Rocky Mountain producers are seeking broader application of a reduced royalty on heavy crude produced from federal leases in the U.S.
Although the Bureau of Land Management has proposed a sliding scale royalty for such oil, producers say the measure mostly benefits California and want it broadened.
However, Clinton administration officials told a House resources subcommittee hearing expanding the rule would result in very little added production.
Rep. Cal Dooley (D-Calif.), has filed a bill to lower heavy oil royalties on all production under 250 gravity,(15644 bytes) while the BLM proposal cuts off relief at 200 (OGJ, Apr. 10, p. 32). The rates of royalty reduction also differ.
Both approaches aim to extend the life of fields in which production costs are higher than in fields that produce lighter oil. U.S. heavy oil production is more than 500,000 b/d at present.
INDUSTRY VIEW
Andrew Franklin of Marathon Oil Co. testified for the Rocky Mountain Oil & Gas Association at the House hearing.
He said BLM's proposed rule is estimated to increase production 125,000 b/d, but nearly 86% of that would be in California.
"In addition," he said, "the linear royalty reduction ... in BLM's proposal provides the most significant relief once the crude oil gravity falls below 15d. Over 95% of this production (of less than 15d) is in California."
Franklin said Dooley's bill would extend relief to 191,000 b/d and help other producers without harming those in California.
J.C. McFarland, CEO of McFarland Energy Inc., Santa Fe Springs, Calif., testified for the California Independent Petroleum Association.
He said production in his state peaked at 1.2 million b/d in 1985 and has dropped 20% since then. He also pointed out that heavy oil costs several dollars a barrel more to produce and receives a lower price than lighter oils.
"Just within the past 18 months, we've seen the price of 130 gravity heavy crude span a range from $8 to $15/bbl, and our margins fluctuate from acceptable to 'nearly out of business.' Heavy oil producers of all sizes experience similar economics, and we are all adversely impacted by volatile and often slim margins."
The Western States Petroleum Association said heavy oil (less than 200 gravity) made up 67% of the 941,000 b/d produced in California in 1993.
GOVERNMENT VIEW
W. Hord Tipton, a BLM assistant director, said his agency's proposed rule would be revenue neutral, but a higher gravity cutoff would deny the federal government money.
He said when BLM began work on the rule early in 1994 California heavy oil producers were spending $9-10/bbl to produce crude that was typically selling for $8.50-9/bbl.
"When depreciation, depletion, and amortization costs were considered, California independent producers were estimating that nearly 69% of the state's heavy oil production was uneconomic," Tipton said.
"Now, heavy crude oil prices have recently risen to the point that the immediate crisis has passed. At the same time, many of the heavy oil properties remain marginally economic and may be vulnerable to volatile oil prices."
BLM tested the rule using the Department of Energy's Tertiary Oil Recovery Information System (Toris) database.
Rmoga said Toris focuses on tertiary recovery methods used in California and does not accurately reflect enhanced recovery projects elsewhere.
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