The US Minerals Management Service has issued a revised oil royalty reform rule that gives industry some, but not all, of the changes it had requested.
The changes included: adding language to resolve industry objections about MMS "second-guessing" a sale under an arm's-length contract; ensuring MMS could issue binding-value determinations; changing the definition of producer's affiliate because of a judicial decision; changing the way transportation costs are calculated; and eliminating MMS-published differentials and the proposed Form MMS-4415 (OGJ, Jan. 3, 2000, Newsletter).
MMS said an updated economic analysis concluded the rule would increase royalty collections by $67.3 million over the current system. The previous analysis estimated $66 million.
Comments on the rule must be filed by Jan. 31. The rule was published in the Dec. 30, 1999, Federal Register.
MMS also scheduled three public workshops on the proposed rule. They will be Jan. 19 at MMS's offices in Houston; Jan. 19 at the Bureau of Land Management's Albuquerque offices; and Jan. 20 at the interior department in Washington, DC.
MMS Director Walt Rosenbusch said, "I look forward to continuing a productive dialogue with the states, industry, and public interest groups at the upcoming workshops."
Reactions
The American Petroleum Institute said, "We're pleased that the proposal appears to address at least a few of our recommendations that we believe are essential to making crude oil valuation regulations more workable."
It said changes to limit binding-value determinations and clarify the definition of energy company affiliates appear to eliminate some of the uncertainty of the current system and earlier proposed rules. "We also are encouraged that the new proposal would eliminate the burdensome and costly need for massive amounts of data collection and submittal by oil companies on the proposed Form 4415.
"On the other hand, we are disappointed that MMS continues to believe there is an insufficient market at the lease, thus making it necessary to use the spot markets as an index to estimate value. Such an approach totally disregards comparable sales in a production area as a viable, alternative tool to establish value.
"And the agency's insistence that the lessee has a duty to market production free of charge to the government continues to be a major area of disagreement. While we appreciate the opportunity to provide the agency with additional comments on appropriate transportation allowances, we believe this issue to be a major stumbling block to achieving a rule that is fair, simple, and [that] provides certainty."
API renewed its call for MMS to seriously consider developing an alternative royalty system-royalty in-kind-in which producers would deliver the actual royalty oil to the government.
Indian oil valuation
Separately, MMS is revising its proposed rule for valuing oil produced on Indian lands. Public workshops are planned for early February.
MMS said, "The proposed Indian oil valuation rule differs from the federal oil valuation rule. There is a higher valuation standard called for in Indian lease terms. It is a markedly different valuation procedure than the federal oil valuation rule. "Indian lease contracts contain unique provisions requiring the royalty to be paid on the `highest price paid or offered for the major portion of like-quality oil produced and sold from the field.'"
MMS said the changes would: allow deductions for the cost of transporting oil on reservations; use spot prices instead of New York Mercantile Exchange prices; use the average of the entire month's high index prices rather than the five highest index prices for the month; and simplify the proposed Form MMS-4416.
It said the changes would make the Indian oil valuation rule more consistent with the recent Indian gas valuation rule. The proposed rule would increase royalties to Indian tribes and allottees by $4.7 million/year, says MMS. MMS collects and distributes more than $150 million/year from Indian lands mineral development.
