Large U.S. gas producers are objecting to a proposed Minerals Management Service rule on natural gas valuation.
The Natural Gas Supply Association said the proposal would allow producers to deduct only certain gas transportation costs from royalties they owe the federal government on gas production from federal and Indian leases, not of all of the costs.
Rusty Cates, a Texaco Inc. official who chairs NGSA's federal regulatory affairs committee, said, "This proposal would permit government to benefit from all the services that lead up to realizing the market price for gas while denying producers the ability to deduct the costs of those services. That approach is inappropriate."
Cates said MMS should instead allow producers the option of paying royalties based on index prices of gas, as proposed last year by a negotiated rulemaking committee consisting of MMS officials, producers, and states.
MMS published the proposed rule in the July 31 Federal Register.
Rule details
The MMS rule is a guide to lessees and royalty payors on which transportation service components are deductible transportation costs as a result of Federal Energy Regulatory Commission Order 636, which required the separation of sales and transportation services of natural gas.
Order 636, issued in April 1992, required pipelines to unbundle their fees, charging separate costs for transmission, storage, gathering, transition costs, and administrative charges.
The proposed rule allows producers to adjust royalties for the following costs: firm demand charges, commodity charges, gas supply realignment, the Gas Research Institute fee, annual charge adjustments, wheeling charges, and certain compression or treatment services.
It would not allow deductions for placing gas in a marketable condition, or marketing expenses. MMS said that includes short or long term storage fees, fees for aggregator/marketers, intrahub title transfer fees, cash-out penalties, and scheduling penalties, imbalance penalties, and operational penalties.
The agency said demand charges, which account for the bulk of costs, will remain allowable costs so "the rule should have a very small impact on overall royalties paid but will better enable auditors to identify the type of costs that would be allowable."
MMS also said the rule should reduce litigation.
"Currently, companies interpret allowable costs to their benefit. When auditors look beyond the FERC tariff to disallow components, no specific regulatory language can be cited as the basis for a finding. Therefore, many payors appeal these adverse decisions.
"If an appeal by the lessee is affirmed because of MMS' lack of regulatory authority, potential royalties may go uncollected. The proposed rule will specify which costs are allowable or nonallowable, and will result in less appeals due to different interpretations by payors and auditors."
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