With the U.S. natural gas industry just learning to work outside the confines of federal market controls, the Department of Interior proposes the royalty-management equivalent of the Natural Gas Policy Act.
NGPA, lest anyone forget, created dozens of price categories for one simple hydrocarbon fuel and nearly as many incentives for gas producers and purchasers to engage in uneconomic behavior. Now the price categories are gone, and regulatory changes since passage of NGPA encourage gas producers, marketers, transporters, and users to act like grown-up business people.
INTERIOR'S PLAN
But regulators will be regulators. The Interior Department is charging ahead with the plan it introduced a year ago to assess royalties on funds producers received to settle contract disputes. From settlement payments dating back to 1980, the department expects to collect $200-400 million.
To producers, this is no minor shock. Like most people, they don't expect to receive bills from the government for doing things the government wanted them to do.
Contract renegotiations were central to the gas industry's overhaul of recent years, including the "devintaging" rule by which the Federal Energy Regulatory Commission rescued natural gas from NGPA's price labyrinth. For its part, NGPA was Congress's attempt to rescue interstate gas from wellhead price controls.
Most producers, pipelines, marketers, and distributors would probably like to write the NGPA and price-control eras off to history now that FERC has given economics a chance to bring discipline to the hitherto wayward gas market. But the Interior Department's move provides a sad reminder about how the gas business became as scrambled as it used to be.
Last month, the department upheld orders requiring two producers to pay royalties on contract settlement payments. In doing so, it signaled its intention to apply its interpretation that such payments constitute gross proceeds from federal and Indian leases and thus are subject to royalty.
Interior's interpretation is legally complex, its instructions for calculating retrospective royalty liabilities as perplexing as the old NGPA price categories. Independent Petroleum Association of America calls the interpretation unlawful and is challenging it in court. If IPAA's lawsuit fails, court may be where producers spend much of their time in the next few years.
Legalities aside, Interior's action raises huge questions about whether regulators ever learn anything. Throughout its history, natural gas has been the battered product of incentives contorted by faulty governance, which usually means overregulation.
WRONG INCENTIVES
It was the incentive to dedicate gas to free intrastate rather than price-controlled interstate markets that bifurcated the gas grid and produced shortages in nonproducing states during the mid-1970s. It was NGPA's incentives for production of "new" and "high-cost" gas that led to the deliverability surplus of the 1980s. And it was heavy-handed service requirements that led buyers to sign long term contracts for overpriced gas, which later necessitated FERC's rules encouraging contract renegotiations...
... Which Interior now seeks to burden with royalties. In an administration that wants to encourage the production and use of natural gas, and in a country that needs much more gas drilling if the fuel is to fulfill expectations for it, this new incentive from Washington, D.C., makes little sense. But in view of the way the U.S. has always treated the hydrocarbon it now heralds as the fuel of the future, it really is nothing new.
