#### § 203.36 Do I keep royalty relief if prices rise significantly?

(a) You must pay the Office of Natural Resources Revenue royalties on all gas production to which an RSV otherwise would be applied under § 203.33 for any calendar year in which the average daily closing New York Mercantile Exchange (NYMEX) natural gas price exceeds the applicable threshold price shown in the following table.

| A price threshold in year 2007 dollars of . . . | Applies to . . . |
| --- | --- |
| (1) $10.15 per MMBtu, | (i) The first 25 BCF of RSV earned under § 203.31(a) by a phase 2 ultra-deep well on a lease that is located in water partly or entirely less than 200 meters deep issued before December 18, 2008; and |
| | (ii) Any RSV earned under § 203.31(b) by a phase 2 ultra-deep well. |
| (2) $4.55 per MMBtu, | (i) Any RSV earned under § 203.31(a) by a phase 3 ultra-deep well unless the lease terms prescribe a different price threshold; |
| | (ii) The last 10 BCF of the 35 BCF of RSV earned under § 203.31(a) by a phase 2 ultra-deep well on a lease that is located in water partly or entirely less than 200 meters deep issued before December 18, 2008, and that is not a non-converted lease; |
| | (iii) The last 15 BCF of the 35 BCF of RSV earned under § 203.31(a) by a phase 2 ultra-deep well on a non-converted lease; |
| | (iv) Any RSV earned under § 203.31(a) by a phase 2 ultra-deep well on a lease in water partly or entirely less than 200 meters deep issued on or after December 18, 2008, unless the lease terms prescribe a different price threshold; and |
| | (v) Any RSV earned under § 203.31(a) by a phase 2 ultra-deep well on a lease in water entirely more than 200 meters deep and entirely less than 400 meters deep. |
| (3) $4.08 per MMBtu, | (i) The first 20 BCF of RSV earned by a well that is located on a non-converted lease issued in OCS Lease Sale 178. |
| (4) $5.83 per MMBtu, | (i) The first 20 BCF of RSV earned by a well that is located on a non-converted lease issued in OCS Lease Sales 180, 182, 184, 185, or 187. |

(b) For purposes of paragraph (a) of this section, determine the threshold price for any calendar year after 2007 by:

(1) Determining the percentage of change during the year in the Department of Commerce's implicit price deflator for the gross domestic product; and

(2) Adjusting the threshold price for the previous year by that percentage.

(c) The following examples illustrate how this section applies.

# Example 1:

Assume that a lessee drills and begins producing from a qualified phase 2 ultra-deep well in 2008 on a lease issued in 2004 in less than 200 meters of water that earns the lease an RSV of 35 BCF. Further, assume the well produces a total of 18 BCF by the end of 2009 and in both of those years, the average daily NYMEX closing natural gas price is less than $10.15 (adjusted for inflation after 2007). The lessee does not pay royalty on the 18 BCF because the gas price threshold under paragraph (a)(1) of this section applies to the first 25 BCF of this RSV earned by this phase 2 ultra-deep well. In 2010, the well produces another 13 BCF. In that year, the average daily closing NYMEX natural gas price is greater than $4.55 per MMBtu (adjusted for inflation after 2007), but less than $10.15 per MMBtu (adjusted for inflation after 2007). The first 7 BCF produced in 2010 will exhaust the first 25 BCF (that is subject to the $10.15 threshold) of the 35 BCF RSV that the well earned. The lessee must pay royalty on the remaining 6 BCF produced in 2010, because it is subject to the $4.55 per MMBtu threshold under paragraph (a)(2)(ii) of this section which was exceeded.

# Example 2:

Assume that a lessee:

(1) Drills and produces from well no.1, a qualified deep well in 2008 to a depth of 15,500 feet TVD SS that earns a 15 BCF RSV for the lease under § 203.41, which would be subject to a price threshold of $10.15 per MMBtu (adjusted for inflation after 2007), meaning the lease is partly or entirely in less than 200 meters of water;

(2) Later in 2008, drills and produces from well no. 2, a second qualified deep well to a depth of 17,000 feet TVD SS that earns no additional RSV (see § 203.41(c)(1)); and

(3) In 2015, drills and produces from well no. 3, a qualified phase 3 ultra-deep well that earns no additional RSV since the lease already has an RSV established by prior deep well production. Further assume that in 2015, the average daily closing NYMEX natural gas price exceeds $4.55 per MMBtu (adjusted for inflation after 2007) but does not exceed $10.15 per MMBtu (adjusted for inflation after 2007). In 2015, any remaining RSV earned by well no. 1 (which would have been applied to production from well nos. 1 and 2 in the intervening years), would be applied to production from all three qualified wells. Because the price threshold applicable to that RSV was not exceeded, the production from all three qualified wells would be royalty-free until the 15 BCF RSV earned by well no. 1 is exhausted.

# Example 3:

Assume the same initial facts regarding the three wells as in Example 2. Further assume that well no. 1 stopped producing in 2011 after it had produced 8 BCF, and that well no. 2 stopped producing in 2012 after it had produced 5 BCF. Two BCF of the RSV earned by well no. 1 remain. That RSV would be applied to production from well no. 3 until it is exhausted, and the lessee therefore would not pay royalty on those 2 BCF produced in 2015, because the $10.15 per MMBtu (adjusted for inflation after 2007) price threshold is not exceeded. The determination of which price threshold applies to deep gas production depends on when the first qualified well earned the RSV for the lease, not on which wells use the RSV.

# Example 4:

Assume that in February 2010, a lessee completes and begins producing from an ultra-deep well (at a depth of 21,500 feet TVD SS) on a lease located in 325 meters of water with no prior production from any deep well and no deep water royalty relief. The ultra-deep well would be a phase 2 ultra-deep well (see definition in § 203.0), and would earn the lease an RSV of 35 BCF under §§ 203.30 and 203.31. Further assume that the average daily closing NYMEX natural gas price exceeds $4.55 per MMBtu (adjusted for inflation after 2007) but does not exceed $10.15 per MMBtu (adjusted for inflation after 2007) during 2010. Because the lease is located in more than 200 but less than 400 meters of water, the $4.55 per MMBtu price threshold applies to the whole RSV (see paragraph (a)(2)(v) of this section), and the lessee will owe royalty on all gas produced from the ultra-deep well in 2010.

(d) You must pay any royalty due under this section no later than March 31 of the year following the calendar year for which you owe royalty. If you do not pay by that date, you must pay late payment interest under 30 CFR 1218.54 from April 1 until the date of payment.

(e) Production volumes on which you must pay royalty under this section count as part of your RSV.