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Senate Bill Could Settle Royalty Valuation Dispute

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 point downstream.

"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 comment.

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