Montana proposes gas and oil royalties hike

The Schweitzer administration has proposed increasing the royalty producers pay on oil and natural gas taken from state lands to better reflect the market value of the fuels and make sure government gets a bigger share.
The rate would rise 33 % at a time when eastern Montana is experiencing a boom in oil and gas drilling sparked by rising energy prices.

Department of Natural Resources and Conservation officials outlined their proposal to the state Land Board, saying they will ask members to decide at the August meeting whether to approve the increase. They said the current royalty amounts were set 22 years ago and lag behind the market rate being paid by the industry.
''We're still getting a smaller piece of the pie than what the market will bear,'' said Mary Sexton, department director.

Gail Abercrombie, executive director for the Montana Petroleum Association, said she had not yet surveyed her members about the new proposal to determine if the plan will discourage drilling on state lands.
''However, at first blush it does not reflect well on the state of Montana being open for oil and gas business,'' she said.

Oil and gas is big on state holdings. About 1.3 mm of the 6.2 mm state-owned acres are leased for exploration and development. The state made $ 12.5 mm in royalties on what was removed from the ground. That is about half of all money made off minerals on state lands.
Monte Mason, chief the department's Minerals Management Bureau, said the agency believes the royalty rate should increase from 12.5 % on gas and 13 % on oil to 16.67 %. Almost all of Wyoming's leases carry that rate and nearly half of the leases issued by North Dakota are at that level, he said. Although the US Bureau of Land Management leases have the same rate that Montana charges, the federal government -- unlike the state -- is not required to obtain fair market value for its leases, Mason noted.

When leaseholders sell state leases to someone else, they apply royalty rates ranging from almost 18 % tonearly 20 %, a practice that shows the market can handle a rate increase, he said.
Now is the time to consider a change, Sexton said. With the market prices for oil and gas so high, the industry is able to afford paying more without affecting their drilling, she said.
''We want to be a partner in reaping benefits from this exploration,'' Sexton said. ''We would be remiss if we didn't look at it with the market the way it is. If it were in the doldrums, this is not something we would be considering at this point.''

Abercrombie said producers already are smarting from a new state policy of collecting ''surface damage payments'' and increasing the royalty expense on top of that may go too far.
''When you get those put together, it makes the industry wonder if the state wants drilling,'' she said. ''I'm starting to worry about the state's reputation again.''
If approved at the next Land Board meeting, the new rates could apply to the September oil and gas lease sale. However, the board could delay the effect for several months until after the department rewrites related regulations.