Industry seeks to set aside MMS rule on royalties

Oil industry associations have asked a federal court for a preliminary injunction blocking a new U.S. Minerals Management Service policy claiming royalties on take or pay gas contract settlements. The Natural Gas Supply Association, Independent Petroleum Association of America, and other groups also have challenged the policy in a lawsuit. The Interior Department agency sent companies a letter requiring them to provide detailed information on gas contract purchase settlements signed since 1980.

Sept. 20, 1993

2 min read

Oil industry associations have asked a federal court for a preliminary injunction blocking a new U.S. Minerals Management Service policy claiming royalties on take or pay gas contract settlements.

The Natural Gas Supply Association, Independent Petroleum Association of America, and other groups also have challenged the policy in a lawsuit.

The Interior Department agency sent companies a letter requiring them to provide detailed information on gas contract purchase settlements signed since 1980. The letter was part of an MMS crackdown on gas royalty collections (OGJ, May 24, P. 28).

What's at stake

IPAA said compliance with the order would force producers to spend more than 10 hr/lease to gather the data, costing the industry more than $9 million. It said in some cases the 13 year old records are in dead storage and the employees who handled the cases are gone.

It said many smaller companies later would be forced to post fully collaterailized bonds covering potential royalty liability, affecting companies' debt to equity standings and their ability to obtain loans or attract investors.

Denise Bode, IPAA president, said, "This demand for data creates a crippling burden which will cause irreparible harm to many companies. In essence the government, without justification, is forcing producers to spend millions of dollars they can't recover.

"This policy undermines the Clinton administration's stated goal of increasing gas production. It ultimately will deprive the government of oil and gas royalties because it will discourage drilling on federal lands."

IPAA and other groups filed suit challenging MMS's gas royalty settlement policy. The government agreed to postpone requirements for the information order until Oct. 15 but did not lift other investigative orders to producers or suspend a requirement for posting appeal bonds.

If granted, the preliminary injunction would run from Oct. 15 until settlement of the suit. The lawsuit was filed in U.S. District Court in Wheeling, W.Va. Interior has asked that it be transferred to U.S. District Court in the District of Columbia.

The chairman of IPAA's public lands committee, Larry Nichols of Devon Energy Co., Oklahoma City, said MMS is trying to "manufacture a new tax on producers. Royalties are paid when gas is produced, it's that simple. That's what the law says and that's the legal principle we are defending through this suit."