Maureen Lorenzetti
Washington Editor
WASHINGTON, DC, Mar. 26 --The American Petroleum Institute Mar. 25 said it plans to seek a rehearing of a Feb. 8 decision by the US Court of Appeals for the District of Columbia Circuit in Washington, DC, that largely affirmed the Minerals Management Service's "duty-to-market" gas royalty rules.
If the full appeals court refuses to rehear the case or industry loses again, API could still appeal to the US Supreme Court.(OGJ Online, Feb. 22, 2002).
API's stance
According to David Deal, API's assistant general counsel and director, Office of General Counsel, industry believes that royalty is due on the value of production at the lease, not the value inclusive of value added downstream.
In its filing API emphasized the plain terms of the mineral leasing statutes and the lease terms, Deal said.
API also contends that the court went overboard in its deference to the agency and seems at odds with many other court decisions.
"While the agency does have broad discretion, its exercise cannot alter the gist of the bargain that has been struck," Deal said. "For example, the MMS plainly has authority to issue regulations that affect the methodology it employs to arrive at the value of production, but it does not have authority to alter the basic bargain by categorically excluding marketing costs away from the lease. "
API said it also urged the judges to consider that MMS's categorical exclusion of marketing costs undercuts FERC Order 636, whose open-access character sought to encourage downstream marketing.
Meanwhile, it remains unclear what MMS's next legal step may be. The agency's new director Johnnie Burton is still new to the job, having assumed her post Mar. 15.
Gas's role
Gas royalties traditionally account for more than 60% of the agency's royalty revenues. According to an analysis by the House Committee on Resources, MMS programs will collect about $4.2 billion in revenues next year, mostly from gas and oil. The committee also predicted that, based on current energy price forecasts, about $900 million in Gulf of Mexico-derived crude oil royalties will be diverted into efforts to fill the Strategic Petroleum Reserve by delivering royalty-in-kind volumes to the Department of Energy in exchange for crude oil that meets SPR specifications.
According to the court's decision, the American Petroleum Institute and Independent Petroleum Association of America argued MMS was wrong for refusing to permit deductions for costs incurred in marketing gas to markets downstream of the wellhead.
Industry's legal arguments focused on fees incurred in aggregating and marketing gas with respect to downstream sales, intrahub transfer fees charged by pipelines, and any unused pipeline demand charge.
Court reversal
The appeals court reversed an earlier district court's decision and ruled that Interior's method of calculating downstream marketing costs was fair.
"We find nothing unreasonable in Interior's refusal to allow deductions for so-called 'downstream' marketing costs," the court opinion said.
And on the unused pipeline issue, the court affirmed the district court ruling and agreed with producers' assertion that the cost of reserving space on a pipeline, i.e., the unused pipeline demand charge, should be considered by MMS.
The district court ordered MMS and industry to share the cost of the reservation fee, and the appeals court said the government offered no reason why industry should be liable for the entire amount.
MMS gas rule
MMS in 1997 sought to update the way it calculates gas royalty payments in light of sweeping changes made by the Federal Energy Regulatory Commission in the mid-to late 1980s to open the wholesale gas market to competition.
The agency revised the way it calculated transportation allowances, which industry opposed and which ultimately led to the appeals court latest action.
Even though the controversial gas rule was never finalized, American Petroleum Institute and Independent Petroleum Association of America sued MMS in 1998 because they were unhappy with how much credit Interior gives leaseholders for transportation costs.
