U.S. House Bill Would Lower Royalties Paid by Some Producers

A single sentence in a sweeping offshore drilling measure headed for a floor vote in the House next week could cut federal fees paid by oil and gas producers on new leases in shallow waters.

The provision says the royalty rate on production from new outer continental shelf leases "shall be the same for all leased tracts." Currently, the rates are 16 2/3 percent for waters shallower than 400 meters and 12.5 percent for deeper waters.

Architects of the plan want the lower rate applied to shallow waters, although the bill does not specifically instruct the Interior Department to apply a lower rate across the board.

The goal is to increase interest in shallow Gulf of Mexico production, which has been in decline, said Brian Kennedy, a spokesman for Resources Committee Chairman Richard Pombo (R-Calif.). "Keeping the rate at 12.5 across the board for all of them will ... help spur more production in those areas," he said.

Interior's Minerals Management Service does not currently have a position on the provision, a spokesman said today. But the language drew fire from Rep. Ed Markey (D-Mass.), who in a committee markup this week tried unsuccessfully to strip it from the bill.

"Under this section, the lower royalty rate could be granted for all leases, even if they are in shallow water," Markey said, according to a transcript provided by his office. "I think that with $70 per barrel oil, and as oil and gas companies are making record profits and tipping consumers upside down at the pump, we should not be increasing their taxpayer subsidies."

The language would help independent companies that are currently the most active operators in the gulf's shallower waters. Lee Fuller of the Independent Petroleum Association of America said he was not familiar with the provision but added it could be helpful if the lower rate was applied to shallow areas.

"I certainly think a lower royalty would have a beneficial effect in encouraging people to look at the shallow waters for possible additional development," Fuller said. But he added that other factors also affect company decisions.

"The question is probably what is happening with the geology there in terms of how robust the opportunities are," Fuller said.

Shallow-water oil and gas production in the gulf has been declining, although production of "deep gas" in shallow waters -- so named because the gas is found far below the sea floor -- is growing. Deep gas is already subject to federal royalty waiver incentives, depending on gas prices.

The new royalty-rate proposal is part of a larger bill to relax coastal drilling bans and share offshore production royalties with coastal states. House leadership plans to bring the bill to the floor for a vote next week.

The measure also encourages producers receiving royalty waivers on 1998 and 1999 deepwater leases that lack energy "price thresholds" to renegotiate the incentives with the Interior Department. Companies that do not renegotiate would face new fees to offset lost federal revenues, which could be $10 billion over 25 years, according to the Government Accountability Office.

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