In the wake of a New York Times article alleging underrecovery of natural gas royalties, House Resources Committee Chairman Richard Pombo (R-CA) has asked the Department of Interior (DOI) to turn over all “relevant data” so the panel can determine if the federal government is receiving “full compensation” for the production of oil and natural gas from federal offshore and onshore lands.

Pombo’s letter to Interior Secretary Gale Norton does not immediately call for a congressional hearing or investigation into allegations that the agency is significantly undercollecting gas royalties because there are a “number of unanswered questions” about the Times article, Pombo spokeswoman Jennifer Zuccarelli told NGI.

“The article itself was rather confusing, in that it did not detail volumes of oil or natural gas produced from federal lands. It also did not reference the royalty-in-kind program, in which the federal government takes oil and natural gas in product, rather than revenue. I would like your department to provide the committee with the impact of these programs,” Pombo wrote in the letter to Norton Monday.

In addition, he asked Interior to provide the following:

Pombo said he was “particularly struck with the irony” that the Times, while alleging underrecovery of royalties from energy production, opposes the exploration for energy in Alaska’s Arctic National Wildlife Refuge, “which would bring taxpayers between $2.5 billion and $5 billion immediately, and tens of billions of dollars of revenue over time if economic quantities of oil are discovered.”

In order for the House panel to “properly determine the integrity of this story” and of Interior’s royalty accounting process, Pombo called on Interior to respond to his request by no later than Feb. 1.

Elsewhere on Capitol Hill, Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the Senate Energy and Natural Resources Committee, said he would ask the Government Accountability Office (GAO) to probe the allegations of gas royalty underrecovery by Interior. On the House side, Rep. Edward Markey (D-MA) also called for a GAO review. Sen. Charles E. Schumer (D-NY) on Monday ordered Interior to report to Congress within 30 days on the scope of the underpayment and the steps it plans to take to better enforce royalty regulations (see Daily GPI, Jan. 24).

In the meantime, legal and industry experts are disputing the conclusions reached in the Times article, which was published Monday following a three-month probe by the newspaper of gas royalty payments to the agency.

The article alleged that royalty collections did not keep pace with the significant uptick in natural gas market prices in 2005, and as a result Interior’s Minerals Management Service (MMS) took in about $700 million less than it should have. Due to an often “byzantine set of federal regulations,” gas producers have been able to provide the Interior Department with much lower prices for their natural gas — the basis on which royalties are calculated — than the market prices for gas that they report to the Securities and Exchange Commission (SEC) and their shareholders, it noted. As a result, royalties were sorely undercollected last year, the newspaper said.

Industry and royalty experts pointed out that while producers must report gross market gas prices to the SEC and their shareholders, they are permitted to report to the MMS lower wellhead prices, which is the value of gas prior to taking into account the costs of transportation, processing and other allowances that are permitted under the agency’s regulations. They questioned whether the Times factored into the equation these allowed deductions when computing the alleged gas royalty undercollections in 2005.

They also had doubts about whether the newspaper took into account the royalties that were lost in 2005 due to the gas production that was shut in following Hurricanes Katrina and Rita. It was estimated that as much as $500 million in royalties were lost as a result of the twin disasters, which have put 585 Bcf cumulatively offline since September.

Like Pombo, the critics said they could not make out whether the Times article allowed for royalty-in-kind (RIK) payments, whereby producers pay royalties owed to the federal government with gas product, not money. The federal government then turns around and sells the gas. In fiscal year 2005, Interior estimated that it sold 183.9 million MMBtu of RIK gas received from producers at an average price of $6.88/Mcf, taking in a total of $1.27 billion.

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