Idaho now has the results of its first-ever audit of natural gas and oil wells on state lands, and of royalty payments from a Texas oil company.
The good news: The state — and thus, the general public — is receiving the royalties it should for the volume and pricing of fuel sold by Alta Mesa Holdings.
The bad news: No one is sure if the fuel is being sold at market value, Idaho Land Board members learned Tuesday. And that means there’s no way to tell if Idaho’s royalties should be different than they are now.
“The pricing information and market information that [auditors] collected is significantly different than the pricing that we are seeing passed onto us from Alta Mesa,” said Mike Murphy, Idaho Department of Lands endowment leasing bureau chief.
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The Land Board comprises Gov. Butch Otter, Secretary of State Lawerence Denney, Attorney General Lawrence Wasden, Superintendent of Public Instruction Sherri Ybarra and State Controller Brandon Woolf. It oversees management of more than 2.4 million acres of state endowment trust lands in Idaho, including the state’s oil and gas leases.
The auditor, Houston-based Opportune, looked at three wells under two larger state leases operated by Alta Mesa from August 2015 to December 2016. Opportune examined whether royalties paid to the state were appropriate and in line with Idaho’s statutes, regulations and lease agreements.
“In the review of payments and volumes, in general the amounts match,” Opportune’s James Fisher told the Land Board. “The receivable amount was about $25,000. You received about $24,950. You are short about fifty bucks.”
Fisher said Alta Mesa has not been paying royalties on fuel it uses on-site during production. That amounted to about $110 during the audit period.
Total Idaho royalties during the five audited months were not immediately available Tuesday afternoon. But for comparison, Idaho received total royalties of $26,240 on its 566 oil and gas leases for 12 months in 2016-17, according to IDL’s annual report.
Other key issues identified in the audit include a lack of contracts between Alta Mesa and NorthWest Gas Processing, a company owned by an Alta Mesa subsidiary that processes the fuel. Auditors also mentioned concerns about “arms-length” transactions between Alta Mesa, its subsidiaries and other related companies.
The biggest issue, though, is transparency, Fisher said.
“There is no transparency on the pricing. That is the issue here,” he told the board.
That’s complicated by the fact that Idaho is relatively new to the oil and gas world.
“One issue with pricing is you are a low-producing state without a real market, a regular reporting market, a trading market, so expecting reportable pricing and an index to report against it may not be realistic,” Fisher said.
“Our conclusion is not that pricing is wrong, because pricing may be absolutely correct. The issue is IDL does not get the info it needs to assess whether they are getting market value.”
“What needs to change to get that information?” Wasden asked. “Is it statutory, regulatory, contractual, all of the above? Or something else that I haven’t thought of?”
The solution is to update the state’s leases, Fisher replied. “Clearly, you need better information, so define the information you need.”
The state has hundreds of leases with Alta Mesa. Most of them are for sites measuring only one, two or three acres. And the current leases are “very simple,” with few consequences if Alta Mesa or other companies don’t follow the rules, Fisher said in response to a question from Otter.
Wasden said his office has been working with IDL to update and bolster the leases’ language. He told the Statesman he has “some concerns” about the audit’s findings and “wants to take a greater look” at it.
Woolf queried IDL staff about the likelihood of overcoming the transparency issues.
“How confident are you in being able to get this information?” Woolf asked.
Staff has not yet met with Alta Mesa to discuss the audit, Murphy said.
“We will see how Alta Mesa responds. Maybe that will resolve things and it will be clear, and maybe not,” he said. “Then we need to look at our options from there, and we will certainly come to the Land Board for further direction.”