API sues MMS on royalty rule

The American Petroleum Institute will determine this month whether to ask a federal court to block a controversial US Minerals Management Service oil royalty valuation rule from taking effect June 1.


The American Petroleum Institute will determine this month whether to ask a federal court to block a controversial US Minerals Management Service oil royalty valuation rule from taking effect June 1.

API Pres. Red Cavaney said it is difficult legally to persuade the court to issue an injunction to block the rule.

API recently sued in the District of Columbia federal court to overturn the MMS regulation, as the Independent Petroleum Association of America had done earlier (OGJ, Apr. 17, 2000, p. 34). The suits were assigned to the same judge and are expected to be consolidated.

MMS issued the lengthy rule Mar. 15, detailing how producers must calculate the royalties they owe the federal government for oil production from leases on federal lands. API, representing its 400 member companies, alleged the MMS rule was unlawful because the MMS exceeded its legal authority and required most federal royalty oil to be valued in marketplaces distant from the wellhead. It said the rule is "inconsistent with the terms of existing oil and gas leases, arbitrary and capricious, an abuse of discretion, unsupported by evidence in the record, and not otherwise in accordance with the law."

It said the MMS rule inflates oil values, and thus royalty obligations, because it uses indices to value crude, disallows downstream marketing costs, and permits producers inadequate allowances for other post-production costs.

API said the oil industry supports royalty valuation revisions that are fair, simple to administer, allow producers certainty about royalty payments, and arrive at the correct value of production at the lease as required by law. It said MMS's rule does not achieve any of those goals and would only prolong disputes over the value of federal royalty crude.

API said a better methodology is royalty in-kind (RIK), in which the government takes its royalty oil rather than the cash value. MMS is testing RIK pilot programs in Wyoming and the Gulf of Mexico.

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