Abstract

Royalty relief is one of the premier topical issues concerning producers in the deepwater Gulf of Mexico (GOM). This paper provides results of a scenario analysis assessing the presence and absence of the Royalty Relief Act provisions on GOM reserves, production and governmental revenues. Results indicate substantive benefits to the Nation for continuance of royalty relief.

Introduction

Recent increases in commodity prices for oil and natural gas highlight the need to increase to increase domestic supply. According to the 1999 National Petroleum Council study Meeting the Challenges of the Nation's Growing Natural Gas Demand1, the Gulf of Mexico will be one of the primary areas providing future supply to the Nation. Walt Rosenbush, former MMS director under the Clinton Administration has stated "Continued growth in OCS (Outer Continental Shelf) deepwater oil and gas exploration and development is vital for our nation's long-term energy supply. Further expansion of Gulf gas production is necessary if we are going to meet the projected demand for 29 Tcf of gas in the nation by 2010."2

The 1995 Deepwater Royalty Relief Act was designed to encourage exploration and development in the deepwater portions (greater than 200 m) of the Gulf of Mexico and seems to have accomplished that goal. During the time period of the Act (1995 through 2000), GOM activity has increased markedly compared to the pre-1995 time period. Oil production totaled an estimated 1000 million barrels last year, up from about 300 million barrels per year earlier in the decade of the 90s. Deepwater gas production increased at rates of 47%, 51% and an estimated 40% in the years 1998 to 2000. Former acting director of the Minerals Management Service (MMS), Carolita Kallaur has stated3 "Deepwater royalty relief for new leases has contributed to the record-breaking lease sales....a clear signal that the Gulf of Mexico is one of the world's leading oil and natural gas plays."

In the fall of 2000, Advanced Resources International conducted a study using its model of the resource base, discovery, development, infrastructure and economics to examine the potential benefits to the Nation of continuance of the terms of the Royalty Relief Act relative to the absence of the royalty relief. This paper presents the results of that study.

Model Overview.

Advanced Resources developed the Natural Gas & Crude Oil Capacity and Production Model to assess discovered and undiscovered natural gas and oil resources and production for the Deepwater Gulf of Mexico (Central and Western Planning areas, Fig. 1) and as a useful tool for examining oil and gas supply issues. The model comprises two major submodels: short term and long term. The results of the short term (discovered resources) and long term (undiscovered resources) models are linked to provide an annualized estimates of production and other parameters.

Short Term Model.

The purpose of short term model is to project natural gas and crude oil rates from producing fields and those expected to come on line in the near-term.

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