INDUSTRY PERSPECTIVE1 ON INDIAN LEASE GAS VALUATION FOR ROYALTY PURPOSES—OUTCOME OF NEGOTIATED RULEMAKING PROCESS AND PROPOSED REGULATIONS

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 5B
INDUSTRY PERSPECTIVE¹ ON INDIAN LEASE GAS VALUATION FOR ROYALTY PURPOSES—OUTCOME OF NEGOTIATED RULEMAKING PROCESS AND PROPOSED REGULATIONS
Mary V. Laitos, Esq.
Hale Pratt Hackstaff Laitos Green & Tymkovich, P.C.
Denver, Colorado

I. INTRODUCTION

II. BACKGROUND

A. The MMS Negotiated Rulemaking Committee Process Was Inherently Flawed.

1. Industry representatives were not included until MMS and Tribes had already met for a year and established the agenda.

2. Only 5 of 19 members represented industry, while Committee consensus was determined upon a 2/3 vote.

3. When drafting the proposed rule, MMS did not always abide by or confine itself to decisions of the Committee. It made arbitrary changes that are reflected in the proposed rules that were directly contrary to the Committee consensus and/or ignored the established basis upon which a consensus vote had been obtained. Examples:

a. Contract settlement proceeds: Committee had agreed to disagree on this issue and that it would not be included in rulemaking. Addition of requirement for royalties (and comparative calculations) where contract settlement proceeds received viewed as bad faith by MMS and contrary to IPAA v. Babbitt.

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b. Additional dual accounting requirements for liquids.

c. Safety net calculations: Industry participants voted in favor of index-based formula based upon the belief that use of the formula would satisfy both gross proceeds and major portion clauses. Safety net added several months later over the objection of industry participants.

4. In the preamble to the proposed regulations, MMS misstates several key positions of industry representatives on the Committee.

5. Industry participation nevertheless valuable and resulted in more reasonable rules.

III. COMMENTS ON SUBSTANCE OF THE PROPOSED RULES

A. Purpose of New Regulations

1. Certainty, simplicity and access to information in "real time" were not achieved. The after the fact addition of: (i) safety net calculation; (ii) contract settlement proceeds language; and (iii) dual accounting for liquids, negate the value of using an index pricing methodology because the payor is still required to perform alternate or duplicative calculations in many circumstances.

2. Maximizing revenues on Indian leases only goal achieved to the detriment of other considerations.

3. Inclusion of a provision requiring...