CHAPTER 8 NATURAL RESOURCE ROYALTY MANAGEMENT AND ACCOUNTING: SPECIAL ISSUES ASSOCIATED WITH VALUATION AND ROYALTY ACCOUNTING FOR PRODUCTION FROM INDIAN LANDS, PAST, CURRENT, AND PROPOSED OIL AND GAS VALUATION REGULATIONS
| Jurisdiction | United States |
(May 1999)
NATURAL RESOURCE ROYALTY MANAGEMENT AND ACCOUNTING: SPECIAL ISSUES ASSOCIATED WITH VALUATION AND ROYALTY ACCOUNTING FOR PRODUCTION FROM INDIAN LANDS, PAST, CURRENT, AND PROPOSED OIL AND GAS VALUATION REGULATIONS
Nordhaus Haltom Taylor Taradash & Frye, L.L.P.
Albuquerque, New Mexico
I. SYNOPSIS
Indian mineral properties have long been highly regarded and coveted by the United States as well as private interests. The number of cases is far too great to require particular citation or elaboration here on the lengths to which the United States and its courts have gone to rationalize divesting Indians of their mineral properties. What little remains of these mineral properties still possessed by their tribal owners has been entrusted to the United States, by its own acts, as trustee for the beneficial tribal owners. The recent history of the Department of Interior and its attempts to properly account for tribal mineral development has been a not particularly distinguished one. A summary of some of those actions is discussed below as a necessary factual predicate for understanding why separate regulations, and accounting and auditing systems are necessary for tribal oil and gas leasing activity as opposed to federal leasing. This need becomes even more obvious when one examines the underlying reality of the conflict of interest of the United States as a mineral resource owner on its own account and that of the behavior to which it ought to rise as a trustee of tribal mineral resources.
When the United States acts with regard to its own vast mineral estate on public lands and offshore properties, it affects directly and indirectly the value of tribal mineral assets. As a trustee for tribal mineral properties, the United States is in a very difficult conflict of interest situation which is all too often forgotten when it has acted to benefit the development of its own mineral estate and the domestic energy industry which has been elevated to the status of a key ingredient of our national security.
The economic burden that tribal mineral development now suffers under due to dual taxation (states and tribal taxes) is further exacerbated when Congress authorizes, and the Secretary of Interior awards, huge economic incentives designed to guarantee oil and gas industry profitability. The author suggests that it is now time for Congress to examine this history and to offer encouragement to tribal mineral resource owners and their industry partners by providing a flexible tax credit that will reward the exploration, development and production of tribal energy minerals. It is further suggested that providing this relief will benefit tribal economic self sufficiency as well as the regional economies wherein such energy development will take place. Properly structured, the hypothesis continues, such Congressional relief will assist and encourage joint Indian and non-Indian energy development which will benefit all. In turn, Congress will have vindicated the federal government's trust responsibility to tribal resource owners and will have created the climate within which regional prosperity will be encouraged. This will, in turn, enhance the tax base both regionally and nationally. Finally, it is suggested that due to the confluence of certain described events, now is the time for such Congressional action.
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II. INTRODUCTION
Oil and gas leases (the "Leases") on tribal lands1 are administered by the United States Department of Interior as the trustee for each tribe individually. Unfortunately, the Department of Interior ("DOI" or "Interior" or the "Department"), through its Bureau of Indian Affairs ("BIA"),2 Minerals Management Service ("MMS"), and Bureau of Land Management ("BLM"),3 has demonstrated a long-standing, consistent, and extraordinary disregard of its statutory and judicially-mandated fiduciary duty to completely and accurately account for all production4 from the Leases, appropriately determine value consistent with the Lease terms, and to timely collect and disperse royalty payments to the tribe.5 These problems are systemic failures
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of long standing of the Secretary of the Interior (the "Secretary"). These Secretarial failures result in significant underpayment of royalties due on both tribal as well as federal leases because the same deficient systems are employed by the Secretary to "account" for both tribal and federal leases. There are no exceptions other than the Osage Tribe which unfortunately for years has fared even worse under the exclusive administration of the BIA.6 Indeed, Congress was moved to act when the Linowes Commission report was submitted in 1982,7 documenting the gross underpayment, under-reporting, and even outright theft as the oil and gas industry was found to be "essentially on an honor system".8 These shocking revelations moved Congress to pass the Federal Oil and Gas Royalty Management Act of 1982 ("FOGRMA").9 However, before a discussion of the relatively recent past in the post-Linowes Commission era, it is very instructive to examine the principal Indian oil and gas lease terms and the regulations extant in 1936.10
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In relevant part, the 1938 Regulations with regard to royalty computation provided:
(e) Price basis for computing royalties. The value of production, for the purpose of computing royalty, in the discretion of the Secretary of the department having jurisdiction over the leasehold, may be calculated on the basis of the highest priced per barrel, thousand cubic feet, or gallon, paid or offered) whether such price is established on the bases prescribed in these regulations or otherwise) at the time of production in a fair and open market for the major portion of like-quality oil, gas, natural or casing-head gasoline, propane, butane, and all other hydrocarbon substances produced and sold from the filed where the leased lands are situated; but under no conditions shall the value of any of said substances for the purpose of computing royalty be deemed to be less than the gross proceeds accruing to the lessee from the sale thereof or less than such reasonable minimum price as shall be determined by said Secretary.
1938 Regulations at Sec. 8(e), 56 Decisions of the Department of Interior at 426-27 (1939). It is thus very clear that the fundamental principals of valuation as contained in standard Indian oil and gas leases have remained virtually unchanged for at least sixty years. As one can readily see from examining the above quoted paragraph, value for purposes of royalty determinations is entrusted to the Secretary's discretion and is to be based on the highest prices paid or offered for the major portion of production. The concept of gross proceeds as a minimum floor is also present. It is also worth noting that these pricing data elements are to be derived in "a fair and open market". A concept that has great relevance to issues presented in affiliated company sales and in cases where variations of side agreements or exchange agreements exist. Furthermore, the 1938 Regulations contained the same value based principals and dual accounting requirements as are contained in the current MMS valuation regulations. The 1938 Regulations provided in relevant part:
(g) Royalty on gas. The royalty on gas, whether casing-head or natural gasoline has been extracted or not, shall be a percentage (established by the terms of the lease) of the value of the gas.....
Royalty accrues on dry gas, whether produced as such or as residue gas after the extraction of gasoline.
For the purpose of computing royalty the value of wet gas shall be either the gross proceeds accruing to the lessee from the sale thereof or the aggregate value determined by the Secretary of the department having jurisdiction of all commodities, including residue gas, obtained therefrom, whichever is greater.
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1938 Regulations at Sec.3(g), Id. at 428-29. To suggest that the United States' failure to enforce these fundamental and long standing principals of valuation in Indian oil and gas leases is a tragic record of consummate default by the tribe's trustee11 is too benign a description of the hundreds and hundreds of millions of dollars of loss suffered by tribes that such failure has directly caused. Major portion analysis has only recently been attempted by the Department. Dual accounting is a requirement that the Department obdurately refused to enforce even in the face of a loss in court on the very subject.12 Congress attempted to change this uniform governmental default when it passed FOGRMA in 1982. An examination of the Secretary's performance since 1982 suggests otherwise when it has been a matter of enforcing these special provisions associated with valuation and royalty accounting for production from Indian lands.
III. SPECIAL ISSUES ASSOCIATED WITH VALUATION AND ROYALTY ACCOUNTING FOR PRODUCTION FROM INDIAN LANDS.
FOGRMA mandates "the development of enforcement practices that ensure the prompt and proper collection and disbursement of oil and gas revenues owed to the United States and Indian lessors ... ."13 Under FOGRMA, the Secretary of the Interior is charged with the establishment of "a comprehensive inspection, collection, fiscal and production accounting and auditing systems to provide the capability to accurately determine oil and gas production, royalties, interest, fines, penalties, fees, deposits, and other payments owed, and to collect and account for such amounts in a timely manner."14 Congress explicitly directed the Secretary of the Interior to "aggressively carry out his trust responsibility in the administration of Indian oil and gas."15
The directives of FOGRMA have yet to be fulfilled. As will been seen in the discussion below, these failures, the crucial differences between Indian and federal leases, and...
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