The Minerals Management Service (MMS) report’s conclusion that amandatory royalty in-kind (RIK) program for royalty collectionwould cost the federal government up to $374 million annually inlost revenues was “deeply flawed,” according to an industry-backedstudy of the agency’s analysis.

The Interior Department agency’s alleged mistakes ranged from”math errors to lack of documentation to faulty assumptions” abouta mandatory RIK bill that has been proposed by Rep. William M.”Mac” Thornberry (R-TX), said Linden C. Smith, managing director ofBarents Group LLC, a Washington-based consulting firm that reviewedthe MMS analysis.

After adjusting for what it saw as three major mistakes in theMMS report, Barents concluded the Thornberry legislation would netat least $8 million more in annual revenues for the federal coffersthan the existing royalty collection system, Smith told reportersat a press conference last Thursday sponsored jointly by theIndependent Petroleum Association of America (IPAA) and theAmerican Petroleum Institute (API).

The biggest gaffe was agency’s assumption that the federalgovernment would be required to assume $178 million in costs toplace oil and gas in marketable condition under Thornberry’s bill,Smith said. He noted the interpretation was incorrect, and thatproducers would shoulder all of the costs for “sweetening,treating and conditioning” of production. “That’s a large componentof that $366 million [loss] estimate” by MMS.

Furthermore, he said the agency’s $178 million estimate formarketable-condition costs was far too high. The basis for theestimate was a Purvin & Gertz analysis, which Smith said MMSmisinterpreted. “In describing the report, MMS says that gastreatment costs [would] range from 18 cents/Mcf to 38 cents/Mcf for44% of all natural gas. To the contrary, the Purvin & Gertzcost figures in the report are valid for only a small fraction ofgas production – 6% in their original report. Had MMS applied thecorrect numbers from the report – 6% instead of 44% – [its] costestimate would have been dramatically reduced,” according to Smith.”When [we] start digging deeper into the apparent meat behind MMS’sreport, [we find] there’s nothing there. There’s no longer anysignificant cost for treatment…”

Another error was the agency’s failure to factor in the revenueeffect of accelerated audit collections, he noted. “Today we have alarge number of valuation disputes, a lot of money at stake. AndMMS collects audit revenues equal to about 3% a year of the totalamount of annual royalties. But it collects that money maybe 7-10years down the road” after the oil and gas has been produced.”Under the RIK bill, that money will be collected today. Thatamounts to about $113 million” of additional revenue for thefederal government each year.

Lastly, Barents also contends the Interior agency”significantly understated” the revenue impact of a mandatory RIKprogram on crude royalties by at least $83 million a year. “Theunderlying data shows that additional [royalty] value can beachieved by moving production downstream” to be marketed as part ofan RIK program, Smith said.

“There are a whole range of other problems with the report,” henoted, adding the three that were singled out are the “big-pictureitems.” If the these items alone are adjusted,the federalgovernment would have a net gain in royalty revenues – at the veryleast – of $8 million a year, compared to the agency’s projectedloss of $374 million per year, Smith noted. MMS Director CynthiaQuarterman initially projected the Thornberry legislation wouldcause revenue losses of about $500 million during a hearing before

The House energy and mineral resources subcommittee is expectedto begin mark-up of H.R. 3334 soon – possibly early in June.Thornberry’s proposal would overhaul the current royalty-collectionsystem, permitting the federal government and the states to acceptoil and gas production from producers to settle their royaltypayments in lieu of cash payments. The MMS is strongly opposed tothe legislation.

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