Department of Interior (DOI) Secretary Ken Salazar announced Tuesday that the agency is considering simplifying the process used to calculate billions of dollars in royalty payments to the federal government for oil and gas production from publicly owned land and offshore sources.
Royalties are currently computed on a transaction-by-transaction basis, which includes a review of the negotiated price for oil and gas production and the costs for transportation and processing. Salazar said the DOI is considering going to a system based on geographically based market prices, which would eliminate the need for the current review process.
The DOI said the proposed changes "could dramatically improve compliance and reduce administrative costs for industry and the government, as well as better ensure proper royalty valuation by creating a more transparent royalty calculation method."
According to the DOI, more than $9.1 billion in royalties were collected and disbursed during fiscal 2010, making royalties one of the largest sources of nontax revenue for the federal government. The agency added that the proposed changes would be revenue-neutral and not alter existing royalty rates.
"Regulations that were initially developed in the 1980s have not kept pace with the significant changes that have occurred in the oil and natural gas markets," Salazar said. "This effort aims to provide cost savings to industry while ensuring the American taxpayer is properly compensated for the use of our nation's resources."
Some oil and gas industry officials welcomed the change while others were cautious.
"The industry has been looking forward to an opportunity for open dialogue with the agency on this issue for many months so that uncertainties in the process can be effectively addressed," Allison Nyholm, a policy adviser for the American Petroleum Institute, said Tuesday. "Uncertainties about royalty obligations still account for a disproportionate number of disputes with huge revenue implications. It would benefit the government, the industry and the public to instill greater certainty, transparency and predictability in the process."
Nicole Daigle, spokeswoman for the Independent Petroleum Association of America, told NGI on Tuesday that the organization was going over Salazar's announcement and would look over the proposal when it is published in the Federal Register.
"At this point we're just trying to figure out what we can from the announcement," Daigle said. "We need to see what the details of the proposal are before we can figure out how it would affect our member companies."
The DOI said the Office of Natural Resources Revenue (ONRR), the federal agency responsible for collecting and disbursing royalty revenues, will be scheduling public hearings on the matter. The ONRR will also schedule public workshops to gather additional input before drafting any legislation, which would also be made available for public comment.
"We want input from industry, states and the general public," Salazar said. "The ultimate goal of the new regulations is a simpler, smarter market-oriented process that is less burdensome to both industry and the government."
In February the DOI announced that in order to fund the Bureau of Ocean Energy Management, Regulation and Enforcement, the agency would hike user fees for oil and gas companies operating offshore, raise royalty rates for onshore production on public land and collect fees for nonproducing leases (see Daily GPI, Feb. 15).
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