American Oil and Gas Reporter - June 2015 - 127

ONRR's proposed rule purports to
offer simplicity, certainty, clarity and
consistency in product valuation while
decreasing compliance costs, but IPAA,
NOIA and API argue the rule instead
would remove much of the certainty that
has been a feature of oil and gas valuation
regulations since 1988.
"ONRR would create new opportunities
for the agency to second-guess lessees'
valuation processes, arrogate to itself the
unilateral ability to set aside its prescribed
regulatory processes, and exercise essentially unreviewable discretion to establish
the royalty value on a case-by-case basis,"
the associations say. "Where ONRR does
declare new bright-line rules, they are
drawn arbitrarily and conflict with prior
well-reasoned explanations and settled
expectations. Overall, the proposed rule
does not represent progress."
The associations add the proposed
rule contrasts sharply with those issued
by ONRR's predecessor, the Minerals
Management Service, when it overhauled
oil and gas valuation regulations in 1988.
At that time, they say, MMS responded
to industry concerns that agency-retained
discretion to establish royalty value would
allow it to second-guess royalty valuations,
even for arm's-length contracts reflecting
the marketplace, which could have led to
substantial audit demands for royalty underpayments and associated interest.
Default Provision
The industry coalition labels including
default provisions in the proposed rule
as "the most blatant, and problematic,
instance of ONRR's newly injected uncertainty." Under the proposal, ONRR
may decide it dislikes any lessee's reported
oil or gas valuation for any reason. If
that happens, the agency does not have
to give the lessee an opportunity to correct
any errors identified or use another valuation method, but may decide its own
valuation and the amount of royalty due.
NOIA, API and IPAA say a mere inadvertent or insubstantial paperwork error
could be enough to trigger the "default
provision."
"Unreasonably low arm's-length prices
or unreasonably high allowances, with
ONRR as the sole arbiter of what is 'reasonable,' also trigger the default valuation
provision," the associations point out.
"Moreover, ONRR could intercede even
without any observed error, if it simply
is not sure 'for any reason' that a lessee
'properly' valued oil or gas. In setting
the new valuation, ONRR could consider
'any information ONRR deems relevant'-
including the gas valuation benchmarks
ONRR proposes to rescind for lessees'
uses, and other metrics or information

unavailable to lessees.'"
The proposed rule deletes carefully constructed safeguards against the government
second-guessing arm's-length agreements,
the associations say. ONRR does this
despite its simultaneous recognition that
gross proceeds from arm's-length contracts
are the best indication of market value,
they add. Instead, ONRR is claiming "considerable discretion to establish the reasonable value of production using a variety
of discretionary factors and any other information the secretary (of the Interior)
believes is appropriate," they warn.
"Whatever the scope of ONRR's discretion may be legally, it does not follow
that ONRR can or should dispense with
the established rules whenever it wants,"
the associations respond. "ONRR provides
no indication of when it will (or will not)
substitute its judgment for the lessee,
how ONRR would wield such 'discretion,'
or what factors it would utilize. Rather,
lessees are left to guess if and when
ONRR will decide to insert itself into
regular business transactions and what
the results of such intervention will be.
That is, lessees must report and then
hope for the best-hardly a viable business
strategy."
Blanket Rules
ONRR's proposed revision also reverse
government policies and allowances that
industry needs to develop federal leases,
the associations continue. They point to
proposed "blanket" rules that remove
current flexibility and accommodations
without explaining the changes, although
they note the revisions increase the
agency's revenue streams. One example
is ONRR's reversal of treating all subsea
movement of bulk production as gathering
rather than transportation, which the associations say ignores any relevant facts

such as the long distances traveled and
the relative scarcity of deepwater surface
facilities.
"Companies that undertook the risk
and expense, and paid higher bonuses to
develop deepwater oil and gas resources
for the last 16 years, did so relying on
ONRR's existing, well-reasoned deepwater
policy (that recognized) much of the
movement of oil and gas from subsea
manifolds to distant platforms (some 50
or more miles away) constituted a deductible transportation cost and was not
'gathering' as defined by the regulations,"
the associations say.
According to the proposed rule, for
oil and gas produced from Outer Continental Shelf leases, ONRR would declare
categorically that "any" movement of
production from the wellhead to a platform
was gathering. The agency's economic
analysis acknowledges the revision will
have significant economic impacts.
API, IPAA and NOIA argue ONRR
is relying on reasoning that doesn't support
its conclusion. They say the two legal
actions the agency cites as justification-
a 1999 ruling by an administrative judge
in an appeal filed by Kerr-McGee Corp.
and a 1961 decision involving California
Co.-have little or nothing to do with
gathering or transportation.
ONRR's cost estimates of the impacts
of the revised rule on the offshore industry
are equally faulty, the associations say.
The agency projects a $17.4 million$23.6 million total annual cost to all of
industry, but the industry group argues
even conservative assumptions on future
activity and economic conditions yield
an annual royalty increase of $1.5 million-$2.0 million for each project. "At
that rate, ONRR's estimate would account
for only 8-10 subsea projects across the
entire industry," they point out.
❒

Survey Respondents Choose
Prices As Top Industry Issue
HOUSTON-Pressure on commodity
prices was cited as their biggest concern
for 2015 by 73 percent of industry professionals surveyed at the NAPE International in February, according to the second
annual Capital One Energy Survey.
The focus on energy prices represented
a 50-point increase from those Capital
One says it surveyed at the 2014 Winter
NAPE Expo in Houston. Only 11 percent
of respondents indicated increased regulation was their greatest concern, down
from 40 percent last year, the firm adds.
Capital One says 89 percent of this

year's respondents did not expect a significant bounce in energy prices for at least
12 months. Only 10 percent said they expected a price rebound within six months,
which Capital One says is a significant
contrast from last year's more optimistic
findings when two-thirds of respondents
expected gas prices to remain steady or increase in 2014, and 71 percent anticipated
similar stability for crude oil prices.
Survey participants selected U.S. energy
independence (58 percent) and opposition
to shale development (27 percent) as the
industry trends likely to gain the most
JUNE 2015 127
American Oil and Gas Reporter - June 2015

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