U.S. cuts royalty rates for Gulf of Mexico lease sale to reflect market conditions

The U.S. Bureau of Ocean Energy Management (BOEM) has decided to set the royalty rate at 12.5 percent for leases located in water depths less than 200 meters in the proposed Gulf of Mexico (GOM) Sale 249.

BOEM said on Thursday that the new rate was lower than the 18.75 percent royalty rate for shallow water leases in the Proposed Notice of Sale, and is now equal to the Federal onshore oil and gas lease rate.

“The purpose of this change is to adjust the royalty rate to reflect recent market conditions, thereby encouraging competition and continuing to receive a fair and equitable return on oil and gas resources. The royalty rate in 200 meters of water and deeper will remain at 18.75 percent as in the Proposed Notice of Sale,” said BOEM.

The offshore oil and gas regulator said it made its decision after careful consideration of market conditions, available resources, leasing, drilling, and production trends, along with comparable international fiscal systems.

In particular, hydrocarbon price conditions and the marginal nature of remaining GOM shelf resources suggest a royalty rate reduction is an appropriate and timely action. The shallow water royalty rate reduction targets the GOM shelf where exploration, development, and production are in decline and where critical infrastructure already exists.

The royalty rates and other lease terms related to GOM Sale 249 will be formally announced in the Final Notice of Sale at least 30 days before the sale date. The sale date is currently scheduled for August 16, 2017.

BOEM also said that it was analyzing a price-based royalty system. The concept of a price-based royalty system would provide an incentive to lessees through lower royalty rates in times of lower oil prices, while also ensuring the Federal government receives a greater return for Outer Continental Shelf resources when prices are high, but the system would not be in place for Sale 249.

Sale 249

The GOM Lease Sale 249, scheduled to be live streamed from New Orleans, will be the first offshore sale under the new Outer Continental Shelf Oil and Gas Leasing Program for 2017-2022 (Five Year Program). It will include about 13,725 unleased blocks, located from three to 230 miles offshore, in the Gulf’s Western, Central, and Eastern planning areas in water depths ranging from nine to more than 11,115 feet (three to 3,400 meters).

The estimated amount of resources projected to be developed as a result of the proposed region-wide lease sale ranges from 0.211 to 1.118 billion barrels of oil and from 0.547 to 4.424 trillion cubic feet of gas.