Oil and gas industry groups are disappointed the U.S. Minerals Management Service has withdrawn a proposed amendment to its rules for valuing onshore federal natural gas for royalty purposes.
MMS Director Cynthia Quarterman said, "After consideration of several pertinent factors, including the continuing dramatic changes to the gas market and the results of an internal cost/benefit analysis, which indicated a potential $20 million/year or more revenue loss from the proposed rule, we have decided it is best not to amend the existing regulations at this time.
"We are concerned that published indices for natural gas have not yet developed sufficiently to be representative of the gross proceeds actually received for lease production. We believe that the existing regulations are the best means to contend with continuing changes in the natural gas market.
"Nonetheless, the negotiated rulemaking process was effective in both surfacing portions of the existing regulations that require clarification and educating MMS and all affected parties about their respective concerns with gas valuation."
On Nov. 6, 1995, MMS proposed amending regulations governing the valuation of natural gas produced on federal leases. The amendments reflected recommendations of the Federal Gas Valuation Negotiated Rulemaking Committee, a team consisting of representatives from states, industry, and the federal government.
The amendments would have allowed lessees to choose from several options for valuing gas, including index prices published in natural gas newsletters, affiliated companies' "arm's-length" resale prices, and residue gas prices applied to the wellhead.
MMS still wants to pursue other options to simplify the gas valuation process. It is seeking comment on two options, one using indices and the other patterned after Norway's royalty collection practice for crude oil.
NGSA reacts
Nicholas Bush, Natural Gas Supply Association president, said, "We are disappointed that the MMS was unable to issue a rule based on the outcome of the gas valuation negotiated rulemaking."The producing industry has expended hundreds of thousands of dollars and considerable time-more than 2 years-in an effort to modify gas valuation so that it is simpler to administer and more equitable to all parties.
"Such a system remains, I am sure, the goal of producers, states, and the MMS, and we hope that the value of the many insights resulting from the negotiated rulemaking committee will not be lost."
NGSA said MMS and producers began the negotiated rulemaking in an effort to modify the current statutory valuation system, which is based on the "gross proceeds" from individual leaseholds.
The panel sought to design a "system more responsive to current market conditions, under which gas may be moved many miles and undergo various processes before producers receive a contract for its sale." The rulemaking group reached consensus on a system that would continue to base royalties on gross proceeds but also would permit producers to elect to use an index-base valuation method.
But MMS put that recommendation on hold last year after independent producers objected.
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