As imports become riskier, the US Department of Energy (DOE) investigates ways to extend productive life of marginal Gulf properties.
Responding to an industry request, DOE's National Energy Technology Laboratory (NETL) recently completed a comprehensive evaluation of what would be deemed "marginal" Gulf of Mexico producing properties in water depths of 650 ft (200 m) or less.
The chief reason for the study was to determine how to extend federal royalty relief to smaller Gulf fields in shallow water.
The study also could help determine how the federal government might assist marginal property operators in keeping such properties on production.
The study is particularly important, DOE said, because unlike onshore marginal properties - which are defined by daily production limits from individual wells - there is no existing, statistically reliable definition of an offshore marginal property.
The study's researchers considered several units of economic analysis, including individual wells, platforms, leases and fields. However, based on Gulf operations, it became apparent that all contracts, production accounting and royalty payments are conducted at the lease level. Therefore, the lease was chosen as the study's measurement unit.
Made in response to a request from the Independent Petroleum Association of America and the National Offshore Industries Association, the NETL analysis resulted in two main conclusions:
• an offshore lease reaches its economic production limit when revenues are equal to costs; and
• from Gulf of Mexico leases approaching this limit, "targeted" royalty relief could result in possible additional production during the next 20 years of up to 2.5 Tcfe of gas or 455 million boe of oil.
According to DOE, the Gulf is the source of 20% of US oil and gas production, with 7,564 active leases.
However, some 3,628 of them are in 650 ft (330 m) of water or less, and account for about 50% of the total oil production and 75% of the total gas production from the Gulf.
For a variety of reasons, many of these shallower leases are likely to reach their economic limit during the next few years, said NETL researchers.
Once such leases reach their economic operating limit, operators usually curtail production, remove all in-place infrastructure, plug and abandon wells and allow the leases to expire. Therefore, access to the left-behind production is lost and most likely replaced by imports, making further negative impact on the nation's energy security.
As an incentive for operators to use new techniques to prolong the life of such marginal leases, the study suggested that once marginal conditions are reached, royalty relief could be instituted in either of two ways: 100% relief from the existing rate of one-sixth of gross production, or half of that (one-twelfth) on all further production until field shut-in.
In order to bracket the impact of royalty relief for such leases, study investigators chose four price scenarios. These were US $16/bbl for oil and $1.96/Mcf for gas; $20/bbl and $2.25/Mcf; $25/bbl and $2.81/Mcf; and $28/bbl and $3.64/Mcf (Table 1).
And since the DOE prepared the report, the government's revenue interests in royalty relief also are addressed. The Cost column under both scenarios in Table 1 represents the cost and benefit to the US Treasury, defined as royalties foregone divided by incremental production. A positive number indicates a cost to the Treasury; a number enclosed in parentheses indicates a gain.
Under the 100% royalty relief case, the total increment production during the next 20 years ranges from 401 million boe at $16/bbl to 455 million boe at $28/bbl for oil, and about 2.249 Bcfe at $1.96/Mcf to 2.550 Bcfe at $3.64/Mcf for gas. This net production gain amounts to about a 9% average increase in recovery. The incremental production remains the same for the three listed revenue-to-cost ratios.
In the 50% royalty relief case, however, up to 309 million boe (or 1,734 Bcfe) of incremental production is possible at no cost to the Treasury.
In fact, it would generate more royalties than the amount foregone and would produce a net gain to the Treasury as high as $2.09/boe (or $0.37/Mcfe) across the analyzed cases. Under the 50% scenario, the incremental production averages
about 6%.
So the study indicates that while the potential incremental production under the 50% royalty relief case is about half that of the 100% case, it is produced at a lower cost to the Treasury.
However, while nothing has been proposed officially in terms of royalty relief for marginal offshore leases, the study shows such a program is possible, and the resulting incremental production under at least two relief scenarios could benefit the operator and the Treasury.

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