Royalty Relief Incentives for Deepwater Leasing.  The Deep Water Royalty Relief Act of 1995, mandated royalty suspensions for new leases in deep water in selected areas of the Gulf of Mexico (GOM) in amounts based on the water depth of the eligible leases.  The incentives contributed to a significant increase in deepwater leasing and development in the central and western GOM.  This mandatory provision expired in 2000, but the Department of the Interior chose to continue to offer royalty relief in smaller amounts in lease sales after 2000.  The continued use of royalty relief in the deep waters of the GOM provides economic incentives that encouraged industry to develop new technologies and to explore aggressively in deep and ultra-deepwater frontiers.    The ensuing deepwater success story has contributed to not only a doubling in oil production from Federal offshore lands; it has also staved off a decline from OCS natural gas production in shallow water by adding increased supply from the deepwater. With the significant and sustained increase in oil and gas prices, many previously economically non-viable Outer Continental Shelf (OCS) operations now have become increasingly profitable on their own.  Accordingly, in order to ensure that American taxpayers are fairly compensated for the sale of Federal OCS minerals, the Minerals Management Service (MMS) recently announced that it will raise royalty rates from 12.5 percent to 16.67 percent (equal to the rate charged on shallow water leases) for all new deepwater GOM leases beginning in 2007.  MMS estimates that this increased rate for new deepwater offshore GOM lease will increase OCS royalty revenue by $4.5 billion over the next twenty years.  Moreover, the President, in the Department of Interior's Fiscal Year 2008 Budget, has proposed changes that would eliminate the required continuation of this relief which was mandated under section 345 of the Energy Policy Act of 2005 (EPAct05).  The House of Representatives also has passed a bill (H.R. 6) that repeals this section of EPAct05.  If this provision of EPAct05 is repealed, MMS will review the need to continue offering royalty relief to new leases in light of the prolonged high oil and gas prices and the momentum that has developed for deepwater production.   

Royalty Relief for Development of Natural Gas from Deep Depths in Shallow Water.  Since 2001, MMS has offered royalty relief in Outer Continental Shelf (OCS) lease sales to promote drilling of new deep wells in shallow waters of the Gulf of Mexico (GOM). This royalty relief served to offset the cost and risk disadvantage faced by deep wells relative to shallow wells on the same lease where all production is subject to the same royalty rate.  In addition, by rulemaking issued in 2004, MMS extended deep gas royalty relief to active leases in shallow waters issued before 2001. This extension was designed to take advantage of substantial infrastructure already in place on leases that have been producing from shallow wells.  MMS estimates that from 5 to 20 trillion cubic feet of natural gas may be located on the GOM shelf thousands of feet beneath already developed oil and gas reservoirs. This incentive supports the goals of President Bush’s National Energy Policy which offers a long-term energy strategy for securing America’s energy future and addresses production of traditional energy sources, alternative and renewable sources, and energy conservation and efficiency. However, the persistence of high natural gas prices have generated unexpectedly high industry profits and encouraged increased exploration, so the President, in the Department of Interior's Fiscal Year 2008 Budget, has proposed changes that would eliminate the required extension of deep gas relief that was mandated under section 344 of the Energy Policy Act of 2005. (EPAct05).  The House of Representatives also has passed a bill (H.R. 6) that repeals this section of EPAct05.  If this section of EPAct05 is repealed, MMS will review the need to continue offering royalty relief for new leases in light of prolonged high oil and gas prices and the momentum that has developed for deep drilling on the shelf.   

Additional Information:

• Gulf of Mexico Offshore
• Deepwater- America's Expanding Frontier
• Subsalt Exploration in the Gulf of Mexcio
• Deep depth opportunities in shallow water
• Alaska Offshore OCS Development
• Beaufort Sea Lease Sale 186
• Deepwater Royalty Relief
• Deep Gas Royalty Relief -post 2001 leases
• Proposed Regulation for Deep Gas Royalty Relief: pre-2001 leases
• Alaska Economic Incentives - Royalty suspensions and Reduced minimum bid levels; and sliding scale rentals

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