Will a Royalty Relief Repeal Slow Oil and Gas Drilling in the Gulf of Mexico?

Last Updated Jun 17, 2009 12:13 AM EDT

Mandatory royalty waivers -- often referred to as royalty relief -- would end for some offshore oil and gas production, under an amendment approved Tuesday by a Senate panel.

Technically, the amendment doesn't ban royalty relief. It simply leaves the decision up to the Interior department secretary, which would be Ken Salazar, in this case. And that worries Republicans and some Gulf state Democrats. who say leaving it up to Salazar is essentially the same thing as killing the program.

The amendment was approved by the Senate Energy and Natural Resources Committee and is expected to be included in a broad energy bill, which the committee plans on finishing by Wednesday.

Here's the skinny on the amendment:

  • Royalty relief for minerals leasing in the Gulf of Mexico, which is required under the Bush administration's Energy Policy Act of 2005, would be eliminated for "certain" offshore drilling;
  • Under the 2005 energy act, royalties were suspended indefinitely for natural gas wells drilled at least 20,000 feet below the sea floors in shallow water -- or 15,000 feet in deeper waters -- with a volume threshold of at least 35 billion cubic feet. Deepwater oil and gas leases -- meaning those with water depths greater than 400 meters -- were given mandatory relief through 2010.
  • Leases that are currently pending would be grandfathered.
The concern, of course, is that this could further slow investment in offshore oil and and gas exploration. Offshore exploration companies tend to take a long-term view, so I doubt the country will see an immediate slowdown solely because of the amendment.

The amendment does allow the Interior secretary to establish price thresholds for both lease categories, which could provide some support to the offshore drilling industry. (Interior regulation provided a $38.08/barrel price threshold for oil; $4.76/MMBtu threshold for gas.) Louisana Democrtat Mary Landrieu, who voted against the amendment, has offered to work with committee chairman Jeff Bingaman to establish a statutory price threshold for royalty relief before the bill comes to the Senate floor.

All of this amounts to potentially more royalty dollars coming into federal coffers. Especially in light of another measure included in the energy bill to expand oil and gas leasing in the eastern Gulf of Mexico. The question is whether domestic oil and gas explorers, discouraged by the changing tide in Washington, will seek drilling leases offshore foreign soil?