A Low Oil Price Environment

1
A Low Oil Price Environment
Effects on the Federal OCS Program in the Gulf of
Mexico

• Tom Kitsos, Deputy Director
• Minerals Management Service
• U.S. Department of the Interior

Adams and Reese Annual Energy Conference-
November 20, 1998
2
MMS Perspective on Low Prices

• What does MMS do?
• How are MMS policies affected by oil gas
  prices?
• How can MMS leasing policies respond to price
  swings?

3
What does MMS do?

• Manage leasing regulate mineral extraction on
  OCS
• 1.5 billion acres
• 20 of U.S. oil
• 27 of U.S. natural gas
• Gulf of Mexico
• 85 of OCS oil
• 99 of OCS natural gas

• Collect payments for the right to produce
  minerals on all Federal land
• Since 1954, 118 billion from OCS leases
• Over last 10 years, 75 royalties - 20 bonuses -
  3 rentals

4
MMS Mandate

• Expedite exploration development of the OCS
• Protect human, marine, coastal environments
• Obtain fair equitable return for public on OCS
  resources
• Preserve maintain competition
• Balance range of priorities under ALL market
  conditions

5
Effect of Price Changes on MMS Policies

• 4 Program Activities for illustration
• 5-year oil and natural gas leasing program
• Bid adequacy procedures
• Royalty relief
• Leasing policies

6
5-Year Leasing Program

• Programs included sales dropped later for lack of
  industry interest because of low prices
• No Central or Western GOM sales have been
  threatened
• Planning lead-times require use of long-term
  (10year) price expectations

7
Bid Adequacy Procedures

• Price expectations play an important role in MMS
  bid adequacy determinations
• Low prices
• Tend to compress the range of bids
• Make it more likely that MMS will accept high
  bids for lower-valued tracts

8
Changes in Royalty Relief Authority

• Prior MMS authority
• MMS granted new discretionary authority by Deep
  Water Royalty Relief Act
• New requirement under the OCS DWRRA

9
Royalty Relief for Existing Leases

• Deep Water
• Royalty suspension based on forecast of economic
  need
• Price assumptions
• Use 3-year average of GOM-specific prices for
  starting prices
• Coupled with long-term EIA outlook projections
• Since 1996, 4 applications

• End-of-Life
• Royalty rates reduced by half (demonstrated
  economic need)
• Weak prices tend to ease qualification as
  revenues decrease relative to costs
• Since 1990, 12 requests approved (2 in GOM)

10
Oil Price
Tracts Leased
11
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12
What Happens Next?

• What are the fiscal effects of a prolonged low
  price period?
• What possible options does MMS have to respond to
  continued low prices?
• How will continued low prices influence other MMS
  responsibilities?

13
Revenue Estimates to 2008
OCS Revenue
14
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15
Conclusions

• Aware of the effects of low prices
• Modified policy in the past to effectively
  mitigate the effects of low prices
• Future policies target converting yesterdays
  successes in leasing into tomorrows achievements
  in development and production