incentivein the deepwater areas of the Gulf of Mexico,” said MMS DirectorWalt Rosenbusch. “The ability to continue some form of selectiveroyalty relief is important for maintaining the momentum created bythe Deep Water Royalty Relief Act, avoiding abrupt changes to ourongoing leasing system and stimulating technological advances andexpansion of infrastructure into deeper waters.” The relief act waspassed in 1995 and has been credited with increasing lease salesand Gulf production, since the suspension of royalties on initialvolumes allows producers to recover the high cost of deepwaterdrilling faster.

The proposed rules published in the Federal Register willprovide royalty relief “as needed” for new leases issued afterNovember 2000. The amount of automatic royalty relief (or theinitial production volumes on which producers will not pay royalty)and the oil and gas price thresholds above which relief would notapply will be specified and posted prior to each lease sale. Thisis different from the current program, which set relief volumes,price thresholds and water depths to apply to all leases.

“Once established, the royalty suspension volumes are expectedto be in place for about three years,” the MMS announcement said.”Relief volumes, if provided, will be issued to the individualleases, not fields, and these volumes would not be affected by thestatus of the fields to which the leases may be assigned. Newleases will be issued with an extended ‘rental fee’ provision thatapplies during the period of royalty suspension.”

The rules will include “an application process that will allowlessees to apply for additional relief (project relief) on newleases when they believe the automatic royalty suspension isinsufficient to justify development.”

“Some may question the need to continue leasing incentives whenoil and gas prices are now unusually high,” Rosenbusch commented.”However, given that oil and gas prices are highly volatile, wethink it is prudent to have the means or the framework establishedin regulations that will enable us to offer incentives that areboth targeted and flexible. This will help ensure that deepwaterdevelopment can move forward in all market conditions.”

The comment period for the proposed new rules ends Oct. 16.

Ellen Beswick

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