Oil Industry Accounting Expert: Regulatory Overreach Crimps Profits, Engenders Lawsuits

---

Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--Oil and gas production on government lands is facing increasing scrutiny regarding revenue and regulations, much of which is unauthorized, according to a speaker at the recent Louisiana Energy Conference in New Orleans.

Steve Dudgeon, principal, severance tax/royalty for Ryan, a Dallas, Texas-based global tax service firm, sees a growing overreach of agencies such as the Office of Natural Resources Revenue (ONRR), Bureau of Land Management (BLM) and the Bureau of Ocean Energy Management (BOEM). In a presentation entitled "Taxes and Royalties: The Pursuit of Every Dollar," he listed two factors he believes are driving this overreach. One is the retirement of personnel with experience in how the Oil & Gas Industry actually works. The second involves congressional gridlock.

One result of inexperience is in misguided accounting questions. Dudgeon recalled, "I had an auditor the other day that asked me why I was reporting gas on an oil well. I guess oil wells produce oil--not gas, according to them."

Due to congressional gridlock, Gudgeon observed, "We're seeing a trickle-down effect into the regulatory bodies, where they're sort of taking up the charge and saying, 'If D.C.'s not going to act, we're going to act. We're going to put policies into place. We're going to change the regulations. We're going to, in effect, pursue some of these things that D.C. has failed to act on.'"

The problem is that only Congress is authorized to act in many of those areas. For example, Dudgeon said that about seven years ago the ONRR decided to attack the venting and flaring of natural gas in North Dakota's Bakken play. "They took it upon themselves to assess every single oil and gas company in North Dakota royalties on all their venting and flaring volumes." The amount totaled $200 million overall. Only through litigation did the oil industry get that ruling overturned.

The fundamental money question revolves around how much the government should get from oil and gas. Especially in the Gulf of Mexico, some agencies such as ONRR unilaterally increase the agreed-upon royalty rates oil companies must pay. Stated royalty rates are between 12.5% and 18%, he noted. "But based on how they have interpreted their own regulations the actual effective royalty rate tends to be quite a bit higher. Overall, it's generally one and a half to five percent higher. At 12 and a half you go up to more like 14 to 17 and a half. So with their regulatory re-interpretation they are requiring payors to pay a lot more than what they signed up for."

Offshore natural gas royalties are even higher, reaching 35-40%.

To fund renewable energy spending per the Inflation Reduction Act, the legislators decided to take more money from oil and gas. But from 2011 to 2018, those same agencies, including the Department of the Interior, evaluated the percentage of a well's revenue that went to the government. They included costs and revenues for the entire life of the well, from initial bid to plugging and abandonment (P&A), Dudgeon said. "What they found was that the government received between 49 and 76% of the net cash flow of the project. In deep water (wells) the percentage ranged from 47-74."

In evaluating 10 shallow fields for the study, Dudgeon said the agencies could only include numbers from two of them in order to keep the government's portion from exceeding 100%. He stressed that the percentage includes high P&A costs, which he said is likely a main reason that many abandoned wells go unplugged.

He cited other scenarios in which agencies first decided how much revenue they wanted to collect from the industry, then adjusted the rates and formulae to achieve that number, regardless of what the oil companies had thought they were agreeing to contractually.

Realizing that one possible goal is to limit production, he noted that U.S. Gulf of Mexico oil and gas production is the cleanest of any offshore oil operations in the world in terms of carbon emissions per barrel.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).