Producers claim MMS rule is 'wrongheaded'

Oil groups have complained that the U.S. Minerals Management Service's proposed crude oil valuation rule still is badly flawed.

The groups were highly critical of the rule in comments they recently filed with MMS, which plans to issue a final rule later this year.

Producers said the proposed rule would require them to value production based on a commodity price, determined by New York Mercantile Exchange indexes or spot prices, which often are higher than the prices producers actually receive (OGJ, Feb. 16, 1998, p. 36).

Rocky Mountains

The Independent Petroleum Association of Mountain States (Ipams) said it was concerned with MMS's proposed three-way approach to crude oil valuation.

"We believe that, under this latest proposal, large independents and major oil companies with production in several areas would be required to establish as many as three separate systems to account for federal oil royalties alone.

"This will significantly increase the administrative burden and the costs associated with royalty compliance.

"Further, the proposed rule is unduly complex and manages, in one way or another, to discriminate against virtually every producer on federal lands.

"MMS first attempted to narrow the definition of an arm's-length sale and now it wants to redefine 'affiliate,' thereby greatly escalating the affiliate class and throwing many producers into Nymex-based valuation.

"MMS has not explained why a benchmarking system, similar to the one proposed for the Rocky Mountain region, cannot be implemented for the entire U.S.

"Ipams finds it incredulous that, given the voluminous amounts of testimony, comment, and discussion about the inapplicability of Nymex to the Rocky Mountain area, MMS would propose Nymex as a benchmark for the Rocky Mountain area at all. It simply makes no sense. Frankly, we feel our comments in these areas have been ignored."

IPAA agrees

The Independent Petroleum Association of America said, "At first glance, it would appear MMS in its proposed rule is allowing producers to value their royalty payments on gross proceeds received at the lease.

"But in reality, a key feature of the proposed rule allows MMS to second-guess the gross proceeds that a royalty payment was based on several years down the road.

"A producer's royalty payments could then be revalued based on a commodity price (Nymex or spot prices), which are often higher prices than producers actually receive for their oil.

"To further add to this uncertainty, the government has chosen the most administratively complex method to determine the value of a barrel of nonrefined oil at a point far downstream from the wellhead.

"This creates a virtually impossible administrative burden for producers, who would be required to trace those barrels of oil far downstream.

"On top of this, MMS is now refusing to allow producers to deduct the cost of certain midstream activities (such as aggregation, marketing fees, and storage transfer fees), thus inflating the value of oil at the wellhead. This is in direct conflict with the long-held terms of the lease contract between producers and the federal government."

IPAA, which filed joint comments with the Domestic Petroleum Council, observed that some of the consultants MMS used in drafting the rule "have a direct financial stake in federal crude valuation" in a lawsuit they filed under the federal False Claims Act (OGJ, Mar. 2, 1998, p. 44).

"At the behest of these consultants and proponents, MMS has spent the last 3 years on a theoretical valuation odyssey. It is now time for MMS to bring this journey to an end and use arm's-length sales at the lease as the basic tool for all valuation."

API views

The American Petroleum Institute and the Western States Petroleum Association called the latest MMS rule "wrongheaded."

They said, "Despite MMS claims, it does not offer certainty, it does not reduce administrative costs, it does not reduce litigation, and does not arrive at the value of production at the lease."

API and WSPA raised many of the same complaints that Ipams and IPAA had.

They added, "Notwithstanding the MMS's early proposed goal of certainty, the February 1998 proposal is riddled with uncertain requirements. Many of these provisions are simply vague.

"Many others presume an unchanging environment and do not explain how a lessee is expected to handle changes in circumstances.

"Many provisions would impose complex demonstration and ambiguous information collection requirements on lessees, yet the most the MMS is willing to offer is 'non-binding guidance determinations.'

"The MMS should focus on the 'value of production' at the lease and eliminate unnecessary downstream tracing requirements. This could involve reasonable valuation procedures or use of royalty in-kind," they said.