Deepwater Royalty Relief Economic Model
The Outer Continental Shelf (OCS) Deep Water Royalty Relief Act (DWRRA) directs the Secretary of the Interior to suspend royalties on existing leases in certain deep water areas of the Gulf of Mexico OCS Region when a specific set of conditions are met. Upon receipt of a complete application, the Secretary is to determine whether proposed new production would be economic while subject to the requirement to pay Federal royalties. The DWRRA directs the Secretary to consider in the determination the increased risk of operating in deep water and costs associated with exploring, developing and producing. Lessees are required to submit a complete application which provides the necessary raw and interpreted data on the field so that such a determination can be made.
There are two economic hurdles that a field must clear to be eligible for a royalty suspension. If, after reviewing the application, the Secretary determines that the new production would be economic while paying Federal royalties, then royalty obligations will not be suspended. Further, a determination that no amount of royalty-free production would make the new production economically viable also disqualifies the field from a royalty suspension. Alternatively, if the field would not be economic while paying Federal royalties but some amount of royalty-free production would make the new production economically viable, the field would qualify for at least the minimum suspension volume. Should production from a field not be economic with a royalty suspension volume equal to the mandated minimum, the Secretary must determine the precise volume of royalty-free production which would make the production economic.
A two-part evaluation process has been devised to direct royalty relief to fields that appear uneconomic with royalties but are potentially viable with royalty suspensions. The first part of the process is conducted by the royalty relief applicant and the second part is performed by BOEM.