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Dear Walt:
On behalf of the large independent exploration and production
company members of the Domestic Petroleum Council, this
is to express serious concerns with respect to the recently
announced royalty suspension volume reductions for the deep
waters of the Gulf of Mexico.
Along with our growing reliance on imported oil, the United
States is facing the prospect of dramatic increases in natural
gas demand and will need to meet that demand in large measure
with as-yet-unproven supply from the deep Gulf of Mexico.
So, the recent MMS decision to effectively increase deepwater
royalty burdens for oil and gas production appears to move
in the wrong policy direction.
As you know, DPC members drill most of the independent
wells in the United States and hold more than three thousand
interests in federal Gulf of Mexico leases, more than one
thousand in deep water, including many as operator. For
these reasons we are keenly aware of the challenges we must
meet in providing the future energy American consumers will
need from this rich gas and oil area.
Based on our Gulf of Mexico experience, we are pleased
that the MMS is moving to encourage deep natural gas activity
in shallower Gulf waters and below salt formations. Applying
royalty incentives on a lease basis and certain other proposed
changes regarding discretionary royalty relief are positive
steps. But the announced deepwater royalty suspension volumes
should be revised upward - and continued for leases in 200-to-800
meter water depths for which they were eliminated altogether
- to more closely match the incentives that have been in
place since enactment of the Deepwater Royalty Relief Act
of 1995.
We in no way want to delay or complicate planning for Sale
178, but prompt announcement of suspension volume revisions,
with the price-related caps proposed, could enhance the
viability of Sale 178 and future sales.
The DPC expects to join with other industry associations
in filing more detailed comments, but we want you to have
early benefit of our general views concerning the November
16, 2000, notice of proposed rulemaking relating to the
royalty scheme to be used in the upcoming Gulf of Mexico
lease sales. Although we understand that the proposal was
intended to outline a framework for the continuation of
the Deepwater Royalty Relief Act of 1995, which expired
on November 28th of this year, the suspension volumes, which
will be a major component of the program, were not a part
of the notice and were not published until November 29.
With the suspension volumes now announced, we have a much
clearer picture of what the future leasing program will
look like in its entirety and are now better able to comment.
We commend the Agency for the time and effort it put into
the rulemaking and for taking time to meet and receive input
from the various companies and trade associations interested
in the upcoming lease sales. As a result of that input,
MMS moved to integrate solutions to some of the collective
industry concerns, including the need to encourage subsalt
and deep gas exploration and development.
However, MMS has stated that no automatic royalty relief
is justified in waters 200-800 meters deep because: 1) substantial
amounts of leasing have occurred in the last five years,
thus there is a sizeable inventory of unexplored acreage;
and, 2) the infrastructure in 200-800 meters has been developed
sufficiently to make it economic now for all to drill in
these water depths. While MMS was reaching those conclusions,
an independent third party analysis of the total resource
base in the Gulf of Mexico contracted by a number of companies,
including DPC members, was conducted. It established that
there exists a considerably larger number of small and medium-sized
fields in the deep water areas of the Gulf, particularly
in the 200-800 meter water depth range, than is currently
included in the MMS resource base assessment upon which
the recent deepwater royalty proposal is based. Consequently,
we believe the proposed royalty changes would eliminate
existing incentives for many marginal fields with resulting
reduced leasing, exploration and production in deep water
as more prospects are evaluated as uneconomic.
There are wide differences of opinion between industry
and MMS concerning field size distribution and access to
infrastructure in waters 200-800 meters. These differences
are significant enough that, if MMS is incorrect in its
assessment, significant natural gas and oil resources will
be at risk of being bypassed. Therefore, prior to finalizing
the proposed new royalty suspension volume program, MMS
and industry at a minimum should jointly undertake additional
modeling and/or other efforts to better understand and hopefully
narrow field size distribution and exploration and production
cost estimate differences. Perhaps a panel of recognized
economists and geo-scientists could aid those efforts.
During the interim, we believe that royalty suspension
provisions similar to those of the 1995 Act should be continued,
with addition of price ceiling provisions contained in the
proposed notice of Lease Sale 178.
In addition to the further economic and technical examination
we have recommended, we encourage MMS to reevaluate its
proposal carefully with respect to two overarching investment
considerations facing the exploration and production industry.
First, of course, is the clear need to anticipate economics
that justify maintaining or increasing capital investments
necessary to maintain or increase oil, and more dramatically,
domestic natural gas supply. Second, and tightly linked
to the first, is the need to be certain that any proposal
keeps the Nation's resource development program competitive
with similar offshore programs in other producing countries.
It is not readily apparent how, or whether, these considerations
were taken into account in formulating the November 29 proposal.
In conclusion, it is clear that the results of the royalty
incentives under the 1995 Act have been remarkably successful
in generating exploration and production activity in the
deep waters of the Gulf of Mexico. Unfortunately, a significant
part of what is being proposed as its replacement will have
the effect of increasing royalty burdens above those that
have been in effect for the last several years, with the
potential consequences we have outlined. For these reasons
we hope we can work with MMS to improve its proposal.
Thank you for considering our views. And please let me
know if we can provide anything further.
Sincerely,
William F. Whitsitt
President
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