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Design and Rationale of the Final Rule on the Deep Water Royalty Relief Act

J. Michael Melancon, M.B. Rose, T.W. Farndon, S.J. Fraser, Oil & Gas Development on the Outer Continental Shelf (1998)

Following passage of the Deep Water Royalty Relief Act in November 1995, the Minerals Management Service (MMS) implemented its deep water royalty relief program for existing leases (any in most areas of the Gulf of Mexico that were issued before the act and are located in water deeper than 200 meters) with publication of an interim rule in May 1996. Comments subsequently received from the oil and gas industry focused on six core issues: categorical qualification, application timing, certification, complexity, treatment of historic costs, and criteria for material changes and redeterminations. The first half of this paper reviews the basic relief qualification process and summarizes the changes MMS made in the program in response to industry comments as well as the reasons for making these changes. The final rule was published in January 1998.

Inquiries and initial applications submitted under the Act identified some oversights and omissions in the evaluation and implementation procedures. These included possible changes to the field composition after an application, poor representation of the geologic data, the effect of ownership changes on sunk cost, justifying the development option chosen over alternatives, unanticipated cost arrangements and structures, wide and skewed cost distributions, contingency and excessive overhead cost factors, and evaluating fields that