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US cuts royalties for shallow water drilling

07 Jul 2017 17:21 (+01:00 GMT)
US cuts royalties for shallow water drilling

Washington, 7 July (Argus) — President Donald Trump's administration has reduced by a third the federal royalty rate it will charge oil and gas producers that bid on oil and gas leases in shallow water in the US Gulf of Mexico.

The US Bureau of Ocean Energy Management (BOEM) yesterday said it was cutting the royalty rate to 12.5pc from 18.75pc after considering market conditions and a decline in exploration and leasing in shallow waters. The lower rates will take effect for an upcoming lease sale in the Gulf scheduled to occur on 16 August.

BOEM said it found that "hydrocarbon price conditions and the marginal nature of remaining [Gulf ] shelf resources suggest a royalty rate reduction is an appropriate and timely action." The rate reduction will only apply to future leases in water depths of less than 656 feet (200m), while leases in deeper areas will continue to pay an 18.75pc rate.

Offshore producers have been struggling because of low crude prices, but shallow water drilling has been particularly challenged. BOEM last year only received bids on 27 blocks in shallow waters, generating $5.5mn in high bids. That is down from $11.1mn in 2015, $58.6mn in 2014 and $26mn in 2013.

US offshore groups praised the move. National Ocean Industries Association president Randall Luthi said it was a "common-sense decision" that would increase industry interest and help "hard hit operators" struggling in an extended period of low commodity prices. Cutting rates was also beneficial to taxpayers, he said.

"A 12.5pc royalty rate is far better than a 0pc royalty rate, which is what the government receives if there are no bids," Luthi said.

But cutting rates also aligns with an administration push to increase oil and gas production so the US can achieve what Trump calls "energy dominance." Environmental groups have criticized the administration for catering to industry while disregarding other interests, such as environmental damage and reduced revenue for taxpayers.

The reduced rate is the minimum amount allowed by law and the same level it was at in January 2007, when offshore drilling was booming and former president George Bush's administration decided to raise royalty rates to 16.7pc. The Bush administration increased the royalty rate again later that year to 18.75pc, where it remained until yesterday.

BOEM says it is considering switching to a "price-based royalty system" that would reduce rates when oil prices are low and increase rates when oil prices are high. The agency said it planned to engage with stakeholders on the concept later this year.