CHAPTER 6 INDIAN ROYALTY MANAGEMENT AND VALUATION ISSUES

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 6
INDIAN ROYALTY MANAGEMENT AND VALUATION ISSUES
Dennis Cameron
Senior Vice President and General Counsel
WPX Energy, Inc.
Tulsa, OK

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DENNIS CAMERON is Senior Vice President and General Counsel, with WPX Energy in Tulsa, OK. Dennis has over 25 years of legal experience. Prior to joining WPX in 2012, he was a shareholder with GableGotwals. His practice with GableGotwals consisted primarily of complex litigation involving energy interests including the defense of class actions. His practice included commercial litigation with an emphasis in oil & gas issues, products liability, and environmental law. Dennis served as national counsel to a major oil & gas company on royalty, severance taxes, and qui tam matters, and regional counsel to two other oil & gas companies on similar matters. He also represented three major oil & gas companies on Federal and Indian oil & gas matters related to production throughout the United States and offshore.

Education:

B.S. in Mechanical Engineering, University of Oklahoma, 1984

J.D., University of Oklahoma College of Law, 1984

The following is intended to provide an overview of the differences between the valuation regulations as they pertain to oil and gas productions from Federal lands and Indian lands. To put the differences in perspective, the paper begins with a discussion of the foundations of what developed into the field of "Indian Law" and the associated Federal Indian Trust Responsibility. This broad overview is followed by a more detailed discussion of the more important differences between the rules for valuing production from Federal Lands and Indian Lands.

I. FUNDAMENTAL TENETS OF INDIAN LAW:

A paper authored by Professor Monte Mills for the RMMLF contains a very meaningful, succinct discussion of the Federal/Tribal relationship, including a description of certain fundamental tenets of Indian law.¹ Although the Indian oil and gas valuation regulations are the product of many different factors, at least two tenets--Indian Trust Responsibility and Tribal Sovereignty--have played a prominent role in their formation and application. The discussion that follows can only skim the surface of these two complex principles. But a general understanding of them helps illuminate why differences between the Federal and Indian oil and gas valuation statutes and regulations exist.

A. The Indian Trust Responsibility.

The original building blocks of the Indian Trust Relationship are found in two provisions of the Constitution and a series of three Supreme Court cases sometimes referred to as the "Marshall Trilogy." ² The Constitution grants the power to Congress to "regulate commerce...with the Indian Tribes." ³ In addition, the Constitution provides that the President has the power to make treaties with the advice and consent of the Senate. ⁴ It is pursuant to this authority that the Federal Government has negotiated and entered into a number of treaties with Indian tribes that help to define the nature of the Federal/Tribal relationship. ⁵ The nature and extent of that relationship was left to the courts to define.

The first case in the Marshall Trilogy was Johnson v. M'Intosh. ⁶ The case defines the nature of Indian property rights utilizing the colonial doctrines of discovery and conquest. ⁷ The court held that Tribes retained a right of possession and use of land that was subject to the United States' "absolute ultimate title" as successors in interest to Britain. ⁸

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The second case in the Trilogy is Cherokee Nation v. Georgia. ⁹ This case and the third case in the trilogy both relate to a dispute between the State of Georgia and the Tribe concerning the Tribe's property located in the State. Cherokee Nation addressed the issue of whether the Supreme Court had jurisdiction over the original action filed by the Tribe. In concluding it did and after describing the relationship between the United States and the Tribe as "domestic dependent nations", the court made the often-quoted statement that:

[t]hey occupy a territory to which we assert a title independent of their will, which must take effect in point of possession when their right of possession ceases. Meanwhile they are in a state of pupilage. Their relation to the United States resembles that of a ward to his guardian. They look to our government for protection rely upon its kindness and its power; appeal to it for relief for their wants; and address the President as their Great Father. ¹⁰

The final case, Worcester v. Georgia,¹¹ addressed the merits of the dispute between the Tribe and the state and whether the laws of the State applied within the boundaries of the tribal lands. The court concluded the laws of the state did not apply. ¹²

Fast forward nearly two centuries, and certain language in the Marshall Trilogy--such as ward, guardian, and pupilage--is antiquated. The more recent Tenth Circuit Court of Appeals decision in Jicarrilla Apache Tribe v. Supron Energy Corp. ¹³ supplies the language more commonly used today in discussing the trust responsibility in the royalty context. Supron describes the trust responsibility in terms of the United States acting in the "best interests" of the Indian tribes to ensure that the tribes receive the "maximum benefit from mineral deposits on their lands through leasing." ¹⁴ Following the Tenth Circuit's lead, the Indian oil and gas regulations seek to "ensure that Indian lessors receive maximum revenues from their mineral resources as required by the unique terms of the Indian leases and [ONRR's] ¹⁵ trust responsibility to the Indian lessor." ¹⁶

In Supron, the regulations at issue--which have been superseded--arguably were subject to more than one reasonable interpretation, one of which clearly benefited the Indian tribe. Applying trust responsibility to this ambiguity, the Tenth Circuit explained:

When the Secretary is acting in his fiduciary role rather than solely as a regulator and is faced with a decision for which there is more than one

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'reasonable choice' as that term is used in administrative law, he must choose the alternative that is in the best interests of the Indian tribe. ¹⁷

Consistent with Supron, ONRR resolves any ambiguity in statutes, regulations, and leases in favor of the Indian lessor to maximize the financial benefit to the Indian lessor of the oil and gas resources.

C. Tribal Sovereignty.

Tribal Sovereignty forms "the bedrock of the modern court decisions and statutes." ¹⁸ In the minerals arena, it is the driving force behind the Indian Mineral Development Act of 1982 ¹⁹ and the Indian Tribal Energy and Self-Determination Act of 2005. ²⁰

One way in which Tribal Sovereignty plays a role in Indian oil and gas valuation is through negotiated rulemaking. In negotiated rulemaking, an agency appoints a committee of persons who represent the interests that will be significantly affected by the regulatory action. This committee negotiates to develop a proposed rule. ²¹ Negotiated rulemaking was used in the two most significant revisions of the Indian oil and gas regulations. ²² The negotiated rulemaking committees included Indian Tribes, Allottees, ONRR representatives, and industry representatives. ²³

Negotiated rulemaking has allowed for a certain amount of innovation, such as index-based valuation and alternative dual accounting, in Indian oil and gas valuation. ²⁴ And when traditional rulemaking reached an impasse for major revisions to the Indian oil valuation regulations, negotiated rulemaking led to a final rule. ²⁵

A less public--but increasingly more significant--way in which Tribal Sovereignty plays a role in oil and gas valuation today is through IMDA agreements. The Indian oil and gas regulations provide that lease terms prevail over conflicting valuation regulations. ²⁶ Because lease terms generally prevail over conflicting valuation regulations--at least where the parties' intent is clear and unmistakable--IMDA agreements provide Indian tribes with a powerful tool for exercising sovereignty over royalty valuation.

II. KEY DIFFERENCES BETWEEN INDIAN AND FEDERAL REGULATIONS:

The basis of the current regulations that govern the payment of royalties on Federal and Indian land traces its origin to the implementation of the 1988 valuation regulations. The

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consistent theme of those regulations has always been deceptively simple-value is based on gross proceeds and allowances are taken for transportation away from the lease and processing for the removal of natural gas liquids. From that starting point a handful of other important themes were created. The two most notable are the difference in how the regulations treat arm's length transactions and non--arm's length transactions. And while the royalty paid could be materially different depending on whether the relevant agreements were arm's length or not, the regulations provided directions for arriving at the answer to the questions:

1. What did you receive for the sale of my oil/gas?

2. What did it cost you, once production left the lease, to make that sale? ²⁷

Within this framework, the differences between Federal and Indian royalty regulations were few and related to unique matters like Major Portion Pricing and Dual Accounting. Over time the regulations evolved, and the differences expanded. Until recently, it is reasonable to say that the regulations related to the payment of royalty on Indian leases outpaced the regulations related to Federal production in relation to the implementation of a pragmatic approach to royalty remitting. The most notable area in which Indian regulations outpaced Federal is the area of transparency. As discussed more fully below, the ability to use index zones for gas valuation, elect to utilize a procedure like alternative dual accounting for processed gas, proceeds based...