US oil, gas producers must recalculate royalties

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US oil, gas producers must recalculate royalties

14 June 2019

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Oil, natural gas and coal producers operating on federal land must recalculate years of royalty payments using tougher rules expected to cost them upwards of $72mn/yr.

The US Office of Natural Resources Revenue (ONRR) yesterday sent a letter to all leaseholders on federal and tribal land instructing them to tally royalties dating back to 1 January 2017 using a more stringent valuation rule finalized under former president Barack Obama.

A court reinstated those regulations two months ago after finding attempts by President Donald Trump's administration to repeal them were unlawful.

The tougher standards are expected to require producers to pay $72mn-85mn/yr in additional royalty payments to the government. An additional hit to the industry will be the time required to recalculate the royalty payments for tens of thousands of wells, an industry source said.

Oil, gas and coal leaseholders will have until 1 January 2020 to submit corrected reporting and royalty payments, ONRR said in the letter.

Industry groups, which successfully lobbied the Trump administration to halt enforcement of the Obama-era royalty rule, are mounting new efforts to challenge its enforcement. The trade group the American Petroleum Institute said it filed a lawsuit against the rule yesterday, citing aspects it said would increase uncertainty and stifle energy production.

"The industry is committed to paying its fair share of royalties for oil and natural gas production on federal lands, but the Obama administration's 2016 Valuation Rule is tantamount to trying to play a sports game when there are no clear rules," the trade group said.

The Obama administration spent years developing the 2016 rule, which was meant to stop tactics that regulators said allowed producers to pay less than their fair share of royalties. It prohibited coal producers from calculating royalties based on sales to affiliates. And it would have given regulators the ability to adjust upward a company's below-market valuation of federal oil and gas.

The new royalty rule went into effect on 1 January 2017, but the Trump administration suspended and quickly repealed it, citing alleged "defects" and a need to reduce uncertainty for industry. A federal court in April threw out the repeal, which it found was unlawful and not adequately supported in the record.

ONRR said it was evaluating options for issuing new rules that would attempt to offer more simplicity, certainty and clarity for royalty reporting.