The Independent Petroleum Association of America (IPAA) broughta lawsuit in federal court in Washington D.C. last week challengingthe validity of a new regulation that bars producers from deductingthe full cost of transporting natural gas to the marketplace.

Filed in the U.S. District Court for the District of Columbialast Monday, IPAA’s civil complaint accuses the Interior Departmentof claiming a larger share of royalties through the regulation,which went into effect on Feb. 1. The producer group seeks”declaratory relief and injunctive relief” against Interior andRobert L. Armstrong, Assistant Secretary for Land and MineralsManagement.

Under the new rule, virtually all marketing costs (aggregation,marketing, storage and transfer fees) will be added to the wellheadprice of natural gas, which “drives up the cost of gas and meansproducers end up paying an inflated royalty,” charged IPAA ChairmanGeorge Yates, president of Harvey E. Yates Co. of Roswell, NM. Thiswill “threaten future gas production because it will discouragedrilling on federal lands.”

Interior’s Minerals Management Service (MMS) “is forcing the gasindustry to include downstream marketing costs in the royaltypayment equation. This is in direct conflict with the leasecontract between producers and the federal government, which saysthat royalties are valued at the lease,” he said.

The agency’s new rule butts heads with the “core principle” thatroyalties are to be paid on the value of oil and gas production ator near the lease, said Ben Dillon, IPAA’s vice president of publicresources. The rule requires that values “far removed from thelease” be included in the calculation of royalties.

“The situation is very frustrating. On the one hand, the MMSkeeps talking about making the royalty-collection system simplerand fairer, but continues to make it more complex. It continues todo things like implement this gas rule, which keeps a producer’sliability in question for years,” Yates said.

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.