Industry groups slam new US royalty rule

The US Department of the Interior has published a final rule that industry groups fear will enable federal officials to second-guess oil and gas values used in royalty calculations (OGJ Online, Apr. 17, 2015).

A department statement said the new regulations will ensure “Americans receive every dollar due” for oil and gas produced on federal land. The regulations also apply to coal on federal and Indian land.

DOI said current oil, gas, and coal valuation methods haven’t kept pace with energy-market changes.

The new rules eliminate benchmarks for “non-arm’s length” sales between affiliated companies and require valuation based on gross proceeds from the first arm’s length sale, with allowances.

An American Petroleum Institute statement said the rule won’t achieve its stated goals, which include simplification and cost-cutting, and will discourage development by reversing “many longstanding policies on valuation options and allowances.”

A new “default provision,” API said, “permits the agency to second-guess lessees’ royalty valuation yet provides no standards for when and how such a decision would be made and justified.”

According to API, DOI’s Office of Natural Resources Revenue redefined “gathering” for Outer Continental Shelf leases to disallow deductions of costs for moving oil and gas from the wellhead to the first platform.

“This is significant for companies as the first movement of production could span hundreds of miles and could bring additional costs of tens of millions of dollars annually without providing companies any flexibility to conform their operations to the new rule,” API said.

The Western Energy Alliance, many of whose members operate on federal land onshore, said the rule will further discourage development.

“Small businesses will be especially hard hit with this regulation, which disallows normal deductions for the cost of doing business, charging royalties for money producers haven’t earned,” it said.

According to WEA, the changes will disallow cost allowances of about 40¢/Mcf of gas.

“We keep hearing from the administration that it wants to get ‘every dollar due’ from oil and natural gas production on federal lands,” the group said. “Yet there are no ‘dollars due’ if you drive production off federal lands by making it too time-consuming, complex, and costly.”

The group cited a recent Congressional Research Service report that natural gas production is down 15% on federal land but up 66% on nonfederal land since 2008.

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