The Interior Department on Wednesday proposed new incentives for energy companies to increase deep natural gas production in the Gulf of Mexico (GOM), which, among other things, would provide royalty suspension incentives for nearly 2,400 existing leases in the area targeted for relief.

Under the proposed rule, 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. The program, which would be administered by the Minerals Management Service (MMS), would provide a royalty suspension on the first 15 Bcf 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.

“There is a clear and significant gap in the projection of domestic natural gas demand and the available supply,” said MMS Director Johnnie Burton. “This new rule seeks to stimulate domestic production in the near term from our most abundant and easily accessible areas.”

MMS estimates that the incentives would save about $280 million a year over the next 15 years. Production from deep wells on existing leases in the shallow water of the GOM may yield up to 20 Tcf of yet undiscovered reserves, according to the Interior agency.

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

To encourage companies to drill early, authorized drilling could begin immediately, MMS said in a statement. The deep production has to start before five years after the effective date of the final rule. One royalty suspension volume is available per lease.

There also are dry hole incentives. MMS would allow a royalty suspension supplement of 5 Bcf, applied to future production of gas or oil from any drilling depth on that lease, for an unsuccessful well drilled to a target reservoir 18,000 feet or deeper. This dry hole incentive would offset the high risk associated with deep drilling. Two royalty suspension supplements are available per lease prior to production from a deep well.

According to MMS, a well drilled after the date of the proposed rule and before five years after the effective date of the final rule may qualify for either incentive, if the lease has not had any deep gas production from wells drilled before the proposed rule. Any royalty suspension volume or supplement earned has to be applied only to production occurring after the effective date of the final rule, even if the production actually started between the proposed and final rule.

MMS has included a deep gas royalty incentive for new leases since March 2001, and proposes to allow lessees to exercise an option to replace their existing deep gas royalty terms on leases acquired from sales held after Jan. 1, 2001, with the terms in the final rule on this initiative. The rule provides for a 60-day comment period, and MMS plans to hold a workshop during the comment period, which has not yet been set. For more information visit www.mms.gov.

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