Senate Bill Could Settle Royalty Valuation Dispute
Sens. Mary Landrieu (D-LA) and Don Nickles (R-OK) introduced
legislation last week designed to prevent the Department of the
Interior's Minerals Management Service from altering its oil and
gas royalty valuations methodology in a way that could cost
producers millions more in royalty payments. The proposed
legislation, titled the "Federal Royalty Certainty Act" (SB 924),
is designed to give producers what they have been seeking for some
time: certainty about what they owe the government.
"My bill will codify the fundamental, longstanding principle
that royalty is due on the value of production at the lease,"
Nickles said in a statement. The MMS' rule as currently written
would require that royalties be valued at market points downstream
of the wellhead, something producers charge would cost a
significant amount more in marketing, transportation and storage
costs than the true value of the production.
Under Nickles' legislation, if royalty payments, whether in kind
or in cash, are based on the value of oil or gas farther
downstream, companies would be reimbursed for transporting,
marketing and processing. The legislation would apply to oil and
gas produced from onshore and offshore federal leases, but would
not apply to leases on Indian lands.
"These provisions will reduce the costs of a complicated system
that spawns disputes, while preserving the taxpayer's right to a
fair return for its resources," said Nickles. "As I have said on
many occasions, we need to reduce unnecessary, burdensome and
excessively costly regulations. We need a little common sense."
The Natural Gas Supply Association and the Independent Petroleum
Association both said they strongly support the legislation. "The
basic premise on why we oppose the MMS' current rulemakings is
because they include those add-ons - [the costs of marketing and
transportation]," said NGSA's John Sharp. "We believe royalties
should be something that is evaluated at the wellhead, not at some
"I think we've gotten down to the point now where this
rulemaking is more of a legal battle than anything else. It has
become a very legal question as to where we believe royalties
should be collected. I don't know if we're going to be able to
persuade MMS to our way of thinking and certainly they are not
going to be able to persuade us to their way of thinking."
Congress has imposed several moratoria on MMS' valuation rules
because of the strong industry opposition. Currently there is
emergency funding supplement in Interiors' appropriations bill that
if passed would halt funding for any royalty valuation rulemaking
until the end of the year.
MMS concluded a second comment period on its oil royalty
valuations rule April 27. It addressed gas valuation in a formal
negotiated rulemaking proceeding over the last few years and a
proposed final rule was published last year, but it was met with
strong industry opposition. The MMS has placed the final gas
valuations rule on hold until resolution of the issues involved in
both the gas and oil royalty valuations proceedings.
The Nickles legislation may lead to hearings at the Senate
Energy and Natural Resources Committee level but a schedule has not
been drawn up, said a committee staffer.
MMS' Lyn Herdt, chief of the office of communications, said the
MMS is still reviewing the legislation and currently has no
©Copyright 1999 Intelligence Press Inc. All rights reserved. The
preceding news report may not be republished or redistributed, in
whole or in part, in any form, without prior written consent of
Intelligence Press, Inc.