The US Minerals Management Service Sept. 15 said it will extend the comment period on its proposal to amend controversial oil valuation rules.
MMS Aug. 20 proposed industry-supported changes to its 2000 oil valuation rule that the agency characterized as only technical adjustments. MMS had planned to issue a final rule in mid-October, but concerns from state royalty interests including California and Texas, along with some members of Congress, changed that ambitious timetable (OGJ, Sept. 8, 2003, p. 26).
An MMS spokesperson said a new 30-day comment period was expected to start by Sept. 22; the exact date depended on when the notice is published in the Federal Register.
Nick Rahall (D-W.Va.), ranking member of the House Resources Committee, and Carolyn Maloney (D-NY), ranking member of the House Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth of the Financial Services Committee wrote MMS about the proposal. So did Sen. Barbara Boxer (D-Calif.) and Rep. Lois Capps (D-Calif.).
They all argued in written correspondence in August that the proposed changes were too extensive and complicated to be reviewed in 30 days.
Then in a Sept. 9 letter, Rahall and Maloney asked Sec. of the Interior Gale Norton to provide answers to 14 detailed questions that cover a myriad of assumptions MMS used when drafting its proposal. The lawmakers asked Norton to respond by Sept. 15 unless MMS decides to extend the comment period. MMS officials later agreed to extend the comment period and were still working on responding to the letter at press- time last week.
Questions raised
"We find it difficult to ascertain precisely what data MMS used to justify these changes; therefore, we request that you provide additional information as well as the answers to these questions," Rahall and Maloney wrote.
Lawmakers as well as California and Texas are worried that MMS proposals to expand transportation cost deductions, and rates of return on oil pipeline investment may mean industry is not paying its fair share of royalties.
The legislators, frequent critics of the administration of President George W. Bush's public land policies, lambasted MMS for what they see as inconsistencies between the proposed rulemaking and the agency's administrative record.
In the letter, Rahall and Maloney asked Norton to explain the extent to which litigation is motivating MMS's proposed rule. Industry sued the agency over its 2000 rules, and the lawsuit is still pending.
Financial impacts
The letter also said the financial impacts of revising the rule on the federal government and states appear unclear.
"MMS lists a broad range of financial impacts to the federal government and to the states. For several issues, this impact ranges from the negative to the positive, a sign of uncertainty in the estimated impacts. While we understand the ambiguous nature of royalty oil that may be diverted to the [Strategic Petroleum Reserve], other factors that add to this uncertainty are troubling."
Rahall and Maloney said that MMS makes broad assumptions on the amount of oil that is not sold at arm's length, even though MMS's newly revised 2014 form asks lessees to report whether sales are or are not at arm's length.
They also wanted MMS to explain its reasons for supporting most of industry's requests for expanding deductible transportation costs.
MMS gathered comments from industry, state groups, and other stakeholders this spring on its 2000 oil valuation rule. That information was then used by MMS when it decided to propose what it considers to be technical revisions to the way the government values oil sold between two related parties. The 2000 regulations moved away from an outdated posted price system to one in which the agency calls on leaseholders to use published spot prices at benchmarked market centers.
Benchmarking issues
MMS also proposed changes to its crude oil benchmarking system that may make data less accurate than under the current system, according to McGraw-Hill Cos.' energy information service, Platts.
In its Aug. 20 notice, MMS said it wants to change its valuation basis for transactions between related parties (not at arm's length) from spot to New York Merecantile Exchange prices adjusted for locality and quality differentials. But to make those adjustments, producers still will need to use Platts or another approved price information service to calculate the crude value at a market center.
Platts officials cautioned that using a "half-and-half approach—NYMEX as the basis, published differentials for market-center values—has the potential to create several accuracy problems," said John Kingston, global director of oil for Platts.
"The MMS appears to be trying to get away from a price that they believe might be manipulated, but ultimately conceding that it can't do that completely," Kingston said.
He noted, for example, that for the 3 days between the expiration of a particular month's NYMEX contract, and the concurrent close of cash West Texas Intermediate trading and pipeline scheduling for that same month, there will be a different basis for the NYMEX value and the differential to the market center.
Kingston said that it should also be noted that the NYMEX crude contract is not a strictly WTI-based contract: "Other grades are deliverable against it, and there are periods, particularly during tight supplies, when the value of NYMEX crude is not equal to cash WTI for the same delivery month."
He added that this scenario also can happen if the market perceives that a significant amount of non-WTI crude is going to be delivered against the contract.
