US to raise oil, gas valuations it deems too low

OREANDA-NEWS. July 01, 2016. The US Interior Department has revised a decades-old policy so it will have the ability to adjust royalty valuations of oil and natural gas developed on federal lands it believes are "unreasonably low."

The regulatory changes, released today, are intended to prevent companies from selling oil and natural gas at discounted prices in an attempt to reduce royalty payments to the federal government or tribes. Interior will have the ability to adjust a company's oil and gas valuations if they are 10pc below a reasonable market prices for similar quality gas in nearby locations.

Oil and gas companies have opposed the changes, which Interior proposed early last year. Three top lobbying groups for oil and gas producers complained the policy would let Interior "second-guess" royalty valuations and remove certainty in royalty valuation practices that have been in place since 1988.

The rule would give Interior "essentially unreviewable discretion to establish the royalty value on a case-by-case basis," the American Petroleum Institute, the Independent Petroleum Association of America and the National Ocean Industries Association said in comments on the rule last year.

Those groups did not have an immediate reaction to the final regulation.

Industry trade group the Western Energy Alliance said the regulations would hurt oil and gas producers by removing an earlier policy that let them claim royalty deductions for business-related expenses. The group's government affairs director Kathleen Sgamma said the loss of those deduction rule could make "significant amounts" of gas development on federal lands uneconomic.

The regulations maintain a policy of setting oil and gas royalties based on the first "arm's-length" contract between non-affiliated companies. Interior also plans to offer an index-based option for royalty valuation of natural gas and NGLs, in which a gas producer could use an index price in a publication that has been approved by Interior.

Interior secretary Sally Jewel said the new royalty policy was "long overdue and urgently needed." The regulations will create a simpler market-oriented process that ensures US taxpayers will receive the royalties they are owed, Jewell said today.

The regulations will take effect on 1 January 2017. Interior estimates the regulations will increase oil and gas royalty collections by \\$73-84mn, equivalent to less than 1pc of the \\$8.1bn in oil and gas royalties collected in fiscal year 2015. The agency projects that industry's administrative costs will decline by \\$3.6mn because of the rule.