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Regs extend royalty relief to Alaska Energy Policy Act final rule by Minerals Management Service for ultra-deep, deep Gulf of Mexico gas wells includes offshore Alaska Kristen Nelson Petroleum News
A final rule amending royalty relief for ultra-deep and deep gas wells in the Gulf of Mexico also extends natural gas royalty relief provisions to leases offshore Alaska.
The provision for Alaska in the final rule “applies discretionary royalty relief procedures that have been used by deepwater leases in the Gulf of Mexico to leases offshore of Alaska,” the Department of the Interior’s Minerals Management Service said in a Nov.18 Federal Register notice.
(See www.mms.gov/federalregister/PDFs/AD33FinalRuleFR69490.pdf.)
The final rule becomes effective Dec. 18 with royalty suspension volumes — natural gas which is free of federal royalty payments — of varying volumes for qualifying wells, depending on the type and depth of well. For wells in federal waters offshore Alaska the royalty suspension would be “for a minimum production volume” plus any additional volume needed to make the project economic, the agency said.
The rule implements sections of the Energy Policy Act of 2005; a proposed rule was published May 18, 2007.
The Alaska provisions implement section 346 of the Energy Policy Act, using established royalty relief applications and evaluation procedures “for any lease offshore Alaska that seeks royalty relief before production on the lease begins.” MMS said case-by-case procedures for royalty relief for Alaska leases are the same as those that can be used by deepwater Gulf leases issued before the Deep Water Royalty Relief Act of 1995 or after 2000. Prior to this new rule MMS said pre-production royalty relief procedures “did not apply to leases offshore of Alaska.”
Price threshold flexibility MMS said that based on comments received on the proposed rule and further review of its process for evaluating pre-production royalty relief applications it has added flexibility to the price thresholds prescribed in the regulation for leases both offshore Alaska and in the deepwater Gulf issued after 2000. The agency said it provided authority to grant exceptions to price thresholds in law “in cases where we find a project would not be economic without royalty relief subject to price thresholds above those fixed in the rule.”
The agency uses “future oil and gas price paths” to determine whether pre-production projects or expansion projects need relief. “Should an applicant demonstrate that even at this price path, royalty relief is necessary to transform development of a discovery from an uneconomic to an economic proposition, we may decide that production of the resource with a higher royalty relief price threshold is preferable to stranding the resources.”
Generic price thresholds in lease terms or for a general category of leases “may be set conservatively to avoid providing excessive relief” because in many cases relief to which thresholds apply may not be necessary for many that use it, the agency said. “In those cases, a more parsimonious price threshold properly limits the size of the foregone royalty from those leases that would have been explored and developed without royalty relief.”
But that may not be the proper price threshold “in specific cases where the individual applicant can demonstrate convincingly that royalty relief is the difference between a prospective profit and loss situation, and thus this relief would directly affect the lessee’s decision between development and abandonment of a discovery.”
No relief in older leases Older Alaska leases have no royalty relief in their lease terms and would have been subject to the Deep Water Royalty Relief Act of 1995 threshold for newly approved royalty relief.
MMS said the intent of the proposed rule in implementing section 346 “was to provide added flexibility to consider, on a case-by-case basis, additional royalty relief for projects that may otherwise prove uneconomic to develop.” The final rule adds flexibility to allow for the possibility of applying a different price threshold, “consistent with the specific circumstances of the project being granted relief.”
Most offshore Alaska leases already have royalty relief under lease term. “Section 346 of the Energy Policy Act of 2005 gives the owners of other offshore Alaska leases a chance to request relief but MMS will grant relief only on a demonstrated economic need basis,” MMS said.
Royalty relief has been available to Alaska leases since the Energy Policy Act was enacted; the rule establishes “a standardized process for the lessee of a lease offshore Alaska to follow in submitting a complete application for relief” and explains how MMS will evaluate the application.
As of the beginning of fiscal year 2008 the rule adds some 750 currently active Alaska leases to the roughly 2,700 deepwater Gulf leases that could apply for royalty suspension volume before production or to expand production. MMS said that historically it has received less than one application a year in the Gulf under the procedures now being expanded to offshore Alaska and leases that have previously qualified for this form of royalty relief have avoided an average of $30 million annually in royalties since 1999.
The value of relief from “this added rulemaking action may not significantly ease the daunting obstacles to developing offshore Alaska,” the agency said, adding that royalty relief provided in this rulemaking is “discretionary, and MMS will only approve relief in the appropriate amount or provide an exception in the established price thresholds if MMS deemed the applicable project uneconomic absent relief.”
The agency said there will be “no negative effect” on revenues from the rulemaking.
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