US cuts royalties for ‘uneconomic’ project in Gulf

President Donald Trump's administration has reduced royalty rates for an existing offshore oil and gas lease as it tries to spur more production in the Gulf of Mexico.

The administration this summer quietly cut royalty rates to 8.07pc from 18.75pc for a shallow-water well off Louisiana being proposed by independent driller Topco Offshore. It marks the first time the US has approved what is known as "special case" royalty relief for an offshore project in the past decade.

"The Bureau of Safety and Environmental Enforcement (BSEE) has reviewed Topco's application and concluded that the project is uneconomic without royalty relief," Gulf regional director Lars Herbst said in a 14 June letter approving royalty relief. Argus obtained the letter this week under the Freedom of Information Act.

Offshore operators are seeking similar treatment on other leases. The royalty relief mechanism offers an avenue to support offshore development after US interior secretary Ryan Zinke earlier this year rejected calls by industry to cut royalty rates on new leases to 12.5pc, down from the existing rate of 18.75pc for most leases.

Offshore operators say existing royalty rates are hindering development, particularly as the industry competes for investment dollars against shale resources and offshore development abroad. The US Gulf as of last week had only 22 active drilling rigs, according to Baker Hughes data. That is two more than last year but just a third of the peak number of active rigs in 2014, when crude prices exceeded $100/bl.

"Even though commodity prices are improving, companies will go where they can get the most bang for their investment buck," National Ocean Industries Association president Randall Luthi said. "Simply stated, without royalty relief, Gulf of Mexico fields with declining production or difficult geological features may not be worth the cost."

Public interest groups say reducing royalty rates is unwarranted at a time when US oil and gas production is booming and energy prices are on the rise. US crude prices have climbed to more than $70/bl, up from close to $50/bl a year ago.

"This is a completely unnecessary taxpayer giveaway," Public Citizen's energy program director Tyson Slocum said. "I think Congress ought to be examining why taxpayers should be paying for these royalty relief provisions and why there is not more transparency over the process."

Topco Offshore last year acquired the shallow-water lease in question from another operator and then requested royalty relief in March. The lower 8.07pc royalty will terminate if Topco's capital expenditures are less than $18.1mn or if it does not begin production within one year. The royalty rate will revert to 18.75pc if the average Henry Hub natural gas price in a calendar exceeds $3.47/mmBtu. Topco partner Amanda Thompson declined to comment on the status of the project.

BSEE said in fiscal 2018 it received at least one other special case royalty relief application and two end-of-life royalty relief requests, one of which has been withdrawn. Industry officials have called on the administration to provide more clarity on the circumstances when relief will be granted.