Outer Continental Shelf Deep Water Royalty Relief Act of 1995

Description

In an effort to promote the exploration and production of natural gas and crude oil in deep water, the Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA) implemented a royalty-relief program that relieves eligible leases from paying royalties on defined amounts of deep-water production. After its expiration in 2000, the DWRRA was redefined and extended to promote continued interest in deep water. The Minerals Management Service (MMS) defines a "deep-water" lease as having a minimum water depth of 200 meters (656 feet). To be eligible for relief, the lease must be located in the Gulf of Mexico and west of 87 degrees and 30 minutes West longitude (the Florida-Alabama boundary). MMS must determine that the field is not economically viable without relief. Until November 2000, the water depth of the lease determined the amount of gas that was exempt from royalty payments. For deep-water leases considered "new" (purchased between November 28, 1995 and November 28, 2000), the volume of gas not subject to royalty obligation was classified into three categories of royalty (see table). Reduced royalty rates were available for deep-water production from leases purchased before November 28, 1995. For these leases, the Secretary of the Department of the Interior determines the suspension volume on a case-by-case basis.

Royalty Suspension Volumes
Depth Minimum Relief Volume (gas equivalent) Minimum Relief Volume (barrels of oil)
200-400 m
(656-1,312 ft)		 98.5 billion cubic feet 17.5 million
400-800 m
(1,312-2,625 ft)		 295.6 billion cubic feet 52.5 million
>800 m
(>2,526 ft)		 492.6 billion cubic feet 87.5 million

The original terms and conditions of the DWRRA expired in November 2000, and since that time, the MMS has offered a revised incentive plan for royalty relief. For deep-water leases purchased after November 2000, royalty relief may be specified at the discretion of MMS prior to the sale of each lease. In this renewed incentive program, royalty suspension is no longer granted in the form of volumes determined by water-depth intervals. Instead, MMS assigns a lease-specific volume of royalty suspension based on how the determined suspension amount may affect the economics of various development scenarios. In this program, the most economically risky projects would receive the most relief, while less venturesome leases would receive little or no relief. For example, a deep-water field might not receive any relief if it is adjacent to an existing gathering system. On the other hand, a similar field may receive a great deal of relief if it is located far beyond the current pipeline infrastructure.

Impact

The DWRRA apparently has helped stimulate interest in developing deep-water leases in light of the significant increase in deep-water exploration and production since its implementation. In 1994, deep-water leases produced 288 Bcf of gas; by 2002, deep-water production increased to 1,328 Bcf.1 Deep-water production has grown to about 3.6 Bcf per day and accounted for 30 percent of the Gulf's dry natural gas production in 2002. Of the 7,800 active oil and gas leases in the Gulf, 54 percent are in deep water. However, MMS has acknowledged that relatively few of the deep-water leases sold in the initial DWRRA sale have been tested. Of the 3,200 deep-water leases issued from 1996 to 2000, only 6.5 percent of them have been drilled. Because the terms of these leases will expire over the next couple of years, it is expected that many of the current deep-water leases will remain untested unless companies reacquire and drill them in the future. It is estimated that 42 percent (10 Tcf) of proved natural gas reserves in the Gulf of Mexico as of 2002 are in deep water.

1   Energy Information Administration data as of 2002 are the most current at time of publication.