U.S. STATES EYE ROLE IN COLLECTING FEDERAL ROYALTY

U.S. producing states are drafting a plan that would let them assume the Minerals Management Service's royalty collection functions.

The plan is a counteroffer to the Interior Department's proposal to abolish MMS and let 38 producing states and 29 Indian tribes collect royalties (OGJ, Apr. 3, p. 38).

After subtracting 25% of collection costs, MMS gives 50% of royalties to states where federal leases are located. Under the producing states' proposal, royalties and costs would be split evenly.

Interior also proposed moving the Bureau of Land Management's lease inspection functions to states and tribes. MMS oil and gas leasing functions would be shifted to another Interior bureau.

Interior said the actions would save about $59.8 million during 4 years.

Oil associations criticized the MMS "devolvement" proposal, but states were cautiously enthusiastic at a House resources subcommittee hearing.

Rep. Ken Calvert (R-Calif.) said now that Interior Sec. Bruce Babbitt has made the proposal "there simply is no closing the lid and sustaining the status quo."

Sylvia Baca, a deputy assistant Interior secretary, said Interior officials will meet this month with states, tribes, and industry groups to provide more information about the proposal and discuss alternatives.

IOGCC COMMITTEE

Christine Hansen, Interstate Oil & Gas Compact Commission executive director, said oil state governors have set up a committee to develop a counterproposal. Individual states also are reviewing whether they can or want to assume MMS royalty collection functions.

Hansen said the logcc committee is examining the issue from the perspective of states with large small federal royalty payments.

She said small states may propose some "creative alternatives." She noted that Tennessee's share of federal royalties was $57.46 in the first quarter.

"Perhaps there is something else the federal government could do with that Tennessee leasehold than collect a royalty, process it, audit it, and split the net with the state amounting to $57.46. It might be more cost effective to give the lease to Tennessee."

ROCKY MOUNTAIN VIEWPOINT

Diemer True, a partner in True Oil Co., Casper, Wyo., testified for the Independent Petroleum Association of Mountain States.

He said Interior's proposal "leaves the impression that Interior has no interest in managing the nation's vast mineral resources and seems intent on discouraging development of oil and gas by independent producers on federal lands."

Ipams believes the federal government should totally transfer the federal mineral and surface estate to the states. "In the long term, we believe this would lead to overall reduction of government and (yield) economic prosperity for the Rocky Mountain region."

The Rocky Mountain Oil & Gas Association said the devolvement proposal was ironic because MMS was established in 1982 after the government decided it needed centralized production reporting and royalty collection systems. It said DOI's 1992 Mineral Royalty Transfer Study found that very few MMS functions could be transferred without losing economies of scale.

Rmoga recommended that MMS simplify its valuation of oil and gas sales and reporting requirements.

It also said MMS requires an accuracy that is not cost effective. "Measuring, tracing, and accounting for oil and gas production is not an exact science.

Many of the government's system tolerances are so low that in pursuing such small differences, the government spends more money than is recovered in additional royalties."

Jim Magagna, Wyoming's state land director, said Interior based its devolvement on his state's 1993 proposal to assume collection of federal royalties.

He said the 1993 plan has "limited applicability" because the state has implemented an automated collection system that changes the assumptions.

Magagna said one of the ideas the states are discussing calls for MMS to deed minerals to states with small amounts of federal mineral royalties and take an overriding royalty in states with large amounts.

"Under this scenario," he said, "there would be no inherently federal function to blur lines of authority between the federal and state government. The states would own all the minerals and perform all the functions, while the federal government would simply get a royalty check each month.

'Another possibility is for the states to develop a uniform reporting and remittance form and procedure."

DPC, IPAA

Larry Nichols, president of Devon Energy Corp., Oklahoma City, testified for the Domestic Petroleum Council and the Independent Petroleum Association of America. He is DPC president.

He said Interior would transfer only MMS' royalty collection functions but retain authority to set royalty policy, determine values, issue rules, enforce lease terms, and settle disputes.

"The Interior Department believes these functions cannot constitutionally be delegated to the states because they involve the exercise of executive power and must therefore be performed by employees of the executive branch," Nichols said.

"The administration proposal thus simply shifts much more of the cost of running the program to the states without empowering them to make policy decisions that might result in significant cost reductions."

Gary Junco, president of Enserch Exploration Inc., Dallas, said industry prefers to deal with one entity, MMS, rather than 67 states and tribes.

He said dealing with more entities will increase administrative costs for producers, with the long term effect of decreased exploration and production and lower bonuses and royalties.

Junco said states are likely to raise severance taxes and fees to cover their higher costs.