Responding to President Obama’s call for federal agencies to streamline their regulations, the Interior Department last week said it plans to explore a “simplified market-based approach” for valuing oil and gas to calculate the billions of dollars in royalty payments that are owed each year to the federal government for production on publicly owned onshore and offshore property.

This “could dramatically reduce [the] accounting and paperwork requirements and costs on industry, and better ensure proper royalty valuation” for the federal government, the department said in its “retrospective regulatory review” plan, which was posted on the White House website last Thursday. Approximately 30 federal agencies submitted plans for trimming regulations thought to be unnecessary, and the administration contends this could eliminate tens of millions of hours of reporting burdens and billions of dollars in regulatory costs.

In January Obama signed an executive order calling for a government-wide review of regulations that discourage job creation and make the U.S. economy less competitive (see NGI, Jan. 24). “We’re…making it our mission to root out regulations that conflict, that are not worth the cost, or that are just plain dumb,” he said.

Royalties currently are 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. Interior Secretary Ken Salazar said the department is considering going to a system based on geographically based market prices, which would eliminate the need for the current review process.

“We are launching an Advanced Notice of Proposed Rulemaking [ANOPR] that will evaluate the potential adoption of a radically different, simplified and market-based approach to establish the value of oil and gas upon which federal royalties are calculated,” the Interior plan said.

“More specifically we will be exploring the use of geographically based market prices as the presumptive value of oil and gas produced in that region. The royalty rate would then be applied to this market-based value, removing the need to undertake a transaction-by-transaction, fact-specific evaluation of contract amounts, and transportation and processing costs,” it noted.

Interior’s Office of Natural Resources Revenue (ONRR) is seeking comments on the proposed changes to existing royalty valuation regulations — specifically on the use of index prices to value oil and gas; possible alternatives to the requirement to track actual costs for determining transportation; and whether to make an adjustment or “bump” to the index prices to account for the value of liquid hydrocarbons contained in the gas stream. Comments will be due 60 days after the ANOPR is published in the Federal Register this week.

The proposal is very vague at this time. The devil will be in the details,” said an industry spokesman.

According to Interior, 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,” said Allison Nyholm, a policy adviser for the American Petroleum Institute. “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 that the organization was going over Salazar’s announcement and would look over the proposal when it is published in the Federal Register.

Once initial comments have been reviewed, ONRR, the Interior agency responsible for collecting and disbursing royalty revenues, will schedule public hearings to gather additional input before drafting the proposed regulations.

“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 Interior announced that in order to fund the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM), 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 NGI, Feb. 21).

Also in its regulatory review plan, Interior reported that its U.S. Fish and Wildlife Service and the National Oceanic and Atmospheric Administration’s Fisheries Service have initiated an effort to develop administrative changes to the Endangered Species Act (ESA) to “improve recovery of imperiled species, enhance our ability to achieve meaningful conservation on the ground and better engage the resources and expertise of our partners to meet the goals of the ESA.”

The initiative is aimed at addressing the significant increase in federally listed endangered or threatened species, which now number 1,300 with an additional 249 species identified as candidates for protection under the ESA. While the ESA has made a major contribution to protecting endangered species and preventing the probable extinction of hundreds of species across the nation, Interior said there is more to be done to make the ESA more effective.

BOEM defended changes in offshore safety standards that it has made in the wake of last year’s Macondo well blowout in the Gulf of Mexico, which sank the Deepwater Horizon drilling rig (see NGI, April 26, 2010). BOEM is “now considering applying ‘safety case’ type performance standards, such as those widely applied internationally, to the U.S. offshore regulatory regime.

“A hybrid combination of performance-based and prescriptive standards will provide flexibility to adapt to changing technologies and increasingly complex operation conditions, while maintaining worker and environmental protections,” the Interior agency said.

Oil and natural gas producers have complained that the new safety regulations for offshore drilling activity have slowed the pace of permitting in the Gulf of Mexico and stifled job creation.

In its review plan, the Department of Energy (DOE) said it has proposed amending the National Environmental Policy Act (NEPA) with respect to categorical exclusions (CE). The granting of CEs, or the ability to forgo detailed environmental reviews of an energy project, came under fierce attack following the BP plc-leased Deepwater Horizon disaster. BP had received a CE for the Deepwater Horizon.

The proposal to amend NEPA is “intended to better align DOE’s categorical exclusions with current activities and recent experiences,” said the department.

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