FEDERAL GAS VALUATION NEGOTIATED RULEMAKING—MMS AND STATE PERSPECTIVES

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 2A
FEDERAL GAS VALUATION NEGOTIATED RULEMAKING—MMS AND STATE PERSPECTIVES
John L. Price
Office of Enforcement Minerals Management Service
Denver, Colorado
Valdean Severson
New Mexico Taxation & Revenue Department
Santa Fe, New Mexico

I. Background/Introduction

A. Establishment of Committee

The Federal Gas Valuation Negotiated Rulemaking Committee (Committee) was established under the authority of the Federal Advisory Committee Act (FACA) (Pub. L. 92-463). The Committee's Charter was signed by Secretary Babbitt on June 2, 1994.

The Committee was established to advise the Minerals Management Service (MMS) on a rulemaking to address: 1) the valuation of gas produced from Federally-approved unitization and communitization agreements, and 2) the benchmark valuation system for non-arm's-length contracts, no sales situations, and situations in which the lessee does not sell a portion of its allocated production.

B. Membership

The Committee included representatives of the oil and gas industry, States, and MMS. The representatives of the oil and gas industry included the American Petroleum Institute, the Council of Petroleum Accountants Societies, the Rocky Mountain Oil and Gas Association, the Independent Petroleum Association of America/the Independent Petroleum Association of Mountain States, the Natural Gas Supply Association, an independent marketer, and large independent producers. Representatives of States included the States of Utah, North Dakota, Montana, and New Mexico. Representatives of MMS included the Royalty Management Program's Royalty Valuation Division, Office of Enforcement, and the Dallas Compliance Division, and the Office of Policy and Management Improvement.

C. Report

The Committee issued its report in March 1995. The Committee's report contains the full description of the issues and alternatives considered and the Committee's deliberations on each. As such, this paper will serve only as a summary of the Committee's work. The report is available by contacting the Royalty Valuation Division at (303) 275-7201.

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II. Constituent's Goals (Motivation)

A. Industry's

B. State's

The State's goals and motivations to participate in a rule-making process as requested by the Royalty Management Advisory Committee can be and were defined as follows:

• Develop regulations that clarify and simplify the mechanism behind valuation of oil and gas under affiliated, non-arm's length or no-sale type of transactions.

• Develop regulations that clarify payment responsibilities as it relates to the sales v. entitlements issue.

• Develop regulations that clarify the definitions Of "gross proceeds", "marketing", "compression" and "gathering /transportation".

• Develop regulations that maintain the key principles defined and required by lease terms and statutes.

• Develop regulations that maintain a fairness between majors and independents.

• Develop regulations that are flexible to support changing transactions, arrangements and market structures.

• Develop regulations that are revenue-neutral to the recipients of the royalty revenues.

• Develop regulations that would reduce both the reporting burden from royalty payors and the oversight burdens of the MMS and State participants.

The State participants knew fully going into this process that each goal defined may be difficult to obtain. However, we felt the urgency for change was critical if we were ever to resolve the contentious issue of royalty valuation. The participants went into this process with open minds and ears, with the hope that whatever came out of this process would resolve, at a minimum, some issues.

C. MMS's

As a general matter, MMS desired a royalty valuation system for both the lessees and lessor that would be more simple and less costly to administer than the system under the 1988 valuation rules, and be "revenue neutral" relative to the system under the 1988 valuation rules to the extent it could be determined. In addition, MMS desired a royalty system that kept the lessor whole each month, based value on the fair market value at the lease and at the time of production, and clearly identified the parties responsible for reporting and paying royalties, the parties liable for

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paying royalties, and the appropriate party against which enforcement actions should be taken if the two are not the same.

The MMS's goals in specific areas are outlined below.

General—The 1988 valuation regulations were in large part written for a gas market...