CHAPTER 4 VALUATION OF GAS AND GAS PRODUCTS

• Jurisdiction: United States

Federal Royalty Revolution--Oil and Gas
(Nov 1986)
CHAPTER 4
VALUATION OF GAS AND GAS PRODUCTS
Bonnie S. Mandell-Rice
Parcel, Mauro, Hultin & Spaanstra
Denver, Colorado

I. Scope and Purpose of Proposed Regulations

A. To establish one set of rules for the valuation of gas and gas products (now referenced as principal products and associated products) produced from Federal and Indian Lands. All existing gas and associated products royalty valuation directives, regulations and Notices to Lessees (e.g., NTL-5) will be superseded.

B. To clarify policy.

1. Relating to the bases on which value for royalty purposes will be determined.

2. Relating to the consideration received by the lessee that is to be included in "gross proceeds."

3. Specific guidelines governing the application of the regulations will be incorporated into the MMS Payor Handbook subsequent to the issuance of the rulemaking in the Federal Register. See Draft "Revision of Gas and Associated Products Royalty Valuation Regulations and Related Topics," dated February 7, 1986 (the "Draft Valuation Regulations"), at 2-3.

C. To be applied prospectively. Id., at 3.

1. To avoid inconsistent royalty enforcement in view of MMS audit activities and voluntary compliance by some payors with existing rules and regulations. See 51 Fed. Reg. 26759, at 26761 (July 25, 1986) ("Procedures for Determining Natural Gas Value for Royalty Purposes," modifying NTL-5 effective as of August 1, 1986).

2. To provide lessees and other payors with certainty regarding their payment obligations! Id.

II. Authority.

A. Onshore leases.

1. The Mineral Lands Leasing Act of February 25, 1920 (30 U.S.C. §§ 181 -263) provides that royalty is payable on a percentage of the "value of production" (30 U.S.C. § 223), and gives the Secretary of the Interior discretion in carrying out its purposes. 30 U.S.C. § 189.

2. The Mineral Leasing Act for Acquired Lands of August 7, 1947 (30 U.S.C. §§ 351 -359) provides that deposits of

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oil and gas "may be leased by the Secretary under the same conditions as contained in the leasing provisions of the mineral leasing laws, subject to the provisions hereof" (30 U.S.C. § 352), and also gives the Secretary discretion in carrying out its purposes. 30 U.S.C. § 359.

3. The federal lease forms generally authorize the Secretary to establish the "reasonable minimum value" of the production for the purpose of computing royalty.. See, e.g., The Offer to Lease and Lease for Oil and Gas (Section 17 Noncompetitive Public Domain Lease," Form 3110-1, 11th Ed. (Feb. 1982); The Offer to Lease and Lease for Oil and Gas ("Noncompetitive Acquired Lands Lease," Form 3110-3 (Feb. 1982); Mineral Lease (Acquired Lands), Form 3520-6 (Feb. 1972); Oil and Gas Lease Under the Acquired Lands Mineral Leasing Act (Future Interest or Competitive), Form 3130-4 (Feb. 1977); and Oil and Gas Lease (Competitive Public Domain Lands), Form 3120-7 (Feb. 1977).

4. The Secretary's discretion and authority have been construed broadly. See United States v. General Petroleum Corp. of California, 73 F. Supp. 225 (S.D. Cal. 1946), affirmed sub nom Continental Oil Co. v. United States, 184 F.2d 802 (9th Cir. 1950); California v. Udall, 296 F.2d 384, 388 (D.C. Cir. 1961); Marathon Oil Company v. United States, 794 F.2d 1461 (9th Cir. 1986).

B. Offshore Leases.

1. The Outer Continental Shelf Lands Act, 43 U.S.C. § 1331, et seq., provides for royalty based on a percentum "in amount or value of the production saved, removed or sold from the lease" (43 U.S.C. §§ 1335(a)(8), 1337(a)), and gives the Secretary discretion in carrying out its purposes. 43 U.S.C. § 1334.

2. The OCS lease forms give the lessor the right to "estimate the reasonable value" of production for royalty purposes. See, e.g., Oil and Gas Lease of Submerged Lands under the Outer Continental Shelf Lands Act, Form MMS-2005 (Aug. 1982).

C. Indian Leases.

1. The Act of May 11, 1938, 25 U.S.C. §§ 396, et seq., authorizes the lease of allotted lands (§396) and unallotted lands (§§396a) on such terms and subject to such conditions as the Secretary may prescribe. See also the Indian Mineral Development Act of 1982, 25 U.S.C. §§ 2101, et seq.

2. The Indian lease forms generally give the Secretary discretion to calculate the value of production. See, e.g., "Oil and Gas Mining Lease — Tribal Indian Lands,"

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Form 5-157 (July 1964), and "Oil and Gas Mining Lease — Allotted Indian Lands," Form 5-154...