Deep Gas Royalty Relief Proposed Rule

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Deep Gas Royalty ReliefProposed Rule

• Al Durr
• Minerals Management Service
• January 22, 2004
  

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General Information

• Proposed Rule published March 26, 2003
• Federal Register Vol. 68, No. 58, Pages
  14868-14886
• Amends 30 CFR 203 (adds 203.40-48)
• Notifications to drill deep wells 28
• Drilling has not started 4
• Currently drilling 12
• Plugged and abandoned 7
• Temporarily abandoned 2
• On production 3

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3
Program Design

• Meaningful incentive minimizes unnecessary
  relief
• Immediate effect
• Applies to deep depths
• Categorical relief
• Uses a familiar royalty incentive format
• Not limited to new reservoirs

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Eligible Leases

• Issued before January I, 2001, or issued after
  January 1, 2001 and exercised option to switch to
  deep gas royalty relief regulation.
• Wholly located in the GOM west of 87 30 west
  longitude
• In water depths less than 200 meters
• Has not produced gas or oil from a completion
  15,000 feet or deeper in a well that commenced
  drilling before March 26, 2003.

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Types of Royalty Relief

• Royalty Suspension Volume
• Royalty Suspension Supplement

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Royalty Suspension Volumes
Successful Deep Well
Well Depth (TVD SS)
From 15,000 to less than 18,000 feet
15 BCF
18,000 feet or deeper
25 BCF
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Royalty Suspension Volume Provisions

• Successful well with top of perforated interval
  15,000 TVD SS or deeper that commenced drilling
  after March 26, 2003.
• New wellbore (bypasses eligible sidetracks not
  eligible)
• Gas production from a deep well before 5 years
  after effective date of final rule
• Not limited to new reservoir

8
Royalty Suspension Volume Provisions

• First deep well to produce establishes the lease
  royalty suspension volume.
• RSV will be monitored using OGOR-A
• Production volumes reported by well
• Slightly reduces royalty relief

9
Royalty Suspension Volume Provisions

• Gas Measurement Requirements
• Semimonthly testing of all producing wells
• Monthly calibration of each test separator gas
  meter
• MMS Notification
• Intent to drill deep well
• Commencement of deep production

10
Royalty Suspension Volume Provisions

• Letter to Regional Supervisor for Production and
  Development

• Intent to drill well
• Lease number
• Area/Block
• Anticipated spud date
• Target depth

• Commence production
• Within 30 days
• Lease number, Area/Block
• Well number
• Perforated interval
• Reservoir name
• Date production commenced
• Request confirmation of size
• of size of RSV

10
11
Royalty Suspension Supplement
Unsuccessful Deep Well
Well Depth (TVD SS)
From 15,000 to less than 18,000 feet
0 BCF
18,000 feet or deeper
5 BCFE
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Royalty Suspension Supplement Provisions

• Unsuccessful well targets a reservoir at least
  18,000 feet TVD SS
• Drilling commenced on or after March 26, 2003
• Well (no sidetrack) commenced drilling before
  deep production begins on the lease

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Royalty Suspension Supplement Provisions

• Applicable to oil and gas volumes produced from
  or allocated to the lease, regardless of depth,
  as reported on OGOR-A (5.62 MCF1BO).
• Lease is eligible for two royalty suspension
  supplements, but only one per wellbore.
• Maximum relief
• 2 RSS 10 BCF
• 1 RSV 25 BCF
• Total 35 BCF

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Royalty Suspension Supplement Provisions

• Letter to Regional Supervisor for Production and
  Development
• Within 60 days after reaching total depth
• Well log data, if well does not meet the
  producibility requirements of 30 CFR 250, subpart
  A
• Well log, well test, seismic, and economic data,
  if well does meet the above producibility
  requirements

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15
Royalty Suspension Supplement Provisions

• Well meets producibility requirements but is not
  commercially producible

• GG Data
• Digital well logs showing target
• Structure and amplitude map
• Reserve estimate
• Seismic volume used for evaluation
• Well test data

• Economic Data
• Point estimate (production
• profile, costs, etc.)
• Prospective costs only
• No PA costs
• Before tax analysis
• Oil and gas prices published
• by MMS
• lt15 ROR is uneconomic
• Assume royalty suspension
• volume

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Unitization

• Options considered by MMS for deep gas
• royalty relief in federal units prior to the
• proposed rule
• Unit Based Approach
• One RSV per unit
• Entire unit ineligible
• RSV allocated to unit leases
• Lease Based Approach
• Each eligible unit lease can earn an RSV
• Only individual leases are ineligible
• RSV is not allocated

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Unitization

• Hybrid Approach
• Each eligible lease can earn an RSV
• Only individual leases are ineligible
• RSV allocated to unit leases
• In the proposed rule, MMS chose the lease-based
  approach including no allocation of the RSV to
  the unit leases.

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Unitization

• Primary Reason Some unit leases are allocated
  production, but can not be allocated an RSV, e.
  g., state leases and ineligible federal leases.
• ineligible federal leases include those in water
  depths deeper than 200 meters or with deep
  production from wells drilled prior to March 26,
  2003
• approximately 50 of existing shallow water units
  have either state leases or federal leases that
  are ineligible for relief
• other units may contain leases issued after
  January 1, 2001, which have no provision in the
  lease instrument requiring lessees to share their
  deep gas RSV

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Unitization

• Allocation of Production
• Separate Participating (Productive) Areas will be
  used to allocate royalty-bearing and royalty-free
  gas production
• Shallow PA (shallow reservoirs and ineligible
  deep reservoirs)
• Deep PA (reservoirs with successful qualified
  wells)
• Each PA has its own allocation percentages adding
  up to 100

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Price Threshold

• Royalties are due in a calendar year when NYMEX
  average price exceeds gas price threshold.
• Gas price threshold equals 5.00/MMBTU, adjusted
  annually for inflation from year 2000.
• Royalties plus interest are due within 90 days
  after end of the year.
• Production volumes count as part of the royalty
  suspension volume and royalty suspension
  supplement.

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Miscellaneous Provisions

• Minimum royalties are due during royalty-free
  production
• RSV and RSS can be transferred to successor
  lessees
• Unused RSV and RSS terminate when lease expires

22
Sharing RSV on Lease

• If C1 produces first,
• lease gets 25 BCF
• - C2 can share up to
• 15 BCF of 25 BCF
• If C2 produces first,
• lease gets 15 BCF
• - C1 can share up to
• 15 BCF

15,000 ft
C2
18,000 ft
C1
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Sharing RSV, RSS on Lease

• If C1 is unsuccessful, lease gets 5 BCFE RSS.
• If C2 then produces, lease also gets 15 BCF RSV
  for total of 20 BCF.

15,000 ft
C2
18,000 ft
C1
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Sharing RSV, RSS in Well

• If C1 is unsuccessful and RSS used up, then C2
  earns 10 BCF
• (15 BCF 5 BCFE)

15,000 ft
C2
18,000 ft
C1
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Substitution Option

• Lessees may replace deep gas royalty relief
  provisions in lease terms with provisions in
  final rule.
• Available to shallow water leases in sales after
  January 1, 2001.
• Exercising the option is irrevocable.
  

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Substitution Option

• Letter to the Regional Supervisor for Production
  and Development
• Within 180 days after effective date of final
  rule
• Specify decision to exercise option
• Provide Lease Number and Area/Block

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Substitution ComparisonLease instrument vs.
Proposed Rule
Lease Instrument Proposed Rule
RSV First qualified completion (new well or sidetrack?) 15,000 or deeper RSV 20 BCF RSV First qualified well (no sidetrack) 15,000 to17,999, RSV 15 BCF 18,000 or deeper, RSV 25 BCF
RSS None
RSS Certified unsuccessful well (up to 2) RSS 5
BCFE
Price Threshold 5.00/MMBTU 3.50/MMBTU (Sale 178)
Price Threshold 5.00/MMBTU
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Substitution ComparisonLease instrument vs.
Proposed Rule
Lease Instrument Proposed Rule
Eligibility Deep new well (or sidetrack?) to a new gas reservoir qualifies for an RSV. An RSV is not available if the reservoir has been produced on any current lease prior to spudding well/sidetrack. Eligibility Deep well (no sidetrack) may qualify for an RSV even if the target reservoir has been produced on an adjacent lease. Also, the deep production can be associated gas from an oil reservoir.
Timing Deep gas production by 5 years after lease issuance Timing Deep well spudded after March 26, 2003 deep production within 5 years after date of final rule
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Pending Issues

• Lease/Well Eligibility
• Sidetracks
• Unitization
• Price Threshold
• Ultra Deep Drilling
• Production Start-Up

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Industry Comments on Pending Issues

• Lease/Well Eligibility
• Grant RSV to each successful deep well
• Grant additional RSV to a successful well drilled
  to a deeper depth interval
• Grant deep gas relief to deepwater leases

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Industry Comments on Pending Issues

• Sidetracks
• Include sidetracks in deep gas relief program
• Provides opportunities to drill and produce
• small resource accumulations
• Maximum use of existing facilities

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Industry Comments on Pending Issues

• Unitization
• Allocate royalty suspension volume same as
  production
• Not allocating RSV could
• Reduce value of relief
• Promote drilling of unnecessary wells

33
Unitization
Lease A
Lease B

15,000
Qualified Well
x1
50
50
18,000

• Lease B earns an RSV of 15 BCF and is allocated
  50 of production from X1
• Lease A has no royalty relief but is allocated
  50 of production from X1
• With no allocation of RSV, X1 will have to
  produce 30 BCF to receive the
• full royalty- free incentive of 15 BCF

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Unitization
A
B
X1
C
D

• Lease-based approach promotes drilling of
  unnecessary wells if X1 alone can efficiently
  drain the reservoir.
• Comments also suggested allowing an RSV for
  Leases B,C, and D without the drilling of a deep
  well, if MMS concurs that X1 alone can
  efficiently drain the reservoir.

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Industry Comments on Pending Issues

• Price Threshold
• Eliminate or modify 5.00/MMBTU gas price
  threshold
• Creates uncertainty about availability of relief
• Reduces value of relief
• Imposes unnecessary barrier to deep gas
  exploration
• and development

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Industry Comments on Pending Issues

• Ultra Deep Drilling Category
• Add a third tier of relief (35 to 45 BCF) for
  wells
• below 20,000 feet
• Costs and risks are disproportionately greater
  at
• 20,000 vs. 18,000
• Real targets of opportunity lie below 20,000
• Greater incentive for greater cost and risk
  seems
• appropriate

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Industry Comments on Pending Issues

• Production Start-Up Requirement
• Five years is too short a time to explore and
  commence production of deep gas reserves given
  the technological challenges.
• Provide an extension on a case-by-case basis when
  additional time is justified
• Allow for unavoidable delays, such as weather,
  that are beyond the control of the operator

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Royalty Relief Information

• MMS GOMR Web Site
• Homepage www.gomr.mms.gov
• (click on offshore information and then
  on
• royalty relief for additional
  information
• click on deep gas)
• MMS Contacts
• Al Durr at [phone]
  alvin.durr_at_mms.gov
• Kevin Karl at [phone]
  kevin.karl_at_mms.gov