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MMS issues final rule for valuing oil from federal lands Agency estimates $67.3 million in additional revenues from royalties under new rule; $63.5 from oil companies, rest from administrative savings Petroleum News Alaska
The U.S. Department of the Interior’s Minerals Management Service said March 14 that it would publish the final rule for valuing crude oil produced on federal lands in the March 15 Federal Register.
MMS is the federal agency that manages the Nation’s natural gas, oil and other mineral resources on the Outer Continental Shelf; and collects, accounts for, and disburses about $4 billion yearly in revenues from federal offshore mineral leases and from onshore mineral leases on federal and Indian lands.
The rule will be come effective June 1, with a three-month interest-free grace period (until September) allowed for industry to make system changes to implement the rule.
New rule took four years Assistant Secretary for Land and Minerals Management, Sylvia Baca said, at March 14: “Today, I am very pleased to announce the successful completion of the federal oil valuation rule. Developing this rule has been a long, arduous and involved process with the oil industry, the states, public interest groups, and Members of Congress. But in the end, what began more than four years ago, has resulted in a better, more balanced rule. It will ensure that we are collecting the proper amount of royalties from oil produced on federal lands, but at the same time, this rule is fair to industry.”
MMS Director Walt Rosenbusch noted “an unprecedented level of public input” in developing the rule including eight comment period, five proposed rules, numerous meetings with members of Congress, 20 workshops with states, industry and public interest group, and a review of thousands of pages of comments.
“Because of the valuable contributions from everyone, we believe we have a rule that strikes a responsible balance between the interests of the oil and gas industry and the government’s absolute obligation to assure a fair return for the public’s mineral resources,” Rosenbusch said.
An estimated $67.3 million per year in increased royalty revenues to the government will be realized. Approximately $2.4 million of this revenue will be shared with the following states: California ($1,012,926); Wyoming ($568,421); New Mexico ($384,760); Louisiana ($217,372); North Dakota ($87,647); Texas ($78,569); Montana ($39,803); Colorado ($27,233); Utah ($7,338).
MMS said about 90 percent of the additional revenue will come from major integrated oil companies. The agency said there are administrative savings in the new rule, so industry will pay only an estimated $63.5 million of the expected $67.3 million a year increase in royalties.
Spot market pricing key feature Rosenbusch noted that, “The key feature of this rule is the application of spot market pricing for the major integrated companies and others that refine their oil. In other words, this provision does away with reliance on posted prices for non-arm’s-length contracts. We continue to believe that spot market pricing is by far the best indicator of crude oil’s true value in today’s market.”
What the rule does for arms-length crude oil sales contracts:
The MMS will continue to accept prices under arm’s-length contracts as it did under the 1988 rules. Thus, small independent producers that sell under arm’s-length contracts will not be affected. The rule includes language affirming that MMS will not second-guess producers’ marketing decisions.
What the rule does for non-arms-length crude oil sales contracts:
• Uses market-based spot pricing in most situations when sales are not at arm’s-length.
• Provides tailored valuation methods to fit different marketing areas of the country.
• Allows options to fit lessees’ unique marketing situations.
• Provides for location and quality adjustments between the lease and market center when using spot-market pricing.
• Allows for actual costs of transportation.
• Allows the first purchaser of a pipeline to begin a new depreciation schedule based on the price they paid for the pipeline.
• Allows for a minimum return on fully depreciated pipelines.
• Spells out new and clearer criteria for determining company affiliation. • Provides for binding value determinations.
What the rule does not do:
• Does not allow marketing costs as a deduction from royalty.
• Does not use comparable sales or tendering at the lease, other than in the Rocky Mountain region.
• Does not allow FERC tariffs for non-arm’s-length transportation.
MMS said it will be developing training materials and holding training sessions in the coming months to ensure a smooth transition and implementation of the new rule.
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