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Deep Water Royalty Relief

L. Poe Leggette, Nancy L. Pell, Devanhshi P. Patel, Federal and Indian Oil & Gas Royalty Valuation and Management

The offshore oil and gas industry was faced with many challenges in the early 1990s. Between 1982 and 1995, approximately 400,000 to 450,000 jobs in the domestic oil and gas industry had been lost.1 Domestic production of oil and gas was projected to continue to decline significantly, having already fallen by 1993 to its “lowest level since 1958.”2 Imports of crude oil were projected to rise to sixty-eight percent by 2005.3 Oil companies were investing large portions of their drilling and development budgets overseas.4 In January 1995, the Energy Information Administration released its “Annual Energy Outlook 1995” (“AEO '95”) forecasting a continued decline of the production of oil from wells within the United States.5 Wells in the lower 48 states were projected to decrease production at a rate of almost one percent per year through 2010.6

In response to these developments, and recognizing the potential discovery of vast new oil and gas reservoirs in deep water areas of the Gulf of Mexico, Congress passed the Outer Continental Shelf Deep Water Royalty Relief Act (“DWRRA”).7 As a result, according to the Minerals Management Service's (“MMS”) Regional Director for the Gulf of Mexico, deepwater development “has succeeded probably beyond the most optimistic dreams of most of us and shows no sign of diminishment[.]”8 The royalty relief program has resulted in record bidding