Royalty Relief Comments Due to MMS by July 17, 2006
FEDERAL REGISTER
72 FR 28396
PROPOSED RULE
May 18, 2007
[Page 28396]
DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Parts 203 and 260
RIN 1010-AD33
Oil and Gas and Sulphur Operations in the Outer Continental Shelf (OCS)—Royalty Relief—Ultra-Deep Gas Wells and Deep Gas Wells on OCS Oil and Gas Leases; Extension of Royalty Relief Provisions to OCS Leases Offshore of Alaska
AGENCY: Minerals Management Service (MMS), Interior
ACTION: Proposed rule.
SUMMARY: MMS is proposing to amend its deep gas royalty relief regulations to incorporate statutory changes enacted in the Energy Policy Act of 2005. This proposed rule would provide additional royalty relief for certain wells on the Outer Continental Shelf (OCS) leases in the Gulf of Mexico (GOM). It would also extend the applicability of existing deep gas royalty relief regulatory provisions to more OCS leases. MMS is also proposing amendments to discretionary royalty relief provisions and associated definitions to extend the applicability of certain royalty relief to leases offshore of Alaska.
DATES: Submit comments by July 17, 2007. MMS may not consider comments received after this date. Submit comments to the Office of Management and Budget on the information collection burden in this rule by June 18, 2007.
FOR FURTHER INFORMATION CONTACT: Marshall Rose, Chief, Economics Division, at (703) 787-1536 or marshall.rose@nullmms.gov.
ADDRESSES: You may submit comments on the proposed rulemaking by any of the following methods. Please use the Regulation Identifier Number (RIN) 1010-AD33 as an identifier in your message. See also Public Availability of Comments under Procedural Matters.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions on the Web site for submitting comments.
• E-mail MMS at rules.comments@nullmms.gov. Use the RIN 1010-AD33 in the subject line.
• Fax: 703-787-1546. Identify with the RIN, 1010-AD33.
• Mail or hand-carry comments to the Department of the Interior; Minerals Management Service; Attention: Regulations and Standards Branch (RSB); 381 Elden Street, MS-4024; Herndon, Virginia 20170-4817. Please reference “Royalty Relief—Ultra-Deep Gas Wells on <OCS> Oil and Gas Leases; Extension of Royalty Relief Provisions to <OCS> Leases Offshore of Alaska, 1010-AD33” in your comments and include your name and return address.
• Send comments on the information collection in this rule to: Interior Desk Officer 1010-AD33, Office of Management and Budget; 202-395-6566 (fax); e-mail: oira—docket@nullomb.eop.gov. Please also send a copy to MMS.
SUPPLEMENTARY INFORMATION:
A. Background and Summary of the Proposed Rule
Section 344 of the Energy Policy Act of 2005,
On January 26, 2004 (69 FR 3510), MMS adopted regulations at 30 CFR § § 203.40-203.48 to provide royalty relief incentives for deep gas production from GOM leases in less than 200 meters of water that lie wholly west of 87 degrees, 30 minutes West longitude (the rule was effective for wells spudded on or after the date of the proposed rule, March 26, 2003). These rules, subject to certain limitations, provide a royalty suspension volume (RSV) for two basic categories of deep gas production: 15 billion cubic feet (BCF) of RSV is provided for qualifying wells with a perforated interval the top of which is between 15,000 and 18,000 feet true vertical depth subsea (TVD SS); and 25 BCF of RSV is provided for qualifying wells completed at least 18,000 feet TVD SS. The rules also provide lesser amounts of royalty relief for deep sidetracks and for drilling certain unsuccessful deep wells.
Section 344 requires MMS to adopt regulations providing for additional categories of deep gas royalty relief for GOM leases wholly west of 87 degrees, 30 minutes West longitude. First, section 344(a) provides that for certain ultra-deep wells in less than 400 meters of water (defined in section 344(a)(3)(A) as wells with a perforated interval the top of which is at least 20,000 feet TVD SS), the agency shall issue regulations granting an RSV of not less than 35 BCF. This requires adding a new well depth category and new RSV amount to the existing deep gas royalty relief rule.
Second, section 344(b) requires MMS to promulgate regulations granting royalty relief suspension volumes for gas produced from deep wells on leases in waters more than 200 meters but less than 400 meters deep. In calculating the suspension volumes, section 344(b) requires MMS to use the same methodology used to calculate suspension volumes for deep wells in shallower waters. This requires adding a new water depth category to the existing deep gas royalty relief rule. These proposed regulations implement these two statutory directives.
In addition, section 346 of the Energy Policy Act, 119 Stat. 704, amended section 8(a)(3)(B) of the <OCS> Lands Act (OCSLA), 43 U.S.C. 1337(a)(3)(B), to extend the Secretary’s discretionary authority to grant royalty relief to leases offshore of Alaska. This proposed rule also implements this provision. However, neither the existing deep gas royalty relief rule nor the additional deep gas royalty relief granted in section 344 applies to leases offshore of Alaska.
Both subsections (a) and (b) of section 344 provide that any final rule that the Secretary adopts will be retroactive to the date of this proposed rule. Therefore, production from any wells that earn royalty relief under section 344 drilled on or after the publication date of the proposed rule would qualify for the relief provided for in the final rule, if the well meets the requirements of the final rule. Of course, MMS may modify the rule between this proposed rule and the final rule, so lessees should not assume that the proposed rules would apply.
With respect to ultra-deep wells on leases located wholly west of 87 degrees, 30 minutes West longitude in the GOM in shallow waters less than 400 meters deep, section 344(a)(1) provides:
[T]he Secretary shall issue regulations granting royalty relief suspension volumes of not less than 35 BCF with respect to the production of natural gas from ultra deep wells on leases issued in shallow waters less than 400 meters deep located in the Gulf of Mexico wholly west of 87 degrees, 30 minutes west longitude.
While this statutory language does not specify how the rulemaking should allocate or grant the 35 or greater BCF “with respect to the production of natural gas from ultra deep wells on leases,” Congress certainly intended an incentive to drill and produce ultra-deep wells beyond what MMS rules currently provide. Section 344(a)(2) further grants the Secretary considerable discretion when an ultra-deep well is not an original well or if there has been previous deep gas production on the lease. Section 344(a)(2) provides:
[Page 28397]
(2) Suspension Volumes.—The Secretary may grant suspension volumes of not less than 35 billion cubic feet in any case in which—
(A) The ultra deep well is a sidetrack; or
(B) The lease has previously produced from wells with a perforated interval the top of which is at least 15,000 feet true vertical depth below the datum at mean sea level. (Emphasis added.)
Therefore, section 344 requires that an ultra-deep well drilled on a lease receive an RSV of at least 35 BCF except for (1) an ultra-deep well that is a sidetrack, or (2) an ultra-deep well on a lease that has previously produced from a well with a perforated interval the top of which is at least 15,000 feet TVD SS. The combined effect of these provisions is that only the first ultra-deep original well on a lease with no prior production from a deep well is entitled to the 35 BCF RSV. Thus, while Congress directed generally that the first ultra-deep well on a lease drilled after the date of the proposed rule receive 35 BCF or more of RSV, Congress’ use of the term “may” in section 344(a)(2) gives the Secretary discretion to decide whether any sidetracks completed to depths below 20,000 feet TVD SS or the first ultra-deep well completed after production from any deep well (including a second ultra-deep well on a lease) should be granted an additional 35 BCF or more of royalty relief. One objective of this proposed rulemaking is to determine whether MMS should grant RSVs of not less than 35 BCF for ultra-deep sidetracks and subsequent ultra-deep wells. Because of the statutory language, MMS cannot use section 344’s authority to grant an RSV of between 0 and 35 BCF.
Since the royalty relief is available only upon the “production of natural gas from ultra-deep wells on leases,” Congress intended to supplement the existing rules that were promulgated with the objective of reducing the cost of producing domestic natural gas from deep formations in the shallow waters of the GOM. MMS intends to adopt an approach that is consistent with the statute. In general, with only limited exceptions, MMS is proposing to give no more relief than section 344 compels. Therefore, MMS seeks comments on its proposal to grant royalty relief only for the first ultra-deep well.
Subject to the receipt and analysis of requested comments regarding those discretionary provisions, for any lease that has never produced from any deep well, MMS is proposing to grant 35 BCF of RSV for the first producing ultra-deep original well or sidetrack with a sidetrack measured depth (i.e., length) of at least 20,000 feet drilled after the date of this proposed rule. (One exception is discussed below.) MMS is not proposing to grant an RSV for subsequent ultra-deep wells or shorter sidetracks on a lease.
Because section 344 is not retroactive, it does not provide for additional royalty relief for ultra-deep wells drilled before the publication date of this proposed rule. However, an ultra-deep well drilled before the publication date of this proposed rule would, if it met the other requirements of the existing rule, earn the same royalty relief as a deep well with a perforated interval the top of which is 18,000 feet TVD SS or deeper. Thus, MMS is proposing to treat ultra-deep wells drilled before the publication date of this proposed rule in the same manner as any other deep well in the 18,000-feet-or-deeper depth range.
MMS is not proposing to grant an RSV of 35 BCF under section 344 for an ultra-deep well that is a sidetrack that has a measured depth of less than 20,000 feet. Treatment of such a well for purposes of royalty relief under this proposed rule, as explained further below, depends on when the well begins producing.
For purposes of clarity, MMS proposes to revise the definitions in the existing rule to segregate a “deep well” (a well with a perforated interval the top of which is at least 15,000 feet and less than 20,000 feet TVD SS) from an “ultra-deep well” (a well with a perforated interval the top of which is at or below 20,000 feet TVD SS) for all purposes. This is also consistent with section 344(a)(3)(A)’s definition of “ultra-deep well.” Trying to use the term “deep well” to include an ultra-deep well in some contexts but not in others carries a high potential for confusion. The changes in definitions necessitate revisions to several provisions of the existing rule to accommodate the change in terminology. These changes do not change the substance of the existing rule with regard to deep wells or ultra-deep wells drilled before the publication date of this proposed rule.
Section 344(a) provides no time limit on the relief it grants for ultra-deep wells (a “sunset” provision). MMS therefore is not proposing one in this rulemaking.
The sunset provision in the existing deep gas rule is contained in the definition of “qualifying well” in the current § 203.0, which limits qualifying deep wells to those that produce gas before May 3, 2009. That date is 5 years after the effective date of the final rule currently in force and 6 years (plus a few weeks) after the publication date of the original proposed deep gas rule (March 26, 2003). Because section 344(b) requires that MMS use the same methodology in calculating RSVs for deep wells in 200-400 meters of water that is used to calculate RSVs for deep wells in shallower water, MMS is proposing a sunset provision for deep wells in 200-400 meters of water of May 3, 2013, which is exactly 4 years after the sunset date for relief for gas produced from deep wells in 200 meters of water or less, and about 6 years from the publication date of this proposed rule.
Section 344(c) provides that “[t]he Secretary may place limitations on the royalty relief granted under this section based on market price.” Therefore, as explained more fully below, MMS is proposing price thresholds that, if exceeded, would require the lessee to pay royalty on production that otherwise would be royalty-free. The concept underlying the price threshold terms proposed here is that to the extent ultra-deep gas and deep gas royalty relief granted under the proposed provisions would have been granted under the existing rule for existing leases, the existing rule’s price threshold ($9.88 per MMBtu, adjusted annually for inflation after 2006) would apply. For all deep gas and ultra-deep gas royalty relief that results from section 344’s new provisions, and for deep gas royalty relief for leases issued after the effective date of the final rule that are located partly or entirely in less than 200 meters of water, a different price threshold of $4.47 per MMBtu, adjusted annually for inflation after 2006, would apply. MMS is requesting comment, data, information, and other input on this proposed threshold or why a threshold other than $4.47 per MMBtu might be more appropriate for section 344 royalty relief.
Section 344(c) also provides that “The royalty relief granted under this section shall not apply to a lease for which deep water royalty relief is available.” The proposed rule reflects this limitation.
The existing regulations at § 203.44 provide royalty relief in the form of a royalty suspension supplement (RSS) of up to 5 BCF for certain unsuccessful wells drilled to a depth below 18,000 feet TVD SS. MMS is not proposing any additional relief for unsuccessful wells simply because an unsuccessful well or sidetrack was drilled to a depth below 20,000 feet TVD SS. Unsuccessful wells drilled to a depth below 20,000 feet TVD SS would continue to be treated the same as unsuccessful wells drilled to a depth between 18,000-20,000 feet TVD SS.
[Page 28398]
The fact that section 344 is not retroactive also means that the extension of deep gas royalty relief to leases in the 200-400 meter water depth range does not apply to deep or ultra-deep wells drilled on such leases before the publication date of this proposed rule.
B. Section-by-Section Analysis
The discussion in part A of this preamble summarized the principal concepts of this proposed rule. This section-by-section analysis will describe the more significant proposed changes in additional detail.
What definitions apply to this part? ( § 203.0)
MMS proposes changes to some definitions in the existing rule and some new definitions to implement section 344’s requirements.
MMS proposes to revise the definition of “deep well” to mean a well with a perforated interval the top of which is at least 15,000 feet and less than 20,000 feet TVD SS, and to add a definition of “ultra-deep well” to mean a well with a perforated interval the top of which is 20,000 feet TVD SS or deeper. Under the existing rule, the term “deep well” includes all wells deeper than 15,000 feet TVD SS.
Because section 344 adds a new water depth category (leases located in more than 200 meters and less than 400 meters of water) to deep gas royalty relief, the coverage of these definitions extends beyond the existing rule, which applies only to leases in 200 meters of water or less.
Further, the existing rule does not cover all leases located in water entirely or partly less than 200 meters deep. At the end of October 2006, about 70 leases in that water depth range are subject to deep gas RSV’s, conditions, and requirements specified in the lease instruments because their lessees did not opt to convert to the deep gas royalty relief terms in the existing regulations. To accommodate section 344 requirements for these leases, MMS proposes to add a definition of “non-converted lease” in § 203.0. This category of leases must be separated from leases in the 0-200 meter water depth category that are covered by the existing rule because their deep gas wells have different timing and reservoir conditions for qualification, earn different RSV’s, and are subject to different price thresholds.
In addition to distinguishing between deep wells and ultra-deep wells, MMS further proposes to add definitions for the terms “phase 1 ultra-deep well,” “phase 2 ultra-deep well,” and “phase 3 ultra-deep well.” The proposed royalty relief treatment of ultra-deep wells depends first on whether an ultra-deep well was drilled before or after the date of publication of this proposed rule. Wells drilled before the date of publication of the proposed rule are phase 1 ultra-deep wells.
A phase 1 ultra-deep well would be an ultra-deep well on a lease that is located in water entirely or partly less than 200 meters deep for which drilling began before the date of publication of this proposed rule. In other words, these are wells that would continue to be treated the same as they are under the provisions of the existing rule for deep wells of more than 18,000 feet TVD SS. Phase 1 ultra-deep wells would not be eligible for the higher RSVs prescribed in section 344.
A phase 2 ultra-deep well would be an ultra-deep well for which drilling began on or after the publication date of this proposed rule and that falls into one of the three following categories: (1) The ultra-deep well begins gas production before May 3, 2009, on a lease that is located in water partly or entirely less than 200 meters deep that is not a non-converted lease; (2) the ultra-deep well begins gas production within the primary term of a non-converted lease; or (3) the ultra-deep well begins production before May 3, 2013, on a lease that is located in water entirely more than 200 meters and entirely less than 400 meters deep.
A phase 3 ultra-deep well would be an ultra-deep well for which drilling began on or after the publication date of this proposed rule and that begins gas production on or after the dates prescribed for production from a phase 2 ultra-deep well. Only phase 2 ultra-deep wells and phase 3 ultra-deep wells would be eligible to earn the higher 35 BCF RSV prescribed in section 344.
Because MMS also proposes to differentiate the treatment of ultra-deep wells that are sidetracks with a sidetrack measured depth of 20,000 feet or more from sidetracks with a sidetrack measured depth of less than 20,000 feet, MMS also proposes to add a definition of “ultra-deep short sidetrack” to mean ultra-deep wells that are sidetracks with a sidetrack measured depth of less than 20,000 feet.
The reasons for distinguishing between phase 2 and phase 3 ultra-deep wells relate to both the proposed royalty relief treatment of ultra-deep short sidetracks and the proposed price threshold provisions. Both of these matters are addressed in detail below.
Under the existing rule, the term “qualified well” means a deep well for which drilling begins on or after March 26, 2003, the date the original deep gas proposed rule was published, and which meets other applicable requirements. Qualified wells are wells to whose gas production an RSV may be applied. The fact that a well is a qualified well does not mean that it earns an RSV. A well must be a qualified well to earn an RSV, but it also must meet other requirements. Wells that earn an RSV are a subset of qualified wells. But RSVs also are applied to gas production from qualified wells that do not themselves earn an RSV. MMS proposes to amend the definition of “qualified well” and add definitions for “qualified deep well” and “qualified ultra-deep well,” to address all four categories of deep gas royalty relief that exist after enactment of section 344—namely, deep gas wells on leases located in less than 200 meters of water that are covered by the existing rule, deep gas wells on non-converted leases (all of which are in less than 200 meters of water), deep gas wells on leases located in 200-400 meters of water, and ultra-deep gas wells on leases in all water depths less than 400 meters.
MMS also proposes to revise the definition of “certified unsuccessful well” in § 203.0, used in the royalty suspension supplement provisions in re-designated § § 203.45 and 203.46 ( § § 203.44 and 203.45 in the existing rule), to add the new 200-400 meter water depth category.
In the definition of “expansion project,” MMS proposes to specify that reservoirs to whose production an RSV would be applied under § § 203.30 through 203.36 and 203.40 through 203.48 cannot be included as part of an expansion project.
MMS also proposes amendments to certain of the part 203 provisions to include leases offshore of Alaska under section 346 of the Energy Policy Act. These amendments would involve modifying the definitions of “development project” and “expansion project” and the royalty relief provisions for development projects and expansion projects in § 203.2. In addition, references to a lease location or water depth in § § 203.60, 203.69, and 203.78, mention of a specific MMS Regional office in § § 203.62, 203.70, 203.77, 203.81, and 203.90, and the associated price threshold provisions in § 203.78 would be revised to accommodate leases offshore of Alaska.
[Page 28399]
Royalty Relief for Drilling Ultra-Deep Gas Wells on Leases Not Subject to Deep Water Royalty Relief ( § § 203.30 through 203.36)
For the most part, the new proposed ultra-deep gas provisions in § § 203.30 through 203.36 follow the structure of the existing deep gas rule at § § 203.40 through 203.48, and many of the provisions are similar. MMS is also proposing changes in § § 203.40 through 203.48 to accommodate the new ultra-deep gas provisions in § § 203.30 through 203.36.
Which leases are eligible for royalty relief as a result of drilling an ultra-deep well? ( § 203.30)
Proposed § 203.30 prescribes the basic criteria for a lease to be eligible for deep gas royalty relief. Paragraph (a) of this proposed section follows the statutory requirement in section 344(a) and (b) that the lease must be located in the GOM wholly west of 87 degrees, 30 minutes West longitude.
Paragraph (c) of this proposed section implements the requirement of section 344(c) that deep gas royalty relief shall not apply to a lease for which deep water royalty relief is available. (In this context, “available” means either provided for in the lease terms or granted in response to an application.) This issue arises because section 344(b) requires the Secretary to extend deep gas royalty relief to leases located in more than 200 but less than 400 meters of water. Deep water royalty relief applied to leases in that water depth range under the <Outer> <Continental> <Shelf> Deep Water Royalty Relief Act of 1995, Pub. L. No. 104-58, Title III, 109 Stat. 563 (DWRRA). Thus, to be eligible for deep gas royalty relief, a lease located in more than 200 but less than 400 meters of water had to have been issued either before November 28, 1995 (the date of enactment of the DWRRA), or after November 28, 2000. Leases issued between those dates (i.e., in the first 5 years after the DWRRA’s enactment) were issued under the mandatory deep water royalty relief provisions of DWRRA section 304. All the leases issued under section 304 provide for deep water royalty relief and therefore are not eligible for deep gas royalty relief.
A lease issued before November 28, 1995, would not be eligible for deep gas royalty relief if MMS had granted deep water royalty relief under section 302 of the DWRRA (adding 43 U.S.C. 1337(a)(3)(C)).
A lease issued after November 28, 2000, would not be eligible for deep gas royalty relief if MMS had granted deep water royalty relief under 30 CFR 203.60 through 203.79. The royalty suspension (RS) provisions in 30 CFR 260.120 through 260.124 that apply to post-November 2000 leases do not themselves grant deep water royalty relief and refer back to the specific lease terms. There are no RS leases in the 200-400 meter water depth interval—in other words, there is no lease issued in a lease sale held after November 28, 2000, in the 200-400 meter water depth interval that provides for any royalty relief in the lease terms. Therefore, the only leases issued in lease sales held after November 28, 2000, that are excluded from deep gas royalty relief are those that have applied for and been granted deep water relief under § § 203.60 through 203.79.
Paragraph (b) of this proposed section reflects MMS’ general proposal, under section 344(a)(2)(B), not to grant deep gas royalty relief if the lease has previously produced gas or oil from a deep well or an ultra-deep well. Proposed section 203.31(b) contains an exception.
If I have a qualified phase 2 or phase 3 ultra-deep well, what royalty relief would my lease earn? ( § 203.31)
In proposed § 230.31(a), the text preceding the table and the table reflect the interpretation of the statute described above that the first qualifying original phase 2 or phase 3 ultra-deep well on a lease that meets the requirements of proposed § 203.30 would earn an RSV of 35 BCF.
The table in § 230.31(a) shows that if a sidetrack drilled after the publication date of this proposed rule is completed to a depth below 20,000 feet TVD SS and has a length (measured depth) of at least 20,000 feet, i.e., a length equivalent to that of an original ultra-deep well, the sidetrack would earn an RSV of 35 BCF if there has been no gas production from a deep well or an ultra-deep well on the lease. As a practical matter, MMS believes that the only sidetracks that are likely to have a sidetrack measured depth of 20,000 feet or more are sidetracks drilled from a platform slot reclaimed from a previously drilled well. (See the inclusion in the definition of “sidetrack” in section 344(a)(3)(B)(ii)(I).) These wells are new wells and are the functional equivalent of original wells. (MMS does not believe that a 20,000-foot-long sidetrack drilled to a new objective bottom-hole location by leaving a previously drilled well—see section 344(a)(3)(B)(i)—is a practical likelihood.)
As stated above, in light of
