The U.S. Bureau of Land Management has issued a final rule for reduced royalties on heavy oil produced from federal leases.
BLM said the action should encourage operators to return marginal or uneconomical shut-in wells back to production, implement enhanced oil recovery projects, and delay plugging of wells. The rule covers crude of 20 gravity or less.
It is essentially unchanged from a proposed rule (OGJ, Apr. 10, 1995, p. 32) that mainly benefits California producers. It was not broadened to help Wyoming heavy oil producers (OGJ, June 5, 1995, p. 32).
Bob Armstrong, the Interior Department's assistant secretary for land and minerals, said expanding the royalty reduction to help Wyoming producers would have resulted in a cost to the government.
Under the rule, royalties on qualifying heavy oil will reduce on a sliding scale from 12.5% for 20 gravity crude to a minimum of 0.5% for 6 gravity crude. The rule will take effect Mar. 8.
Producers will revert to full payments if the price of West Texas intermediate crude averages $24/bbl for any 6 month period. BLM originally considered a $28/bbl cutoff.
Effect, reaction
BLM said the rule will improve the economics for U.S. heavy oil reserves, increasing California's heavy oil reserves to 229 million bbl from 133 million.
Because more heavy oil will be produced, although at royalties less than the current 12.5%, overall federal heavy oil royalties will increase $1 million/year. But when effects of other taxes are included, federal revenues will increase $48 million/year.
Rep. Cal Dooley (D-Calif.), who had pushed for the royalty change, said, "This royalty reduction will result in producers paying $1/bbl less to the government. That should spur a significant increase in production. It also will create new jobs for Kern County."
Albert Boyce, California Independent Producers Association president, said, "The Interior Department's action is certainly going to provide heavy oil producers with the necessary incentive to make investments in wells that might otherwise have been uneconomic.
"We're grateful BLM has acknowledged the fundamental differences between much of the crude oil produced in California and oil found elsewhere in the country.
"While the bureau's royalty rate reduction program of 1992 reduced royalties on wells producing less than 15 b/d, it did not thoroughly address the problems of California producers, whose crude oil is much heavier than most and commands a lower price. This new program goes a long way toward eliminating those inequities."
BLM received 209 comments on the proposed rule, most of which were favorable. It will review the program in 1999 to ensure that it is effective.
The Department of Energy performed economic analyses for BLM. The two departments are working on a plan to grant royalty relief for producers who have marginal gas wells on federal leases.
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