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Interior Releases Final Rule For Natural Resource Valuation

The Department of Interior's (DOI) Office of Natural Resources Revenue (ONRR) released a final rule Thursday designed to improve the valuation of natural resources on public and tribal lands, and clarifying how the resources' market value is calculated for royalty purposes.

According to the DOI, the rule [ONRR-2012-0004] will affect oil and natural gas produced in federal onshore and offshore leases, and coal produced from federal and Indian leases. Following publication in the Federal Register on July 1, the rule will take effect on Jan. 1, 2017.

"These improvements were long overdue and urgently needed to better align our regulatory framework with a 21st century energy marketplace, offering a simpler, smarter, market-oriented process," DOI Secretary Sally Jewell said. "As the steward of America's oil, natural gas and coal production on public lands, Interior has an obligation -- and is fully committed -- to ensuring that the American taxpayer receives every dollar due for the production of these domestic energy resources."

The DOI said the federal government's current valuations for oil, gas and coal have been in place since the late 1980s and "have not kept pace with the significant market changes that have occurred in the domestic energy markets since that time. The final rule updates the regulations to help keep pace with modern technology and practices."

Specifically, the rule reaffirms that gross proceeds from "arm's-length" contracts are the best indicators for determining the market value for oil, gas and coal. It also reaffirms that valuation, for royalty purposes, is best determined at or near the lease site. The rule eliminates benchmarks for non-arm's-length sales between affiliated companies, and replaces them with a simplified system of determining the value of production "by using gross proceeds from the first arm's-length sale with applicable allowances.

"By replacing them with a market-driven mechanism, the rule provides greater efficiency for payors, reducing industry's cost of compliance as well as ONRR's cost to ensure industry's compliance," the DOI said. The department estimates that annual royalty collections will increase between $71.9 million and $84.9 million, and that annual administrative costs to the energy industry will decline by $3.61 million.

U.S. Sen. Lisa Murkowski (R-AK), chairman of the Senate Energy and Natural Resources Committee, called the Obama administration's position on resource development "incoherent" in a statement Thursday.

"On the one hand, we are told we must maximize value to the taxpayer, but on the other, we see decision after decision to keep valuable resources in the ground -- whether on the North Slope of Alaska, the Arctic and Atlantic offshore, or a multi-year moratorium on coal leasing," Murkowski said. "This approach will not benefit taxpayers but instead leave them with higher energy costs and fewer economic opportunities."

Last November, the ONRR said royalties from energy production on federal and Indian lands and offshore areas fell by more than $3.5 billion in 2015 (see Daily GPINov. 30, 2015). The agency attributed the shortfall -- which harmed states, Indian tribes, the Treasury Department and others -- to the drop in commodity prices.

In April 2015, the DOI began taking public comments over a proposal to empower its Bureau of Land Management to adjust royalty rates for drilling on public lands (see Daily GPI, April 17, 2015). One month later, the DOI finalized its Indian Oil Valuation Amendments, which expanded and clarified a major component of tribal oil and natural gas leases pertaining to how royalty payments are calculated (see Daily GPI, May 6, 2015).

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