CHAPTER 7 FEDERAL ROYALTIES: A CONGRESSIONAL LOOK BACK

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management III
(2000)
CHAPTER 7
FEDERAL ROYALTIES: A CONGRESSIONAL LOOK BACK
Ben Dillon
Independent Petroleum Association of America
Washington, D.C.

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Introduction

The Independent Petroleum Association of America (IPAA), and a coalition of other associations, has been actively involved in a national debate about federal oil royalty payments. The debate began in January 1997 when the Minerals Management Service (MMS) published its first version of the oil valuation rules, which essentially required all producers, large and small, to use NYMEX as a starting point for valuation. The debate occurred in the United States Congress. On March 15, 2000, MMS published a final oil royalty rulemaking, which may have temporarily ended the debate in Congress and shifted it to the courtroom.

Federal lawmakers began to take an interest in the government's federal oil royalty practices during the 104^th Congress. During the 104^th session of Congress, I was working for the House Resources Committee, then chaired by Representative Ken Calvert (R-CA). The committee was approached by industry to consider the need for a statute of limitations, interest for overpayments, and other accounting matters of fairness. These fairness and simplification requirements were introduced in the form of a bill, the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996 (Royalty Fairness), S.1014 and H.R. 1975, which became law on August 13, 1996.

Passage of this bill quickly educated members of Congress and their staffs about a rather arcane and, quite frankly, boring facet of the oil and gas business. What members decided was that royalties play an important part in a domestic energy policy. Like taxes, royalties can serve as an incentive or disincentive to drill and produce domestically. Chairmen of the Senate Energy Committee and House Resources Committee began to take their jurisdictional responsibilities over royalty policies seriously as America's reliance on foreign oil increased.

Given this situation, Congress has been, and remains active in the federal royalty arena. After passage of the Royalty Fairness. Congress moved to a more comprehensive reform of the royalty management system by introducing and debating legislation requiring mandatory royalty in-kind (RIK). Most of this debate occurred in the House of Representatives. However, in January of 1997, the focus on RIK was displaced by reactions to the federal oil royalty rule mentioned above. Even though this rule has finally been published, I can foresee Congress remaining active in the royalty debate through the 107^th Congress. The focus may return to a more comprehensive RIK program. Legislation clarifying duty to market may occur depending on the outcome of pending litigation. Congress may intervene should MMS issue a new rulemaking regarding gas valuation.

The bottom line is that starting in the 104^th Congress, many senators and representatives became engaged in royalty reform. They were not going to ignore major royalty policies that can

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affect the domestic oil and gas industry, while ensuring every dime owing to the federal treasury was paid in the most efficient manner possible.

This paper is not a legal dissertation. It is a look back at the major royalty events that have occurred before Congress. Most of the focus will be on the oil royalty rulemaking. I have attempted to write this paper in an unbiased, chronological fashion. The objective of this paper is to inform the public as to the depth of Congress' involvement in this issue and ponder what its future role may be.

The 104^th Congress — Royalty Fairness

Patricia Dunmire Bragg, with Gardere and Wynne in Tulsa, Oklahoma, has written about Royalty Fairness in length. I refer you to her publications. To summarize, starting on June 30, 1995, Congress began to debate federal royalty practices by the introduction of H.R. 1975 and S.1014. The lead sponsors were Representative Calvert and Senator Don Nickles (R-OK). This bill passed in the House and Senate in record time in November 1995 as part of the Balanced Budget Act. You will recall the fierce debate over the budget temporarily shutdown the federal government leaving administrative and congressional staff to negotiate to find common ground.

The bill's main provisions included:

—A statute of limitations

—Record retention

—Appeals timeframes

—Settlements

—A stay pending appeal

—Offsets of over and underpayments

—Marginal property relief

—Interest

—Liability for royalty payments

—Delegation to states

The main areas of concern for the administration included lessee liability, tolling for restructured accounting, limitations on accounting, and delegation to states.

Given the government shutdown caused by this aggressive approach to a budget package, there was no comprehensive budget package acceptable to the president. This meant Royalty Fairness needed to move as a stand-alone bill. The House Resources Committee went to work immediately by conducting mark-ups and reported the bill out of full committee in March 1996. The Senate Energy Committee reported the bill in May 1996.

Throughout this period, daily negotiations took place between Congress and the administration on various parts of this bill. Additionally, the states were actively involved, and were a key factor in its passage. Following the Senate Energy Committee action, the administration issued statements of support. These cleared a path for passage. The only issues were to find time for the bill on the

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congressional calendar and to protect the bill from becoming tied to an unrelated matter in the Senate.

The House passed Royalty Fairness on July 16, 1996. The only opposition expressed during the floor debated was from Representative Carolyn Maloney (D-NY) who questioned the effect of this bill on MMS'...