Legislation to grant royalty relief for deepwater Outer Continental Shelf (OCS) fields in the Gulf of Mexico apparently has a green light in Congress.
Sen. Bennett Johnston (D-La.), sponsor of the legislation, said the Congressional Budget Office has ruled the measure would not deny revenues to the federal government. The Clinton administration supports Johnston's measure.
Johnston told a Senate energy committee hearing the bill should place on production at least two more fields in the Gulf of Mexico with possible reserves of 150 million bbl of oil equivalent.
Johnston said the bill would clarify the Interior secretary's authority to grant royalty relief on existing OCS leases to encourage production and provide a royalty holiday for existing leases in more than 200 m of water that are uneconomic to develop under current conditions.
He stressed that without the bill, deepwater fields might not be developed and the federal government would not receive added taxes or royalties.
JOHNSTON'S PROPOSAL
Under johnston's bill, producers would apply to the Interior secretary for royalty relief.
Fields receiving royalty holidays would have to be able to produce 17.5 million bbl of oil equivalent if they are in 200-400 m of water, 52.5 million bbl in 400-800 m, and 87.5 million bbl in more than 800 m.
Asst. Interior Sec. Bob Armstrong explained, "For new production from existing leases, the secretary would determine whether the production is economically viable at the lease-stipulated royalty rate.
"If not, royalties would be suspended for an initial volume sufficient to make such new production economically viable. In addition, all new leases offered in deepwater portions of the central and western Gulf of Mexico for the next 5 years would include royalty suspensions on initial production as specified in the bill."
Armstrong also disclosed the Minerals Management Service is developing proposed rules to adjust terms on existing Gulf of Mexico leases to prevent premature abandonment and to set terms for new deepwater leases that extend the margin of economic development.
Interior has authority to grant royalty reductions to keep existing fields on production. Armstrong said when operators file requests for reductions, Interior grants them about half the time.
Deputy Energy Sec. Bill White said, "This change is important because our existing royalty structure may not maximize long-run revenues and production from deep water. Exploratory costs are much higher on the OCS than on land and increase significantly with water depth: $64/ft for an onshore well vs. $392/ft offshore."
BOOST FOR INDEPENDENTS
H. Leighton Stewart, chairman and chief executive officers of Louisiana Land & Exploration Co., said the royalty relief bill would help independents expand their operations in the gulf.
"Historically, independents have not been very active in water depths greater than 200 m. Because of the high costs of operating in these depths, it has been difficult for anyone but the largest oil companies to have the financial wherewithal to take the risk involved in these plays."
Stewart said "It has been well established by other countries like the United Kingdom and Canada that a royalty holiday will produce a definite response from the industry. Those countries have successfully used royalty holidays to stimulate drilling when they have experienced low activity in their oil and gas producing regions."
Stewart also urged the energy committee to expand the relief bill to include subsalt drilling in the Gulf of Mexico. But Johnston replied, "I think it's a little late in the process to add that to this bill."
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