New rules revealed by Scott Angelle, director of the federal Bureau of Safety and Environmental Enforcement, may revive drilling for oil and gas in shallow water off the coast of Louisiana.
Angelle, a Breaux Bridge native and former lieutenant governor, made the announcement Thursday to local oil industry representatives and public officials at the Cajundome.
These new rules were recommended after a report release by the Bureau of Ocean Energy Management. The rules include updated discount rates of up to 25% on shallow water royalty rates on a case-by-case basis and the separation of deep water and shallow water into two provinces.
Production and infrastructure investment used to be substantially higher in the Shallow Water Province, coastal waters under 200 meters or 660 feet deep. Over the past 20 years, development has moved onshore or to deepwater operations farther out in the Gulf of Mexico.
"Deep water has elephant-sized reservoirs and shallow water has rabbit-sized reservoirs," Angelle said. "There's a different approach by businesses to capital investment for this and having a one-size-fits-all approach to the Gulf doesn't make sense. A 16.66% royalty take is just too much to inspire a company to drill for those rabbit-sized reservoirs."
BOEM officials estimate about $20 billion in oil and gas resources could be stranded in the Shallow Water Province of the Gulf of Mexico if the trend of losing around 100 rigs a year continues unabated.
Angelle said the United States is essentially "on a shot-clock" to make sure this does not occur.
The new discount rules will mostly apply to new wells and production in the region, but Angelle said there could be some exceptions on a case-by-case basis.
Angelle said after talking to industry leaders and experts at Goldman-Sachs, shallow water drilling has no room for businesses to "stub their toe" when it comes to making a return on their investments. As such, it makes investment in the shallow waters too risky to undertake.
Under the new rules, which were announced Tuesday night in Houma and were officially mailed out to the regional director Thursday, BSEE will be able to receive applications from oil companies interested and review them on a "per-project basis" on factors such as the projected yield, economic viability geological surveys, economic analysis, location and other factors to apply a 15% to 25% discount to the federal royalty price.
"Depending on these factors, we could see some of these rates go into the single digits ... I would expect for us to start seeing responses from companies by the first of the year," Angelle said. "Not every project gets a discount, as they don't need it. And some projects, no matter how big the discount is, can't become economically viable. We're trying to find that sweet spot."
Under the old rules, the maximum discount was set at 15% and there were blanket rules for all projects. The average lease royalty rate in the Gulf of Mexico is 16.66%, Angelle said.
The Shallow Water Province is an historically energy-rich area that now primarily serves as a natural gas province. It accounts for 33% of the Gulf’s natural gas production and just over 10% of its oil production.
Production and infrastructure investment were considerably higher in the Shallow Water Province, which began more than 70 years ago, but over the past 20 years development has moved onshore or to operations in the Deep Water Province, where costs have been more favorable.
The number of wells drilled has decreased 89% over the past 10 years, and about 100 platforms a year are being removed with almost no new platforms being installed according to BOEM.