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Statement of Need: Very little of the deep gas potential in shallow water areas of the Gulf of Mexico has yet been explored. Extensive infrastructure already exists in shallow water, unlike in deep water, so new production could reach market quickly. Because the most productive tracts in shallow water are already under lease, most of the deep gas potential in shallow water may already have been acquired. This rule would accelerate exploration and production of deep gas by providing temporary incentives in the form of royalty suspension volumes for deep wells on existing leases that explore for or produce gas.

Summary of the Legal Basis: The OCS Lands Act is the basis for our regulations on suspending or lowering royalties on "producing" OCS leases. The Deep Water Royalty Relief Act, which amended the OCS Lands Act, is the basis for regulations to reduce or eliminate royalty on "non-producing" leases in the Gulf of Mexico west of 87 degrees, 30 minutes West longitude. It gives the Secretary of the Interior this authority to (1) promote development or increased production on producing and non-producing leases, or (2) encourage production of marginal resources on producing and non-producing leases.

Alternatives: There are two alternatives -- providing incentives only through the lease sale process, or through an application process. Reserving the deep gas incentive only for new leases issued in future sales will not encourage exploration and production of much of the deep gas potential that underlies existing leases. Many of the best blocks have not been through a sale in decades. Also, new leases would be less able to use the existing infrastructure than existing leases so additional gas production would be delayed. Granting royalty relief on a case-by-case basis to existing leases would better protect against unnecessary royalty relief but is unlikely to encourage much additional production. The unavoidable complexity and delays in a system like we use in the discretionary deep water royalty relief program would discourage many lessees and delay the desired activity by those that would apply.

Risks: The risk of not offering royalty relief provided in this rulemaking; action is that some deep gas resources in shallow water will not be; developed, at least not during a period when growing demand and declines in traditional sources for natural gas will lead to volatile prices.