DOI to propose reforms in federal oil, gas royalty regulations

This story was updated late May 24 with additional comments and again May 25 with more comments.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, May 24 -- The US Department of the Interior will consider using geographically based market prices in an effort to streamline regulations governing calculation of royalties from oil and gas produced from federal tracts both on and offshore, US Interior Sec. Ken Salazar announced on May 24.

Royalties now are calculated by using complex negotiated price evaluations for production on federal lands and offshore, followed by an analysis of associated transportation and processing costs. Using a geographically based market price as the presumptive value of oil and gas produced within a region could dramatically improve compliance and reduce administrative costs for both producers and the government, Salazar said. It also might ensure better royalty valuation by creating a more transparent calculation method, he added.

Salazar said DOI will publish an advanced notice of proposed rulemaking outlining the proposal within a week in the Federal Register, with comments and suggestions accepted for the subsequent 60 days. “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.”

DOI’s Office of Natural Resources Revenue (ONRR), which is responsible for collecting and disbursing federal energy revenue from production on federal tracts and American Indian lands, will schedule public meetings and consultations to discuss proposed regulations which will be drafted once initial comments have been evaluated. The proposed regulations also will be offered for public comment.

“A simplified regulatory approach can make it easier for industry to comply with the requirements, reduce industry costs, and help ONRR ensure that all oil and gas royalties due to the government are paid correctly and in a timely fashion,” said Rhea Suh, DOI’s assistant secretary for policy management and budget. Salazar announced in May 2010 that he would move the responsibility for minerals royalty policies and collections to her division from what was then the US Minerals Management Service to resolve conflicting missions there. ONRR formally assumed that responsibility on Oct. 1.

The oil and gas industry welcomes the news, an American Petroleum Institute official said on May 24. “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, API policy advisor.

“An open, deliberative process involving all stakeholders is the most effective means for developing sound, cost-effective regulations,” Nyholm said, adding, “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.”

Kathleen M. Sgamma, government and public affairs director at the Western Energy Alliance in Denver, was more cautious in her response. “The complexities of royalty reporting involve fluctuating commodity prices, and processing and transportation costs,” she said on May 24. “There's no other way to account for price and costs except on a transaction basis.

“Oil and natural gas companies already return $40.12 for every dollar spent administering the onshore oil and gas program, so we think the return to the government is more than fair,” Sgamma said. “We're concerned that in an effort to simplify, [DOI] may reduce the ability to deduct costs, but we'll wait to see the details of their proposal.”

The Independent Petroleum Association of America is trying to get more details about the proposal and possibly will have a full comment once the proposed rulemaking notice appears in the Federal Register, an IPAA spokeswoman wrote OGJ by e-mail.

Contact Nick Snow at nicks@pennwell.com.

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