U.S. Minerals Management Service has proposed a rule to reduce reliance on posted prices when oil producers calculate royalties owed the federal government.
MMS' goal is to ensure that its oil valuation regulations reflect the actual value of oil produced. It has billed a number of large oil firms for allegedly underpaying oil royalties (OGJ, Jan. 13, 1997, Newsletter).
MMS asked whether its current royalty payment rules reflect actual values and for suggestions to improve them.
Cynthia Quarterman, MMS director, said, "The intent of the proposed rule is to reduce reliance on posted prices for royalty valuation, reflect true market value, provide certainty to all involved, and provide maximum flexibility to adapt to changing market conditions. We believe that the proposal achieves this."
The proposal retains the concept that royalties will generally be paid on gross proceeds in arm's-length deals, but its application will be limited.
Quarterman said, "Because of the frequency of oil exchange agreements, reciprocal deals between crude oil buyers and sellers, and other factors where the real consideration for the transaction could be hidden, arm's-length contract prices will be used as royalty value only by producers who do not also purchase crude oil."
MMS said most federal oil production will be valued as if it were non-arm's-length, because most is sold under exchange agreements or sales to affiliated refiners.
In those cases, the proposed rule would base the value on either the affiliated arm's length resale prices, or the monthly average of the New York Mercantile Exchange prices. For production in California and Alaska, the value would be set on Alaskan North Slope prices, adjusted for location and quality differentials.
The proposed rule would not apply to Indian leases, for MMS has developed a separate rule for them.
However, MMS said a number of tribes have asked it to delay that proposed rulemaking for further consultation.
MMS will accept comment on the proposed rule for 2 months.
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