MMS' royalty valuation on gas also difficult issue to resolve

As with its oil royalty rule, the Minerals Management Service has had a difficult time drafting a rule changing the way gas production is valued for federal royalty purposes.

After a long-negotiated rulemaking process, which included participation by industry groups, MMS withdrew a proposed rule that would have relied largely on published indices of gas sales to value gas production (OGJ, May 5, 1996, p. 50).

MMS said it would pursue other alternatives and requested industry suggestions.

MMS has scheduled a July 1 meeting in Golden, Colo., with industry groups, and has extended the public comment period on the rulemaking until July 23.

Although some independents objected to the draft rule, most industry groups supported it. They explained that gas indices are a better yardstick for measuring gas valuation than Nymex prices are for oil valuation, primarily because the former are established closer to the lease.

When she withdrew the proposed rule in April, MMS Director Cynthia Quarterman explained that an internal cost/benefit analysis indicated a potential $20 million/year-plus federal revenue loss from the proposed rule.

She said, "We are concerned that published indices for natural gas have not yet developed sufficiently to be representative of the gross proceeds actually received for lease production. We believe that the existing regulations are the best means to contend with continuing changes in the natural gas market."

On Nov. 6, 1995, MMS proposed amending its regulations to incorporate changes suggested by the Federal Gas Valuation Negotiated Rulemaking Committee, a team consisting of representatives from states, industry, and the federal government.

Amendments would have allowed lessees to choose from several options for valuing gas, including index prices published in natural gas newsletters, affiliated companies arm's-length resale prices, and residue gas prices applied to the wellhead.

MMS said it still wants to simplify the gas valuation process and is considering two options: either using indices and/or following Norway's royalty collection practice for crude oil.

"Even under the MMS's own theory, an exchange must involve a contemporaneous exchange of equivalent volumes to be suspect. The 2-year rule, on the other hand, amounts to using cannons to kill flies.

Producers who have never seen an exchange agreement still buy oil for use as load oil and field fuel. There is no justification under the MMS's market theory to go back even 1 month, let alone 24 months, to disqualify an arms-length contract."

American Petroleum Institute

"New filing requirements...would cause the lessees and the MMS to incur significant filings and necessitate costly revisions of complex administrative, accounting, and recordkeeping systems.

The cost impact alone, irrespective of the many other procedural, factual, legal, and workability flaws of the proposals, justifies a MMS reassessment."