A rule proposed by the Interior Department’s Minerals Management Service (MMS) “unilaterally and arbitrarily” thwarts congressional intent in the Energy Policy Act of 2005 (EPAct) to spur more natural gas production from deep and ultra-deep offshore wells, said six national associations that represent the offshore sector.

The agency’s proposed rule would extend existing royalty relief to leases in waters up to 400 meters deep, and would add a third tier of royalty relief providing a suspension volume of 35 Bcf for new wells drilled and completed in 20,000 feet or deeper through water and ocean floor. It also would extend discretionary royalty relief to leases in the Alaska Outer Continental Shelf region.

Current regulations provide royalty suspension volumes of 15 Bcf and 25 Bcf for new wells drilled and completed at depths exceeding 15,000 and 18,000 feet, respectively, in water depths of less than 200 meters.

“We commend the MMS for attempting to implement the EPAct mandate by extending royalty relief to waters in the Alaska region and by proposing a third tier of royalty relief for ultra-deep gas wells, but we do not believe this proposed rule achieves those goals,” said the National Ocean Industries Association, the American Exploration & Production Council, the Independent Petroleum Association of America, the International Association of Drilling Contractors, the Natural Gas Supply Association and the U.S. Oil & Gas Association in comments filed at the MMS recently.

“We have several concerns about the proposed rule’s treatment of production of natural gas that has been achieved by sidetracking or by drilling secondary wells to greater depths on a lease already producing from another deep gas reservoir. Further, we strongly oppose the agency’s proposal to apply a price threshold of $4.47/MMBtu to the new royalty relief volumes required by EPAct, since this threshold effectively nullifies the royalty relief measures of the act,” the groups said.

“Congress stated clearly and unequivocally in [EPAct] that the rule MMS adopts must grant royalty suspension volumes of not less than 35 Bcf for natural gas production from ultra-deep wells in less than 400 meters of water. Notwithstanding this explicit statement of congressional intent, the proposed rule relies on a convoluted interpretation of [EPAct) to give itself discretion to grant no royalty relief at all for an ultra-deep well or sidetrack if a deep well or ultra-deep well [already] exists on the lease.”

“MMS has failed to provide any rationale for its decision to deny granting 35 Bcf of royalty relief for a second well on a lease. The agency has chosen instead to unilaterally and arbitrarily thwart Congress’ expressed intent to incentivize ultra-deep production by denying royalty relief for ultra-deep wells on leases with existing deep wells or ultra-deep wells regardless of the situation that exists on the lease,” the offshore groups told the Interior agency.

They further charged that the $4.47/MMBtu price threshold was contrary to the intent of EPAct. Since adopting its existing royalty relief rule in 2004, “the costs of drilling deep gas and ultra-deep gas wells have gone up exponentially,” the groups said. “However, rather than raising the threshold to respond to the fact that it costs more for companies to make the investment into these frontier areas than it did before, the MMS has instead gone in the opposite direction by proposing an extremely low threshold.”

By doing so, the MMS is “functionally repealing the section [in EPAct] and ensuring that the relief will never be granted, thereby once again thwarting the will of Congress,” the offshore groups said.

They also found fault with the agency’s proposed royalty relief for the Alaska region. “Rather than implement that authority by amending existing royalty relief regulations and by including Alaskan waters in this new ultra-deep gas regulation, the MMS has merely proposed to extend to Alaskan waters the discretionary relief for end-of-life and marginal production. Once again, the agency has chosen to apply EPAct in such a way that Congress’ action will be minimized,” the six groups said. “We urge the MMS to fully extend royalty relief regulations to the Alaska region.”

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.