<article><p><i>Updates with changes throughout</i></p><p class="lead">President Donald Trump's administration is preparing a rule that would allow oil and gas producers to defer royalty payments to the federal government for three months because of the Covid-19 pandemic.</p><p>The US Office of Natural Resources Revenue (ONRR) sent the rule, named "Reporting and Royalty Payment Delay Related to Coronavirus Disease," to the White House for internal review on 20 May, according to a public notice. ONRR declined to comment on the rule, but two industry sources briefed on the rule say it would allow a three-month deferral of royalty payments.</p><p>Oil industry officials say a three-month deferral of royalty payments could help smaller producers that are facing a short-term liquidity crunch. Producers today are struggling to cover their operating costs and debt as they sell crude for $30/bl or less, depending on the grade and location, while operators earn nothing on production they have shut in.</p><p>Oil and gas royalty payments to the federal government have totaled $5.3bn so far in fiscal 2020. Allowing operators to defer payments for three months "could be helpful, and it does not do any harm really," an industry official said, by allowing companies to conserve cash while oil prices remain low and production is shut in.</p><p>The degree of flexibility on the deferral could affect how useful it is for operators, industry sources say. Companies would prefer not to have to come up with three months of royalty payments immediately at the end of the deferral period.</p><p>But the three-month deferral could also spark concerns among producing states, which receive a portion of federal oil and gas royalties and are similarly cash-strapped as a result of the coronavirus.</p><p>The US Interior Department, separately, has started to approve temporary royalty relief to onshore producers on a case-by-case basis. The agency has reduced royalty rates to as low as 2.5pc from 12.5pc for onshore production in May and June, and it has the option to extend those royalty reductions if conditions warrant.</p><p>Oil industry officials expect the pending rule might also address a <a href="http://direct.argusmedia.com/NewsAndAnalysis/Article/2019487">looming</a> 1 July deadline for onshore operators to retroactively recalculate and pay royalties dating back to 2017, as a result of a court ruling last year that blocked ONRR from rolling back a more stringent royalty valuation rule.</p><p>"At a time when companies are barely hanging on during this crisis, that retroactive reporting is a needless distraction," Western Energy Alliance executive director Kathleen Sgamma said. "A delay to the requirement is indeed significant and very much appreciated."</p><p class="bylines"><i>By Chris Knight</i></p></article>
