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Senate Bills Could Settle Royalty Dispute, Lessen E&P Tax Burden

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 functions.

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 royalty payments.

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 February.

Rosenbusch was a senior tax manager for Ernst &amp 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 mineral acres.

"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."

Rocco Canonica

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