New royalty rule could stifle production, create uncertainty – industry

Erik Milito, API upstream and industry operations director.

“This rule directly undercuts the goals described by the rule itself. Many of the provisions in the proposal are arbitrary and create wide business and contract uncertainty, and could further stifle energy production on federal lands,”  said Erik Milito, API upstream and industry operations director, following the US Department of the Interior’s Office of Natural Resources Revenue (ONRR) release of a final regulation on valuing royalties from oil and natural gas produced on public lands.

According to the ONRR, the purpose of implementing this final rule was to offer greater simplicity, certainty, clarity, and consistency in product valuation for mineral lessees and mineral revenue recipients. To ensure that Indian mineral lessors receive the maximum revenues from coal resources on their land, consistent with the Secretary’s trust responsibility and lease terms.

And to decrease industry’s cost of compliance and ONRR’s cost to ensure industry compliance while providing early certainty to industry and to ONRR that companies have paid every dollar due.

“Clear, consistent leasing and royalty terms are part of what makes investments possible. Preserving certainty and fairness in the process is critical for the consumers and workers that benefit from domestic production,” said Milito.

An area of concern for the oil and natural gas industry, a new “default provision” permits the agency to “second-guess” lessees’ royalty valuation yet provides no standards for when and how such a decision would be made and justified.

Permian Basin oil and gas producers are switching from rod pumps to plunger lift, with significant cost savings.

ONRR has also redefined “gathering” for Outer Continental Shelf (OCS) leases to no longer allow for transportation deductions for movement in the OCS areas from the wellhead to the first platform.

This is significant for companies as the first movement of production could span hundreds of miles and could bring additional costs of tens of millions of dollars annually without providing companies any flexibility to conform their operations to the new rule.

“We keep hearing from the Administration that it wants to get ‘every dollar due’ from oil and natural gas production on federal lands,” Kathleen Sgamma, vice president of government and public affairs, in a statement.

“Yet there are no ‘dollars due’ if you drive production off federal lands by making it too time consuming, complex and costly. The Administration continues to further discourage development on federal lands with this and other adversarial regulations that reinterpret laws contrary to the will of Congress.”

She says small businesses will be particularly hard hit with this regulation, which disallows normal deductions for the cost of doing business, charging royalties for money producers haven’t earned.

“For all the complaints against the IRS, American taxpayers are allowed to deduct expenses and aren’t taxed for income they haven’t made, yet the Interior Department has finalized a rule that does just that,” Sgamma said.