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Design and Rationale of the Final Rule on Royalty Relief For Deep Gas Production From Shallow-Water Leases in the Gulf of Mexico

J. Michael Melancon, Alvin G. Durr, Jr., Federal and Indian Oil & Gas Royalty Valuation and Management (2004)

Natural gas production over the last 20 years from offshore Federal lands has been fairly constant at about 5 TCF per year, which supplies approximately 25 percent of domestic demand. Forecasts, however, indicate that demand for natural gas will increase significantly. For example, the Energy Information Administration projects that demand for natural gas in the United States could increase more than 50 percent in the next 20 years, rising from 22 TCF in 2003 to 35 TCF in 2025. Without new sources of domestic natural gas, there will be a growing imbalance between supply and demand, resulting in continued gas price volatility and an increased reliance on imports, such as liquefied natural gas (LNG) from overseas.

Production from deep wells in the shallow waters (less than 200 meters) of the Gulf of Mexico is one of the most attractive sources of additional natural gas supplies needed to alleviate predicted shortages and help moderate price increases over the next decade. Abundant infrastructure needed to produce the gas and transport it to onshore processing plants is already in place. Further, according to “Gulf of Mexico OCS Deep Shelf Gas Update: 2001-2002” published by the Minerals Management Service (MMS) in April 2003, completions in new deep gas reservoirs on the OCS are showing signs of providing the best opportunity for quickly increasing natural gas production