The Utah Royalty Owners Association Board of Directors has expressed concern to Gov. Mike Leavitt over a three-year-old tax exemption given to oil and gas companies.
The exemption allows such companies to deduct 50 percent of production costs at the wellhead for transportation.The association apparently became aware of the exemption for the first time due to proposed amendments to the section of Utah law dealing with the Oil and Gas Conservation Act. The amendments, sponsored by Rep. Jack Seitz, R-Vernal, as part of HB274 are meant to encourage secondary recovery of oil and gas reserves through tax incentives. Seitz's proposed legislation had no effect on the 50 percent transportation costs, which have apparently been on the books since 1993.
While the Utah Royalty Owners Association says it doesn't have a problem with Seitz's bill, they do want the governor to know they feel the "net-back method" - which allows oil and gas companies to calculate the fair market value of oil or gas at the well - robs royalty owners of revenue. Under this method, they say up to 50 percent of the value of the oil or gas is included in the costs of transportation. Processing and trans- portation costs are then deducted from the proceeds received for the oil or gas.
In a letter to the governor, board members note that start-up costs have already been paid on these wells and according to their leases with oil and gas companies, royalty owners "are not to pay production and transportation costs."
While there is a provision for unit operations to be amended in the Oil and Gas Conservation Act, they contend such amendments cannot be made without the approval of the owners of royalty - overriding royalty, production payment and other such interest which are free of costs to the royalty owners, as stated in the original lease agreements.
"Royalty owners, according to their leases, are not supposed to pay production or transportation costs," the letter states. "They are 1/8 or 1/6 owners, surely companies who have 7/8 or 5/6 should be able to fund the expense they agreed to in the leases."
At the same, time the association is asking that computerized metering be installed on gas company pipelines both entering and leaving processing plants to better monitor production. Such computerized metering is already being used on oil wells in the Uintah Basin, they said.