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IPAA - Oral Statement by David Blackmon

Oral Statement by David Blackmon
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 David Blackmon, Coordinator of Regulatory Affairs for BurlingtonResources Oil and Gas Company (BR), an independent producer headquartered in Houston, Texas. I appear here today on behalf of the Independent Petroleum Association of America (IPAA), an industry trade association representing over 8,000 of the nation’s independent producers. I am vice-chairman of IPAA’s Land and Royalty Committee, and the current chairman of the Interior Department’s Royalty Policy Committee. The Chairman and Chief Executive Officer of BR, Bobby Shackouls, is the current Chairman of the Domestic Petroleum Council, a trade association representing America’s large independent producers, and BR is a member of all the trade associations who are signatories to the joint written comments submitted to you today. I also submit for the record a list of eighteen other trade associations endorsing the testimony presented here today by the industry.

Mr. Chairman, we appreciate the opportunity to appear before you today and thank you and this committee for offering Senate Bill 924, legislation that would clarify the rules governing the valuation of federal oil and gas royalty payments, and would do much to end to the morass of protracted audit disputes and litigation which plague the industry and the Minerals Management Service today.

IPAA has remained actively engaged in the debate over MMS’s proposed new rule on oil valuation, and remains a strong advocate of the Joint Industry Task Force’s compromise presented to the MMS at its public hearings in March and April. We remain so in spite of the no-doubt heart-felt concerns of those on the other side of the issue, who continue to claim that the rule would only affect about 40 large companies.

Let me assure you, Mr. Chairman, that our friends on the other side are mistaken. The overwhelming majority of IPAA’s members sell their production in arm’s length transactions at the wellhead. In its current form, MMS’s proposed rule would leave the agency’s audit staff in a position to second-guess the validity of those contracts and to hold these mostly small producers responsible for downstream "marketing" costs over which they have no control and about which they have no knowledge. IPAA sincerely hopes MMS will offer language neutralizing or eliminating these provisions in its next proposal. So long as this language remains unchanged, the rule adversely impacts all 8,000 IPAA members, despite protestations to the contrary.

IPAA remains engaged on this issue for other reasons as well. The association’s leadership has been surprised to find out how many IPAA members currently engage in the activity of marketing their production downstream of the lease, either on their own or through affiliated companies. All of these IPAA members would be adversely impacted by the proposed rule’s failure to allow proper deductions for costs incurred downstream of the lease, and by MMS’s newly-minted "duty to market" downstream of the lease at no cost to the federal government. While MMS claims that this "duty" already exists, IPAA continues to ask why, if the "duty" already exists, is this undeniably new language necessary? To date, we have not received an adequate answer to that simple question.

In short, IPAA believes efforts by those on the other side of this debate to shift the point of valuation downstream of the lease are inconsistent with the lease agreement we all signed. Senate Bill 924 corrects that inconstency.

IPAA believes that MMS’s proposed rule fails to allow proper adjustments for costs incurred downstream of the lease. Senate Bill 924 corrects that failure.

IPAA believes producers have a duty to place production in marketable condition, but producers do not have a duty to market those products at the government’s behest at no cost to the government. Senate Bill 924 clarifies that duty.

Mr. Chairman, Senators, if I leave you with no other message today, I want to leave you with this: We do not want to litigate these issues. Oil and gas producers want to pay our royalties and pay them correctly the first time we file a report to the MMS. I can tell you from personal experience that, in today’s regulatory and litigious environment, that is an impossible task. Indeed, it is fair to say that in today’s environment, in which one arm of the federal government is engaged in the practice of suing producers who have previously entered into settlement agreements with another arm of the federal government, it is impossible for any producer - no matter how large or how small - to ever know with any certainty that it has satisfied the government’s notion of its royalty obligation.

Senate Bill 924 would do much to add some certainty to this byzantine process.

IPAA continues to believe that a comprehensive royalty in-kind program is the ultimate solution to this royalty quagmire in which we find mired today. In fact, as we sit here today, MMS is engaged in several successful RIK pilot programs across the country, and we commend the agency for its diligent efforts in this regard.

Barring a comprehensive RIK program, Senate Bill 924 goes a long way toward resolving many of the points of controversy that lead to royalty disputes today. IPAA commends the Chairman and the Committee for offering this bill, and we pledge our full support in helping to make it law.

I will be happy to answer any questions you might have.