House subcommittee examines royalty-in-kind pilot program

By Maureen Lorenzetti
OGJ Online

WASHINGTON, DC, June 12 -- The House Subcommittee on Energy and Minerals Resources Tuesday sought industry and government feedback on a White House proposal to redirect oil and gas royalty money for low income home energy assistance (LIHEAP).

Subcommittee Chairman Rep. Barbara Cubin (R-Wyo.) heard testimony from industry, state, and government stakeholders. The White House's recently released national energy policy report specifically references the use of royalty in kind programs to supplement LIHEAP and the refill of the Strategic Petroleum Reserve.

Industry is lobbying Congress and the White House to expand RIK to all federal oil and gas leases. RIK programs, in which the government takes production instead of cash, have occurred on a case-by-case basis in Wyoming and the Gulf of Mexico.

But most oil and gas royalties are collected on a cash-basis under a system both regulators and lease holders admit can be confusing.

The US Minerals Management Service collects cash royalty payments from oil leases using a market-based formula that industry says unfairly inflates crude value. MMS says the formula, which came into place after an arduous 3-year fight with industry, is fair. They said companies habitually underreported the true cost of crude under the old system, which pegged royalty payments to a company's posted prices. Industry says the new rule forces them to pay royalties on their downstream marketing costs. Litigation by industry over the June 2000 rule is pending.

Gas royalties are collected under a gross proceeds basis (prices posted by producers taking into account premiums). It is less controversial from an industry standpoint but public interest groups say it allows producers to underreport the true production value.

Industry argues that expanding RIK programs would simplify MMS' accounting burden because there would be no need to estimate the value of production. Instead, the government would take oil from the lease and market the production itself.

"Any set of regulations designed to capture value in such an uncertain atmosphere must of necessity be vague and open to interpretation by the various players in the process," said Poe Leggette, a lawyer representing 5 oil and gas associations. "Interpretations lead to disagreements, disagreements to disputes, disputes to litigation."

Meanwhile, a MMS official testified the agency continues to study RIK "as a possible business approach for managing oil and gas royalties."

But study is all MMS is likely to do until the White House appoints a new MMS director, industry officials concede. That is expected to happen by the end of the year.

Meanwhile, RIK skeptics question the White House's latest proposal to specifically earmark royalty funds toward a popular congressional program like LIHEAP.

"Apparently, my Republican colleagues would like to replace a state-run program with an unspecified, expensive, federal bureaucracy whose job it would be to transfer oil royalties taken in kind to low-income consumers," Rep. Carolyn Maloney (D-NY), a frequent oil industry critic told the subcommittee.

An analysis of ongoing pilot programs prepared for the city of Long Beach, Calif., and supplied to the subcommittee criticized the agency's RIK program. Innovation & Information Consultants Inc. said RIK oil sales in Wyoming did not generate as much revenue as could have been realized if the agency had collected a cash payment.

Contact Maureen Lorenzetti at Maureenl@ogjonline.com