CHAPTER 6 Federal Oil Valuation Regulations; Transportation Allowance Regulations and OCS Royalty Valuation Issues

• Jurisdiction: United States

Federal Royalty Revolution--Oil and Gas
(Nov 1986)
CHAPTER 6
Federal Oil Valuation Regulations; Transportation Allowance Regulations and OCS Royalty Valuation Issues
S. J. Casamassima
Exxon Company, U.S.A.
Houston, Texas

Workshop on the Federal Royalty Revolution

Rocky Mountgain Mineral Law Foundation

Denver, Colorado

November 13, 1986

INTRODUCTION

This outline covers a "grab-bag" of selected topics dealing with federal royalty valuation. The first topic, "Oil Valuation Regulations," encompasses a highlight summary of the draft MMS oil valuation regulations and key issues raised by the Oil Panel which recently reviewed those draft regulations on behalf of the Royalty Management Advisory Committee. The second topic, "Transportation Allowance Regulations," reviews the draft transportation allowance regulations for both oil and gas as well as some of the points addressed by the Oil and Gas Panels. The final topic, "OCS Royalty Valuation Issues," focuses on some of the major royalty problems arising from federal OCS leases.

I. Oil Valuation Regulations

A. Policy and Objectives

1. MMS Draft Proposal

(a) Simplify, clarify and reorganize existing 30 CFR regulations.

(b) Establish, where possible, consistent format with valuation regulations of other leaseable minerals.

2. Advisory Committee (Oil Panel Recommendations)

Oil Panel charged with evaluating reasonableness of draft oil and transportation allowance regulations and recommending changes. Panel was specifically requested to provide recommendations on alternative oil valuation techniques.

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B. Definitions — § 206.5

1. Arm's-length contract

A contract "freely arrived at in the open market place between independent, nonaffiliated parties of adverse economic interests not involving any consideration other than the sale, processing...and/or transportation of lease products, and prudently negotiated under the facts and circumstances existing at that time."

(a) Concept of "adverse economic interests." Connotes opposite, adverse interests must be demonstrated to prove arm's-length. Even though contracting parties are independent and do not have identical interests in a transaction, the contract can still benefit both parties economically.

(b) "Prudently negotiated"—A subjective standard unrelated to the independence of the parties. In hindsight, agreements can frequently appear to be imprudent.

2. Gross proceeds

Definition encompasses all consideration paid to lessee.

(a) Monies to which lessee is "entitled." "Entitled" signifies a claim of right—to demand or receive—as opposed to an acknowledged right to consideration. Royalties would be payable on what a lessee was entitled to receive, not on what is received or settled for under a compromise.

(b) Includes payments for services, tax reimbursements, and take-or-pay. Not as controversial an issue as is the case with gas and coal.

3. Posted price

Publicly announced price a buyer will pay for like-quality oil from specific fields or terminals. Price bulletins list postings and generally include deductions for transportation and adjustments based on quality.

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C. Valuation Standards — § 206.100

1. Arm's-length contracts

Gross proceeds accruing, or which could accrue, to the lessee establishes value under arm's-length contracts.

(a) "Or which could accrue" requirement adds uncertainty to the term "gross proceeds." Does it apply to situations where the lessee has agreed to settle for less than the contract price for justifiable business reasons?

2. Non-arm's-length contracts

Price accepted as value if the MMS determines that the non-arm's-length contract is "similar" to arm's-length contracts. (A "similar" contract is one which is comparable in price, duration, terms, volume, and other circumstances for the sale of like quality oil for the same field.) Prioritized...