Energy Firms Get $1 Bln Break in Fees January 23, 2004 5:42:00 PM ET By Tom Doggett WASHINGTON (Reuters) - The Bush administration on Friday said it will give royalty relief of more than $1 billion to energy companies drilling in the Gulf of Mexico to help increase domestic natural gas supplies, reduce consumers' energy bills and create jobs. U.S. Interior Secretary Gale Norton said the plan would save Americans $570 million a year because of lower energy costs and create up to 26,000 jobs in the next six years. But the plan would also cost the U.S. government about $1.1 billion in lost royalty fees from energy companies over the next five years, according to officials. When the program expired in 2009, the government's royalty revenue is expected to increase by $1.4 billion through 2020 from the new gas drilling. ``With demand for natural gas rising as more American families and businesses choose this clean-burning fuel, we must provide incentives for development of known resources that are harder to reach,'' Norton told reporters. ``These incentives will help ensure we have a reliable domestic supply of natural gas in the future.'' Under the plan, energy companies would not have to pay a royalty fee on gas drilled at certain depths in the Gulf of Mexico. Normally, companies have to pay a royalty based on 16-2/3 percent of the market value of the gas they find. The Interior Department believes the incentives will make it more profitable for companies to drill in U.S. waters rather than some foreign countries, putting more gas supplies in the domestic market and lowering prices. ``The consumer eventually benefits from it,'' said Johnnie Burton, who heads the department's Minerals Management Service that oversees drilling on federal leases. U.S. homes and businesses use 22 trillion cubic feet (Tcf) of gas a year and about 55 Tcf of gas reserves may exist in the shallow waters where the royalty relief is allowed. The drilling areas eligible for the royalty relief are located 10 miles to 15 miles off the coastlines of Texas, Louisiana, Mississippi and Alabama in waters of less than 656 feet. Specifically, royalties would be suspended on the first 15 billion cubic feet (Bcf) of gas found at between 15,000 and 18,000 feet below the sea floor, or on the first 25 Bcf of gas drilled at greater than 18,000 feet. Only those wells started after March 26, 2003 would be eligible for the royalty suspensions. The relief would stay in effect as long as the average price for gas traded at the New York Mercantile Exchange was below $9.34 per million British thermal units (equal to about 1,000 cubic feet). On Friday, NYMEX natural gas for delivery in February closed at almost $6.06 per million Btu. Independent energy companies welcomed the decision as a way to reduce the economic risks of drilling. ``As the nation's demand for natural gas rises, it is important for the government to take steps that encourage new natural gas supplies,'' said John Walker, chairman of the Independent Petroleum Association of America. Similar royalty relief was called for in energy legislation stalled in the Congress. � 2004 Reuters
The Houston Chroncile reported on the royalty relief program also. The newspaper said that the incentives amounted to about one-third the cost of drilling a qualifying well. This is very significant for companies like Remington that are active in the offshore areas that qualify for the royalty relief. Importantly, the incentives apply to dry holes also: a dry hole credit of 5 bcf can be applied against future oil and gas production from a company's other offshore wells regardless of the location or depth of the wells.
If the royalty relief applies to wells commenced after March 2003 (the Houston paper did not report the effective date), this could have a material effect on Remington's 2003 financial results.
The royalty relief program will obviously also benefit offshore drillers who drill in the shallower waters of the Gulf of Mexico.