Congress halts SPR sale, oil royalty rule

The U.S. Congress has approved a spending bill that will prevent the sale of additional oil from the Strategic Petroleum Reserve this fiscal year.

The Emergency Supplemental Appropriations bill reversed a 1997 budget law that required the sale of $207.5 million worth of oil to fund SPR operations.

The latest legislation also included a provision that prohibits the Minerals Management Service from issuing a controversial royalty valuation rule during the current fiscal year.

President Bill Clinton has promised to sign the bill.

SPR drawdown

Energy Sec. Federico Peña recently postponed the planned SPR sale, which he had opposed, after receiving assurances from congressional leaders that they would try to block it in the supplemental appropriations bill.

Peña had complained that the oil would bring only $10-15/bbl, requiring the sale of 14-21 million bbl of oil and dropping the SPR inventory of 563 million bbl to less than 550 million (OGJ, Apr. 13, 1998, p. 30).

Frank Murkowski (R-Alas.), Senate energy committee chairman, said the federal government would have taken a $500 million loss.

"Buying high and selling low never makes sense. But that's exactly what the federal government is doing every time it taps into the SPR," he said.

George Yates, Independent Petroleum Association of America chairman, agreed the sale "doesn't make good economic sense for the federal government."

Yates, who is president and CEO of Harvey E. Yates Co., Roswell, N.M., said the government paid an average $33/bbl for the relatively poor-grade oil but would have received only $9-13/bbl for it today.

Steve Layton, National Stripper Well Association president, said, "The sale would have hurt oil producers by flooding the market with about 23 million bbl of oil and driving already low prices further down." Layton is president and CEO of Equinox Oil Co., Houston.

Valuation rule

Sen. Kay Bailey Hutchison (R-Tex.) added the provision that blocked the MMS oil royalty valuation rule.

MMS had planned to issue a final rule next month despite widespread oil industry opposition (OGJ, Apr. 27, 1998, p. 25). It now cannot issue the regulation until after the current fiscal year ends Sept. 30.

Hutchison said, "Federal law requires that oil be valued where it is removed from the ground. The MMS wants to value the oil after the industry has added significantly to its value. Such a change would have the effect of increasing the amount of royalties collected on any set amount of oil."

She said the additional time will allow Congress "to weigh in on this matter, rather than letting the MMS arbitrarily change the law through the exercise of its rulemaking authority.

"The fiscal 1998 Interior appropriations bill specifically directed MMS to report back to the committees prior to finalizing the new regulations after numerous members expressed concern. Neither the Senate energy and natural resources committee nor the appropriations committee ever was notified that MMS proposed to finalize the new rule this June.

"It is unfortunate that MMS has failed to take these fundamental issues into consideration and has further complicated an already difficult process. But the bottom line is, Congress makes the law, not the agency."

Babbitt responds

Interior Sec. Bruce Babbitt claimed Congress "bowed once again to pressure from the oil industry."

He said, "This rule would ensure that taxpayers receive fair-market value for the oil produced on their public lands. It would yield an estimated $66 million in additional revenue each year."

Babbitt said the delay "will cost American taxpayers $5.5 million every month until this rule is finalized. States will lose money they need for education, public works, and recreational facilities."

Ray Singleton, president of the Independent Petroleum Association of Mountain States (Ipams), replied, "Babbitt's statement that oil producers are not paying fair-market value for oil produced on public lands is outrageous. Nothing could be further from the truth."

Singleton, president of Basic Earth Science Systems Inc., Denver, said, "Interior regulations currently require oil producers to pay royalties at a fair market value established at the point of production.

"What's at issue here, is that the government wants producers, large and small alike, to transport the government's oil from anywhere in the U.S. to a central trading point in Oklahoma for free.

"Producers in the Rocky Mountain West will be especially impacted in that there is no effective way to transport oil out of the Rockies to Oklahoma. It hardly seems fair, at a time when small independent oil producers are already devastated by low oil prices, to saddle these little companies with transporting the government's oil for free."

Carla Wilson, Ipams tax and royalty director, said, "The proposed rule imposes an extremely unfair valuation scheme that discriminates against virtually every producer on federal lands. Yet the rule provides no certainty whatsoever to producers because MMS can come back years later and determine that royalties were improperly paid."

She predicted numerous lawsuits from the uncertainties surrounding the proposed rule itself and oil valuation issues.

RIK question

In a related issue, MMS issued a study attacking a House bill that would require it to take royalty production in-kind.

MMS said the bill adopts many of the positions the oil industry has taken in past valuation disputes with MMS and would require the government to pay for gathering and treatment costs.

It said the bill would require MMS to take minimal volumes of oil in remote areas and assume the costs of marketing oil and gas in an RIK program where production is sold downstream of the lease.

MMS said the bill would cost the government hundreds of millions of dollars per year while the associated administrative cost savings are less than $8 million/year.

It said MMS already has the authority to require RIK in situations where it might result in revenue gains for the government.

"MMS can realize all of these revenue gains without the many costs associated with this legislation, and without revenue losses from areas where RIK is not a viable option," it said.