As U.S. independent producers are becoming more active on the Outer Continental Shelf, they are only beginning to discover a program designed to help other U.S. independents-the small refiners.
Since 1978, a federal law has mandated that every OCS lease require the leaseholder to offer 20% of the crude oil, condensate, and natural gas liquids production at market value to small refiners-those with capacity of 75,000 b/d or less.
Known as Section 8(b)(7) of the Outer Continental Shelf Lands Act Amendments, the provision requires the same market valuation and point of sale delivery procedures as the leaseholder's current point of sale for its production, or the point of delivery of the federal government's royalty oil.
Producers unaware
Jess Hewitt, President and CEO of independent refiner Hydrocarbon Processing Inc., Houston, said, "We've talked with a lot of OCS producers to submit bids for these 20% setaside volumes. We're finding that many companies are generally unaware of this requirement, or they assume that participation in the federal royalty in-kind program takes care of their set-aside requirements."Hewitt said, "The MMS set-aside program is the only thing we have to put small refiners on equal footing with large trading companies to gain access to OCS volumes."
MMS said the small refiner set-aside program is separate from its pilot projects to take its crude and condensate as royalty in-kind (RIK), although the RIK oil is dedicated for sale to small refiners.
Even if a lessee is delivering 12.5% of his oil and condensate production to a small refiner under RIK, he still could be required to sell small refiners another 20% of all liquid production under the set aside program.
MMS monitors lessees' reporting and compliance under the RIK program. The set-aside program is run by the leaseholders themselves.
How it works
The concept for set-asides is neither new or unique to the oil and gas industry. The federal government has a long history of requiring contractors to set aside a portion of government work or purchases for small businesses.Bob Meurer, chief of MMS's development and unitization section, said, "While a producer's participation is not voluntary, the government doesn't require leaseholders to sell at a loss.
"The law only mandates that the leaseholder offer the production to small refiners at market value."
Leaseholders are free to set their own price structures when negotiating sales agreements for set-aside volumes with small refiners.
Meurer said MMS has never received a complaint, issued penalties, or terminated an OCS lease under the set-aside program.
"However, we get requests from small refiners to identify who the post-1978 leaseholders are so they can contact them to bid on production. Our public records office can provide a list to small refiners of the leases requiring 20% set-aside volumes."
Compliance
Meurer said that compliance is self-regulated and that a producer might only have to sell to a single small refiner."You don't have to deal with all small refiners, you only have to deal with one, if the contract is for the entire 20%."
While the MMS looks to the lease operator to verify compliance of lease provisions, all lessees, including non-operating working interest holders, are ultimately responsible.
For example, if a working interest owner is taking production in kind for use or sale, lessees should have the operator net out the 20% set-aside volume, or they should set up their own program to comply.
Fred Haston, Seneca Resources marketing manager, said, "The bulk of our liquids subject to the set-aside program is being sold to two small refiners.
"To participate in our program, refiners have to produce certification that verifies they are a qualified small refiner.
"Next, we talk finances and creditworthiness, sometimes requiring an acceptable letter of credit.
"Finally, a small refiner has to match current market price, if they want to buy the barrels."
If a producer is concerned about the risk of selling to a smaller, unfamiliar buyer, he can buy insurance for his accounts receivable.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.