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Issues » Fact Sheets
Tax/Capital Fact Sheets
Supporting A Fair Rule for Calculating Federal Royalties
MMS' Proposed Rule on Oil Valuation. On March 18, 2000, MMS changed the rules that set forth the criteria for paying royalties on federal oil production. MMS' proposals essentially increase the amount of royalties to be paid by assessing royalties on downstream values without full consideration of all costs.
On December 30, 1999, the MMS issued its latest proposal. During the 1st Session of the 106th Congress, another moratorium was signed into law prohibiting the MMS from issuing a final rulemaking prior to March 15, 2000. Originally the moratorium would have prohibited MMS from issuing a final rulemaking until October 1, 2000. However, during negotiations between appropriators and the Administration, this shorter timeframe was agreed to because the Administration threatened a veto of the entire budget should it contain a moratorium thereby allowing MMS to issue a final rulemaking on March 16 with an effective date of June 1, 2000.
This proposal contains some positive modifications. For example, except for the newly minted duty to market, MMS has added more certainty for those producers selling oil arm's-length at the lease. When this rulemaking began, all producers including wellhead sellers were to base royalties using NYMEX. Considerable progress has been made in this area. Another area that has been improved is the ability to receive a binding determination as to how to properly pay royalties. The proposal also provides an opportunity to receive guidance, unless MMS disagrees with the factual situation. Improvements have been made in the area of quality adjustments and transportation for those producers who are required to use index.
Unfortunately, no improvements have been made for those producers using an affiliate to market their oil or refine their oil with regard to the starting point for determining value for royalty purposes. Except for the Rockies (excluding New Mexico), the MMS continues to ignore willing buyer/willing seller transactions in the field by proposing published indexes.
The MMS continues to claim that it is legally authorized to require producers to market production downstream at no cost to government.
Royalty Litigation. On March 15, 2000, MMS issued a final oil valuation proposal. During the 1st Session of the 106th Congress, another moratorium was signed into law prohibiting the MMS from issuing a final rulemaking prior to March 15, 2000. The rulemaking became effective June 1, 2000.
On March 28, 2000 IPAA obtained a landmark royalty court decision in IPAA v. Armstrong. The judge clearly ruled against MMS by stating that royalties are due on the value of production at the well. He determined that MMS’ gas transportation rule was arbitrary and capricious and thereby ordered that it could not be implemented. The government has responded by asking the judge to clarify his decision so it can implement parts of its rulemaking. In conjunction with API, IPAA has filed a motion objecting to the government’s request.
This win led to an expedited filing on the oil valuation rulemaking. On April 10, 2000, IPAA filed a lawsuit, IPAA v. Baca, claiming that this rulemaking is arbitrary and capricious as well. Fortunately, IPAA was assigned the same judge who decided IPAA v. Armstrong. In response to these two lawsuits, Democrats from Texas and a group of Senators have sent letters to Secretary Babbitt requesting the oil valuation rule not be implemented until IPAA v. Baca is decided. IPAA’s oil royalty litigation task force is currently deciding if IPAA should file a stay with regard to the oil royalty rulemaking or to approach the government and see if it will agree to an expedited hearing schedule.
ACTION
It is likely the government will appeal IPAA. v. Armstrong. If so, the Land and Royalty Committee is seeking approval from the Board to respond to this appeal on behalf of the association. Additionally, IPAA is discussing a possible expedited hearing with MMS in regard to IPAA v. Baca.
Royalty In-kind. IPAA continues to pursue royalty in-kind as an alternative to royalty payments. IPAA strongly supports MMS' efforts to maximize and internalize royalty in-kind via pilots. IPAA supports targeted royalty in-kind legislation that would provide MMS additional tools to be more creative when marketing in-kind barrels. This "tool kit" legislation may be included in a more comprehensive energy-related legislative package.
August 2000
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