Industry seeks to salvage U.S. royalty reforms

U.S. oil industry lobbyists are working to retain royalty reform language in the federal budget reconciliation bill.

A royalty simplification bill had been inserted in the budget bill Congress passed, which President Clinton vetoed.

The measure places a statute of limitations on back collections of royalties and simplifies collection and recordkeeping provisions.

In vetoing the budget bill, the White House said the bill would invite (royalty) evasion by making collection more difficult and costly.

Nicholas Bush, Natural Gas Supply Association president, said the measure would decrease the amount of government and industry time spent in litigation. And several additional provisions of the bill would streamline collections, again saving money for all parties.

The president appears to have been misinformed about the bill. Contrary to his statement, a statute of limitations does not make royalties harder to collect. It adds predictability and certainty to the system. And there is certainly nothing in the bill that invites evasion.

The Presidents remarks are particularly surprising in light of reports this summer that, in meetings with industry representatives, he expressed support for the goals of the royalty fairness provisions.

Royalty bill

The bill, introduced in the Senate by Don Nickles (R-Okla.), would require Minerals Management Service to conduct an audit within 6 years, after which MMS and oil companies could not collect underpayments, overpayments, penalties, or interest.

It also would end the requirement that producers retain records after the audit cycle has closed.

Nickles said courts have allowed MMS as much as 12 years to initiate and complete audits of oil and gas royalty matters. Companies who have made legitimate mistakes and have overpaid their royalties should not be penalized for the lost value of scarce financial capital for so long.

Complicating matters is the fact that the administrative appeals process at the Interior Department moves at a glacial pace. Hundreds of appeals are pending decision by the director of MMS, and still more appeals have fallen into the black hole at the Interior Board of Land Appeals, where the backlog is now somewhere at 18-24 months or more. The appeals process must be expedited.

MMS complaint

MMS complained, Any adjustment made by a company near the end of the 6 year period would be almost immune from verification. Similarly, a company receiving a payment for oil or gas produced many years earlier (a relatively common occurrence) could easily escape paying royalties on that payment.

It said the 6 year limit would lead to more administrative costs and burdens on industry, because MMS would have to institute a broader audit effort, requiring companies to provide more records covering more leases.

Bush said, Our industry makes a major contribution to the federal budget through royalty payments and the economic activity involved in gas exploration and production on federal leases.

It is not too much to ask that royalty collections be subject to the same conditions as personal income taxes and other forms of payments to the federal government and that limits be placed on the MMSs ability to open questions about royalty payments made in previous decades.