Royalties on school trust land minerals

Land Board eyes new policy on flared gas royalties

This week we’ll again talk to the Board of Land Commissioners about getting the royalties the state should on minerals produced from school trust lands.
Once again, the board will rule on several lease extensions that again show the willingness of industry to pay higher royalties on these state-owned minerals. The Board of Land Commissioners meeting starts at 8 a.m. Feb. 2 in Room B63 in the Herschler Building.
The board also will consider a new policy regarding flaring of gas produced from wells on state lands. The Office of State Lands and Investments wants to reduce the amount of time that extractors and flare gas without paying royalties on that production. That proposed policy is the subject of a joint op-ed that the Equality State Policy Center, Wyoming PTA, and Wyoming Education Association have sent to Wyoming’s newspapers.

Here’s the op-ed:

Wyo should take its royalties on natural gas extracted from school trust lands

By Marguerite Herman, Dan Neal, and Ken Decaria

This week the Wyoming Board of Land Commissioners can decide to close a large loophole in the collection of royalties on natural gas produced on school trust lands that is simply burned off as a nuisance. Under current policy, millions of cubic feet of gas go up in smoke free of the royalties that are due to the trust and Wyoming school children, who are the beneficiaries.
The proposed policy will be considered for a board vote on Feb. 2. The proposal declares that the state will collect royalties on gas produced from school trust leases beginning 15 days after completion of a well. If producers get permission from the Oil and Gas Conservation Commission or any other body to vent or flare natural gas for a longer period, they must pay royalties unless the Land Board determines that circumstances justify extending the  royalty-free flaring, according to the proposed policy.

In addition, the policy provides for extensions of this royalty-free disposition for up to 180 extra days, so producers have time to determine how commercially productive the well is and to make long-term plans for capturing and selling the gas.

The Office of State Lands and Investment would make the final determination of when a well is “completed” and production begins. Producers must maintain records of the volume and composition of flared or vented gas. Royalties will be calculated based on a weighted average sales price received for like gas. Producers won’t get a free pass on royalties just because they have permission from the Oil and Gas Conservation Commission to flare.

At stake are millions of royalty dollars the state should be collecting on production from school trust lands, the land that the State of Wyoming is managing for the support of public schools. This is the land that was transferred to Wyoming at statehood in 1890 to be held in trust for schools. Currently, there are 3.2 million of surface acres and 3.9 million acres of subsurface minerals in the trust. They generated revenues of about $300 million to the Common School Income Fund, Permanent Land Fund and Capital Construction Account in fiscal 2011. Most of that is from mineral royalties.

The state has a fiduciary duty to ensure school trust lands make money for the beneficiaries, and that means making sure it captures royalty revenue from gas production, whether that gas is vented or flared or put in a pipeline. As OSLI Director Ryan Lance noted, the state gets one shot at that gas stream and royalty revenue. Once it goes up the flare stack, it’s gone. To let it go without collecting royalties is a clear violation of the fiduciary duty.

Certainly the 180-day extension is a too-generous concession to the industry, especially since the greatest volumes of gas often flow in the first days and weeks of production.

The Equality State Policy Center thinks even the 15-day grace period is inappropriate and contends the Office of State Lands and Investments should be collecting royalties on all production, as the State of Texas does.

As Mike May, senior auditor of Financial Compliance in the Texas General Land Office told the ESPC: “Our leases have language to the effect of ‘anything produced.’ … Disposition of the gas does not matter, whether it goes into a pipe or is flared.”

The Wyoming policy change was first proposed last October. The current form represents a fair amount of discussion and negotiation among Lance’s staff and producers with school trust leases. Meanwhile, flaring has continued. We are particularly concerned about the amount of flaring being done on school trust leases in the development of oil shale wells in the Niobrara formation in southeastern Wyoming.

How much is there? The volume reported to the Oil and Gas Conservation Commission over the past two years from state land wells is about 412 million cubic feet. That reported flaring and venting conservatively is worth about $250,000 in royalties. Production is on the increase, and it’s time to approve a policy that will make sure the royalties that are due are paid.

Marguerite Herman is legislative chair for the Wyoming PTA. Ken Decaria serves the Wyoming Education Association as its governmental affairs director. Dan Neal is executive director of the Equality State Policy Center. 

Tax battle at Exxon's Shute Creek facilities

House Revenue Committee clarifies valuation of ExxonMobil's sour gas


The House Revenue Committee Wednesday narrowly approved a bill to clarify the valuation of natural gas produced at ExxonMobil’s LaBarge-Shute Creek operation.

The history of tax disputes with ExxonMobil is long. Back in the late 1980s, Exxon declined to pay taxes on its gas production at Shute Creek, declaring that the gas was worthless – even as the company continued to produce and sell the gas. Exxon held that after it deducted all its expenses, including a large deduction for return on investment, there was no value left to the gas.

Exxon’s action triggered a legislative overhaul of the state’s mineral taxation statutes during the early 1990s.

Taxation of processed natural gas — the “sour” gas produced in western Wyoming that requires processing to remove toxic compounds — continued to be an issue throughout the decade and well into the current century. The 2008 Legislature at long last enacted a bill that appears to have addressed most of the problems.

The measure considered Wednesday, HB 78 Natural gas-taxation, is sponsored by Rep. Tom Lubnau II (R-H31, Gillette — pictured above) and co-sponsored by a bipartisan group of legislators including the Revenue Committee chairman, Rep. Rodney “Pete” Anderson (R-H10, Pine Bluffs), Rep. Jim Roscoe (D-H22, Wilson) and Sen. John Schiffer (R-S22, Kaycee).

The measure addresses another situation peculiar to the ExxonMobil LaBarge-Shute Creek operation: whether a facility located between the wellfield and the Shute Creek plant is a dehydrator or a processing facility. The difference is more than semantic, as it determines the “point of valuation” for the gas and therefore how much ExxonMobil owes in taxes.

In late 2009, the Wyoming Supreme Court held that Wyoming’s tax statutes on this point were ambiguous and that ambiguity must be resolved in favor of the taxpayer, ExxonMobil. HB 78 seeks to remove the ambiguity by adding definitions, thereby restoring the state’s position on the point of valuation.

The change will increase state severance and advalorem tax revenues on ExxonMobil's extraction by about $1.1 million in 2011 and an estimated $2.2 million in 2012 and 2013, according to the fiscal note attached to the bill.

Wyoming Attorney General Bruce Salzburg led off Wednesday morning’s testimony in concert with a lawyer for Sublette County, followed by a lawyer for ExxonMobil. It was a quick education (of sorts, since the third lawyer did not agree with the first two) for several of the committee members who were not involved in the years of legislative work leading up to the 2008 processed gas valuation bill.

Committee members voting for HB 78 were Reps. Amy Edmonds (R-H12, Cheyenne), Ken Esquibel (D-H41, Cheyenne), Patrick Goggles (D-H33, Ethete), Mike Madden (R-H40, Buffalo) and Owen Petersen (R-H19, Mountain View).

Those voting against it included one of the co-sponsors, Chairman Rodney “Pete” Anderson (R-H10, Pine Bluffs) and Reps. David Miller (R-H55, Riverton), Mark Semlek (R-H1, Moorcroft) and Sue Wallis (R-H52, Recluse).

The ESPC supports the bill and has long advocated that the state hire an expert to help with the valuation of the LaBarge-Shute Creek operation, which undeniably is unique, and to boost its investment in the technical and legal teams needed to counteract ExxonMobil’s aggressively litigious approach to tax issues.