Despite the widespread congressional criticism of the Minerals Management Services’ (MMS) royalty-relief program, the Interior Department agency issued a proposed rule Friday that seeks to expand royalty relief for deep and ultra-deep natural gas production in the Outer Continental Shelf (OCS).
The new regulations were required under the Energy Policy Act of 2005 (EPAct), which ironically was passed by the Capitol Hill lawmakers who have targeted the royalty-relief program.
Specifically, the proposed rule would extend existing deep gas royalty relief to more OCS leases, would provide additional royalty relief for certain wells on OCS leases in the Gulf of Mexico, and would expand authority to grant royalty relief to leases offshore Alaska, the MMS said.
The proposal would suspend payment of royalties for two basic categories of deep gas production volumes from certain Gulf leases, the agency noted. It would provide a royalty suspension for 15 Bcf to qualifying wells between 15,000 and 18,000 feet true vertical depth subsea (water plus ocean floor). And a royalty suspension of 25 Bcf is proposed for qualifying wells that are at least 18,000 feet or more in depth.
The proposed rule also provides lesser amounts of royalty relief for drilling certain unsuccessful deep wells and subsequent successful deep wells or sidetrack wells, the MMS said.
In addition, the proposed rule extends royalty relief for ultra-deep natural gas (wells drilled 20,000 feet or more through water and ocean floor). It would extend deep gas royalty relief from the MMS’ current limit on leases in up to 200 meters of water depth to leases in water depths up to 400 meters in the Gulf. The proposal also would raise the royalty suspension volumes to 35 Bcf for qualifying ultra-deep wells that are drilled at least 20,000 feet in depth in less than 400 meters of water, the agency said.
This additional relief would apply only in years when the annual Nymex natural gas price is at or below $4.47/MMBtu expressed in 2006 dollars, the MMS noted.
EPAct further amended the Outer Continental Shelf Lands Act to extend the Interior secretary’s discretionary authority to grant royalty relief to leases offshore Alaska prior to the start of production. The proposed rule implements that provision.
Contracts for eligible leases issued after enactment of EPAct would be eligible for the proposed royalty relief. Even if repeal of EPAct were to occur as requested by the Bush administration in its fiscal year 2008 budget, Interior said the rulemaking process must be completed to impose the appropriate terms, conditions and restrictions on the mandated deep gas relief for these recently issued leases.
MMS said it will accept comments on the proposed rule through July 17. The proposed rule was published in the Federal Register on May 18.
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