JurisdictionUnited States
Federal & Indian Oil & Gas Royalty Valuation and Management III


Sarah L. Inderbitzin *
Office of the Solicitor Department of the Interior
Washington, D.C.

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I. Introduction

Although the title of this paper may lead readers to believe it is solely about rules in progress in the year 2000 and beyond, it also discusses final rules published before the millennium.1 All of the rules and rulemakings discussed began before the new millennium, and, hopefully, will be completed before the next millennium!

The genesis of most of the recent rulemakings is twofold. First, On August 13, 1996, the President signed the Federal Oil and Gas Royalty Simplification and Fairness Act, (RSFA).2 RSFA contained numerous provisions which made it necessary for the Minerals Management Service (MMS) to amend existing regulations, or promulgate new regulations implementing the RSFA's provisions. Thus, this paper discusses regulations for which the Department has promulgated a final rule,3 proposed rule, or initiated a rulemaking implementing RSFA.

The second reason for recent rulemakings is Departmental concerns over the clarity and certainty of its royalty valuation regulations particularly in light of changes in market structure and industry practices. Thus, this paper also discusses regulations for which the Department has promulgated a final rule, proposed rule, or initiated a rulemaking in response to Departmental concerns about MMS's valuation regulations.

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II. Final Rules

A. Appeals of MMS Royalty Orders, 30 C.F.R. Part 290, Subpart B, 43 C.F.R. Part 4, Subpart E

Section 4 of RSFA amended the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA),4 and added a new FOGRMA § 115(h), governing the Department's process for resolving appeals of MMS orders or decisions involving royalties and other payments due on Federal oil and gas leases.5 For appeals involving Federal oil and gas leases covered by this new provision, the Department has 33 months from the date an administrative proceeding is commenced to complete all levels of administrative review.6 If the Department does not decide the appeal within 33 months, the appeal is deemed decided either for or against the Department, depending on the type of order and the monetary amount at issue in the appeal.7 The 33-month deadline does not apply to appeals involving Indian leases or Federal leases for minerals other than oil and gas.8

As a result of MMS review of its appeals process, and the new legislation, MMS announced a proposed rule on October 28, 1996.9 The proposed regulation provided for amendments to the appeals process at 30 C.F.R. Part 290.10 On December 31, 1997, MMS announced that it intended to withdraw the October 28, 1996, proposed rule when it published a revised notice of proposed rule.11 On January 12, 1999, MMS published a proposed rulemaking that withdrew the October 28, 1996, proposed rule.12 That proposed appeals rule implemented many of the recommendations of a Royalty Policy Committee (RPC) Subcommittee on Appeals and Alternative Dispute Resolution Report (RPC Report) approved by the RPC and submitted to the Secretary of the Interior on March 27, 1997.13 The new proposed 43 C.F.R. Part 4, Subpart J, would have established a new procedure for appeals of royalty orders adopting large parts of the RPC Report recommendation that MMS replace the Department's current two-step appeals process with a one-stage IBLA administrative appeal process.14 That section would have replaced the current regulations at 30 C.F.R. Part 290 and 43 C.F.R. Part 4, Subpart E, as they relate to appeals of royalty orders initially to the MMS Director and then to the IBLA.

MMS decided not to go forward with the entire appeals process as proposed on January 12, 1999, for two major reasons. First, the Department received numerous negative written and oral

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comments regarding the proposed process.15 Second, because the Department needed to publish a final rule implementing the RSFA default rule of decision under 30 U.S.C. § 1724(h) before May 13, 1999, the Department could not complete a thorough and reasoned review of all the comments received on the appeals process and the issues involved in that process.16 Thus, the Department made final those portions of the proposed rulemaking necessary to implement RSFA, and the portions of the proposed rule which received few or no comments.17 As a result, the final rule requires appellants to continue to use the appeals procedures for royalty orders found at 30 C.F.R. Part 290 and 43 C.F.R. Part 4, Subpart E, unless the Department publishes a final rule on the appeals process.18

The sections of the final appeals rule that the Department felt were necessary to implement RSFA dealt with the 33-month RSFA time frame within which to decide an appeal. The final rule included 43 C.F.R. § 4.906, which specifically deals with what happens when a decision is deemed "decided" under 30 U.S.C. § 1724(h). The final rule also included other provisions necessary to implement Section 4.906 such as:

• Defining "monetary obligation";19

• Defining "nonmonetary obligation";20

• Defining "commencement" of an appeal;21

• Explaining how to extend to 33-month period commensurate with a request for an extension of time;22

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• Explaining that a final decision of the IBLA satisfies the 33-month period regardless of whether a party requests reconsideration;23

• Explaining what happens when the IBLA orders MMS to perform a recalculation of an order;24 and

• Explaining what constitutes the administrative record if a decision is deemed decided under the RSFA statutory rule of decision.25

The Department is continuing to consider comments received on the proposed rule and hold internal discussions on the appeals process.

B. Bonding, 30 C.F.R. Part 243

As discussed above in Section II.A., RSFA made changes to the timing of appeals decisions. RSFA also made other changes relevant to the appeals process. RSFA Section 4(a) amended FOGRMA to add a new Section 115(l), 30 U.S.C. § 1724(l) "Stay of Payment Obligation Pending Review." Section 115(1) allows any person (as that term is defined by FOGRMA § 102 (12)), who MMS or a delegated State orders to pay any obligation (other than an "assessment") subject to RSFA, to demonstrate that person is "financially solvent."26 Under the final rule, for Federal leases, if MMS determines that the person is financially solvent, the person is entitled to a stay of an order (other than one to pay an assessment) without posting a bond or other surety instrument pending an administrative or judicial proceeding.27 If they are unable to demonstrate financial solvency, the Secretary may require a bond or other surety instrument satisfactory to cover the obligation.28 Thus, the final regulations set forth the process and standards for demonstrating financial solvency.29

Several concepts under the final rule are worth noting. First, although RSFA only applies to Federal oil and gas leases, MMS decided to allow federal lessees to demonstrate financial solvency for all Federal mineral leases.30

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Second, the final rule would allow any person other than a lessee to demonstrate financial solvency for the lessee as long as that person notifies MMS in writing that it wishes to assume another person's responsibility with respect to an appealed order.31 However, in such notification, the person would have to agree that if it posted a bond or demonstrated financial solvency on behalf of another person, it could not use its possible non-liability for the underlying monies due, either under the provisions of RSFA or otherwise, as a defense.32 Thus, as explained in the final rule, a designee could not use the fact that it is not liable for royalties or other payments made, under FOGRMA, 30 U.S.C. § 1712(a), as amended by RSFA § 6(g), as a defense if MMS calls its bond or requires it to fulfill its responsibility covered by its financial solvency.33

Finally, the final rule was designed to allow lessees to demonstrate financial solvency in more than one way. If a lessee has an audited financial statement documenting a net worth greater than $300 million, they are presumptively deemed financially solvent and do not need to post a bond or other surety instrument.34 If a lessee has a net worth less than the $300 million benchmark amount, or did not have an audited financial statement documenting its net worth, the lessee can ask MMS to consult an MMS determined-business information or credit reporting service or program.35

C. Service and Finality, 30 C.F.R. Part 290

On September 20, 1999, MMS published an interim final rule with correcting amendments to the May 13, 1999 final rule36 governing appeals of Royalty Management Program and Delegated States Orders.37 This correction was necessary due to a technical error in the final appeals rule and was made effective as of the effective date of the final appeals rule.38

The final appeals rule amended among other things, 30 C.F.R. Part 290 by adding new Subpart B-Appeals of Royalty Management Program and Delegated States Orders.39 The correction added two sections to 30 C.F.R. Part 290, Subpart B that were formerly found in 30 C.F.R. § 243.3 "Exhaustion of administrative remedies,"40 and in 30 C.F.R. § 243.4 "Service of official correspondence."41

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MMS believed that it needed to correct the final rule because, without the provisions regarding exhaustion of administrative remedies and service of official correspondence, it was unclear where recipients of orders should seek resolution to royalty disputes and how those orders must be served.42 These sections were inadvertently omitted from the May 13, 1999, final rule.43 Thus, the correction simply replaced former 30 C.F.R. §§ 243.3 and 243.4 with minor modifications to reflect changes in the...

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