Issues » Comments on Rules and Regulations

IPAA - Oral Statement by Den Dillon

Oral Statement by Ben Dillon
for the Hearing on Valuation and Collection of Oil Royalties
before the
U.S. Senate Committee on Energy and Natural Resources
Subcommittee on Energy Research, Development, Production and Regulation

Mr. Chairman, Members of the Committee:

I am Ben Dillon, Vice President for Public Resources, of the Independent Petroleum Association of America (IPAA). I submit for the record a list of 18 additional state associations, mostly independents, endorsing the industry’s written and oral statements for this hearing, including the California Independent Petroleum Association.

Mr. Chairman, IPAA appreciates the opportunity to appear here today. Your examination of MMS’ oil royalty rules could not be more timely. The past year has been devastating for America’s producers. With record number layoffs and shut-in wells, over $ 2 billion has been lost in tax and royalty revenues, much of which is dedicated to education.

Even though prices have recovered somewhat, a number of bold steps need to be taken to save the domestic oil industry. Prices remain unstable and recovery time will be lengthy. However, fair and certain valuation regulations are needed irrespective of the economic climate.

Yes, MMS has claimed to have made improvements to the rulemaking, resolving a number of concerns. For this we are grateful. However, the rule, as outlined last August by MMS, still significantly impacts independents.

I submit for the record a September 1998 letter signed by some 272 independent producers discussing how they are impacted by the rule and these concerns represent the views of the vast majority of IPAA’s 8,000 members.

Consider an excerpt from the letter: "The rulemaking will cripple independent producers because the government can "second guess" the proceeds I receive from a third party. If a government auditor decides my proceeds aren’t’ reasonable or I’ve breached newly delivered duties, they will subject me to their complex and costly bureaucratic formulas." The letter concludes "To survive in this business climate when oil prices are disastrously low, I must dedicate my scarce resources to matters that affect my bottom line. That’s not speaking on behalf of majors; it’s stopping arbitrary regulations that will harm my business."

Independents are not asking for more favorable royalty calculations because of low oil prices. We are simply asking that the rulemaking, especially during these challenging times, be fair and predictable and thereby eliminate uncertainty and reduce litigation. In a letter to MMS on April 27 Senator Bingaman recognized the impact of this rule on independents by proposing regulatory language that would not allow MMS to reject wellhead sales when compared to other transactions. We have no indication that MMS will accept this language, unless MMS re-proposes the rule and seeks comments.

In his letter, Senator Bingaman discussed another component of second guessing creating uncertainty for all producers. MMS wants to be able to challenge bona fide wellhead sales contracts in search of what it thinks are "hidden" marketing costs. The wellhead producer has no control or knowledge of these costs.

An additional unresolved issue affecting all producers is binding determinations. Every producer, regardless of size, wants to be able to ask the Department a simple question: am I paying my royalties correctly? They want to receive a timely answer, an answer that is binding. To date MMS has stated it may, not will, issue binding guidance – again, more uncertainty.

You may be surprised to learn that many independents are marketing their production downstream of the lease. The proposed rule affects them due to MMS’ failure to allow proper deductions, an expanded "duty to market", and the use of index in the offshore and New Mexico. Even wellhead sellers don’t want to create regulatory disincentives for entering into downstream business. Royalty ought to paid on the value of production at the lease, regardless of where you produce or the size of your company.

Independents strongly support and participated in the development of the industry proposal outlined by Mr. David Deal. During a recent MMS workshop in Washington D.C., public interest groups seemed bewildered by our endorsement of this proposal. Unfortunately, these so called experts left the workshop as soon as the discussion turned technical, and demonstrated how each component of the industry proposal positively affects independents.

Mr. Chairman and members of the Committee, if all sides are flexible, we can find a solution that allows implementation of a final rulemaking in a timely manner. IPAA believes that a comprehensive royalty in-kind program, with possible valuation language similar to S 924, is a permanent solution to the royalty debate. I will be happy to answer any questions you or the Committee might have.

Contact Ben Dillon via email bdillon@ipaa.org, or via phone 202.857.4722.