CHAPTER 2 AROUND THE REGULATIONS IN 50 MINUTES - A PRACTICAL APPLICATION OF THE FEDERAL AND INDIAN OIL & GAS VALUATION REGULATIONS

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management
(Feb 2007)
CHAPTER 2
AROUND THE REGULATIONS IN 50 MINUTES - A PRACTICAL APPLICATION OF THE FEDERAL AND INDIAN OIL & GAS VALUATION REGULATIONS


Judith M. Matlock
Attorney
Davis, Graham & Stubbs, LLP
Denver, Colorado
Deborah Gibbs Tschudy
Deputy Associate Director
Minerals Management Service
Denver, Colorado

JUDITH M. MATLOCK

Judith M. Matlock is a partner in the Energy Group of the Denver law firm of Davis, Graham & Stubbs LLP. She received her Bachelor of Arts degree from the University of Colorado in 1979, graduating magna cum laude. In 1982, she received her Juris Doctor degree from the University of Colorado. She is a member of Phi Beta Kappa, Order of the Coif, and the Denver, Colorado, and American Bar Associations. Since the mid 1980s, her practice has included extensive work involving the transportation, processing and marketing of production giving her a unique perspective on royalty and tax compliance issues involving post-production costs, non-arm's-length transactions (sales, transportation, processing), and accounting system implementation of inconsistent federal, tribal, state and private royalty and production tax requirements. She has negotiated settlements of class action litigation involving private royalties on both conventional and coalbed methane production. She has conducted internal audits for companies to determine their compliance with royalty and tax requirements involving numerous different marketing arrangements. She has also evaluated royalty and tax compliance issues to assist companies in determining the effective net revenue interest and potential liabilities involved in an acquisition. Ms. Matlock also has an extensive background in the more traditional aspects of a natural resources practice. Ms. Matlock has been a member of the Executive Committee of the Rocky Mountain Mineral Law Foundation, served as a trustee of the Foundation, and served as vice chair of the Special Institutes Committee of the Foundation. She has been the program chair for several Foundation Special Institutes and Short Courses including Natural Gas Marketing & Transportation (1991); Practical Natural Gas Marketing Short Course (1993 and 1994); and Negotiating Natural Gas Contracts (1993). She is a frequent lecturer and writer on energy topics including two annual institute papers and 12 special institute papers for the Rocky Mountain Mineral Law Foundation including "The `Duty to Market' Downstream At No Cost To The Lessor (The Alleged Federal `Duty to Market')," Federal and Indian Oil & Gas Royalty Valuation and Management, Paper 2A (Rocky Mt. Min. Law Fdn. 2000); "Post Production Costs," Institute on Natural Gas Transportation & Marketing (Rocky Mt. Min. Law Fdn. 2001); "The Wyoming Class Action Lawsuits" (an update on post-production cost litigation), handout for Independent Petroleum Association of Mountain States, September 2002; and "Royalty Calculation When the Producer/Lessee is Dealing With An Affiliated Entity," Private Oil & Gas Royalties, Paper No. 9 (Rocky Mt. Min. L. Fdn. 2003). She has been listed in Best Lawyers in America - Oil and Gas since 1995 and was selected to the inaugural Lawdragon 500 for her royalty work.

DEBORAH GIBBS TSCHUDY

Deborah Gibbs Tschudy serves as the Deputy Associate Director for Minerals Revenue Management program of the Minerals Management Service (MMS). The MMS is responsible for the collection, disbursement, valuation, and audit of revenues associated with the leasing and production of minerals on Federal lands with collections of an estimated $10 billion annually. Ms. Tschudy received a Bachelor of Arts degree in Mathematics from the University of Colorado in 1981 and a Master of Science degree in Mineral Economics from the Colorado School of Mines in 1982. Ms. Tschudy worked for a mineral resources company before joining the Department of Interior in 1983. During her career with MMS, she has worked on a variety of issues involving royalty valuation; regulatory and policy development; and Indian minerals management. From November 1992 to October 2000, Ms. Tschudy served as the Chief of MMS's Royalty Valuation Division. From December 1993 to March 1995, she chaired MMS's Federal Gas Valuation Negotiated Rulemaking Committee. In recent years, Ms. Tschudy has overseen the development of several new valuation regulations governing Federal and Indian leases and currently oversees MMS' financial and information technology operations in Denver. Ms. Tschudy served on the Program Committee of the 1998 and 2000 Rocky Mountain Mineral Law Foundation (RMMLF) Special Institutes on Federal and Indian Oil and Gas Royalty Valuation and Management and co-chaired the 2004 and 2007 Special Institutes. Ms. Tschudy has also served as a trustee-at-large for the RMMLF.

TABLE OF CONTENTS

I. Introduction

II. Background

III. Royalty and Production Reporting

IV. Royalty Valuation

A. Federal Gas

B. Federal Oil

C. Indian Gas

D. Indian Oil

V. Other Royalty Issues

VI. Enforcement

VII. Appeals

Appendices

A. Glossary

B. Reference List

C. MMS Website

D. Rocky Mountain Mineral Law Foundation Resources

E. MMS Organizational Chart

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I. Introduction

A. For over 80 years, the Department of the Interior has administered an oil and gas leasing program for Federal and Indian lands. Responsibilities are divided among Department agencies between lease and revenue collection management. States and local governments in most cases share 50 percent of the leasing revenue, depending on land category and location. Indian Tribes and individual Indian mineral owners (allottees) receive 100 percent of revenues derived from their lands.

B. Royalty payments are based on production volume, the value of the product, and the lease royalty rate. Certain factors can complicate royalty calculations. Nonproducing Federal and all Indian oil and gas leases require that rentals be paid once a year on or before the anniversary date of the lease.

C. The Minerals Management Service (MMS) is the Federal Agency within the Department of the Interior that is responsible for: (1) offshore leasing and operations and (2) collection and disbursement of mineral revenues paid on Federal and Indian oil and gas, coal, and other mineral leases onshore and for leases on the Outer Continental Shelf (OCS).

1. The Offshore Minerals Management (OMM) Program is responsible for offshore leasing and associated operational functions such as approving permits for drilling and production operations, production verification, and onsite inspection and enforcement.

2. The Minerals Revenue Management (MRM) Program ensures that all revenues from Federal and Indian mineral leases are efficiently, effectively, and accurately collected, accounted for, verified, and disbursed to the appropriate recipients in a timely manner and in accordance with existing laws, regulations, lease terms, orders, and notices, and provides support for technical lease management functions. This activity provides significant revenue to the U.S. Treasury (Treasury), States, and Indian recipients, totaling over $12.8 billion in FY 2006 including:

$ 7.4 Billion to the U.S. Treasury

$ 898 Million to the Land and Water Conservation Fund

$ 1.7 Billion to the Reclamation Fund

$ 2.2 Billion to 34 States

$ 641 million to 41 Indian tribes and to the Department's Office of Trust

Funds Management on behalf of approximately 30,000 individual Indians

The MRM does business with approximately 2,600 payors and 3,700 operators.

D. The Bureau of Land Management (BLM) is the Federal Agency within the Department that administers onshore public lands and natural resources. The BLM programs provide for the protection, orderly development, and use of the public lands and

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resources under principles of multiple use and sustained yield. In addition to its surface management responsibilities, BLM is also responsible for onshore leasing and associated operational functions such as approving permits for drilling and production operations, diligence, drainage, production verification, onsite inspections, and enforcement.

E. Depending upon the location of an onshore lease, BLM may not be the surface management agency. Other agencies, such as the U.S. Forest Service or the U.S. Army Corps of Engineers, may be responsible for surface management. In these cases, BLM is still the leasing agent, responsible for related operational approvals.

F. The Bureau of Indian Affairs (BIA) is the Federal Agency within the Department responsible for facilitating the full development of the human and natural resource potential of Indian and Alaska native people to manage their own affairs under a trust relationship with the Federal Government. The BIA administers all Indian leases and contracts, distributes mineral revenues, and prepares and maintains title records. The BLM is the operational supervisor, ensuring onsite compliance, appraising the value of resources, and providing expert advice on drilling permits, diligence and other operational matters. The MRM receives records, verifies, and distributes oil and gas revenues and related information to BIA generated from Indian mineral properties. The BIA in turn distributes the revenues and information to Indian tribes and allottees. All rents due on nonproducing Indian leases are paid directly to the appropriate BIA agency/area office.

II. Background

A. Pertinent Statutory Provisions

1. Mineral Leasing Act of 1920 (MLA), as amended (30 U.S.C. §§ 181 et seq.).

This act specifies terms and conditions for prospecting and mining of minerals on public domain lands. It specifies rental and royalty terms for each mineral, conditions for pipeline rights-of-way, lease diligence, and royalty disposition. The Act calls for sharing of royalty revenues with States.

2. Mineral Leasing Act for Acquired Lands, enacted August 7...