MMS prepares for streamlined royalty collection system this fall

US Minerals Management Service official Lucy Denett says a streamlining of the royalty collection system this fall will make the process more efficient for both the government and oil producers.

Maureen Lorenzetti
OGJ Online

WASHINGTON, DC The US Department of the Interior's Minerals Management Service says a financial system scheduled to start this fall will streamline the way it collects the nation's oil, gas, and other mineral royalties.

And the top official heading that effort, 19-year veteran Lucy Querques Denett, associate director of the agency's Minerals Revenue Management division, says it's a move that will benefit both industry and the department.

Denett's division collects, accounts for, and distributes nearly $7 billion/year in revenues from mineral production on federal and Indian leases.

Nearing the end of a 3-year "reengineering" of its royalty financial system, Dennett says the changes, some more apparent than others, will make the agency more efficient and effective.

States, which share in revenues collected by the federal government, and Indians, for whom the MMS provides accounting and compliance services, will also benefit from accelerated release of information and revenues.

"On the minerals revenue side of the house, we've always tried to stay abreast of market conditions, and the reengineering will help that," Denett said. "One big goal is to move the money within 24 hr to states. That is, of course, if they want it [that fast]. Some states need more time to process their share."

On compliance cases, Denett is seeking a 3-year timeframe in which to settle disputes.

It was in April 1996 that Denett's department, then called the Royalty Management Program, began its effort to streamline many of the agency's reporting functions. Four months later, President Bill Clinton signed into law the Federal Oil and Gas Royalty Simplification and Fairness Act. It set a 7-year statute of limitations for MMS to start judicial proceedings or demand payments from oil companies that may have underpaid royalties. The law also directed the agency to pay interest on royalty overpayments and complete administrative appeals within 33 months. The law may be applied to future royalty payments and is not retroactive.

That law, MMS officials say, significantly changed many of its historical operating assumptions as well as some fundamental federal oil and gas mineral revenue financial activities. As a result, the agency decided on Apr. 1, 1997, to go beyond compliance reengineering and conduct an in-depth reevaluation of all its core business processes.

Short-term goals

Retooling the agency's collection system and refining royalty in-kind (RIK) pilot programs are short-term initiatives Denett would like to see completed this year. However, she cautioned that neither MMS nor industry should assume the new collection system will be error-free Oct 1.

"This October I want the reengineered systems to be operational. This next year will be a stressful one since the systems have to come up and operate. And industry has to be ready to report under the new system. There are still some issues and we are working on them," Denett said.

The agency plans training workshops regarding the new system at 19 sites and is available to visit the offices of companies.

"There will be a lot of work for all of us, it's a new system, and it's normal," she said. "When we started our reengineering process 3 years ago, we first had to do design and development. Now we are in the acceptance and testing phase of accounting and reporting. On the compliance side, we plan to have audit and verifications in which we can determine whether a lease can be paid in-value or in-kind.

"My goal is to get funding for RIK so in 2002 budget we have money for a gas management system. The RIK program is in a pilot phase, and it's really critical that if it is to be a useful tool that we have automated support that we need. It's a quite a robust program already."

RIK approaches

The agency sees RIK as a valuable management asset, but does not expect it to completely replace royalty cash payments, Denett noted.

"I think the approach we are taking is a logical, methodical process. We have the authority already to take in-kind or in-value. We started to look at the concept of RIK in 1995. There were some good things and some things that did not work. It's a tool. No one in the agency thinks it makes sense across the board," she said.

MMS, she said is also mindful that some companies that actively drill on federal lands would like to see mandatory RIK for all leases. At the same time, states including California have opposed RIK programs, saying the government lacks the expertise to buy and sell oil on its own for a fair price.

"Some folks say we should do RIK all the way, some say never. By taking a methodical approach to it, we can find out under what circumstances it may be warranted. And for now it should be a tool for us to consider. But we do not want to be put in a position [where] we have to do it all the time."

That's a position supported by the Bush administration and some lawmakers from oil-producing states with successful pilot RIK programs.

Denett noted that efforts to expand RIK to Gulf of Mexico gas production have been encouraging. MMS considered factors such as volume and proximity to market centers to ensure the government received fair value for its production. Critics of the agency's RIK program say this was not the case when the agency was directed to fill the Strategic Petroleum Reserve with oil from federal leases.

Denett acknowledges there has been a learning curve but since the SPR-RIK program last year the agency has learned more about how RIK can be used.

"I think we are trying to be smarter and more efficient," Denett said.

To that end, the agency is fully aware that the industry is constantly changing, she said.

"We are doing environmental scanning of how and why the industry changes. We track mergers and shifts in the market," she said.

Denett notes that when one large company mergers with another there may be thousands of leases to be consolidated under one accounting system.

"We know they have to integrate. We are working with each company's unique situation," she said.

Industry has sought mandatory RIK because it says a new MMS oil valuation rule published last year forces producers to pay downstream oil marketing costs.

Most companies that sell oil to related parties and others not using "arm's-length" contracts must use a spot market index system. MMS says the oil valuation is fair and reflects the market worth of the production.

For gas, however, MMS says it has no plans to initiate a similar spot system, although it considered such a plan in the mid-1990s.

"We are finding we can still use the tools [from the current posted price system] we have for gas," Denett said. "I don't know what will happen tomorrow, but right now we look at the framework of rules and hopefully there is enough flexibility so that we can work with impacted parties in a timely fashion. People have asked us about gas but I have not directed anyone to do anything. And I have not received direction to implement a gas rule. From my perspective I am not sure one is needed," she said.

Complicating the picture, she acknowledged, is the fact that Interior Sec. Gale Norton is waiting for congressional confirmation of top aides to help her with decisions.

The Senate has delayed a vote on the nomination of Steven Griles to be deputy secretary. He has bipartisan support but unrelated problems between Democratic and Republican leaders have stalled action.

Denett joined MMS in 1982 and worked in several positions before serving as associate director for Policy and Management Improvement from 1992 to January 1997. She began her federal career with the Federal Energy Administration and later worked at the Energy Department's Energy Research and Development Administration.

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