CHAPTER 9 MINERAL DEVELOPMENT ALTERNATIVES ON INDIAN LANDS

• Jurisdiction: United States

Mineral Development On Indian Lands
(Feb 1989)
CHAPTER 9
MINERAL DEVELOPMENT ALTERNATIVES ON INDIAN LANDS
B. Reid Haltom
Nordhaus, Haltom, Taylor, Taradash & Frye
Albuquerque, New Mexico

I. Changes occasioned by the Indian Mineral Development Act of 1982

II. Comparison of the Indian Mineral Leasing Acts.

A. Tribal Leasing Act of 1938

B. Allotted Lands Leasing Act of 1909

C. Indian Mineral Development Act of 1982

III. Procedures for Acquiring Mineral Agreements under the Indian Mineral Development Act.

IV. Typical Mineral Agreement Provisions

V. Conclusion

Attachments

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I. Changes occasioned by the Indian Mineral Development Act of 1982.

"DOI (The Department of the Interior) estimates that Indian reservations collectively contain billions of tons of strippable coal, more than a trillion cubic feet of natural gas, millions of barrels of oil, millions of tons of uranium ore, and geothermal energy and oil shale in undetermined quantities." CERT (Council of Energy Resource Tribes) Report, July, 1983. The MMS (Minerals Management Service) publication entitled "Mineral Resources: 1987 Report on Receipts from Federal and Indian Leases" indicates gross production of: 19 million barrels of oil, 108 million mcf of gas and 24 thousand short tons of coal in 1987; and for the period 1937 to 1987 gross production of 1,251,718,479 barrels of oil, 3,793,242,199 mcf gas and 374,445,224 short tons of coal.

In this era of Indian self-determination, tribes and tribal members are now afforded the opportunity to participate in development of their own resources, undertaking whatever responsibilities they desire while preserving the choice to lease on competitive bids, leaving all responsibility to others.

In 1982, Congress authorized Indian tribes to negotiate joint ventures, operating, production sharing, service, managerial, leases or other agreements for the exploration, extraction, processing and development of oil, gas and other tribal owned minerals.¹ The Act legitimized a handful of existing agreements² and provided tribes and companies with alternatives to the existing leasing methods; i.e. competitive bidding for oil and gas leases and exploration permits with preference right leases for coal and uranium. The Melcher Bill was supported by industry, the energy producing tribes and the administration.

The philosophy of the Mineral Leasing Act of 1938³ was to provide tribes with a high bonus based on competitive bids and a standard annual rental and a standard royalty of 12-1/2% to 16-2/3%. Some leases have been issued with even higher royalty rates of up to 25% or with sliding scale royalties depending on production and the value of production. It was thought that the greatest economic return to tribes could be achieved through competitive bidding on the standard BIA lease form which had been changed very little since adoption of the Act in 1938. The standard BIA lease form is Form 5-157 of various dates with the most prevalent form being dated in 1957. The most recent general amendments were made in 1964.

In the 1970's, tribes became dissatisfied with the standard royalty of 12-1/2% or 16-2/3% as well as the basis on which "value" of oil and gas and other minerals was determined for payment of royalty. Royalties were being paid on sales prices set by long term, life of lease sales contracts or on artifically set prices or values without

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reference to and lower than the current market. In many instances, lessees producing oil and gas, particularly natural gas, were affiliated with pipeline companies creating pipeline production or sale of natural gas without contracts. The "value" in these pipeline production situations was determined on the basis of prices representing transactions other than sales at arms length or current market prices.

The tribes also had difficulty enforcing diligent development provisions of leases and enforcing the requirement that lease term would be extended after the primary term only on the basis of "production in paying quantities", as well as enforcing special stipulations for environmental, forest protection and tribal preference in employment.

As a result of the dissatisfaction of many tribes with the Indian Mineral Leasing Acts, some tribes negotiated agreements with energy companies without competitive bidding. These contracts were approved, until 1980 or 1981 by the Bureau of Indian Affairs pursuant to 25 U.S.C. § 81 and the regulations pertaining thereto. In 1980 or 1981, the solicitor of the Department of the Interior determined that there was no statutory authority for the alienation of tribal interests in oil, gas and other minerals, without compliance with the mineral leasing statutes. Senator John Melcher, of Montana, introduced the "Melcher Bill", later adopted by the 97th Congress, the objective of which was to permit the tribes greater flexibility in leasing and contracting for development of mineral resources; to provide a higher potential return to the tribes; to provide for tribal employment, also controlled by the tribe; and to provide for accounting and auditing on a more effective basis than previously obtained. One of the major objectives of the Bill was to provide greater flexibility to the tribes, recognizing that each tribe may have different objectives for development of its resources, and that a particular tribe may have different objectives at different times. For example, a tribe may have immediate need for up front cash, and when that need is satisfied through one negotiated agreement, the tribe may look for greater long term benefits at the expense of immediate cash. One agreement, under the 1982 Act, could thus provide cash while the next agreement may have the objective of maximizing long term benefits. Returns at an early date may also be achieved by securing immediate drilling commitments in an area of proven reserves with or without large up front cash bonuses. Long term benefits can be secured by a combination of immediate drilling requirements, higher royalties or working interest assignments after payout of a well or area.

While it is recognized that the Secretary of the Interior is required to exercise supervision and to make findings as to each mineral agreement under the regulations which are mandated by the 1982 Act, the objective of the Act is to provide greater self-determination to the tribes and to permit greater flexibility in drafting agreements.

II. Comparison of The Indian Mineral Leasing Acts.

A. Omnibus Indian Mineral Leasing Act of 1938.

On May 11, 1938, Congress enacted the Omnibus Indian Mineral Leasing Act, 25 U.S.C. § 396 a — g, as a comprehensive Act to govern leasing of minerals on tribal lands, including executive order lands. Certain lands are excluded, including those minerals that are covered by the 1971 Alaskan Native Settlement Act.⁴ In accordance with the 1938 Act, lands within the Indian reservation or lands owned by any tribe or band of Indians under federal jurisdiction can, with the approval of the

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Secretary of the Interior, lease their lands for mining purposes through authorization by the tribal governing body for terms not to exceed ten years and so long thereafter as there is production in paying quantities. The Act sets forth a procedure for public offering of oil and gas leases either by auction or sealed bids after notice and advertisement. There is no set procedure for lease of minerals other than oil and gas. However, BIA approved forms do...