Oil and gas in Washington

Congress temporarily blocks MMS's royalty valuation definition change

June 1998 Vol. 219 No. 6
Washington

Charles D. Matthews,
Contributing Editor

National oil and gas security enhancement plan

Members of the Congressional Oil and Gas Forum, a bipartisan coalition of senators and representatives interested in oil and gas industry issues, are going to become very important to the industry during the remainder of the 105th Congress. Some of the members and their staffs have been working with industry representatives to develop legislation to support domestic producers during periods of crippling low prices.

Those efforts came to fruition recently when the Forum members and industry people got together to discuss four new bills that are the core of a dynamic new energy security plan. Primary Senate sponsors include: Energy & Natural Resources Committee Chairman Frank Murkowski (R-Alaska), Sen. Kay Bailey Hutchison (R-Texas), Assistant majority Leader Don Nickles (R-Oklahoma) and Budget Committee Chairman Pete Domenici (R-New Mexico).

These four bills and what happens to them in Congress is so important to the domestic oil / gas industry that the remainder of this column will be devoted to acquainting you briefly with each of them.

S. 1919, Federal Stripper Well Royalty Deductions. This bill has two principal sections. First, it authorizes and directs the Secretary of the Interior to provide permanent regulatory authority to reduce the royalty rate for stripper oil and gas wells on federal lands. The Secretary already has limited authority to grant such royalty reductions, but he should be given more permanent authority, and stronger directions.

Second, the bill requires the Secretary to suspend any minimum royalty (if applicable) and per-acre lease rental on stripper oil and gas wells on federal lands during the time of any royalty rate reduction. This will ensure that stripper well operators get the greatest leeway during hard times. The applicable lease rental and minimum royalty must be reinstated once the stripper well royalty rate is reduced.

S. 1920, Transfer of Certain Federal Oil / Gas Lease Management Functions. Enactment of this bill will transfer the BLM's authority over certain oil / gas regulatory duties to the states; put into effect distinct and reasonable time frames for leasing decisions and appeals; require responsible actions to increase leasing; and reduce federal appeals delays by rejecting stay requests from parties that have no standing.

BLM and the Forest Service will be required to offer competitive oil and gas leases 90 days after lands are "nominated" by prospective lessees. They will also be required to render final decisions on administrative appeals within two years.

S. 1929, U.S. Energy Economic Growth Act. The Gentlelady from Texas did a very good job of taking the primary responsibility for presenting and explaining this bill on the Senate floor. She said the bill will do three things:

First, marginal well tax relief will be provided for producers who operate the wells and keep Americans working. This bill provides for a maximum $3 per bbl tax credit for the first 3 bbl of daily production from an existing oil well. In addition, a marginal gas well will receive $0.50 per Mcf for the first 18 Mcf of daily natural gas. This tax credit would only occur when prices are low; it is phased out when prices increase.

Second, inactive well tax relief creates incentives for independent oil and gas producers to recover abandoned wells and put them back into production. This economic incentive has an impressive track record. In Texas, a similar state law resulted in returning more than 6,000 wells to production. The estimated annual production from these wells is worth $565 million at the wellhead, and about $1.65 billion to the economy of Texas each year. Thirteen states already have inactive well recovery programs, and this program will allow other states to grow and prosper.

Third, other incentives are created when changes are made in the tax code that make it easier for producers to take full advantage of already existing tax credits. Both geological and geophysical expenditures on domestic production, and delayed rental payments would be allowed to be expensed at the time incurred, rather than capitalized over the well's life. Two relatively new types of drilling methods — hydro-injection and horizontal drilling — are included as qualified enhanced oil recovery methods for purposes of the Enhanced Oil Recovery Tax Credits.

S. 1930, The Royalty Enhancement Act of 1998. Senate Assistant Majority Leader Don Nickles started by calling attention to the fact that once again our domestic oil and gas producers are facing devastating losses due to a significant drop in oil prices. This crisis creates a dangerous situation for the industry and for our national security. He said, "Unfortunately, the policies and practices of the Administration have exacerbated the problem, not helped … (there is) the need to reverse some of MMS's current erratic, ever-changing royalty valuation practices."

Nickles said Congress thought it had solved some of the Interior Department's bureaucratic problems when it passed the Federal Oil and Gas Simplification and Fairness Act in 1996. But, obviously as important as the oil / gas industry is to America's national economy and global stability, "the MMS has failed to get the message we sent them in 1996 that the American people can no longer tolerate this inefficient bureaucracy."

Charles D. Matthews is president of Charles Matthews & Co., consultants and advocates on government relations, Arlington, Virginia.