US SUED OVER GAS ROYALTIES

US SUED OVER GAS ROYALTIES

The Independent Petroleum Association of America said it filed a lawsuit against the U.S. Interior Department, challenging the validity of a new natural gas transportation regulation.

The rule, which pertains to the method of paying royalties on gas produced from federal leases, went into effect Feb. 1. IPAA contends that the rule is illegal and threatens future gas production by discouraging drilling on federal land.IPAA filed the lawsuit in Washington District Court on Monday.

Under the regulation, the Minerals Management Service - the agency in charge of collecting federal crude oil and natural gas royalties - is no longer allowing independent producers to deduct the full cost of transporting gas to the marketplace.

As a result, virtually all marketing costs - including aggregation, marketing fees, storage and transfer fees - are added to the wellhead price, which drives up the cost of the gas and means producers end up paying an inflated royalty, IPAA Chairman George Yates said, according to a transcript of a speech he gave in Washington.

''MMS is forcing the gas industry to include downstream marketing costs in the royalty payment equation. Plain and simple,'' Mr. Yates said.

''This is in direct conflict with the lease contract between producers and the federal government, which says that royalties are valued at the lease. We will not stand for it.''

Mr. Yates noted that the new rule also says a producer has a ''duty to market'' - an obligation to market gas at no cost to the federal government.

''In our view, the 'duty to market' regulation leaves too much room for interpretation and leaves a producer vulnerable (to an audit) years from now,'' Mr. Yates said. The new rule, he said, would keep ''a producer's liability in question for years.''

Mr. Yates reiterated the IPAA's hope for an MMS rule that determines the value of oil and gas at or near the lease between a buyer and a seller.

But he added, ''Unfortunately, there is little time left to resolve differences with a May deadline looming for a final regulation.''

Mr. Yates also said that ''IPAA believes the long-term answer to the royalty collection controversy is a royalty-in-kind program.''

In such a program, the producer gives the government a percentage of its crude oil or natural gas as a royalty payment, rather than a percentage in dollars of the value of the oil or gas.