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Agency to Drop Royalty Rates for US Gulf Lease Sale

Oil Daily

By Bridget DiCosmo

WASHINGTON - The US Bureau of Ocean Energy Management (BOEM) is dropping royalty rates for shallow offshore leases in its Gulf of Mexico auction next month, hoping to boost sales that have stagnated in the face of low oil prices.

BOEM is planning to set the royalty rate at 12.5% for leases where water depths are less than 200 meters (656 feet) for the Gulf sale set for Aug. 16 in New Orleans, lower than the 18.75% royalty rate proposed earlier. The royalty rate for lease sales in territory at depths greater than 200 meters will stay at 18.75%.

"The purpose of this change is to adjust the royalty rate to reflect recent market conditions, thereby encouraging competition and continuing to receive a fair and equitable return on oil and gas resources," BOEM said in earlier this month.

Additionally, BOEM is exploring the idea of moving to a price-based royalty system that would aim to provide an incentive to lessees through lower royalty rates in times of lower oil prices, while also ensuring the federal government receives a greater return for resources when prices are high.

The move aligns with several steps the US Department of the Interior, which houses BOEM, is taking to facilitate greater interest in leasing in federal land and waters.

Last month, Interior initiated public comment on ideas for opening areas in the Atlantic, Pacific and Arctic, where drilling is currently limited or prohibited, in a new 2019-24 leasing plan. The plan is to look at all 26 planning areas in the Outer Continental Shelf (OCS), including those currently unavailable for leasing ( OD Jul.3'17 ).

And, earlier this year, the department launched an external review of whether taxpayers receive maximum benefits from royalties collected from oil, gas and coal development on federal and Indian lands ( OD Apr.4'17 ).

The bureau said it made the decision to lower shallow-water royalty rates after "careful consideration of market conditions."

"In particular, hydrocarbon price conditions and the marginal nature of remaining [US Gulf] shelf resources suggest a royalty rate reduction is an appropriate and timely action," BOEM said.

Lowering the shallow-water royalty rate allows BOEM to target the Gulf shelf where exploration and production is most in decline and where critical infrastructure already exists, the notice said.

The sale is slated to include unleased blocks that are located from 3 miles offshore to the outer limit of the outer continental shelf in the Western, Central and Eastern Gulf at depths ranging from 3 meters to more than 3,400 meters.

BOEM's decision follows a US Government Accountability Office report issued last month finding that raising onshore royalty rates -- not lowering them -- may lead to increases in overall federal revenue even if it led to a slight reduction in oil and gas production on public lands.

In a Wall Street Journal opinion piece Sunday, Merrill Matthews of the conservative think tank Institute for Policy Innovation highlighted the differences in production and royalty rats between federal and state lands.

He cited Congressional Research Service data showing that federal lands production went from 1.57 million barrels per day in 2008 to 1.955 million b/d in 2015, far lower than the jump from 3.5 million b/d to 7.5 million b/d seen on state and private lands.

"Lower energy prices contributed to the decline," in federal lands production from 2015 to 2016, "but so did the Obama administration’s roadblocks on drilling-permit applications," making it more profitable for drillers to look to state and private lands even with higher royalty rates, Matthews wrote.