Legislation and Regulations.

Extension of Deep Shelf Royalty Relief to Existing Leases 

The Minerals Management Service (MMS) of the U.S. Department of the Interior [4] in March 2003 proposed a new rule that would extend to existing leases the same royalty relief that currently is provided for newly acquired leases, for natural gas production from wells drilled to deep vertical depth (below the “mudline”) in the Outer Continental Shelf. Since March 2001, the MMS has provided royalty relief for production from wells drilled to 15,000 feet total vertical depth in newly acquired leases in the shallow waters (less than 200 meters of water depth) of the shelf. Royalty payments to the Federal Government are suspended for the first 20 billion cubic feet of such “deep shelf” production from wells beginning production within the first 5 years of a lease. The purpose of the new rule is to encourage more exploration in the deep shelf play [5], which has significant potential but presents substantial technical difficulties. Of the 10.5 trillion cubic feet of undiscovered resources in the deep shelf (as estimated by the MMS), about 6.3 trillion cubic feet is under existing leases. The proposed new rule would have granted relief for wells drilled after March 26, 2003. Leases currently eligible for royalty relief under the old rule may substitute the deep gas incentive of the new rule. 

The proposed rule includes various levels of royalty relief. The first level covers wells drilled to at least 15,000 feet depth, providing relief on a minimum of 15 billion cubic feet of gas. A second level covers wells more than 18,000 feet deep, which would receive royalty relief on a minimum of 25 billion cubic feet. In addition, until a successful well is drilled, unsuccessful wells drilled to a depth of at least 15,000 feet would receive a royalty “credit” for 5 billion cubic feet of gas. Credits could be received for up to two wells. Thus, if two dry holes were drilled, the operator would accrue credits for 10 billion cubic feet, which could be added to the royalty relief for 15 billion cubic feet from a future, successful well drilled on the same lease. As of December 1, 2003, this proposal was still under review at the MMS. It is not included in AEO2004.

.

Notes and Sources

Released: January 2004