U.S. Minerals Management Service has begun nationwide auditing for potential royalty underpayments.
The agency has alleged that the value of crude oil to certain California producers was higher than the posted prices they paid for it and thus royalty payments should have been higher.
MMS said in July that it plans to collect underpaid royalties on federal onshore and offshore crude production in California and to pursue similar valuation issues in other states and on the Outer Continental Shelf (OGJ, July 29, p. 42).
It issued a procedural guidance in June for MMS auditors and the states and Indian tribes that conduct audits under agreements with the agency.
Audit targets
MMS said, "This guidance explicitly states that royalties are due on premiums received above posted prices. MMS further instructed its auditors to suspend issuance of audit closure letters to companies, effectively holding open the period from 1989 forward for further examination.
"Outside California, MMS's audit targets include 125 companies that account for 86% of (U.S.) crude production."
MMS said it begAn revising its oil product valuation regulations last December to assure that valuation methodologies are sufficient to address a variety of market conditions.
It has received comments from the public in response to that planned rule, and is seeking advice from consultants, industry representatives, the Western States Land Commissioners' Association, and other federal agencies. MMS plans to propose a new oil valuation regulation by yearend.
MMS said it will retain private consultants to study the crude valuation practices of operators outside California to determine whether crude oil companies were a valid basis for royalty valuation purposes prior to the 1990s.
And MMS said it is "continuing to assist the Department of Justice in its nationwide review of oil companies' practices in valuing crude oil for purposes of paying royalties."
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