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Changes Proposed To Energy Royalty Payments

Coal
NPS

The government may be changing the way they collect money from energy companies.

The Office of Natural Resources Revenue is maybe not as well known as the Bureau of Land Management or Fish and Wildlife Service, but the much smaller agency has a big job.  They’re responsible for collecting royalties on government land.  Patrick Etchart is a spokesperson with the ONRR.

“We are involved when the companies make their royalty payments,” says Etchart.  “Once they develop a well or a mine and start producing from that, then they’re going to be required to make a royalty payment to the government.  Government owned land means the taxpayers and the public own that land, they own those resources.  We collect the royalties and then we disperse those royalties to the states, various federal accounts, and the US Treasury.”

The government get’s a certain percentage of what the natural resource is worth.  That’s pretty straight forward, but it can get complicated when you try to figure out what that ‘worth’ is.  Some of the current regulations they use date back to the late ‘80s.  Times have changed.

“The current regulations, originally put in place for natural gas and coal in the 1988, 1989 time frame, have not kept pace with the significant market changes that have occurred in the domestic natural gas and coal markets since that time,” he says, “our draft proposed regulations, which were published in the Federal Register which started a 60 day public comment period, will offer greater simplicity, certainty, clarity, and consistency in production valuation for mineral revenue leases and recipients. “

There’s a reason the ONRR is looking for simplicity and certainty.  It’s because the current rules don’t seem to work very well in certain situations. 

If, say, a company extracts a ton of coal and sells it to some other company, the government gets a royalty payment based off the price it sold at.  Things get a little muddy if they happen to sell the coal instead to a company they own.  It’s definitely possible to sell something to yourself for cheaper than the market value.  The current rules have these benchmarks, kind of checkpoints that are used to figure out what the fair valuation would be.

“These benchmarks in the existing regulations can be confusing.  Both for the industry trying to report and pay the proper royalties, and regulators reviewing royalty payments for audit and compliance purposes.  So the draft proposed regulation that we published aims to remedy this and other issues caused by the outdated rules with clearer regulations that better reflect the changing energy industry while protecting tax payer and American Indian assets,” he says.

The benchmarks didn’t work so well, leading to mistakes, or what some have called loopholes.  The proposed changes would do away with the benchmarks completely, closing the possible loopholes, simplifying the royalty payments, and in some cases increasing the payment that some companies would pay.

That could go a long way, especially for states like Colorado.  Last year, the Office of Natural Resources Revenue says that over $4 billion worth of natural resources were extracted and sold in Colorado.  The ONRR collected $429 million.