CHAPTER 9 SUBSEA DEVELOPMENTS - MONETARY ADJUSTMENTS

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Book 1
(Feb 2004)
CHAPTER 9
SUBSEA DEVELOPMENTS - MONETARY ADJUSTMENTS
John J. Russo
Assistant Program Director
Offshore Compliance and Asset Management
Minerals Management Service
Denver, Colorado
David Hernandez
Director
Crude Oil Transportation and Planning
Shell Exploration and Production Company
New Orleans, Louisiana

I Background on Subsea Developments

- Description of subsea development

- Principles driving decisions for both industry and government

- Implications on monetary adjustments

II Review of Non Subsea Development

- Description

- Quality adjustments - gravity /gravity banks, sulfur, etc.

- Royalty determination point

- Sales point

- Implications on monetary adjustments

III Reasons for Subsea Development

- Options for industry:

1. Build own platform and pipeline

2. Tie in to existing infrastructure (subsea)

IV Typical Monetary Adjustments Resulting from Subsea Option

V Royalty Implications of Subsea Option

SUBSEA FIELDS MONETARY ADJUSTMENTS AND ASSOCIATED ROYALTY IMPLICATIONS

Background:

Subsea technology presents greater opportunity to develop offshore prospects. This presentation will provide background and explanation of Subsea technology and will addresses the associated royalty implications of gravity and other quality adjustments. The presentation explains why these adjustments are required, how they are done and the royalty reporting and payment requirements associated with them.

General Discussion:

Crude Oil produced from different formations and locations have different characteristics which impact their value. In short, not all crude oil is equal, and the quality of the crude establishes the relative value of the crude. Simplistically speaking, refining these different crude oils result in different refined products. For example, heavier crude oil may produce more asphalt type products and lighter crude oil more gasoline. Asphalt is a less valuable product than gasoline hence the relative value of the heavier crude is less than the lighter crude.

Some of the characteristics that affect the value of crude oil are, API Gravity (Density), Sulfur, Metals, Acid Content and Salt.

This presentation focuses on one of these characteristics (gravity) to illustrate the monetary adjustments that occur and the royalty treatment of these adjustments.

Two key concepts form the basis of the definition of API Gravity:

1. Simple Definition - API gravity measures the weight of crude oil relative to weight of water.

2. The lower the API gravity, the heavier the crude oil.

For example, Gasoline has a gravity of 60° API and frequently Gulf of Mexico crude oil has gravity in the range of 35° API.

This difference in value is recognized through some monetary adjustment mechanism: one of the most frequently used is something referred to as the bendover scale. The bendover scale is a mechanism that enables parties to make adjustments when their crude is joined with some other parties and sold as a combined stream. This is referred to as commingling.

The following illustrates the adjustments that would apply when using the bendover scale:

Below 35° API	= >	$0.15 per degree deduction
35 - 39.9° API	= >	$0.02 per degree deduction
40°- 45° API	= >	baseline
Above 45° API	= >	$0.15 per degree deduction

Therefore if the baseline price is $25.06, crude oil of 37...