PAYOR/OPERATOR/LESSEE ROYALTY LIABILITY

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Vol. 1
(Jan 1992)
CHAPTER 2B
PAYOR/OPERATOR/LESSEE ROYALTY LIABILITY
Cecelia D. Williams
Minerals Management Service
Denver, Colorado

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. TERMINOLOGY

III. COLLECTION ACTIVITY AND HIERARCHY PURSUANT TO FOGRMA

IV. A SINGLE PAYOR

V. ASSIGNMENTS

VI. JOINT AND SEVERAL LIABILITY

VII. IMPACT OF BANKRUPTCY ACTIONS ON COLLECTION PROGRAM

VIII. SUMMARY

IX. TABLE OF COLLECTION ACTIVITIES AND HIERARCHY

X. FLOWCHART FOR BANKRUPTCY COLLECTIONS

XI. EXPLANATION OF BANKRUPTCY COLLECTION FLOWCHART

XII. FOOTNOTES 2B-15

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I. Introduction

Royalty accounting issues regarding lessees, payors, operators, and operating rights owners constitute a complex area. Although the lessee is the entity that has contractually obligated himself to be responsible for payment of royalty and other assessments, the Minerals Management Service (MMS), Royalty Management Program (RMP)¹ will accept payment from other interested parties, such as the operating rights owner, the operator, or a purchaser. An entity becomes responsible for royalty liability by the submission of a Payor Information Form (PIF). Because the mission of MMS/RMP is to collect revenues from Federal and Indian mineral leases, to account for the revenues, and to disburse the revenues to the proper recipients, a primary goal of the program is to make each account whole. Historically, the billing practices of RMP have worked well and the success rate is high. Royalty dollars collected are shared with the states and the Indians, therefore, RMP makes every attempt to make an account whole and to resolve the debt. An important distinction to remember is that responsibility for operative and environmental liability may differ from royalty liability. This paper will explore the statutory and regulatory basis of royalty payment liability. The royalty accounting policies and practices of the Department of the Interior (Department) will be discussed from the Minerals Management Service perspective. Also addressed will be the Department's policies and practices in royalty collection concerning the hierarchy for collection under the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), the bankruptcy arena, lease assignment concerns, and joint and several liability issues. This paper represents the views of Minerals Management Service and does not necessarily represent an endorsement by other parties participating in the conference.

II. Terminology

Part of the complexity of working with the liability issues stems from the fact that the pertinent terms are not always defined in the same manner by industry and the Department. The parties involved in oil and gas royalty issues are the payor, the lessee of record, the operator conducting the lease operations, and the operating rights owner(s). In actuality, they may be one and the same entity or person, or several entities or persons.

For the purposes of this paper, the term "lessee" will be used to mean "a person or entity holding record title in a lease issued by the United States."² This is the definition utilized by the Bureau of Land Management. Under FOGRMA, the term "lessee" means "any person to whom the United States, an Indian tribe, or an Indian

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allottee, issues a lease, or any person who has been assigned an obligation to make royalty or other payments required by the lease."³ The term "payor" is included in the FOGRMA definition of "lessee," because it is the entity to whom obligation to make royalty or other payments has been assigned.

III. Collection Activity and Hierarchy Pursuant to FOGRMA

As defined by FOGRMA in Section 101, the Secretary of the Interior (Secretary) is responsible for establishing a program to collect and account for oil and gas royalties, interest, fines, penalties, fees, deposits, and other payments. The Secretary delegated authority to MMS as the agency responsible for accomplishing this mission. Among the duties of the lessees, as defined in Section 102(a)(1), is the requirement to make timely royalty or other payments, as specified by the Secretary. Pursuant to Section 102(a)(2), the lessees have the duty to notify the Secretary of any assignments that the lessees may have made of the obligation to make royalty or other payments.

A payor is established with MMS by submitting a Payor Information Form (PIF). The MMS/RMP Auditing and Financial System (AFS) does not have the information to determine if the payor has a legal interest, financial interest, or both, in the lease. However, when a payor submits a PIF to MMS and obtains an Accounting Identification Number in the AFS two items are accomplished: (1) a Payor Confirmation Report (PCR) is generated and sent to the originating payor, and (2) the payor's submission of the PIF acknowledges the payor's acceptance of the responsibility to pay royalties and other assessments and to act as the lessee's agent. This practice is in compliance with Section 102(a)(2) of FOGRMA. Additionally, the "Dear Payor" letters that MMS issues to payors are deemed to be served upon the lessees when sent to the payors because the payors are acting as agents of the lessees. The payor, which is the first entity that MMS pursues in its collection activity, can be held liable for royalties due and owing.⁴ The MMS usually does not have the information within its records to determine whether the payor is a lessee, operator, interest holder, or assigned agent of a lessee. However, when the payor and the lessee are the same entity, there is no question of liability.

Further, it is evident from the legislative history of the FOGRMA that Congress recognized that persons other than the actual leaseholder could be required by MMS, under the existing law, to make royalty payments:

The Committee is not granting the Secretary new authority to designate a "principal payor," i.e. a single payor legally obligated to make payment for royalty obligation on a lease. The Committee is allowing the

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Secretary the discretion to determine under existing authority of law which person (i.e. lessee, interest holder, operator, etc.) is responsible for making royalty payments to the United States. (Emphasis added). 1982 U.S. Code Cong. & Ad. News 4282.

The Committee recognized the Secretary's authority and discretion under the existing law to determine who is responsible for making royalty payments.

Further, the concept of the payor serving as an agent for the lessee is well-established in decisions dealing with legal responsibility for payment, for example, Phillips Petroleum Company, MMS-84-0030-O&G; MMS-85-0021-O&G (Sept. 15, 1986), aff'd, Phillips 66 Natural Gas Co. and Phillips Petroleum Co., 107 IBLA 223, Gower Federal Service (O&G) 44 (1989). In the initial Phillips case, the MMS Director looked to the term of "lessee" as defined by 30 U.S.C. § 1702(7) (1982) and noted that the lessee also is one to whom an obligation to make royalty or other payments required by the lease has been assigned. Because Phillips had agreed in the casinghead gas contract to disburse payments, including royalty payments, as the seller directed, and because the seller did not elect to make the payments, Phillips had been assigned an obligation to make the royalty payments, and was, therefore, considered to be a "lessee" under the FOGRMA definition.

Should a delinquency in payment arise, MMS will issue a delinquent invoice to the payor. If no appeal is filed, the MMS collection procedures continue. When it is 30 days past the initial date of the delinquency, MMS will issue a second followup notice to the payor. If on the 35th day past the date of delinquency, no payment has been received, MMS will contact the delinquent payor by telephone. When the payment is not forthcoming from the payor by the 50th day past the initial date of delinquency, if the payor and lessee are not the same entity, the lessee is notified and a demand is made for payment. If the payor and lessee are the same entity, steps are taken to notify the surety and a demand is made for payment from the performance bond which was originally required for the lease. Thirty days are given to the lessee(s), if the payor and lessee are not the same entity, or to the surety holding the bond to provide evidence rebutting the MMS allegations or to...