IPAA: MMS relents on royalty valuation rule proposal

Independent producers say the U.S. Minerals Management Service has agreed to amend its proposed royalty valuation rule to allow most small producers to base royalty payments on gross proceeds.

MMS had proposed that when producers calculate royalties owed the federal government, they would generally set the value of the oil using New York Mercantile Exchange prices (OGJ, Jan. 27, 1997, p. 36).

Small producers objected strongly to that at public hearings held by MMS. They said the average Nymex price is almost always higher than the price producers get in the field.

Representatives of the Independent Petroleum Association of Mountain States and the Independent Petroleum Association of America recently met with MMS officials on the issue.

They argued that any valuation method must be based on the gross proceeds a producer receives from true arm's length transactions at the wellhead. They said MMS should be moving toward taking federal production in-kind whenever possible, rather than royalties.

The producers said MMS officials agreed to amend the rule and permit small firms to use arm's length transactions for royalty purposes in cases where small producers would have fallen under the Nymex system because they purchase oil elsewhere or if other firms have a call on their production.

IPAA meeting

MMS' concessions on the issue were disclosed at IPAA's midyear meeting in Washington, D.C.

Sen. John Breaux (D-La.) told producers at the meeting that it would be very difficult to enact legislation reducing the alternative minimum tax because offsetting revenues are not available.

Meanwhile, Rep. Wes Watkins (R-Okla.) filed a bill last week that includes a number of tax changes independents have sought for years, including the deduction of geological and geophysical costs.

Energy Sec. Federico Peña said DOE is working with the Treasury Department "to assess the possibility of extending the federal enhanced oil recovery tax credit to include horizontal wells."

He also pledged to help producers achieve "a fair solution" to the royalty valuation issue with MMS.

Peña said DOE had persuaded the Clinton administration to drop its proposal to sell $1.145 billion worth of crude from the Strategic Petroleum Reserve in 2002 as part of a plan to balance the federal budget in 5 years.

He explained that revised budget projections had enabled the sale to be taken "off the table" and that withdrawal "will send a strong message that we are serious" about maintaining the reserve.