MARGINAL RELIEF FOR MARGINAL PROPERTIES
| Jurisdiction | United States |
(Feb 2004)
MARGINAL RELIEF FOR MARGINAL PROPERTIES
Director of Communications
Independent Petroleum Association of Mountain States
Denver, Colorado
I would like to stress that the opinions expressed in this paper are my own and do not necessarily reflect the opinions of the Independent Petroleum Association of Mountain States, nor those of the other industry members of the Marginal Property Subcommittee of the Royalty Policy Committee.
Background
For many years, lessees have struggled to justify the cost of making royalty payments on marginal properties that cost more to process and mail than the actual royalty payments amount to. The first formal discussions I can recall occurred during meetings of the Interior Department's Royalty Policy Committee Subcommittee on Reporting and Production Accounting. The Subcommittee's report, "Recommendations to Improve Royalty Reporting and Production Accounting," issued in 1996, made a number of recommendations for streamlining and simplifying royalty and production reporting. The Subcommittee focused on revising the existing reporting forms; however, the Subcommittee also recommended that MMS establish a study group to review and modify reporting of estimated royalties, among other things. The Subcommittee also discussed the possibilities of prepaying estimated royalty due, as well as less frequent reporting for lessees of marginally producing properties.
Federal Oil and Gas Royalty Simplification and Fairness Act
At about the same time the RPA Subcommittee was meeting, the Federal Oil and Gas Royalty Simplification and Fairness Act (P.L. 104-185, as corrected by P.L. 104-200) was wending its way through Congress. "RSFA," which passed Congress and was signed into law by former President Clinton on August 13, 1996, provided for prepayment of royalty as well as alternative accounting and auditing options, as follows:
"(b) Prepayment of Royalty.
"(1) IN GENERAL - Notwithstanding the provisions of any lease to the contrary, for any lease or leases or well or wells identified by the Secretary and the State concerned pursuant to subsection (a), the Secretary is authorized to accept a prepayment for royalties in lieu of monthly royalty payments under the lease for the remainder of the lease term if the affected lessee so agrees. Any prepayment agreed to by the Secretary, State concerned and lessee which is less than an average $500 per month in total royalties shall be effectuated under this section not earlier than two years after the date of enactment of this section and, any prepayment which is greater than an average $500 per month in total royalties shall be effectuated under this section not earlier than three years after the date of enactment of this section. The Secretary and the State concerned may condition their acceptance of the prepayment authorized under this section on the lessee's agreeing to such terms and conditions as the Secretary and the State concerned deem appropriate and consistent with the purposes of this Act. Such terms may -
"(A) provide for prepayment that does not result in a loss of revenue to the United States in present value terms;
"(B) include provisions for receiving additional prepayments or royalties for developments in the lease or leases or well or wells that deviate significantly from the assumptions and facts on which the valuation is determined; and
"(C) require the lessee or its designee to provide such periodic production reports as may be necessary to allow the Secretary and the State concerned to monitor production for the purposes of subparagraph (B).
"(2) STATE SHARE - A prepayment under this section shall be shared by the Secretary with any State or other recipient to the same extent as any royalty payment for such lease.
"(3) SATISFACTION OF OBLIGATION - Except as may be provided in the terms and conditions established by the Secretary under subsection (b), a lessee or its designee who makes a prepayment under this section shall have satisfied in full the lessee's obligation to pay royalty on the production stream sold from the lease or leases or well or wells.
"(c) ALTERNATIVE ACCOUNTING AND AUDITING REQUIREMENTS - Within one year after the date of the enactment of this section, the Secretary of the delegated State shall provide accounting, reporting, and auditing relief that will encourage lessees to continue to produce and develop properties subject to subsection (a): Provided, That such relief will only be available to lessees in a State that concurs, which concurrence is not required if royalty payments from the lease or leases or well or wells are not shared with any State. Prior to granting such relief, the Secretary and, if appropriate, the State concerned shall agree that the type of marginal wells and relief provided under this paragraph is in the best interest of the United States and, if appropriate, the State concerned."
The Minerals Management Service subsequently held three workshops in the fall of 1996 to obtain input from its constituent groups regarding RSFA's marginal property provisions and how they could be implemented.
ACCOUNTING AND AUDITING RELIEF
Original Proposed Rule
January 21, 1999, (64 F.R. 3360) the Minerals Management Service published a proposed rule on Accounting Relief for Marginal Properties. The rule defined a marginal property as a "property having average daily well production of less than 15 barrels of oil equivalent per day." In addition, MMS specified that to be eligible for relief, a qualifying property would have to meet the following criteria:
• If the lease is not included in an Agreement, the entire lease would have to qualify as a marginal property.
• If the lease is entirely or partly in one Agreement, the entire Agreement would have to qualify as marginal. MMS stipulated that agreement production allocable to the lessee's lease might be eligible for the relief, and any production from the lessee's lease that is not in the Agreement also separately might be eligible for relief.
• If the lease is entirely or partly in more than one Agreement, each Agreement would have to qualify separately as a marginal property. Only the qualifying Agreement's production allocable to the lessee's lease might be eligible for separate relief.
• If the lease is partly in an Agreement and the lessee owns production from part of the lease that is not included in the Agreement, the part of the lease that is not in the Agreement must qualify separately as a marginal property.
MMS defined the base period for determining eligibility as the previous federal fiscal year, i.e., October 1 through September 30.
MMS proposed that for eligible marginal properties with a total volume during the base period of 125 or fewer barrels of oil equivalent, lessees could submit reports and pay royalties on either an annual, semi-annual or quarterly basis. For eligible marginal properties with a total volume during the base period of more than 125 but not more than 250 barrels of oil equivalent, lessees could submit reports and pay royalties on either a semi-annual or quarterly basis. For eligible marginal properties with a total volume during the base period of more than 250 but not more than 500 barrels of oil equivalent, lessees could submit reports and pay royalties on a quarterly basis.
MMS also proposed net adjustment reporting, rolled-up reporting, alternate valuation relief, audit relief, and "other" relief options. Under the net adjustment reporting option, lessees would be allowed to adjust previously reported lines as a one-line net entry on Form MMS-2014, instead of the previous two-line adjustment process. This option was limited to properties producing less than or equal to 2,500 barrels of oil equivalents during the base period.
Under the rolled-up reporting option, lessees would be allowed to report all selling arrangements for a revenue source to MMS under a single selling arrangement on the 2014. This option was limited to properties producing less than or equal to 1,000 barrels of oil equivalents during the base period.
The alternate valuation relief option allowed lessees to request to report and pay royalties using a valuation method other than what was specified in the proposed rule. There were no limits set on this option.
The audit relief option gave lessees an opportunity to request a reduced royalty audit burden. Suggested relief included limited scope audits, including audits based on a statistical sampling; coordinated royalty and severance tax audits; and MMS's reliance on certified third-party audits. There was also an option to request "other" audit relief.
The "other" relief option provided an opportunity for lessees to request any type of accounting or auditing relief that was not prohibited.
MMS also established which options would be notification based - those that did not require pre-approval by MMS - and approval based, which would require pre-approval by MMS and the State concerned as well as the Assistant Secretary of the Interior for Land and Minerals Management in order to grant the relief.
A state could decide in advance if there were certain relief options it would not grant.
Conflicting Comments
In short, the states felt that MMS was offering too much relief to industry, while industry believed that the rule was too complicated and that it did not offer enough relief.
Industry felt that the proposed rule provided very little, if any, relief to lessees. Industry obviously favored a program that would qualify as many marginal properties as possible and provide relief to as many lessees as possible. Industry said the rule was administratively burdensome and too complex, creating a process that would be very expensive and time-consuming for both industry and MMS. Industry felt that for large companies with automated systems...
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