Sen. Frank Murkowski (R-AK), chairman of the Senate Committee onEnergy and Natural Resources, consolidated several recentlegislative measures and a few new ones into two separate pieces oflegislation last week that could have a wide ranging impact on theexploration and production sector.
One bill is designed to do away with provisions in thealternative minimum tax (AMT) that have the unintended consequenceof escalating tax rates on producers when commodity prices are low.”My bill tackles this problem head on,” said Murkowski. The billalso includes a portion of a measure introduced by Sen. Kay BaileyHutchison that would provide a $3/bbl tax credit to marginal welloperators to help ensure marginal wells stay in operation. And itincludes a provision that would make all gathering linesdepreciable over seven years, rather than allowing non-producingcompanies to spread depreciation over 15 years, which is what theIRS would prefer.
The other Murkowski measure would decide the royalty valuationdispute once and for all, would streamline the royalty process byhanding off some functions to the states and would provide royaltycredits to producers during times of low commodity prices.
Murkowski’s royalty bill would give producers a 20% creditagainst royalties when market prices make domestic investmentunattractive. “If a landlord discovered that his rental units werevacant because they were overpriced compared to the competition, hewould drop the price to attract renters. The federal governmentshould do the same,” said Murkowski.
Other aspects of the legislation include allowing the states toassume sole regulatory oversight of federal leases within theirborders rather than perform duplicate regulatory functions with thefederal government. The bill calls for the federal government topay the states up to 50% of what it originally spent for suchfunctions.
Royalty valuation is perhaps the most contentious industry issuethat would be settled by Murkowski’s legislative package. Sens.Mary Landrieu (D-LA) and Don Nickles (R-OK) introduced “The FederalRoyalty Certainty Act” (SB 924) earlier this month and Murkowskihas incorporated it into his legislation. SB 924 is designed toprevent the Department of the Interior’s Minerals ManagementService from altering its oil and gas royalty valuationsmethodology in a way that could cost producers millions more inroyalty payments.
Nickles said the bill will “codify the fundamental,long-standing principle that royalty is due on the value ofproduction at the lease.” The MMS’ proposed rules on royaltyvaluation as currently written would require that royalties bevalued at market points downstream of the wellhead, somethingproducers charge would cost a significant amount more in marketing,transportation and storage costs than the true value of theproduction. Under Nickles’ legislation, if royalty payments,whether in kind or in cash, are based on the value of oil or gasfarther downstream, companies would be reimbursed for transporting,marketing and processing. The legislation would apply to oil andgas produced from onshore and offshore federal leases, but wouldnot apply to leases on Indian lands.
“These provisions will reduce the costs of a complicated systemthat spawns disputes, while preserving the taxpayer’s right to afair return for its resources,” said Nickles. “As I have said onmany occasions, we need to reduce unnecessary, burdensome andexcessively costly regulations. We need a little common sense.”
True Diemer, chairman of the Independent Producers’ land androyalty committee. said the bill would resolve the disputesurrounding MMS’ Notice of Proposed Rulemaking on royalty valuationissued in January 1997.
“I think we’ve gotten down to the point now where thisrulemaking is more of a legal battle than anything else,” said JohnSharp with the Natural Gas Supply Assoc. “It has become a verylegal question as to where we believe royalties should becollected. I don’t know if we’re going to be able to persuade MMSto our way of thinking and certainly they are not going to be ableto persuade us to their way of thinking.”
Texan Takes Over MMS
There is some question, however, as to whether the MMS mighthave a change of heart. Walt Rosenbusch, a native of Austin, TX,was scheduled to take office as the new director of the MMS on May17. Rosenbusch succeeds Cynthia Quarterman who resigned inFebruary.
Rosenbusch was a senior tax manager for Ernst & Young’sHouston Energy Service Team. Prior to that he was with the U.S.Dept. of Interior in the land and minerals management area, workingto resolve royalty issues involving on- and offshore leasing. Hehad worked in the Texas General Land Office where he wasresponsible for the management and administration of 13.5 millionmineral 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 landscommittee. Hansen credited Rosenbusch for creating Texas’royalty-in-kind program. “The states look forward to working withhim. They know that they’ll be listened to. They know that he hasrespect for the states’ position.”
Hansen said she is unaware whether Rosenbusch has ever spokenout on the topic of royalty valuation; however, “He’s a person witha very disciplined mathematical mind. He will be a very fair personfor folks to deal with.”
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