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March 2007 Pipeline & Gas Journal

House Bill Threatens
Gulf Gas Production

The Oil and Gas Royalty Retaliation Act (note to readers:
just kidding, it isn’t really called that) the House passed on Jan.
18 would impose a new conservation fee on natural gas pulled
out of the Gulf Coast and cancel royalty relief for natural gas
companies which was included in the 2005 energy bill.
The House bill, when it was passed, was seen chiefly as an
attack on oil companies that are reporting huge profits which
raise questions about the necessity of the tax breaks for them in
the 2005 energy bill. But also motivating passage of the Creating
Long-Term Energy Alternatives for the Nation Act of 2007
(CLEAN Act) is the recouping of some of the federal revenue
losses stemming from the Department of Interior’s failure to
include royalty relief thresholds in Gulf leases awarded oil and gas
companies in 1998 and 1999.
The department’s carelessness with those 1998-99 leases,
where the absence of trigger prices has cost the federal government
as much as $950 million to date — with the loss potentially
running as high as $10 billion — is driving the bill politically.
Those leases were awarded under the 1995 Deep Water Royalty
Relief Act (DWRRA) which requires gas producers to pay the
government fees for gas taken off federal land when gas prices in
the commercial market rise above a certain trigger price.
That trigger price was inadvertently left out of the 1998-99
leases which were signed with 45 companies, said Interior
spokesman Gary Strasburg. Interior has recently renegotiated
those leases with six companies.
An investigation by the Inspector General at Interior found
an inordinate amount of buck-passing and called the failure
of the department to include trigger prices in those leases the
result of “a shockingly cavalier management approach to an
issue with profound financial ramifications, a jaw-dropping
example of bureaucratic bungling…”
Congressional anger at Interior for that sloppiness combined
with embarrassment over huge oil company profits in the wake
of the petroleum tax cuts in the 2005 energy bill helped House
Democrats ram the CLEAN Act through as a first order of
business in January. The 264-163 vote was short of a two-thirds
majority needed to override a presidential veto which is likely
if the Senate passes the exact same bill.
The CLEAN Act (H.R. 6) will impose a fee on the holders
of the royalty-free 1998 and 1999 leases unless the companies
agree to renegotiate them to include royalties. According to
Congressional Budget Office (CBO) projections, these provisions
would raise $6.3 billion over 10 years – funds which can be
used to finance renewable and alternative energy initiatives.
However, while H.R. 6 was motivated in part by the Interior
calamity with offshore leases, the bill itself goes far beyond those
leases. It cancels royalty relief given to gas and oil companies by
the Energy Policy Act of 2005, including a provision in that law
which extended royalty relief initially established administratively
by the Minerals Management Service in January 2004.
The MMS program extends royalty relief to natural gas wells
drilled in less than 200 meters of water and which produce gas
from intervals below 15,000 feet. This program specifies a trigger
price for natural gas of $9.91 per million Btus in 2006, substantially
exceeding the average NYMEX futures price of $6.98 for 2006, and
ensuring that all gas production is exempt from royalties in 2006.
Section 344 of the Energy Policy Act expanded that program
from waters less than 200 meters deep to waters less than 400
meters deep. Although the act does not specifically cite the
amount of gas to be exempt from royalties, it provides that this
amount should not be less than the existing program, which
currently ranges from 15-25 Bcf. H.R. 6 cancels royalty relief
for gas from wells in that 200-400 meter deep water.
Mark Stultz, vice president industry and public affairs at the
Natural Gas Supply Association, says the House bill will discourage
investment in U.S. resources at a time when leaders in
Congress are hoping to put a greater emphasis on energy production.
“With regard to the 1998-99 leases, the bill would strike a
blow at contract sanctity,” he adds. —Stephen Barlas

Rules Of Conduct

FERC is revising its standards of conduct for natural gas
pipelines, essentially putting them back to where they were
prior to FERC issuing Order 2004 in October 2004. The purpose
of Order 2004 was to unify separate electric utility and
natural gas standards, and to make them a little more far-reaching,
too, most notably by extending their application beyond
marketing affiliates to non-marketing affiliates.
However, natural gas companies filed a lawsuit and the U.S. Court of
Appeals for the District of Columbia Circuit in the National Fuel decision
(Nov. 2006) agreed that FERC had overstepped its boundaries.
The court in National Fuel Gas Supply Corporation v. FERC
(National Fuel) indicated the Commission could seek to justify
application of the expanded scope of the Standards of Conduct
rule on natural gas pipelines if it could provide new record
evidence or a compelling theoretical argument. But on Jan. 18,
FERC said it wouldn’t go that route, although it has proposed
some tweaks to the pre-Order 2004 standards for natural gas.
In the proposed rule it issued on Jan. 18, FERC said the standards
would only apply to marketing affiliates. The standards
require employees engaged in transmission services to function
independently from employees of its marketing affiliates and
impose prohibitions restricting transmission providers from
sharing certain information with their marketing affiliates.
However, the Commission wants to expand the definition of
“marketing, sales and brokering” to include entities that manage
or control transmission capacity, such as asset managers or agents.
Another issue up for consideration is when a natural gas transmission
company should first become subject to standards of conduct.
Under Order 497, which was in effect until Order 2004 hit the
streets, the standards applied as soon as the pipeline began transportation
transactions with its marketing or brokering affiliate.
Order 2004 changed that so that the standards clicked in
when the transmission provider began soliciting business or
negotiating contracts; that was further modified by Order 2004-
B which kicked in the standards when the pipeline is granted
and accepts a certificate of public convenience and necessity.
That was one of the issues at the heart of the National Fuel
appeal, but the court did not address it in its final decision.
In an interim rule FERC issued on Jan. 9, it relocated the start
date for the standards to when the pipeline company began transportation
transactions with its marketing affiliates. Then in the
proposed rule issued on Jan. 18, it made another change, which
it is asking for comment on, suggesting that the standards begin
applying within 30 days of the transmission provider becoming
subject to the Commission’s jurisdiction. —Stephen Barlas