The U.S. Minerals Management Service is proposing an across-the-board increase in Gulf of Mexico lease rentals, plus what promises to be a controversial “sliding scale” rental system that could end up more than doubling the current annual rate for deepwater leases.
The President’s Fiscal Year 2006 budget calls on MMS to increase the base level of rentals, which have not been adjusted for shallow water leases since 1993 and for deepwater leases since 1996, the agency said March 14.
Rule changes proposed by MMS would apply to leases acquired in future sales and only after the new rule has been adopted by the agency. That could occur in time for the August Western Gulf of Mexico lease sale, MMS said.
MMS specifically proposes to increase rentals to $6.25 an acre from $5 per acre on leases in water depths less than 200 meters (656 feet) and to $9.50 per acre from $7.50 per acre on leases in water depths greater than 200 meters.
That means on a standard 5,760-acre exploration block a lessee would pay $36,000 a year in rent for a block located at a water depth less than 200 meters, compared to $28,800 under the current rate. For blocks in waters depths exceeding 200 meters, lessees would pay $54,720 a year vs. $43,200.
“These increased rental rates mostly reflect inflationary adjustments from the last time rentals were revised,” MMS said.
However, MMS also is proposing a sliding scale rental structure that could dramatically increase rates on deepwater leases located in water depths greater than 400 meters (1,312 feet).
On a 10-year deepwater lease, rentals would remain at the proposed $9.50 per acre level for the first five years and then escalate to $10.50 per acre in the sixth year, to $12 per acre in the seventh year, to $13.75 per acre in the eighth year, to $15.50 per acre in the ninth year and to $17.50 per acre in the 10th year.
That means a lessee could pay as much as $100,800 annually in rental fees, or $17.50 per acre, on a 5,760-acre exploration block in the 10th and final year of a deepwater lease vs. the current rate of $43,200 a year, or $7.50 per acre.
MMS: sliding scale would encourage early drilling
“Use of a sliding scale rental system is designed to encourage exploration in deepwater areas earlier in the lease term,” MMS said. “If a lease is drilled within the first five years of its initial period, escalating rentals can be avoided through either a discovery or through relinquishment.”
In the event of a deepwater discovery during the first five years, the rental rate would remain at the proposed $9.50 per acre level until production begins. For discoveries made after the first five years of a lease’s primary term, the escalating rental rates would return to the level that prevailed during the first five years, MMS said.
Since the Deep Water Royalty Relief Act was implemented in 1996, the increase in the pace of leasing in the U.S. Gulf has been about twice as high as the increase in the pace of exploration, MMS said, adding that the proposed sliding scale rates would apply only to deepwater areas that are currently eligible for royalty relief on commercial discoveries.
MMS believes the combination of huge deepwater lease inventories and a limited drilling rig fleet dedicated to the U.S. Gulf means that the vast majority of today’s deepwater leases will remain untested when their terms expire. In fact, history shows that during times of high lease inventory, fewer than 10 percent of deepwater leases are drilled and fewer than 5 percent are produced.
And a ton of 10-year leases acquired by companies in the big sales of 1996 through 1998 are expected to expire and then be reoffered in 2006, 2007 and 2008, according to MMS projections.
“Since the deepwater arena is already heavily leased, the number of leases that are relinquished or expire will influence activity in future lease sales,” MMS said. “Given the fact that most companies can only drill a small percentage of their active leases, it is likely that many high-quality leases will expire without being tested.”
