Energy companies are concerned they could be forced to pay higher oil and gas royalties under a new Obama administration effort to revamp royalty calculations for energy extracted from federal lands and waters.
Energy companies are concerned they could be forced to pay higher oil
and gas royalties under a new Obama administration effort to revamp royalty
calculations for energy extracted from federal lands and waters.
The Interior Department, which launched the effort last month, insists the proposed
changes will simplify how oil and gas is valued and should not increase or
decrease the royalty payments themselves.
Oil and gas companies are not so sure. They say changes could create an unfair
calculation that leads to higher royalty payments, which would dampen the
industry's profits and hurt smaller producers particularly hard.
"It makes us nervous when we hear of the government trying to simplify
things," said Kathleen Sgamma, director of government affairs for the
Western Energy Alliance, a group representing oil and gas producers in western
U.S.
states.
This debate comes as the energy industry has battled the Obama administration
on other matters, such as a bid to eliminate billions of dollars of tax
incentives for oil and gas companies.
The new royalty formula also comes as the Obama administration looks for ways
to trim the widening deficit. Generating nearly $9 billion in reported revenue
last year, oil and gas royalties represent one of the largest sources of
non-tax revenue for the federal government.
The Interior Department is also considering, through a separate effort, an
increase to onshore production royalty rates, now at 12.5%. The royalty rate
for offshore production is 18.75%.
Government watchdogs have said the Interior Department's royalty program fails
to collect the government's fair share of revenue from the industry. Earlier
this year, the Government Accountability Office identified the program as being
at a "high risk" of fraud, waste, abuse or mismanagement.
When calculating royalty rates, the Interior Department can often rely on the
sale price between the buyer and seller to determine the value of the oil or
gas. But in many cases--such as when affiliated companies sell to each
another--the Interior Department questions whether this sale price reflects the
true market value and conducts its own review. This creates a burden for
government officials and leads to disputes with the industry.
Hoping to simplify the process, the Interior Department is considering a process
where it relies on standardized prices to calculate royalty payments. These
could be published prices from trade publications or prices at which the
products are traded on exchanges.
But the industry is concerned standardized prices could lead the Interior
Department to assign a higher value to oil and gas than what producers receive
from a sale. And that would lead to bigger payments to the federal government.
Such a system could hurt smaller producers particularly hard because they often
receive less money for their production than large multinational companies,
said L. Poe Leggette, partner-in-charge at Fulbright & Jaworski's
Denver
office.
Interior Department spokesman Patrick Etchart said they welcome the industry's
comments. Interior wants a system "that provides fair certainty to us that
we get paid the proper amount," he said.
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