MASSIE et al v. GOVERNMENT OF THE DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA

Filing 120

MASSIE et al v. GOVERNMENT OF THE DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA

Doc. 120 Att. 3

Roswell Workshop

Meeting held at BLM office, Roswell, NM , October 21, 1997.

Attendees:
Jennifer Hurst - Yates Petroleum Neale Hickerson - Navaj 0 Refining Rhonda Nelson - Marbob Company Dave Hubbard - MMS Royalty Valuation Division Peter Christnacht - MMS Royalty Valuation Division Todd McCutcheon - MMS Policy and Management Improvement Dave Domagala - MMS Royalty Valuation Division Johnny Knorr - Navaj 0 Ref ining Margie Oleson - Hayco Kay Huffmon - Hayco will Waggoner - Independent Petroleum Association of New Mexico Dan Girand - Mack Energy Mark Murphy - Strata Producing Company
Meet ing begins at

Hubbard begins with an explanation of rule and goes through the handout.

1: 30 p. m. Dave

Johnny Knorr - The terminology in using the trade month with October quits trading in NYMEX is different than what we

September.

use.

Dave Hubbard - The first of the production month is how you tie to the production month.
Peter Christnacht - We have had comments to revise the timing of using NYMEX.

Johnny Knorr - You might want to change that to the calender

month.
Dave Hubbard - As of the first of any month , we would look at the near term trading month.
Johnny Knorr - What price will you use?

Dave Hubbard - The average of the daily close prices in the trading month.
Todd McCutcheon - How about using a calender to describe what we propose to do?

Johnny Knorr - No one does it the way you are describing

it.

Dockets.Justia.com

Comments Received about the MMS Proposed Federal Crude Oil Valuation Rule Bakersfield , California Workshop Oct. 16 , 1997

Attendees
Michael Sansing Cathy Reheis

Suzanne Noble
John Vautrain

Harold Orndorff
Greg Meisinger

Jeff Braun Jeff Prude
Debbie Gibbs Tschudy T odd McCutcheon

Peter Christnacht

Independent Oil Producers Agency, Bakersfield Western States Petroleum Association Western States Petroleum Association Purvin & Gertz Aera Energy Aera Energy California State Controllers Office Bureau of Land Management , Bakersfield Office. MMS MMS MMS

Debbie Gibbs Tschudy opened the meeting by welcoming the participants and explaining that

MMS was interested in holding a meeting in Bakersfield to allow producers to comment on the rule without the burden of traveling to Denver or Houston. Next , she gave a brief summary of the proposed rule and supplementary proposed rule. She then gave an overview of the Denver and Houston workshops. She also announced that the comment period would be extended to November 5th , and that an additional workshop would be held October 28th (later changed to Oct. 27th. ) in Washington, D.

The floor was then opened to comments from the participants.
J. McCabe Let me begin by stating that the State of California has a problem with the modified provision in the July 3 supplementary proposal regarding calls. We will submit written comments asking for the change permitting value based on competitive crude oil calls to be withdrawn. We don t believe that it will be possible for auditors to verify whether lessees are in compliance. We also would like to see the two year purchase provision back in the rule. This would apply to all lessees except for true captive sellers. We don t believe that captive sellers represent a true market price , but we are sensitive to their having to pay royalties
on phantom income.

The State also feels that the process is dragging on entirely too long. If MMS wants to tinker with this some more , let' s have a separate rule for California. We have been at this issue for over 2 decades , and every day we delay is less money for school funding in our state. Let me also state that we do not hold MMS

responsible for this. It is obvious that the integrated oil companies wish to delay the process as long as possible. It' s been almost two years since we began this process and they have brought nothing to the table.
C. Reheis

We don t see where the supplemental rule gives our members any relief. We believe that posted prices are the market value.

J. McCabe

Our experience in the Long Beach litigation is that postings are not the market price. ANS is the swing crude on the West Coast. It has been acknowledged by the majors under testimony. The interagency taskforce documented that the companies compared their purchases of California crude against ANS and considered California postings to undervalue crude oil by $3- 4 per barrel.
From an economist's point of view , this is not a real spot market. Only a limited number of tankers during any given month unload ANS. The state sells its production in a bidding process. This would be a better value.

J. Vautrain

H. Orndorff

P. is the only seller of ANS crude. Their price is not a good price indicator.

P. Christnacht That is somewhat problematic.

J. McCabe

BP is not a take it or leave it price. Other producers sell and exchange ANS. the contracts we have looked at , we have seen ANS prices track quite nicely with the ANS spot price. There are good incentives for ANS producers to get a competitive price. We don t see the same dynamics with California production.
It' s difficult to get information on exchanges. There may be a way to get market

J. Vautrain

information. One could correlate gasoline to residual fuel oil.
C. Reheis

It sounds like MMS would like our help in coming up with alternatives for
differentials.

G. Meisinger I am having

some trouble grasping the essence ofthis issue.

We have these

alternatives but we need to see them fleshed out a bit more.
J. McCabe

We want a rule now. The majors have had nearly two years to get a proposal on
the table.

J. Vautrain

Why are you getting less than market value for your State sell-off oil? Why don we use the State sell offs to set a value for California crude oil?

J. McCabe

The market is not liquid enough to get the adjusted ANS price. The pipelines continue to be a reason for undervaluation of California crude. Access to our oil is

Casper

Workshop:

Meeting at BLM office 1701 East " E" street, Casper, Wyoming October 16th , 1997.

Meeting begins at

1:02 p.

At tendees :
Dave Hubbard - MMS - Royalty Valuation Division Bob Kronebusch - MMS - Policy and Management Improvement Dave Domagala - MMS - Royalty Valuation Division Ron Redding - True Oi 1 Company Doug Richardson - Goldmark Engineering Jack Blomstrom - True Oil Company Bob McDougall - Phoenix Production Co. Dwain Park - True oil Company Rich Huwaldt - Wyo. Dept. of Audit Francine Schoen - Wyo. Dept. of Audi Sharon Redding - True Oil Company Jeff Cook - Mercury Exploration Jerry Herz - Eighty Eight Oil Michele McIntyre - Pet. Assoc. of Wyoming Jack Bradley - Manx Oil
Dave Hubbard begins the meeting at 1: 05 , begins with going through the handout. Meeting opened for comment including MMS questions, at 1:31.

Jack Blomstrom - MMS is stuck looking at areas and zones. A lot of the things that are of concern in the rule do not fit here.
Bob Kronebusch - We recognize the problem. Is there a way to value this oil?

here.

That r S why we are

Dave Hubbard - The rule probably will have a separate part for length Rocky Mountain areas , we need some feedback on non- arm sales, do you have ideas?
Jack Blomstrom - Gross proceeds will survive? length sales? on arm
Is there any limit

Dave Hubbard - The 2- year

limitation is gone now; true arm length sales will represent royalty value.

Jack Blomstrom - Lease sales will survive as an arm Gross proceeds framework?

length

Dave Hubbard - Yes.

Houston - Second Workshop

CRUDE OIL VALUATION WORKSHOP (October 14 1997)
ATTENDEES
NAME
Ben Dillon Amy Cebull David Blackmon Shirley Neff Sandra Hendrickson Bonn Macy Tom White Jonathon Hunter Stevia Walther David Simpson Michael Mo1berg Sara Tays Anita Gonzales- Evans
Linda Allen

COMPANY NAME
IPAA
Nance Petroleum

PHONE NUMBER
[phone]

Burlington
Shell

Elf MMS
Walter Oil
Liskow & Lewis

Wayne Pachall
Bob Kronebusch

Mary Stonecipher
Jo1m Clark

John Haley Ken Wells

Don Lynch
Ronnie Martin

Bob Steubing Michael L. Adams Fin Doughty
Bryce Bales

Valdean Severson

Tommy Allen Robin Perrine Bob Teeter Mary Ann O' Malley
Robert Leo
Georgianna Haines

Liskow & Lewis Total Minatome Total Minatome Exxon MMS Pennzoil Texaco MMS/PMI Amoco Conoco Conoco Texaco Texaco Texaco Hall- Houston Oil Company State of Louisiana Calcasieu Refining Company University of Texas Lands State of New Mexico Marathon Oil Company Scurlock Permian Coastal
Amoco Marathon Marathon Marathon

[phone] (817) 347- 2356 (202) 466- 1400 [phone] (202) 208- 3827 (713) 659- 1221 (504) 556- 4131 [phone] [phone] [phone] [phone] [phone] (713) 546- 4982 [phone] [phone] [phone] (405) 767- 5044 (281) 293- 1683 (504) 595- 1213 (504) 595- 1331 (713) 752- 7793 [phone] [phone] [phone] [phone] (505) 827- 0952 [phone] [phone] (713) 877- 7019 [phone]
[phone]

Dow Cambell Fred Hagemeyer

[phone] [phone] (713) 296- 2505

Treva Kigar
Deniese Palmer-Huggins

David Darouse Jerry Schanke Donald Norman Greg Moredock Terry Kyle David Lawrence Becky McGee Adrian AcEvedo
Lawrence Dreyfuss

Marathon NYMEX State of Louisiana API API Cabot Kerr- McGee Scurlock Permian Corp Energy/DPC Oryx Oryx Energy Scurlock Permian Corp
Anadarko Petroleum Corp

[phone] (713) 658- 9293 [phone] (202) 682- 8116 (202) 682- 8546 [phone] 270-7295 (405) (713) 646- 4387 [phone] (972) 715- 3865 [phone]

April Kanah

CRUDE OIL V ALVA nON WORKSHOP HOUSTON

(October 14 ,

1997)

9:00am
Deborah Gibbs Tschudy

Introducti ons/Houskeep ing/ agenda Summary of previous workshops.

Purpose is to receive comments on existing alternatives and new ones. Next 3 workshopsn Bakersfield , California, and Casper , Wyoming on October 16 and Roswell , New Mexico on October 21. Summary of previous workshops will be on Internet. At Denver workshop September 30- 0ctober 1 , 1997 , had 8 industry, and 9 State
representatives. Deborah Gibbs Tschudy summarized topics covered (Alternatives 1and industry/State responses. Brainstormed various other alternatives.

At Houston workshop October 7 - 8 , 1997 , further discussed alternatives. Lots of feedback from marketers. Concern about MMS unwillingness to permit marketing cost deductions. Some State support for fixed costs. Many wanted to use gross proceeds after multiple exchanges. Discussion of gross proceeds use even where calls involved. Proposal to limit aggregation points to simplify differentials. Support for different methods for California , Rocky Mountains , rest-of country. Discussed sales where company acts as refiner in some areas and marketer elsewhere. Want to talk about practical valuation methods for Rocky Mountains area
Bob Teeter (Coastal)
Owns 5 domestic refineries--one in New Jersey, 1 in Corpus Christy--mostly supplied by

foreign crude-- thus doesn t think should be classified as Doesn t think refiner/non-refiner breakdown should depend on refinery there s a sale, should be treated differently.
Deborah Gibbs Tschudy

refiner.

ownership. (If

Comments on Alternative 1 (bid-out program)?
Ben Dillon

AA was willing to discuss significant quantities regarding tendering programs (putting industry volumes " at risk" Thinks tendering can be 1 st benchmark onshore and offshore.
Switching of format may lead to lack of comments. IP

Deborah Gibbs Tschudy General Statelindustry support for tendering as 1 st benchmark?

Audience General Agreement

Mary Ann O' Malley

Wanted better description of tendering. BP does outright sales every dayn hopes these types of cases can be included in tendering
Ben Dillon Philosophically, outright purchases and sales should be considered along with tendering. Need to work on specific criteria. Seems Number I issue was comparability. Thought we could reach agreement , though, on like-quality and field or area. Not much movement seen on MMS' s part on comparability. Wants " sideboards " so don t move to next benchmarks because auditors don t see "comparability --sing1e biggest issue he sees.
Deborah Gibbs Tschudy

Should outright sales be included in tendering program?
Mary Ann O' Malley
Using tendering as benchmark

exclusive of outright sales otherwise seems to be a change in way business actually done. Should consider outright sales under tendering umbrella.

Ben Dillon How provide further comments to MMS on comparability?
Deborah Gibbs Tschudy

Comes down to: how can arm length payor know , the next month , whether it paid proper value , and how does MMS know it reflects total value received for production? And how does MMS know the 10 percent reflects value for all production? Need written comments on these.
Dave Darouse

No official position on tendering
Deborah Gibbs Tschudy Move to alternative 2 -- DPC/IP AA benchmarks

Ben Dillon Summarized what was agreed on last week: Benchmark 1 Tendering 2 (different than original)--comparables using outright sales & purchases 3 dropped (3rd party sales/purchases) 4 MMS-calculated value with payor certification of arm length 5 Netback--if refiner, maybe netback from spot price. Non-refiner , use spot or netback through affiliate. But wants marketing cost deductions

Becky McGee DPC had also endorsed benchmarks-- position remains that , even beyond comparability issues , there will be complexities we must overcome. Whether under tendering or comparable sales , thinks lease indicator best. Netback only as last resort. Lots of costs are added value that MMS isn t considering as deductions. Some members may have refiners , but don t be quick to characterize or " cubbyhole " situations-- Iook at actual facts. Supports benchmarks as modified in workshops--will give written comments.
Fred Hagemeyer

Alternative 2--focuses on arm s length notion. Audit criteria should not overwhelm

concept of market value at lease. Need to find comfort level on verification. Segmenting classes of trade may be arbitrary (i. , refiner/non-refiner). Lessors/operators may be willing to verity their arm length status.
Deborah Gibbs Tschudy

Little State support for lease- based benchmark?
Dave Darouse

Past comments stand.

Bob Teeter Generally don t know status of 3rd party sales. But get paid by such entities--often know
what other parties get in a field.
Deborah Gibbs Tschudy

But auditors may say you should have gotten another , higher price in field.

Bob Teeter
thinks should rely on what

you got

Deborah Gibbs Tschudy For Rocky Mountains-- lease- based indicators.

If

arm

length sales are less than 10

percent by volume , how should non-arm what?

length production be valued.

Unot NYMEX

Fred Hagemeyer Standard (10 percent) becomes meaningless. The marginal barrel drives price.
Deborah Gibbs Tschudy But auditors may say some percent (such as 9 percent) may not be significant quantities.

PUBLIC HEARING ON

MINERALS MANAGEMENT SERVICE'

SUPPLEMENTARY PROPOSED RULES ON OIL V ALUA nON

taken on February 18 ,

1998

beginning at 9:00 o clock a.
in the offices of the Mineral' s Management Service

Houston Compliance Division

4141 North Sam Houston Parkway East Houston , Texas
before Amanda L. Smothers , Certified Shorthand Reporter
in and for the State of Texas
taken pursuant to notice

under the Texas Rules of Civil Procedure.

AMANDA SMOTHERS , CSR (281) 443- 1623

INDEX

PAGE

Appearances

Summary of the rule by:

Ms. Deborah Gibbs Tschudy

Speaker No.

Ben Dillon

IP

Speaker No.

John Haley, Conoco

Speaker No.
Tom White, Walter Oil and Gas

Speaker No.

George Butler, Chevron

AMANDA SMOTHERS , CSR (281) 443- 1623

APPEARANCES

MEMBERS OF THE PANEL:

Peter Christnacht, Mineral Economist for M M S
Dave Domagala, Mineral Economist for M M S
Dave Hubbard, Chief of Economic Valuation Branch with M M S
Bob Kronebush ,

Office of Policy and Management Improvement

Don Sant, Deputy Associate Director for
Royalty Management of M M S
Debbie Gibbs Tschudy, Chief of the Royalty
Valuation Division of M M S

Notes--meeting on MMS' s proposed oil royalty valuation rule

Meeting held Thursday, July 9 1998 , at Senate Russell Building. Participants at table included:
True Oil Co. Claire Farley, Texaco North American Production Thomas P. White , Vision Resources , Inc. Victor G. Beghini, Marathon Oil Co. Jack E. Little, Shell Oil Co. Robert L. Keiser, Oryx Energy Co. J. Larry Nichols, Devon Energy Co. Cynthia Quarterman , Director, MMS Bob Armstrong, Assistant Secretary for Land and Minerals Management Senator Breaux (Louisiana) Senator Domenici (New Mexico) Senator Landrieu (Louisiana) Senator Bingaman (New Mexico) Senator Nickles (Oklahoma)
Senator Breaux convened the meeting at 2:05 p. m. He stated that his purpose in holding the
Diemer True ,

meeting was to bring together those concerned by the disputes and controversy over MMS' proposed oil royalty valuation regulations. He and Senator Hutchison as Chair and Co- Chair of the Congressional Oil and Gas Caucus wanted to start a dialogue between industry and the
Administration concerning the regulations by bringing the principals together. He noted that

Senator Hutchison of Texas wanted to participate also , but was unable to. Senator Breaux noted that he wanted honest , frank talks and that note takers were present to record the proceedings. His goal was to resolve disputes; he believed there is a lot of common ground among the participants.
Senator Breaux then turned to Senator Domenici for additional opening remarks.

Senator Domenici stated that there is at least an inference that Congress should have input into the final rule, given the adversarial positions of industry and the Interior Department. indicated the disputes must be resolved reasonably, or the current moratorium on the Department publishing a fmal rule may be extended. He expects Department staff to work in good faith toward a reasonable rule. He wants the process to move along to the point where industry CEO' can say that the Department is not being arbitrary, or that he believes industry itself is being arbitrary. He believed there is a long way to go to achieve this goal.
Senator Domenici emphasized that while some would say he and others are only concerned for the oil companies , that is not so. He is concerned with the needs of the public , including schoolchildren and others , but needs assurance of the rule s reasonableness. He added that Senator Hutchison was pleased he could participate in this meeting.

Notes--7/22/98 meeting on MMS' s proposed oil royalty valuation rule

Meeting held at Senate Dirksen Building. Participants at table included:
Senator Hutchison (Texas) Senator Breaux (Louisiana) Senator Domenici (New Mexico) Senator Bingaman (New Mexico) Senator Thomas (Wyoming) Cynthia Quarterman , Director, MMS Bob Armstrong, Assistant Secretary for Land and Minerals Management Claire Farley (Texaco North American Production) Diemer True (True Oil Co. Thomas P. White (Vision Resources Inc.
Peter Robertson (Chevron U.
A. Co.

Robert L. Keiser (Oryx Energy Co. Jack E. Little (Shell Oil Co.
George Yates (Harvey E. Yates Co.

Senator Hutchison convened the meeting at 2:10 p. m. She noted she wasn t able to attend the July 9 meeting, but got a report on it and felt good progress was made. She said she was one the people who put the amendment forward to delay publication ofMMS' s rule , and more time was needed to discuss the rule. It' s a critical time for the oil industry, and not a time for negative impacts on them. She wants a result that's right for taxpayers and producers alike , so tax
revenues are maintained , jobs are preserved, and industry is stabilized.

Senator Hutchison then asked for briefs ITom MMS and industry on the issues involved and their

status.

Ms. Quarterman noted that at the last meeting Senator Breaux asked for a summary of issues that MMS was to address in the interim between meetings. She pointed to the MMS' s July 16 , 1998
Federal Register notice in response to that request. The notice addresses 1) the affiliate definition , 2) language added to the proposed rule on " second guessing " lessees ' marketing

decisions , 3) requirements for applying gross proceeds under arm length sales following an exchange agreement, and 4) a request for comments on allowability of gathering costs as transportation under certain circumstances.

Senator Hutchison asked whether the Federal Register notice represented a supplemental proposed rule. Ms. Quarterman said yes. Senator Bingaman then noted that the same Interior Department officials had met yesterday with Representative Miller and others and wanted to know if other changes to the rule resulted ITom that meeting. Mr. Armstrong replied that no other changes had been made based on the other meeting. Senator Bingaman asked whether other changes were contemplated , and Ms. Quarterman said minor detail changes might be made
but otherwise the changes were done. She noted that the supplemental rule was meant to

summarize those issues in which the Department had determined to move in the direction of

MINERALS MANAGEMENT SERVICE

PUBLIC MEETING ON SUPPLEMENTARY PROPOSED RULE

155 Van Gordon Court
Training Room B

Lakewood, Colorado
March 2, 1998

MS. GIBBS TSCHUDY:

Welcome to the Minerals

Management Service s public meeting on the February 6th
Supplementary Proposed Rule Making.
Let me introduce the

people
Economist

the tab 1 e.
To my far

right

Dave Domagala, a Mineral

with MMS, and one

the primary authors

the

Economic Impact Analysis of the

Rule.

To his left is

Peter Christnacht, also a Mineral Economist with MMS, one of
the primary individuals working on the Form 4415 and the

instructions.
To my immediate right is Dave Hubbard, he s Chief of our Economic Valuation Branch and one of the primary

authors of the

Rule.

My name is Debbie Gibbs Tschudy, I am

Chief of the Royalty Valuation

Division.

A few housekeeping items; the rest rooms are down
at the end of the hall past the

elevators. There'
door.

s a number

of handouts available at the entrance of the

We do

ask that you sign in and sign up if you re interested in

speaking.

And as long as the court reporter can hear you

you can speak from where you sit, but if she has trouble
hearing you we 'll have to ask you to go to the podium with
the microphone.

We had planned on providing a brief explanation of
the Supplementary Rule before we opened it up to publ
comment

but with so few people here could I see a show of

hands of those people that are interested in a brief

overview?
comment

Okay.

We I 11

just go straight to the public

then.
The transcripts of this meeting are available from
You can get her name and number from

the court recorder.

her directly and order those transcripts directly from her.

And with that I will open it up to anyone who
would like to make a

statement.

We didn t have anyone sign

up to speak, but if there s anyone that would like to come
forward and make a comment on the Supplementary Rule you free to do that at this

time.

This is not good.

We had a number of questions in the preamble that

we specifically wanted public comment on.

Could I ask a few

of those questions and let me see if anyone I s willing to

gi ve us some

feedback on those questions?

The first was on our definition of the Rocky Mountain area, the six state region; should that definition

include other states?

Should it exclude some

states,

particularly New Mexico?

We were interested if the whole

state of New Mexico should remain in the rest of the country

or whether portions of it should be part of the Rocky

Mountains.

I s there anyone
Okay.

that cares to comment on that?

Before I go through all nine questions and

their subparts , if I ask any of these questions is there

anyone that'

s going to give me any answers?

Can I see a

show of hands of anyone who

I s going to provide any comment
to make any

on any of the questions?
statements for the record?

And no one I s going

Could you identify yourself , Bill?
MR . STONE:

Bill Stone , Exxon.

Maybe just a brief

overview might spark a few

questions.

I don

I t know

if the

rest of the people want that or not , but if not that
MS. GIBBS TSCHUDY:

I s fine.

Would that make a difference

to the attendees , if we did an overview would you make

comments?
UNIDENTIFIED SPEAKER:
MS. GIBBS TSCHUDY:

(inaudible)

I'd be willing to do an

overview ,

but if we aren't going to get any comment on it I

don' t know if it' s worth it or not.
MR . STONE:

I guess there may be some points or

questions that might need clarification for something that

might-- the

attendees here

today.
Okay.

MS. GIBBS TSCHUDY:

All right.

Why don I t

we just go ahead and go through

this.

I was just going to

give a little bit of background about the Rule and then go

through the Rule

itself.
ves to

The Rule results from changes in the market that

have occurred over the last 20 years and our obj ecti

decrease reliance on posted prices, develop rules that

reflect market value and reduce the administrative costs of
royalty valuation.

We published the first proposed Rule in January of
last year.

It said if you had a true outright arm

length

sale value would be based on gross proceeds

however, in the
length sale an exchange agreement, a

case of a non-arm

crude oil call or if you bought oil from anyone anywhere in

the United States in the last two years value would be based
on index, and that was proposed to be the Alaska North Slope
spot prices for California and Alaska and NYMEX for the rest
of the country, less a location and quality differential.

We published a Supplementary Proposed Rule in July
that would eliminate the two- year purchase provision,

require payers that had calls on their production to use

NYMEX only if the call was exercised and only if it was

non-competitive, and it would have allowed payers that had
an arm' s - length exchange agreement to pay on the resale the

arm'

s-

length resale after the exchange.

So under that Supplementary Rule , value would be
based on arm I s- length gross proceeds with five exceptions.

The first two are contained in the

current regulations, In
the sales contract does

the r 88 regulations, and that I s that
not reasonable due to

not reflect total consideration; and two, that the value is

misconduct.

The third was if oil was disposed of under an

exchange agreement except, again, if you had a simple

arm

length exchange you could base value on the

arm r S - length resale after the exchange.
The fourth was if an overall balance was

maintained between the buyer and the seller, and the fifth
was if the lessee had a non-competitive crude oil call that
was exercised by the purchaser.

We re-opened the comment period last September and
asked for comments on five of the alternatives that came out

of the comments on the previous

rules. Those five
length

alternatives were to value production sold not arm

based on; 1, an outright sale such as a tendering program; 2
would be a new series of benchmarks that were proposed by

one trade association; 3 was a proposal by one of the state
commenters where MMS would publish values based on prices

reported to us for geographic regions; No. 4 was to use
fixed or flat differentials as deducts from index

prices,

and the 5th was a comment from a state commenter that we use
spot prices instead of NYMEX.

The comment period closed on that re-opened
comment period last November.

We held two public meetings

during this entire process in April and seven workshops

across the country.

ve gotten written comments on the

five alternatives from 28 different entities, and based on
that published this second Supplementary Proposed Rule

Making that I s the subj

ect of this meeting.

It was published

February 6th.

The comment period closes March

23rd.

In addition to the three public meetings we
already held in Houston, Washington and today in Denver

we' ve got public meetings set next week for Bakersfield on

March 11th and Casper on March 12th.
The second Supplementary Proposed Rule is based on
five principles , the first being that royalty must be based
on the value of production at the lease

the second is that

for arm I s- length contracts royalty obligations should be
I s - length based on gross proceeds, and 3, for other than arm

contracts MMS still believes that index prices are the best

measure of value for most parts of the

country.

No.

, the lessee has a duty to market production

at no cost to the federal government, and No. 5, MMS

believes that customized regulations for unique producing

areas are preferable to a one size fits all

approach.

So the second Supplementary Proposed Rule Making

proposes that

gross proceeds under an arm I s- length contract

by the lessee
exceptions.

or its affiliate determine value with four

Again, those first two are contained in the ' 88

regs, they were contained in the January

proposal.

The third is oil disposed of under an exchange

agreement except one or more exchange agreements, in which
case value can be based on the arm
those multiple exchanges.

length resale after

The fourth is oil disposed of

under a non-competitive crude oil
sold arm'

call.

Fifth; oil is not

length before it'

s refined, not sold by the

lessee or its affiliate.

Value is determined differently

for three different parts of the

country.
benchmarks.
The

In the Rocky Mountain area it' s determined based

on the first applicable of a series of four

first is an MMS approved tendering program to be approved by
MMS.

The lessee has to tender at least a third of its

federal and non-

federal production in an area.
received.

It has to

recei ve a minimum

of three bids, and value has to be based

on the highest of the bid

The second benchmark is the weighted average the

lessee I S

or its affi liate I s arm

s-

length sales and purchases
IsIs

in the field or area provided that those arm

length sales
and its

and purchases exceed 50 percent of the lessee

affiliate I S federal

and non- federal production in the field

or area.

The fourth is a NYMEX- based price adjusted for a

location and quality, and the final is if a lessee can
demonstrate that the first three do not yield a reasonable

value the value would be determined and established by MMS.
For California and Alaska we' ve retained a

proposal to use the spot price for Alaska North Slope crude
adjusted for location and quality, and for the rest of the

country the Proposed Rule would rely on spot prices for the

market center nearest the lease, again
and quality.

adj usted for

location

And those location and qual i ty adj

ustments are

from the market center to the aggregation point , the

lessee I S own actual

transportation rates either contained as

a location differential in an exchange agreement or an
actual transportation contract if they physically move the

oil to a market

center.

If

they don

I t then

MMS would

publish a rate based on information we collect on a much
simplified Form 4415.

And from the aggregation point to the

lease it would be the actual cost of transportation.

added a provision to allow the use of quality bank
adjustments from the lease to the aggregation point.

And finally, if we have a situation where a lessee
is forced to index pricing but they re actually selling at

the well head arm

length so they don' t know their

transportation costs from the lease MMS will determine the

allowance for them.
We I ve

greatly simplified the Form 4415 over
It requires information only on

earlier proposals.

exchanges involving federal oil , only on exchanges between

aggregation points and market

centers.

Much fewer data is

required on this form than the earlier form, and there are
roughly one- third less MMS identified aggregation points

than the previous proposal.

Some of the other proposals that are part of the second Supplementary Rule you may be interested in is that

ve changed in response to comments the timing of the

index prices so that the production month coincides with the delivery month rather than the trading month as we earlier

proposed.
And we I ve also eliminated any proposed changes to
30 CFR 208 , which was the portion of the regs that determine

valuing production that we take in kind and make available
to eligible refiners.

The preamble states instead we

decided to establish the value for that oil in the contract
we have with the eligible refiner rather than through

regulat ion.
So statistics on how federal crude oil production

is distributed across the
crude oil comes from the Gulf

country; 73

percent of federal

15 percent from onshore and

offshore California, 6 percent from Wyoming, 4 from New

Mexico and 2 for the remainder of the Rocky Mountain

area.

The Economic Impact Analysis that we completed for
the Rule demonstrates how we believe oil will be valued

under the second Supplementary

Rule.

Based on the refining

capaci ty of the various producers by area we estimated how

much of the oil would remain on gross proceeds and how much
of it would go to index

and as you can see for California

and the Gulf over 70 percent will go to

index.

For New

Mexico , the Rocky Mountain areas and Wyoming nearly 70
percent would remain on gross proceeds.

So that'

s all I had.

Are there any public

statements now that anybody would like to make or any
clarifying questions you might have about the Rule?
MR. STRAIN:

I have a question.

On the

adjustments for the-- this is Bill Strain with Chevron; the

adjustments, if you don 't have a quality bank are you

allowing for

(inaudible)
Only to the extent that you

MS. GIBBS TSCHUDY:

are actually incurring quality adjustments and the market

has somehow taken into account quality

adjustments, so- - but

if you re not actually either getting a debit or a credit

for your quality of your oil then you
quality adjustment.
MR. STRAIN:

I re not

allowed a

(inaudible)
Right.

MS. GIBBS TSCHUDY:
MR. STRAIN:

(inaudible)
To the extent your purchaser

MS. GIBBS TSCHUDY:

made a gravity adjustment in the price you received then
that is allowable , but if your purchaser did not and there

is not a quality bank then you are not allowed a quality

adjustment.
MR. STONE:

Bill Stone , Exxon.

Would you explain

the process when you go directly from the lease to your own

ref iner?
MS. GIBBS TSCHUDY:
is not sold arm'

In that situation if the oil

length before it is refined value is

determined based on the spot price nearest the lease , and

then you are allowed your actual cost of transportation from

your refinery- - or

I should say from the lease to the

refinery to determine value at the

lease.

There is a provision in the Rule that allows you

to demonstrate that applying the spot price at the refinery
yields an unreasonable value , and you can demonstrate that

by actually showing what the market value of the oil is at
the refinery by showing what purchases the refinery makes

and at what price, and then again you would be allowed your

actual cost of transportation from the lease to the refinery
so that we arrive at value at the
MR . STONE:

lease.

The closest spot price is at the

market center?
MS. GIBBS TSCHUDY:

At market center.

There is a

quality adjustment allowed as well , Bill.
MR. HUBBARD:

The difference between the quality

as produced and the quality of the oil that represents the
spot price you 'd be allowed a quality adjustment in addition

to the transportation from the lease to the refinery.
MR. STRAIN:

And the quality adjustment?

MR. HUBBARD:

That would have to be on an
You I d

individual bas is ,
consul t .

too.

have to approach MMS on

that.

I mean, we wouldn t have a table or anything you could

MS. GIBBS TSCHUDY:
MS. BLACKWOOD:

Mary?
The

Mary Blackwood wi th Amoco.

question has been asked of us as a purchaser if we

purchasing another party
The way they' re- - in

s oil in a lease that we own an

interest in we fall under the spot index pricing

scenario.

the regs would they also have to be

valued at that even though it is a true arm

length

situation?

MS. GIBBS TSCHUDY:
the designee?
MS. BLACKWOOD:

Well

let me clarify.

Are you

Yes.
Okay.
But you' re paying on

MS. GIBBS TSCHUDY:
their behalf?
MS. BLACKWOOD:

Yes.

And it'

s a true

arm

length l

there s no other-

MS. GIBBS TSCHUDY:

The value is determined based
so if a lessee is

on the disposition of the lessee I s oill
selling to you arm

length that determines value.

The

gross proceeds under that contract determines
MS. BLACKWOOD:

value.

This producer was understanding

the regs that it was- they had to be-MS. GIBBS TSCHUDY:

There I S a pretty lengthy
the- -a

explanation in the preamble about if you ' re

working

interest owner or a designee or you re an operator who
marketing on their behalf

and there ' s againl a fairly

lengthy discussion I would refer them to in the
Any other questions or comments?
MR. STONE:
Bill Stone

preamble.

Exxon.

In the Rule

provision a payor can solicit guidance from MMS that the
guidance will be provided that will be non- binding
an explanation on why that would be non- binding?
MS. GIBBS TSCHUDY: is there

Essentially the Agency can