Senate Bills Could Settle Royalty Dispute, Lessen E&P Tax Burden
Sen. Frank Murkowski (R-AK), chairman of the Senate Committee on
Energy and Natural Resources, consolidated several recent
legislative measures and a few new ones into two separate pieces of
legislation last week that could have a wide ranging impact on the
exploration and production sector.
One bill is designed to do away with provisions in the
alternative minimum tax (AMT) that have the unintended consequence
of escalating tax rates on producers when commodity prices are low.
"My bill tackles this problem head on," said Murkowski. The bill
also includes a portion of a measure introduced by Sen. Kay Bailey
Hutchison that would provide a $3/bbl tax credit to marginal well
operators to help ensure marginal wells stay in operation. And it
includes a provision that would make all gathering lines
depreciable over seven years, rather than allowing non-producing
companies to spread depreciation over 15 years, which is what the
IRS would prefer.
The other Murkowski measure would decide the royalty valuation
dispute once and for all, would streamline the royalty process by
handing off some functions to the states and would provide royalty
credits to producers during times of low commodity prices.
Murkowski's royalty bill would give producers a 20% credit
against royalties when market prices make domestic investment
unattractive. "If a landlord discovered that his rental units were
vacant because they were overpriced compared to the competition, he
would drop the price to attract renters. The federal government
should do the same," said Murkowski.
Other aspects of the legislation include allowing the states to
assume sole regulatory oversight of federal leases within their
borders rather than perform duplicate regulatory functions with the
federal government. The bill calls for the federal government to
pay the states up to 50% of what it originally spent for such
Royalty valuation is perhaps the most contentious industry issue
that would be settled by Murkowski's legislative package. Sens.
Mary Landrieu (D-LA) and Don Nickles (R-OK) introduced "The Federal
Royalty Certainty Act" (SB 924) earlier this month and Murkowski
has incorporated it into his legislation. SB 924 is 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
Nickles said the bill will "codify the fundamental,
long-standing principle that royalty is due on the value of
production at the lease." The MMS' proposed rules on royalty
valuation 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."
True Diemer, chairman of the Independent Producers' land and
royalty committee. said the bill would resolve the dispute
surrounding MMS' Notice of Proposed Rulemaking on royalty valuation
issued in January 1997.
"I think we've gotten down to the point now where this
rulemaking is more of a legal battle than anything else," said John
Sharp with the Natural Gas Supply Assoc. "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."
Texan Takes Over MMS
There is some question, however, as to whether the MMS might
have a change of heart. Walt Rosenbusch, a native of Austin, TX,
was scheduled to take office as the new director of the MMS on May
17. Rosenbusch succeeds Cynthia Quarterman who resigned in
Rosenbusch was a senior tax manager for Ernst & Young's
Houston Energy Service Team. Prior to that he was with the U.S.
Dept. of Interior in the land and minerals management area, working
to resolve royalty issues involving on- and offshore leasing. He
had worked in the Texas General Land Office where he was
responsible for the management and administration of 13.5 million
"He has a terrific background," enthused Christine Hansen,
executive director of the Interstate Oil and Gas Compact Commission
(IOGCC), where Rosenbusch has been a member of the public lands
committee. Hansen credited Rosenbusch for creating Texas'
royalty-in-kind program. "The states look forward to working with
him. They know that they'll be listened to. They know that he has
respect for the states' position."
Hansen said she is unaware whether Rosenbusch has ever spoken
out on the topic of royalty valuation; however, "He's a person with
a very disciplined mathematical mind. He will be a very fair person
for folks to deal with."