Watching Government Reg-neg regrets

What seems like a practical approach to federal rulemaking is proving to be a headache for the U.S. oil industry.

In recent years, the government has experimented with the regulatory negotiation (reg-neg) process, under which agency officials and industry representatives hammer out rules that both sides agree are effective and practical.

Several years ago, the Environmental Protection Agency used reg-neg to draft rules for reformulated gasoline.

Refiners have complained that EPA later violated its reg-net agreement with them when it dictated use of oxygenates in RFG.

And they said a proposal to cut nitrogen oxide emissions in Phase 2 RFG also violates the pact (OGJ, Apr. 22, p. 24).

Royalties reg-neg

The Interior Department's Minerals Management Service recently used reg-neg to draft rules governing royalties that producers pay on natural gas produced on federal leases.

That reg-neg panel consisted of representatives from large producers, independents, trade groups, states, and MMS.

After months of work, the panel proposed what MMS called "an unprecedented move toward using a market based index price in valuating production for royalty purposes."

When MMS issued the pact as a proposed rule it was lambasted by Rocky Mountain independent producers and three producing states.

Now MMS has reopened the comment period, asking for reactions to five suggestions to improve the rule. It also recalled the reg-neg committee for a June 12-14 session in Denver.

MMS explained in the May 21 Federal Register, "While the proposed rule reflected the consensus decisions of the committee, we received many comments opposing the proposed valuation alternatives and the reporting and payment requirements.

"Many of the comments focused on the complexity of the rule that arose from trying to develop options for valuing gas sold under an array of marketing environments."

MMS also said, "Most independents opposed index pricing as a valuation alternative. They claimed its complexity discriminates against them from a competitive standpoint."

States also objected to the option to allow index based valuation because it could deny them revenues.

Galvin's complaint

Backpedaling by MMS angered Ray Galvin, president of Chevron U.S.A. Production Co. and chairman of the Natural Gas Supply Association, one of the reg-neg participants.

He said the disturbing thing is that this is the second time the U.S. petroleum industry has been caught in a reg-neg reversal.

Galvin complained that gas valuation participants invested a lot of work and compromise on their proposal, and now MMS is allowing a handful of small producers an opportunity to change the deal.

He said, "MMS cannot permit these parties to take a second bite at the apple." If it does, producers will decline to join reg-neg committees for fear of getting sandbagged.