Vol. 9, No. 5 Week of February 01, 2004
Providing coverage of Alaska and northern Canada's oil and gas industry

MMS incentives could spur gas drilling boom in Gulf of Mexico

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Petroleum News

A long-awaited package of government incentives designed to encourage explorers to drill deeper for natural gas on existing federal leases could be the key to unlocking trillions of cubic feet of reserves on the Gulf of Mexico’s already heavily exploited continental shelf.

The initiative, in the making for several years, would help offset declining U.S. natural gas production by tapping reserves that industry otherwise would leave in the ground because of expense issues, U.S. Interior Secretary Gale Norton said in a Jan. 23 conference call.

“This is an important step to stabilizing production as our demand for natural gas climbs,” Norton said. “Gas demand is out-pacing production (and) the gap is expected to increase over the next decade.”

Interior’s Minerals Management Service already offers royalty suspension for the first 20 billion cubic feet of production below 15,000 feet from discoveries on newly issued leases. The new package dramatically expands both the size and scope of the government’s royalty relief program to include some 2,400 existing leases offshore Texas, Louisiana, Mississippi and Alabama.

Under the new program, MMS is offering a royalty suspension on the first 15 billion cubic feet of gas produced from depths greater than 15,000 and less than 18,000 feet, or on the first 25 billion cubic feet produced from 18,000 feet or deeper. A royalty suspension volume of 15 bcf can be increased to 25 bcf from a second successful well to 18,000 feet or deeper. The rule applies to all qualified wells on a specific lease. In the event of a dry hole below 18,000 feet, a producer would qualify for a royalty suspension supplement of 5 bcf of gas equivalent that could be applied to future oil or gas production from any depth. Two supplements are available per lease prior to production from a deep well. The maximum relief a lease can earn from either successful or unsuccessful deep wells is 35 bcf.

Additionally, sidetrack wells could earn royalty suspensions in amounts based on drilling depth and sidetrack length.

Relief goes away with high prices

Royalty relief would be discontinued if natural gas prices exceed $9.34 per thousand cubic feet. Drilling must have started on or after March 26, 2003, and production must begin within five years of the rule’s effective date.

Effected leases are located in relatively shallow waters of the Gulf up to 656 feet or 200 meters. And because platforms, pipelines and other infrastructure are largely in place, the cost of accessing and producing from deeper geologic formations is expected to dramatically reduce exploration and development costs.

“We believe there are significant quantities of gas available from drilling further from (existing) platforms,” Norton said.

MMS estimates that drilling and platform upgrades associated with the extra deep gas production would generate up to 26,000 jobs that could be sustained for at least the next six years.

“We believe the incentives offered in this rule will spur industry to explore and produce these deep, undiscovered resources,” MMS Director Johnnie Burton said.

5 % of shelf wells have gone deep

Industry actually has been drilling and producing natural gas below 15,000 feet in the Gulf for years, with recent discoveries made at Anadarko’s Hickory platform, El Paso’s ST 204 unit, and Shell’s Alex discoveries. But only 5 percent of total wells drilled on the continental shelf have gone deep and that has not been nearly enough to offset the overall production decline. In fact, annual shelf output has plummeted from 4.8 tcf in 1996 to less than 3.3 tcf today.

MMS estimates that undiscovered gas of up to 55 tcf of gas may exist in this new frontier area. “There is a substantial accumulation of gas much deeper than being produced today,” Burton said, “and we are proposing an incentive that will give them (producers) a certain amount of gas they can produce without paying royalty on it.”

Norton said that based on assumed production until 2010, the U.S. treasury would lose about $1.1 billion in royalties. Once the program expires, she added, the treasury would expect to collect about $1.4 billion in royalties. However, she noted that the resource likely would not be developed without government incentives and therefore would not generate any royalties.

Norton also noted that 40 percent of U.S. industry currently depends on natural gas and that about 90 percent of new electricity plants to come online in the next decade will be fueled by natural gas. And she said that some businesses are moving gas-based manufacturing overseas where gas is available at a fraction of the price in the U.S.

The royalty relief program also was characterized a short-term solution to the gas-supply problem and is not part of President George W. Bush’s comprehensive energy package, Norton said.

“This has been under consideration for three years,” she said. “It is something that has gone through the proposed rule process. This was just an administrative proposal progressing at its own pace. It’s not in the bill any where.”

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