CHAPTER 3 BACKGROUND, CONCEPTS AND ISSUES FEDERAL OIL AND GAS ROYALTY VALUATION REGULATIONS

• Jurisdiction: United States

Federal Royalty Revolution--Oil and Gas
(Nov 1986)
CHAPTER 3
BACKGROUND, CONCEPTS AND ISSUES FEDERAL OIL AND GAS ROYALTY VALUATION REGULATIONS
Gordon L. Allott, Jr.
Attorney at Law
Denver, Colorado

I. Background and Present Status of Panel Recommendations:

A. October 20, 1986, Advisory Committee Meeting.

1. Results:

a. Coal regulations were passed, but without "arm's-length contract" and "gross proceeds" definitions.

b. Oil Panel's recommendations were rejected.

c. Gas Panel's recommendations were rejected.

2. Areas of Contention:

a. Arm's-length contracts.

b. Gross proceeds.

c. Post-production costs.

B. MMS is required under their new appropriation to issue coal and oil regulations 90 days from approximately October 17, 1986 and gas regulations 120 days from the same date.

II. General Goals of the Oil and Gas Panels:

A. Gas Panel:

1. Adherence to statutory requirements and to lease terms.

a. Terms and conditions of the lease and applicable statutes are controlling.

b. Recognition of the Secretary's trust responsibilities in administering Indian leases.

c. Value for royalty purposes is the value of production removed or sold from the lease.

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2. Flexibility —

The new regulations should be general in nature in order to meet the many different situations under which gas is sold.

3. Fairness and equity.

a. Regulations should not be biased either in favor of lessee or lessor.

b. Royalty owner should receive its fair share without creating any disincentives for future development and exploration.

4. Simplicity and uniformity:

a. Simplicity for compliance by the lessee and auditing by the MMS.

b. Regulations should be self-implementing without prior approval of MMS.

See: Interim Report to Mineral Management Service Royalty Management Advisory Committee from Gas Valuation Regulations Advisory Committee, July 28, 1986.

B. Oil Panel:

1. Equality — The Oil Panel stated that its focus, first and foremost, was developing a valuation system that is fair and reasonable to both the lessee and the lessor.

2. Market-Based Approach — The Oil Panel believed that goal of "equality" could best be achieved through a market-based approach.

3. Self Implementing — The Oil Panel wanted to have the regulations as self implementing as possible.

4. Lease and Statutory Terms — The terms of the lease and the statutes would take precedence over the regulations.

See: Summary Report of Oil Valuation Regulations Review Working Panel.

C. The Panels' Approaches:

1. There are very few differences between the goals of both Panels.

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2. The differences come in how those goals were built into the proposed regulations.

III. Valuation for Royalty Purposes:

A. Gas Panel: Generally, value of gas for royalty purposes is gross proceeds due and payable less applicable allowances. See: Sec. 206.151(a), Sec. 206.151(b), Sec. 206.152(a) and Sec. 206.152(b), Draft Regulations, Royalty Management Advisory Committee Worksheet, dated October 20, 1986 ("Gas Draft Regs.")

B. Oil Panel: Generally, value of oil for royalty purposes is: (i) if there is an arm's-length contract, the gross proceeds accrued to the lessee; or (ii) if a non-arm's-length contract, the reasonable value as determined by a prioritized benchmark system. See: Oil Valuation Regulations Review Working Panel's Recommendations to the Royalty Management Advisory Committee on...