Gas marketing

March 9, 1998
Last week the Independent Petroleum Association of America sued the Minerals Management Service to overturn a regulation governing transportation costs for gas produced on federal lands. IPAA said the rule, which went into effect Feb. 1, no longer would allow independents to deduct the full cost of moving gas to the marketplace. It sued in U.S. District Court, in Washington, D.C. When it issued the rule last December, MMS explained the regulation would clarify which transportation costs are
Patrick Crow
Washington, D.C.
[email protected]
Last week the Independent Petroleum Association of America sued the Minerals Management Service to overturn a regulation governing transportation costs for gas produced on federal lands.

IPAA said the rule, which went into effect Feb. 1, no longer would allow independents to deduct the full cost of moving gas to the marketplace. It sued in U.S. District Court, in Washington, D.C.

When it issued the rule last December, MMS explained the regulation would clarify which transportation costs are deductible from royalty payments, consistent with the Federal Energy Regulatory Commission's Order 636.

IPAA chairman George Yates said the effect would be to add most downstream marketing costs (aggregation, marketing fees, storage, and transfer fees) to the wellhead price.

"That drives up the price of the gas and means producers end up paying an inflated royalty. This is in direct conflict with the lease contract between producers and the federal government, which says that royalties are valued at the lease."

Duty to market

Yates said IPAA also objects to a provision in the rule which claims a producer has a "duty to market."

He said that would give producers an obligation to market gas at no cost to the federal government.

"In our view, the 'duty to market' regulation leaves too much room for interpretation and leaves a producer vulnerable because an auditor years from now can second guess a producer's decision to sell gas for one price or another, at the wellhead or further downstream."

Yates added, "The situation is very frustrating. On one hand, MMS keeps talking about making the royalty collection system simpler and fairer but continues to make it more complex. It continues to do things like implement this gas rule, which keeps a producer's liability in question for years."

RIK push

Yates argued that the long-term answer to the royalty disputes would be for MMS to use a royalty in-kind (RIK) program.

He said MMS and producers are "still miles apart" on a royalty valuation system for crude oil (OGJ, Feb. 16, 1998, p. 36).

"MMS has talked about writing a rule that captures the value of oil at or near the lease between a buyer and seller. However what MMS says and what the proposed rule says are two different things.

"With RIK, the producer gives some of its production as a RIK payment. This would save taxpayers millions of dollars each year and provide the government an opportunity to maximize its revenues by aggregating large volumes of production and using private marketers."

He said model RIK programs in Texas and Alberta have shown major cost savings for government. "It takes hundreds of employees at MMS to administer the current system compared to 33 to oversee RIK in Canada."

MMS plans more RIK pilot programs but meanwhile opposes the concept because it fears federal royalty receipts would drop.

Against the backdrop of alleged oil royalty underpayments, the government-industry RIK dispute has become acrimonious.

More fireworks are expected when a House resources subcommittee holds RIK hearings Mar. 12 and 19.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.