CHAPTER 14 THE ENERGY POLICY ACT OF 2005: IMPROVING THE REGULATORY FRAMEWORK

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management
(Feb 2007)
CHAPTER 14
THE ENERGY POLICY ACT OF 2005: IMPROVING THE REGULATORY FRAMEWORK^*
George Triebsch
Associate Director
Larry Maloney
Program Analyst
Minerals Management Service, U.S. Department of the Interior
Washington, DC

GEORGE TRIEBSCH

George Triebsch is the Associate Director for Policy and Management Improvement at the Minerals Management Service (MMS). He provides the Director with policy advice and guidance on programmatic and organizational issues. His office provides a review and assessment capability within MMS to ensure the coordination and implementation of sound management decisions. His responsibilities include conducting special studies, strategic planning, overseeing the MMS regulatory process, providing policy analysis, and coordinating program reviews and evaluations. He also has responsibility for the administrative appeals process for royalty orders.

George has over twenty-five years experience managing multi-million dollar projects, programs and facilities in both the private and public sectors. Prior to joining MMS, he was the Department of the Interior's Program Manager for Performance Management and the principle architect of the Department's GPRA implementation plans and process. He holds a Masters of Science degree in Engineering from the University of Pittsburgh, is a Senior Fellow of the Council for Excellence in Government, and has been a member of the Senior Executive Service since October 2002.

INTRODUCTION

After months of hearings and intense debate, Congress approved the Energy Policy Act of 2005 (P.L. 109-58) (EPAct) on July 29, 2005 by substantial margins--275 to 156 in the House of Representatives and 74 to 26 in the Senate. The legislation, signed into law by President Bush on August 8, 2005, addresses a broad range of energy and energy-related issues including expanding domestic production of oil, gas and coal, energy efficiency, renewable energy, nuclear matters, research and development of new and innovative energy technologies and climate change.

The Bush Administration strongly supported passage of the EPAct stating that it would significantly benefit consumers by increasing energy supplies while protecting the environment and fostering greater competition in the marketplace. The administration also stated that it would improve the Nation's energy security and reduce our dependence on foreign sources of oil by increasing the use and diversity of renewable energy sources and by reducing energy consumption through greater conservation and energy efficiency.

Of the EPAct provisions related to the Department of the Interior (Department), most are aimed at increasing development and production of existing and new energy resources from federal lands onshore and on the outer Continental Shelf (OCS). Consequently, the Department bureaus most affected by the EPAct are the Bureau of Land Management (BLM) and the Minerals Management Service (MMS) because of their responsibilities for management of onshore federal lands and the OCS.

The following sections present an overview of the major EPAct provisions to be implemented by BLM and MMS and the Department's progress to date in fulfilling the EPAct regulatory requirements. These provisions are generally grouped under two objectives: (1) increasing production of oil and gas on federal lands and the OCS; and (2) expanding domestic energy supplies through the development of new alternative and renewable energy resources. In fulfilling the EPAct mandates, the Department has sought to establish a regulatory framework that is efficient and avoids imposing unnecessary burdens on regulated entities while ensuring the protection of our environment and natural resources and a fair return to the public.

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INCREASING OIL AND GAS PRODUCTION

The EPAct measures to enhance these vital energy supplies mainly focus on regulatory changes and other actions to expedite development and production of onshore oil and gas fields while offering financial incentives to encourage industry to make the investments required for costly development and production projects onshore and on the OCS.

Marginal Property Production Incentives - Section 343: This section directs the Department to publish regulations within 18 months prescribing standards and requirements for royalty relief for marginal properties for oil and gas leases on the OCS and defining what constitutes a marginal property. In the event the Department determines that it is not practicable to issue regulations, the Department must submit a report to Congress within 18 months explaining such determination. The Department is continuing to look at the feasibility of rulemaking and will either develop a proposed rule or notify Congress that it has determined that it is not practicable to issue such regulations.

For onshore leases, until such time as the Department issues regulations that prescribe a different definition, Section 343 defines a marginal property as a lease or unit that produces on average the combined equivalent of less than 15 barrels of oil per well per day or 90,000,000 British thermal units (BTU) of gas per well per day. The Act prescribes a reduced royalty rate for oil and gas production from qualifying marginal properties as the lesser of five percent or the applicable rate under any statutory or regulatory royalty relief provision that applies to the affected production. Under subsection (d), any royalty relief terminates if the Consumer Price Index adjusted price for oil exceeds $15 per barrel or the price for gas exceeds $2.00 per million BTU. Those thresholds are so low that it is unlikely that the onshore relief provisions will come into effect at any point in the near to medium future.

Incentives for Natural Gas Production from Deep Wells in the Shallow Waters of the Gulf of Mexico - Section 344: This section requires the Department to issue regulations granting a royalty suspension volume (i.e., a volume of production for which no royalty would be owed) of not less than 35 billion cubic feet for the production of natural gas from ultra deep wells on leases issued in water depths less than 400 meters in the Gulf of Mexico wholly west of 87 degrees, 30 minutes west longitude. Ultra deep wells are defined under this section as "a well drilled with a perforated interval, the top of which is at least 20,000 feet true vertical depth below the datum at mean sea level ["TVD SS"]."

MMS regulations already provide for royalty suspension volumes of 15 billion cubic feet for certain wells deeper than 15,000 feet TVD SS and 25 billion cubic feet for certain wells drilled below 18,000 feet TVD SS and located in water depths less than 200 meters. Thus, Congress authorized a higher royalty suspension volume for "ultra deep wells" (deeper than 20,000 feet) on leases located in deeper water depths up to 400 meters. In addition, Section 344(b) directs the Department to issue regulations extending the existing regulatory relief in 30 C.F.R. §§ 203.41 - 48 , which is limited to leases in less than 200 meters of water, to leases in water depths between 200 and 400 meters. Under Section 344(c), the Department may establish price thresholds limiting the royalty reduction granted under this section. In addition, the effective date of the final rule is retroactive to the date the proposed rulemaking is published. Thus, none of this new royalty relief is available until a final regulation is issued, but once such a rule is adopted it will be retroactive to the date of the proposed rule.

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Several issues arising from the language of Section 344, together with associated policy issues, have created complexities for MMS in implementing the deep gas royalty relief provision and publication of the proposed rule.

Royalty Relief for Deep Water Production - Section 345: Section 345 was effective upon enactment and requires the Department to use the bidding system of Section 8(a)(1)(H) of the Outer Continental Shelf Lands Act (OCSLA) (43 U.S.C. § 1337(a)(1)(H)), in offering leases in water depths greater than 400 meters in the Western and Central Planning Areas of the Gulf of Mexico during the five-year period following enactment of the Act. Under this provision, the suspensions must be established at volumes of not less than--

(1) 5,000,000 barrels of oil equivalent for each lease in water depths of 400 to 800 meters;

(2) 9,000,000 barrels of oil equivalent for each lease in water depths of 800 to 1,600 meters;

(3) 12,000,000 barrels of oil equivalent for each lease in water depths of 1,600 to 2,000 meters; and

(4) 16,000,000 barrels of oil equivalent for each lease in water depths greater than 2,000 meters;

Section 345 provides that the Secretary may place limitations on royalty relief granted under the section based on oil and gas market prices.

MMS included the Section 345 royalty relief provisions in Lease Sale 196, which occurred only nine days after EPAct's enactment, because Section 345 expressly provided that the bidding system and the suspension volumes applied to "any oil or gas lease sale under the Outer Continental Shelf Lands Act . . . occurring during the five-year period beginning on the date of enactment of the Act."

The relief provisions have been included in all leases issued since that date. Whether the prospect of increased royalty relief will result in heightened interest in these OCS areas and higher bonus bids for leases will depend on the industry's projections as to whether prices for oil and gas will remain above the price thresholds that operate to suspend the royalty relief. Also, Congress may consider legislation that would change price thresholds on new OCS leases and perhaps impose other limitations on royalty relief.

Gas Hydrate Production Incentive - Section 353: This section provides that the "Secretary shall conduct a rulemaking and...