CHAPTER 3B THE DEEP WATER ROYALTY RELIEF ACT: THREE YEARS LATER
| Jurisdiction | United States |
(Oct 1998)
THE DEEP WATER ROYALTY RELIEF ACT: THREE YEARS LATER
L. Poe Leggette
Fulbright & Jaworski, LLP
Washington, D.C.
The Outer Continental ShelfDeep Water Royalty Relief Act ("DWRRA") was signed into law on November 28, 1995. The purpose of DWRRA was to provide royalty relief incentives to stimulate exploration and production in the Gulf of Mexico, specifically in the deep-water areas. At the time the statute was enacted, only two platforms were producing in water deeper than 400 meters.1 On January 16, 1998, the Minerals Management Service ("MMS") of the Department of the Interior published final rules implementing DWRRA.2 In February 1998, MMS issued guidelines to supplement the rules.3 This paper will provide a general review of the statute, regulations, and guidelines, and then describe some of the issues that have arisen in connection with deep water royalty relief in the three years since DWRRA was passed.
An Overview of the Act
The DWRRA does several things. First, it gives the Secretary the express authority to reduce or eliminate royalties on both producing and non-producing leases in any water depth located in the Western and Central Planning Areas for the Gulf of Mexico, and on whole lease blocks in the Eastern Planning Area west of 87 degrees, 30 minutes west longitude. The Secretary retains the authority to reduce or eliminate royalties on producing Outer Continental Shelf (OCS) leases anywhere, at any water depth.
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Second, the DWRRA grants the Secretary the authority to suspend royalty payments on new production from leases which were in existence on November 28, 1995, located in water depths of 200 meters or more in the same areas of the Gulf of Mexico.
Third, the DWRRA creates a new, alternative bidding system, which expressly provides for the suspension of royalties for a period, volume, or value of production determined by the Secretary. The new bidding system may be used for any OCS lease in any water depth, but is required for all deep water lease sales in the described Gulf of Mexico areas occurring before November 28, 2000.
1. Gulf Leases in General
In order to promote development and increased production and encourage production of marginal resources in the Gulf of Mexico, the DWRRA expressly permits the Secretary to reduce or eliminate royalties and net profit shares on producing and nonproducting leases.4 This provision applies to leases in all water depths in the Western and Central Planning Areas and whole lease blocks in the Eastern Planning Area west of 87 degrees, 30 minutes west longitude. The Secretary's authority under this section extends to leases in existence on the date the DWRRA became law, as well as to leases issued after that date.
2. Existing Leases
For leases and units in the described region in existence on November 28, 1995, the DWRRA outlines the process through which discretionary deep water royalty relief may be granted. The DWRRA will only afford relief to "new production," which is defined as production, other than test production, for which no royalties were due prior to the enactment of the DWRRA, or production significantly exceeding the level anticipated in an approved Development Operations Coordination Document (DOCD).
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Based upon a lessee's "complete application," the Secretary must, within 180 days, determine whether or not the new production would be economical without the royalty relief. The Secretary is directed to consider the increased technological and financial risk of deep-water development, as well as all the costs associated with exploring, developing, and producing from the lease or unit. In situations where the production would be economical without the suspension of royalties, no relief will be granted. If production would not be economical without the royalty relief, then the Secretary will determine what amount of production must be royalty free to make the new production economically viable.
The lessee may, before new production begins, and upon a significant change in circumstances, may request that the Secretary make a redetermination. The redetermination must be made within 120 days of the date of the request. The Secretary may extend the determination and redetermination periods for thirty days, or longer if agreed to by the lessee, and circumstances so warrant.
The Secretary's determination or redetermination constitutes final agency action, and the lessee must be notified in writing, along with the reasons for and the assumptions on which the decision was made. There is no administrative appeals process. Lessees will have 30 days from receipt of determination or redetermination to seek judicial review.
Should the Secretary fail to make a determination or redetermination within 180 or 120 days respectively, royalty relief is automatic in accordance with the established schedule of minimum volumes. In cases where there is new production in excess of DOCD anticipated levels, no royalty will be due for one year following the start of production.
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For new production on which royalties were not previously due, the minimum royalty suspension volumes are: 17.5 million barrels of oil equivalent (MMboe) for 200-400 meter deep leases, 52.5 MMboe for 400-800 meter deep leases, and 87.5 MMboe for leases in water deeper than 800 meters. The DWRRA establishes no limit for new production exceeding the expected levels of a DOCD.
In any year in which the arithmetic average of the closing prices on the New York Mercantile Exchange for light sweet crude oil exceeds $28 per barrel and that for natural gas exceeds $3.50 per million BTUs, royalties will be due at the rate stipulated in the lease. Such production will, however, still be counted toward the lessee's royalty-free volumes. When the average closing price for the previous year exceeds $28 for oil and $3.50 for gas, lessees must make estimated royalty payments. At the end of the year when new average prices can be determined, lessees will pay whatever royalties are due plus interest, but without penalties. If the lessee has overpaid, he will be entitled to a refund with interest.
3. New Leases
The DWRRA established a new alternative bidding system based on a cash bonus bid with at least 12.5% royalty "and with suspension of royalties for a period, volume, or value of production determined by the secretary ...."5 This new bidding system must be used for Gulf of Mexico leases in water depths of 200 meters or more in the Central and Western planning areas and the Eastern planning area West of 87 degrees, 30 minutes West longitude in water deeper than 200 meters. The minimum royalty suspensions are 17.5 million barrels of oil equivalent for 200 through 400 meter deep leases, 52.5 million barrels of oil equivalent for 400 to 800 meter deep leases, and 87.5 million barrels of oil equivalent for leases in water deeper than 800 meters. The use of this
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bidding system, however, is not limited to the described areas—it may be used for leases anywhere on the OCS in any water depth.
Two months after DWRRA was enacted, MMS published a final rule that created three new alternative bidding systems.6 The first allows MMS to reduce the royalty rate from 12.5% to a rate greater than 0% and to suspend or defer royalties for a period, volume, or value of production. The second system provides for royalty payments based on MMS-specified formulas or schedules and permits suspension or deferral of royalties. The third and final new bidding system requires a...
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