Four oil and gas trade groups largely embraced a recent US Minerals Management Service proposal to retool its final oil valuation rule, saying the plan promotes clarity and will minimally impact royalty revenues to the federal government and oil-producing states.
The Royalty Strategy Task Force, a coalition that includes the American Petroleum Institute, the Independent Petroleum Association of America, the Domestic Petroleum Council, and the US Oil and Gas Association submitted comments to the agency. The group collectively accounts for all royalties paid for oil production from federal lands, both on and offshore.
Industry's generally positive view of MMS's changes was in sharp contrast to most states with large royalties receipts, most notably California. The state harshly criticized MMS's efforts, saying the agency's proindustry rulemaking is a thinly veiled attempt to settle a lawsuit that producers were losing.
"According to MMS's analysis, what it proposes to give up in terms of deductions is almost perfectly offset by what it says it will gain by adopting the [New York Mercantile Exchange adjusted price]. Unfortunately, both MMS's data and its math are fuzzy," said Lee Helfrich, partner with the law firm of Lobel, Novins & Lamont for California State Controller Steve Westly.
Industry views
Industry concurred with MMS's view that shifting from spot prices to NYMEX adjusted prices for quality and location is a "workable refinement" of the current oil valuation rule. MMS officials note that under its plan producers still will need to use information supplied by an approved price information service to calculate crude values at the various market hubs.
While industry generally applauded MMS's efforts to revise the rule, it did offer some suggestions and guidance to the agency.
"Industry believes it would be convenient and cost-effective to have a single starting place for all index-based valuations, namely NYMEX." One exception was with regard to Alaskan North Slope crude. Industry said in the case of ANS it is not opposed to using that as a benchmark for the California index.
Producers, however, did recommend that, "MMS consider applying market center differentials, such as Kern River and Line 63, to the ANS index to establish location and quality differentials between Long Beach (where ANS is assessed) and other viable market centers where federal production typically flows."
Addressing the issue of counting holidays and weekends for the purpose of royalty collection, industry said they had formed no clear consensus, but recognized designating one schedule made sense to simplify valuations.
And on adjusting the NYMEX price for transportation costs and location and quality differentials, industry wants MMS to revise its proposal.
Specifically, producers want MMS to allow a lessee to use West Texas Intermediate differentials in lieu of calculating individual location and quality differentials.
The industry group also called for MMS to expand transportation costs to include gauging and scheduling fees; they also want MMS to give nonarm's length transactions the same kind of transportation allowances afforded to nonrelated deals. Producers also want MMS to consider assigning a larger value for its cost of capital when considering royalty exposure.
State view
California state revenue officials generally rejected most of MMS planned revisions. They said, for example, MMS's proposed WTI differential does not take into account the potential for higher values because of location.
"As MMS is well aware this uplift in value is often reflected in arm's length (contract between unrelated parties) exchange agreements, and indeed can offset any downward adjustments relating to crude oil quality," Helfrich said. She pointed to Wyoming's comments that argued there is no need to "locate" the NYMEX price because it can be adjusted in the field for quality differences alone.
On ANS, California said MMS's NYMEX proposal for its state "is nothing more than a thinly disguised return to use of discredited posted prices for valuing federal crude oil produced in the state. Indeed, MMS's proposal will wipe out all of the revenue gain that California expected to realize under the 2000 oil rules."
Helfrich said that for California, "the revenue loss is not attributable to the use of NYMEX as a base index per se, but in MMS's proposal for adjusting the NYMEX price for use in calculating royalties in California.
"The proposed rule would adjust the NYMEX price for quality and location using, as a proxy, the mathematical difference between the WTI spot price and the spot prices for crude oils, which MMS had rejected for use in California under the 2000 oil rules," she said.
California also argued it's still too early to tell whether the 2000 rule is working well or not.
"MMS claims throughout its proposed rule that it has been evaluating the efficiency and effectiveness of the 2000 oil rules for the past 3 years. MMS, however, is on a 3-year audit cycle, which means few, if any audits of federal lessee compliance with the 2000 oil rules have been initiated, let alone completed. Moreover, as a recent report of the Inspector General underscores, MMS has simply been neglecting its audit responsibilities; indeed MMS 'auditors' cannot meet professional certification standards."
