CHAPTER 3 EXOTIC ROYALTY ISSUES FOR OCS LESSEES
| Jurisdiction | United States |
(Jan 1992)
EXOTIC ROYALTY ISSUES FOR OCS LESSEES
Jackson & Kelly
Washington, D.C.
TABLE OF CONTENTS
Page
INTRODUCTION
Royalty Issues Under Section 6
I. Provisions of Section 6 Relevant to Royalty Issues
II. The Framework for Legal Analysis
A. The Relationship Between the Lease Provisions and the Statutory Provisions on Royalty
B. MMS Authority to Modify Provisions Governing Royalties on Section 6 Leases
III. Significant Royalty Issues for Section 6 Leases
A. Gas Used on the Lease, Vented, or Flared, Sonat Exploration Co., 105 IBLA 97 (1988)
B. The "Additional Royalty" Owed Under Section 6(a)(9)
C. Deduction of Transportation Costs Under the Texas and Louisiana Lease Forms
D. Other Issues
1. No Royalty-Free Use of Salt Under the 1942 Louisiana Form
2. No Royalty-Free Use of Gas for Sulfur Operations Under the 1942 Louisiana Form
3. Reimbursements by a Purchaser for Sums the Seller Pays as "Additional Royalty" Under Section 6(a)(9) are Part of the Value of Production for the Purpose of Calculating Royalty
4. Payment of Royalty in Kind Instead of in Value
[Page 3-ii]
Refunds and Credits Under Section 10
I. Overview and Purposes of Section 10
A. Summary of Requirements
B. Authority to Draw on Treasury
C. Congressional Review
D. Limitation on Authority to Issue Refunds or Credits
II. What Kinds of Refunds and Credits Are Covered by Section 10?
A. Refunds and Credits Defined
B. Payments Affected
C. Are Certain Kinds of Overpayments Exempt?
D. Rentals on Rights-of-Way Not Covered
E. Royalty-in-Kind Payments Not Covered
F. Civil Penalties Not Covered
G. Other Payments
III. Problems in Applying the 2-Year Limit on Refunds and Credits
A. Departmental Models for Applying the 2-Year Limit
B. What is Needed in a "Request for Repayment" and in a "Notice" to Toll the Period
C. Audits and the 2-Year Limit
IV. Interest on Refunds or Credits
———————
[Page 3-1]
INTRODUCTION
This paper addresses two aspects of federal royalty management concerning Outer Continental Shelf (OCS) leases. First are the special rules governing royalties on leases originally issued by the States of Texas and Louisiana in the 1940s and maintained as federal leases under section 6 of the OCS Lands Act. 43 U.S.C. § 1335. Second are the special rules governing refunds and credits of overpaid bonuses, rents, and royalties under section 10 of the OCS Lands Act. 43 U.S.C. § 1339.
These two sections create issues unique in Federal mineral law. At the outset it is useful to consider what makes them unique, so that we may later grasp their nuances with less difficulty. In some broad sense, section 6 leases are leases the federal government has taken over from another lessor. It is not uncommon for the Federal Government to take control of lands on which leases have been issued. For example, the U.S. Army Corps of Engineers has assumed the status of lessor on lands it acquired under the Flood Control Act of 1936. 33 U.S.C. § 701 et seq. There, however, the leases had been validly issued, and the U.S. took the lease as it found it. Accordingly, the Department of the Interior has determined that these leases are not subject to the Acquired Lands Leasing Act or the Federal Oil and Gas Royalty Management Act ("FOGRMA").1 Section 6 leases, on the other hand, were state leases issued on lands already belonging to the United States. See United States v. Louisiana, 339 U.S. 699 (1950). Under section 6, state lessees were treated as holders of void leases who, as matter of equity, were given a special opportunity to have their leases maintained as federal leases, provided the
[Page 3-2]
lessees accepted certain modifications.2 The Department treats these leases as being subject to FOGRMA. 30 C.F.R. Part 241.
Unlike section 6, which was born unique, section 10 has had uniqueness thrust upon it. The chief feature of concern is that it limits the Secretary's power to allow refunds or credits to situations in which the lessee has requested them within two years after making the payments. When originally enacted in 1953, section 10's 2-year limit was patterned after a similar 2-year limit governing onshore leases. Since 1960, however, when Congress repealed the onshore limit, it has stood alone.3 While Interior believes it may, through regulation, limit refunds and credits for onshore leases, it has not yet issued such rules.4
Section 10's limit applies to all leases under the OCS Lands Act. 43 U.S.C. § 1339(a). In other words, it applies both to leases maintained under section 6 and to leases issued by the Secretary under section 8 of the Act. 43 U.S.C. §§ 1335 and 1337. We will begin by considering section 6's special issues, then move to the issues of general applicability under section 10.
ROYALTY ISSUES UNDER SECTION 6
I. Provisions of Section 6 Relevant to Royalty Issues
Section 6(b) allows the holder of a former state lease to maintain the lease in accordance with "its provisions as to ... rentals and, subject to the provisions of paragraphs (8), (9) and (10) of subsection (a) of this section, as to royalties...." 43 U.S.C. § 1335(b)(1). Section 6(a) requires that leases maintained under the OCS Lands Act have certain minimum requirements, including "a royalty to the lessor on oil and gas of not less than 12 1/2 per centum ... in amount or value of the production saved, removed, or sold from the lease ...." 43 U.S.C. § 1335(a)(8). Section 6(a) also requires that lessees pay "as an additional
[Page 3-3]
royalty on the production from the lease ... a sum of money equal to the amount of the severance, gross production, or occupation taxes which would have been payable on such production to the State issuing the lease under its laws as they existed on August 7, 1953." 43 U.S.C. § 1335(a)(9).
II. The Framework for Legal Analysis
A. The relationship between the lease provisions and the statutory provisions on royalty. "The language of section 6 ... provides that the terms of the lease, as executed by the state and the lessee, generally govern the royalty obligations. Paragraphs (8) and (9) of subsection (a) ... contain the minimum requirements for royalty that a state lease must contain (or a lessee must agree to accept) to qualify under section 6."5
B. MMS authority to modify provisions governing royalties on section 6 leases. As a general matter, section 6 leases are subject to the MMS's operating and conservation regulations, as amended from time to time, unless those regulations are "contrary to or inconsistent with the lease provisions relating to the area, the minerals, rentals, royalties, and term." 30 C.F.R. § 256.79(b). Similarly, "the provisions of a lease relating to area, minerals, rentals, royalties (subject to sections 6(a)(8) and (9) of the Act), and term (subject to section 6(a)(10) of the Act...)..., in the event of any conflict or inconsistency, shall take precedence over" MMS leasing regulations in 30 C.F.R. Part 256. 30 C.F.R. § 256.79(a). "[T]he provisions with respect to 'area, rentals, royalties, and term' were intended as assurance to the lessees that these would not be changed except as provided by the act itself."6 This assurance is not always to the lessee's benefit. For example, MMS rules permitting lessees to deduct an allowance from royalty to reflect their transportation costs do not apply to section 6 leases barring such allowances. Exxon Company, U.S.A., 118 IBLA 30, 33 (1991).
[Page 3-4]
III. Significant Royalty Issues for Section 6 Leases
Other than the changes in royalty provisions required by section 6(a), "under the OCS Act and regulations the royalty provisions of the ... state lease form govern the computation of royalty owed to the United States." Superior Oil Company, 31 IBLA 127, 132 (1977). Leases maintained under section 6 are based on three state forms: one from Texas in 1947, and two from Louisiana in 1942 and 1948.7 We now consider the most significant legal issues raised by these forms.
A. Gas used on the lease, vented, or flared, Sonat Exploration Co., 105 IBLA 97 (1988). For most federal leases, the law today is that royalty is due on all oil and gas produced from the lease except for oil or gas "unavoidably lost" or "used on, or for the benefit of the lease." 30 C.F.R. §§ 202.100(b)(1) (oil) and 202.150(b)(1) (gas).
On the issue of royalty on natural gas used, vented, or flared on the lease, the state lease forms vary. The 1947 Texas form requires royalty on "any gas, including residue gas, sold or used by Lessee for any purpose," with two exceptions to this general rule. 1947 Texas Lease Form ¶ 3(b). One is for "casinghead gas processed on a percentage basis."8 Id. The other is for "gas or residue gas used for the lease's proportionate share of processing plant or compressor station fuel where gas is processed, cycled, or where a compressor is necessary to put the gas into the line ... ." 1947 Texas Lease Form ¶ 3(d). The 1942 Louisiana form requires royalty on all gas "produced and saved or utilized ...," based on its value "at the well." 1942 Louisiana Lease Form ¶ III. The 1948 Louisiana form is identical. 1948 Louisiana Lease Form ¶ 6.
The language of the Louisiana leases was the subject under review in Sonat Exploration Co., 105 IBLA 97 (1988). There, despite the considerable length of the opinion, the Board spent little time inquiring into the meaning of the lease language: "the
[Page 3-5]
provisions of the leases issued by Louisiana as to royalties on ... gas 'produced and saved or utilized' require payment of royalties on gas used or flared on the leases." Id. at 117. The Board did not inquire whether flaring or venting gas could be considered "saving" or "utilizing" it. Instead, on this point the Board appeared to rely entirely on Sonat's acknowledgement that it had previously paid royalty on flared gas under this...
To continue reading
Request your trial