Federal Crude Oil Valuation Rulemaking

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II (Feb 1998)
CHAPTER 8A
Federal Crude Oil Valuation Rulemaking
Deborah Gibbs Tschudy
Minerals Management Service
Denver, Colorado

[Page 8A-33]

Introduction

• Why MMS is considering revisions to the regulations

• MMS's proposed and supplementary proposed rulemakings

[Page 8A-34]

Why MMS is Considering Revisions to the Regulations

Proposed rulemaking results from:

• Changes in the domestic crude oil market

AND

• MMS objectives to:

— Decrease reliance on posted prices

— Develop rules that reflect market value

— Reduce administrative costs of royalty valuation

[Page 8A-35]

Market Changes Impacting Current Regulations

• Crude oil marketing has changed dramatically over the last 20 years

• Prior to the 1980's, the domestic crude oil market was relatively stable

— Price controls

— Crude oil purchased by refiners under long-term contracts

— Prices based on posted prices

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• Worldwide shortage of crude oil in 1979 placed greater emphasis on spot market

• Spot market resulted in increased price volatility and exposure to price risks

• Spot trading created opportunities for traders and brokers to enter the market

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• Price decontrol brought domestic oil market in line with international market

• During the 1980's trend was away from long-term contracts and toward the spot market

• Futures market became the mechanism to hedge against price volatility and supply disruptions

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• Since the worldwide collapse of crude oil prices in 1986:

— Few producers sell outright at posted prices

— Crude oil purchases are made at either:

> > Posting-plus

> > Spot

> > NYMEX

— Posted prices have consistently remained below spot prices

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• Regional differences exist in domestic oil markets caused by:

— limited number of buyers

— production controlled by few companies

— limited third party shippers and less competition for transportation services

— less spot market activity

• Pronounced in California and Rocky Mountain markets

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Current Regulations

• Arm's-length sales: Gross proceeds

• Other than arm's-length sales, greater of:

— Gross proceeds, or

— Value determined under the first applicable in a series of five benchmarks

> > Benchmarks require comparability of posted prices or contract prices used in arm's-length transactions for significant quantities of production

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