Senator Manchin and the Alaska delegation criticized the DOI decision memo for Sale 258. The memo implied that the highest allowable royalty rate was chosen to minimize bidder interest and limit future production. Unfortunately, the “Inflation Reduction Act,” which mandated these lease sales, was not particularly helpful in creating interest in the less attractive OCS tracts like those in the Cook Inlet and the shallower waters of the Gulf of Mexico.
Sec. 50261 of the IRA raised the minimum allowable royalty rate from 12 1/2% to 16 2/3%, while capping the maximum rate at 18 3/4%. This provision favors deepwater operators, typically majors and large independents, whose royalty rates were capped at 18 3/4%, the same rate as for previous OCS sales.
Conversely, the IRA royalty provisions penalize the smaller companies and gleaners who are critical to sustaining shallow water (shelf) operations, including environmentally favorable nonassociated (gas-well) natural gas production, by raising the minimum royalty rate to 16 2/3%. DOI exacerbated IRA’s impact by electing to charge the highest allowable royalty rate for Cook Inlet and GoM shelf leases. The net result was a 50% royalty rate increase from prior sales (12.5 to 18.75%).
The table below illustrates the royalty rate implications of the IRA language and the DOI decisions.
| Area | Sale | Date | % royalty: <200m water depth | % royalty: >200m water depth |
| Cook Inlet | 244 | 6/21/2017 | 12.5 | 12.5 |
| GoM | 256 | 11/18/2020 | 12.5 | 18.75 |
| GoM | 257 | 11/17/2021 | 12.5 | 18.75 |
| Cook Inlet | 258 | 12/30/2022 | 18.75 | 18.75 |
| GoM | 259 | 3/29/2023 | 18.75 | 18.75 |
Notes:
- The base primary term for GoM shelf leases is only 5 years vs. 10 years for leases in .>800 m of water.
- In lease year 8 and beyond the rental rates are nearly double for shelf leases vs. deepwater leases ($40/ac vs. $22/ac).
- While deepwater development typically requires more time, the higher rental penalty for delayed shelf production (which must be approved by BSEE) is not warranted. $40/acre or $240,000 per year (plus inspection and permitting fees) is a high cost for a marginal shelf lease.
- Cook Inlet Sale 244 drew 14 high bids totaling more than $3 million. Sale 258 drew only 1 bid of $64,000. While many factors influence lease sale participation, the 50% increase in royalty rate certainly made the Cook Inlet leases less attractive.
- Other than the increased royalty rate, the terms for both Cook Inlet sales were essentially the same. The primary lease term was 10 years and the minimum bonus bid was $25/hectare for both sales. The rental rate was increased by only $3/hectare ($13 to $16).
Bud's Offshore Energy (BOE) 