CHAPTER 7 REPORT FROM THE ROYALTY POLICY COMMITTEE: THE PAST, PRESENT, AND FUTURE OF THE ROYALTY POLICY COMMITTEE

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 7
REPORT FROM THE ROYALTY POLICY COMMITTEE: THE PAST, PRESENT, AND FUTURE OF THE ROYALTY POLICY COMMITTEE
Monte Mills
Assistent Professor & Co-Director
Margery Hunter Brown Indian Law Clinic, University of Montana
Missoula, MT

[Page 7 - 1]

MONTE MILLS is an Assistant Professor and Co-Director of the Margery Hunter Brown Indian Law Clinic at the Alexander Blewett III School of Law at the University of Montana, where he teaches a variety of courses related to federal Indian law and also directs the school's Summer Indian Law Program. Monte's work has appeared in a variety of publications, including the American Indian Law Journal, The Federal Lawyer, and the Public Land and Resources Law Review. In 2017, Monte was appointed to the Department of the Interior's Royalty Policy Committee to represent academia and public interests in the Committee's review of royalty and development issues on federal public and tribal lands.

On January 21, 1982, David F. Linowes, Chairman of the Commission on Fiscal Accountability of the Nation's Energy Resources (Commission), transmitted the Commission's comprehensive report to then-Secretary of the Interior James Watt and the White House.¹ The Commission, chartered by Secretary Watt in July 1981 and comprised of legal, scientific, and fiscal experts, was specifically tasked to explore "allegations of massive irregularities in royalties" and "theft of oil" from federal and Indian lands and had spent months studying the management of royalties paid on the development of mineral resources from federal and Indian lands.² The Commission focused primarily on oil and gas royalties but took a broad view of its specific charges, noting that its work aimed to promote the "prudent management of the country's energy resources" and "help to strengthen th[e] faith" of the public in "the competence and accountability of government."³

The issues to be studied by the Commission were not new. According to a 1981 report by the Comptroller General of the United States, government audit reports dating back to 1959 highlighted the failures of the federal royalty collection system.⁴ In a 1979 study, the Government Accountability Office (GAO) pointed out that although the federal government had collected over $1B in royalty revenues in 1977, the failures of the accounting and collection procedures made it impossible to confirm whether additional royalties were due and resulted in late payments totaling over $350 million that year alone.⁵ After its own intense study of these matters, the Commission confirmed that the federal "royalty management system need[ed] a thorough overhaul." In a damning assessment of the current state of that system, the Commission concluded that, with regard to paying royalties, "the industry is essentially on an honor system."⁶

The Commission's 1982 report also made several recommendations to address those challenges.⁷ While many of these recommendations focused on technical aspects of the royalty assessment, valuation, and collections system,⁸ the Commission also recommended that the Secretary of the Interior "appoint a formal advisory committee . . . consisting of representatives of States and Indian tribes and related organizations and Departmental officials, to develop . . . a plan for carrying out

[Page 7 - 2]

[an] expanded policy of Federal/State/Indian cooperation on a comprehensive basis."⁹ Although the Commission called for that initial advisory committee to complete its work within nine months,¹⁰ that recommendation would be carried out over the next three and a half decades of work by what became the Royalty Policy Committee (RPC), which was most recently re-chartered by Secretary Ryan Zinke in March 2017.¹¹

This paper briefly reviews the RPC's history, contextualizes the challenging issues on which the RPC has focused, and updates that history and context with the Committee's work since it was reinstituted in 2017.

II. History: From Linowes to Zinke.

Though not formally established until the mid-1990s, the Royalty Policy Committee grew out of the work of the Linowes Commission and the reforms that the Commission report instigated. The evolution of those reforms provide helpful context for understanding the role of the Committee as it came into existence and its work through the present day.

In conjunction with the 1982 report of the Linowes Commission, Secretary of the Interior James Watt announced sweeping reform of the federal government's approach to oversight and collection of royalties from oil, gas, and coal developed on federal and tribal lands.¹² Central to that effort was the establishment of a Mineral Management Board and Minerals Management Service, which would take over functions that had previously been exercised by the Conservation Division of the United States Geological Survey.¹³ In addition, Secretary Watt called for a legislative task force to develop new royalty management legislation.¹⁴

Watt also moved to develop "an Advisory Commission composed of Federal, State and Indian representatives, to assist in implementing the Commission's recommendations and in improving the levels of cooperation among the various governments."¹⁵ In announcing that intention, Watt noted that this initiative tracked the Commission's recommendations and provided the first iteration of a royalty advisory committee to analyze and assist with royalty policy issues.¹⁶

Notice of the Advisory Committee on Minerals Accountability was first formally published in November 1982 and its purpose was to tackle the specific issues of state and tribal cooperation identified in the Linowes Commission report.¹⁷ As chartered, the Advisory Committee was comprised of representatives from States and Indian tribes, as well as the Department of the

[Page 7 - 3]

Interior, industry, and one at large member.¹⁸ Over the course of the next year, the Advisory Committee met on a monthly basis to develop recommendations intended to implement better cooperation, among other topics. For example, the Advisory Committee recommended a single payor approach for lease management,¹⁹ a recommendation that the Department of the Interior then proceeded to pursue through formal rulemaking.²⁰

Although the Advisory Committee was short-lived and its efforts resulted primarily in the single payor proposal, the concept it represented continued. In August 1985, Interior Secretary Don Hodel incarnated the next predecessor of the Royalty Policy Committee when he signed into existence the Royalty Management Advisory Committee (RMAC).²¹ Unlike the smaller and temporary Advisory Committee established by his predecessor, Secretary Hodel called for a 31 member RMAC that would advise the Department on the whole range of royalty management issues.²² Secretary Hodel also expressly created the RMAC under the authority of the Federal Advisory Committee Act (FACA), which requires certain findings regarding the role of the committee and its service in the public interest.²³ As an initial charge, Secretary Hodel asked the RMAC to address certain "items of immediate concern," including the systems and databases used in royalty management, certain auditing activities, regulations regarding the valuation of resources produced from federal and tribal lands.²⁴

After a nomination and appointment period, the RMAC quickly set to work on its task and, at its first meeting in January 1986, the RMAC asked Secretary Hodel to delay the development of Interior regulations regarding valuation until the RMAC could review those issues and make recommendations.²⁵ The Secretary agreed and made the draft regulations that Interior had been working on available to both the RMAC and the public for additional review and comment.²⁶ The RMAC then developed separate working panels to review the rules related to coal, oil, and gas, along with the transportation and processing rules for each.²⁷ After developing and reviewing detailed recommendations from each task force, the RMAC was "unable to approve the reports of both the oil and the gas panels for transmission to the Secretary," because, according to the terms of the RMAC's charter, a vote of two-thirds of the RMAC was required for such approval.²⁸ The RMAC did vote to approve and forward to the Secretary recommendations regarding coal valuation.²⁹ Despite the lack of a formal RMAC recommendation on oil and gas valuation, Interior still relied

[Page 7 - 4]

upon the work of the RMAC to promulgate amendments to its then-existing oil and gas valuation regulations.³⁰ Interior also moved forward with new coal valuation regulations, which also drew upon the work of the RMAC.³¹ These initiatives eventually resulted in the adoption of new valuation rules for oil³² and gas,³³ and further development of valuation rules for coal.³⁴ As discussed infra, despite the RMAC's extensive work on valuation issues, those matters continued to be the focus of additional advisory and rulemaking efforts in the decades that followed.³⁵

Beyond valuation issues, the RMAC also established panels to work on funding guidelines under the Federal Oil and Gas Royalty Management Act of 1982, database and systemic issues, and production auditing and accounting system issues.³⁶ Due to the requirements of FACA, the RMAC had to be re-established every two years and, up until its last charter expired in 1995,³⁷ successive Secretaries of the Interior maintained the RMAC as "invaluable to the Department in providing input and advice," and providing "a formal mechanism for soliciting the viewpoint of representatives interested in and knowledgeable regarding royalty-related policies."³⁸

In 1994, Secretary Bruce Babbitt restructured and renamed the Outer Continental Shelf (OCS) Advisory Board to more broadly reflect Interior's royalty management mandate.³⁹ The newly named Minerals Management Advisory Board would incorporate...