MMS issues

Patrick Crow
Washington, D.C.
[email protected]

The Minerals Management Service is at odds with industry on several major issues these days, and new ones keep popping up (see editorial, p. 21).

Most of the controversy stems from the agency's effort to change its rules governing how oil and gas is valued for royalty purposes.

MMS has proposed that most royalty payments be based on average New York Mercantile Exchange oil futures prices, with adjustments for location and crude quality. Independents could continue paying royalties based on arm's-length transactions.

The agency believes that oil companies in California long paid royalties based on crude postings that were too low (OGJ, Oct. 28, 1996, p. 19).

Its auditors now are examining payments made in other states. Lucy Querques Denett, the associate MMS director who oversees the royalty management program, said indications are "there will be some findings" of underpayments.

RIK pilots

At a congressional hearing in July, oil industry witnesses argued the best way for MMS to ensure that it was getting a fair value for its production was to physically take and market the oil and gas, or royalty in kind (RIK).

The agency is very wary of RIK. In a 1995 pilot project in the Gulf of Mexico, it took and sold about 45.6 bcf of gas from 79 leases.

Although the pilot was an operational success, MMS calculates it received 9¢/MMBTU less than it would have gotten if the producers had sold the gas.

The pilot represented about 6% of MMS's royalty gas in the gulf, and-extrapolated to all federal leases in the gulf-the loss would have totaled $82 million/year. Oil groups are preparing a study challenging that conclusion.

Denett said MMS soon will seek proposals for more RIK pilots, possibly in Wyoming, the Four Corners area, and the gulf. MMS also will release its own report on RIK programs.

Denett said that in the long term, MMS is unlikely to use RIK exclusively but might accept RIK in regions where federal production can be aggregated easily.

Pending rules

Meanwhile, MMS is reviewing public comments on the oil royalty valuation rule and will consider changes.

Denett said a final rule is due in March "unless there is a decision to do something different."

It has delayed a gas royalty valuation rule because "everyone is focusing on the oil rule." Denett said MMS wants more industry comment and wants to see how the Federal Energy Regulatory Commission may change its policies.

MMS soon will propose a rule giving marginal leases administrative relief. Rather than paying royalties based on monthly production reports, companies will be allowed to pay estimated royalties and adjust them when reports are filed at a longer interval, perhaps semiannually.

Denett said MMS is continuing to work to "re-invent" itself and become less segmented.

She wants a "cradle-to-grave" approach to leases. "Right now, companies might have to call three or four different MMS divisions with questions about the same lease."

Denett said MMS is implementing 50 internal changes a task force has recommended. Also, its 15-year-old computer systems will be revamped by 2001.