By OGJ editors
WASHINGTON, DC, Feb. 20 -- The US Minerals Management Service announced four regional public workshops the week of Mar. 4 to discuss possible technical revisions to its federal oil valuation rule.
After a tumultuous 5-year battle with industry, MMS published its current oil valuation rule in March 2000. The regulation links cash royalty payments from some federal leases to published prices in market centers. Previously, the agency typically relied on a company's own posted prices. Industry eventually acknowledged that the system was outdated after MMS and later the US Dept. of Justice conducted a series of high-profile royalty underpayment investigations in the late 1990s.
Three years later, MMS said it still has confidence in its oil valuation policy but suggested it may be receptive to making what it calls "technical" changes to the rule. Possible "refinements" include changing the way MMS treats transportation costs and using different published market prices as a benchmark for valuing oil from federal leases.
"After 3 years of experience, we are convinced this is a sound rule that generally does what it is intended to do—provide the federal government and lessees alike with a fair valuation of crude oil from federal leases," said MMS Director Johnnie Burton. "At the same time, we believe we need to look at these technical issues to ensure that we are properly accounting for the cost of transporting oil and properly valuing oil produced from federal leases according to current market conditions. We are eager to hear from the public on these issues."
Industry groups such as the Independent Petroleum Association of America maintain that MMS' rule unfairly increases the amount of royalties that must be paid because the agency assesses royalties on the downstream value of the oil without fully considering the cost of marketing and transporting the oil to a market center.
When companies sell oil to a non-affiliated third party, MMS generally allows them to calculate and pay royalty based on the price they receive from that party. They can also deduct from the royalty value the costs of transporting the oil to market.
But when oil and gas companies sell oil to a related affiliate, they must calculate and pay royalty on either the value their affiliate received for the oil or on published market prices. Companies also may adjust the published market prices for differences in the location and the quality of the oil produced from the lease, MMS said.
MMS officials said they want more feedback at the March workshops on a portion of the rule that makes adjustments for oil quality and location when companies don't have that information on hand. It also wants comments on what specific transportation costs companies should be allowed to deduct and the rate of return that companies use to calculate their actual costs of transportation when they own part or all of a pipeline. In addition, MMS wants more information on how companies value oil under a joint operating agreement; i.e., an agreement in which companies jointly develop and produce an oil and gas property.
A related topic likely to be considered at the royalty workshops is a possible update of the agency's gas valuation rule. Over the past several years, gas royalties have represented the lion's share of cash payments received by the agency. In 1997, MMS withdrew a proposal designed to tie gas royalties to published indexes. Since then the agency has avoided the issue, in part because similar changes to the oil rule sparked a running legal battle with industry that has yet to be completely resolved.
Revenue important
With budget pressures increasing, the money MMS generates is becoming increasingly important to the federal government, which is now running large deficits. Under the most recent agency estimate, oil royalties from federal offshore leases are expected to be $1.76 billion in fiscal year 2002 which ended Sept. 30, 2001. Offshore gas receipts are anticipated to be $2.94 billion. Onshore, oil royalties are expected to total $157.7 million; gas totals are $550.3 million.
Over the past 5 years, 32% of oil royalties have been taken in kind instead of in cash. And that figure may increase if the White House opts to further expand the capacity of the Strategic Petroleum Reserve. The stockpile is now being filled through a "royalty-in-kind" (RIK) program using oil from federal leases. Industry typically prefers RIK instead of cash payments. They said that method makes royalty collection more efficient and saves their companies and the government some administrative costs.
A recent General Accounting Office report on RIK said MMS should manage its existing RIK program better before expanding it further (OGJ, Jan. 27, 2003, p. 24.)
Indian leases
MMS also announced Wednesday that it is reopening the comment period on the proposed rule for valuing crude oil produced from Indian leases.
"Even though we will focus the upcoming workshop discussions on federal oil valuation technical issues, questions may be raised and feedback received that could apply to Indian oil valuation," said Burton. "We want to make sure that the final Indian Oil Valuation Rule is as up-to-date as possible, and the knowledge gained through our experience in applying the federal Oil Valuation Rule may also be applicable to Indian oil valuation."
Indian royalty receipts to MMS in FY 2002 are expected to be $36.9 million for oil and $79.6 million for gas.
Workshops are scheduled for 8:30 a.m.-2 p.m. local time on the following dates and locations:
-- Mar. 4, Minerals Management Service, Denver Federal Center, 6th Avenue and Kipling Street, Building 85, Auditoriums A-D, Denver, (303) 231-3302.
-- Mar. 5, Minerals Management Service, 4141 North Sam Houston Parkway East, Houston, (281) 987-6800.
-- Mar. 6, Main Interior Building, South Penthouse, 1849 C Street, NW, Washington, DC, (202) 208-3512.
-- Mar. 6, Wyndham Albuquerque Hotel, 2910 Yale Boulevard SE, Albuquerque, NM, (505) 843-7000.
The workshops will be open to the public without advance registration. However, public attendance may be limited to space available, and attendees may be required to show photo identification to gain access.
