MMS Considering Possible Revisions to Federal Gas Valuation Rule

The Minerals Management Service (MMS) plans to hold four public workshops across the country in the next three weeks to hear from the public about possibly revising the 15-year-old Federal Gas Valuation Rule, used to determine royalties due on natural gas from federal leases.

Oil and gas companies that produce natural gas from federal lands currently pay a royalty, usually a percentage, of the value of the gas produced from the lease. When companies sell gas to a non-affiliated third party, they generally calculate and pay royalty based on the price they receive from that party and they also can deduct from the royalty value the costs of transporting the gas to market. The companies also may reserve the right to process the gas in a processing plant. When they exercise that right, companies are allowed to deduct from the royalty the value the reasonable actual costs of processing.

When oil and gas companies sell gas to an affiliate, however, they have to calculate and pay a royalty on the first applicable of three benchmarks that rely on several market indicators including comparable arm's-length contracts in the field or area. They must then compare that benchmark value to the total proceeds they receive and pay on the higher value.

At the upcoming workshops, MMS will request comment on several issues, including the following:

  • Allowing lessees that sell their production to an affiliate the option over a two-year period of basing the royalty value on either a published index price for gas or their affiliate's arm's-length resale price;
  • Using New York Mercantile Exchange prices at the Henry Hub rather than published spot prices for natural gas;
  • Adjusting natural gas index prices for location differences between the index pricing point and the lease;
  • Reviewing the specific transportation costs identified in the MMS 1998 amendment to gas transportation allowance regulations;
  • Determining the rate of return allowed for calculating actual costs under non-arm's-length transportation agreements;
  • Allowing lessees to apply gas index prices to wellhead gas volumes to eliminate the current requirement of tracing gas that is processed to remove natural gas liquids; and
  • Valuing and reporting natural gas disposed of under joint operating agreements.

The workshops will be held at the following times and locations: 8:30 am..-2 p.m. April 23 in Denver at the MMS, Denver Federal Center, (303) 231-3302; 8:30 am.-2 p.m. April 24 in Albuquerque at the Doubletree Albuquerque, (505) 247-7000; 9-11 a.m. and 2-5 p.m. April 29 in Houston at the Westin Galleria, (713) 960-8100; and 8:30 a.m.-2 p.m. May 1 in Washington, DC at the Main Interior Building, South Penthouse, (202) 208-3512. No advance registration is required, however, attendance may be limited to space available.

"The natural gas market has changed over the years, and MMS has also gained experience form the 2000 Indian Gas Valuation Rule and from five years of taking royalties in kind," said MMS Director Johnnie Burton. "we believe it is time to review and perhaps update the existing rule." Burton said that MMS is not proposing any changes to the 2000 Indian gas rule at this time, but MMS is encouraging tribal representatives to participate.

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