PROPOSED AMENDMENTS TO INDIAN GAS VALUATION: AN EFFORT AT SIMPLIFICATION

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 5C
PROPOSED AMENDMENTS TO INDIAN GAS VALUATION: AN EFFORT AT SIMPLIFICATION
Thomas H. Shipps
Maynes, Bradford, Shipps & Sheftel
Durango, Colorado

Table of Contents

SYNOPSIS

I. Introduction

II. Standard Indian Lease Terms

III. Major Portion Analysis and Use of Indexes

IV. Dual Accounting and the Proposed Alternative

V. Post-Production Allowances

VI. Conclusion

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I. Introduction.

The role of the United States in disposition and management of public minerals and mineral lands is quite different from the fiduciary responsibility that the United States holds with respect to mineral resources owned in trust for Indian tribes and individual Native Americans. Management of public lands includes consideration of a myriad of factors related to public policy ranging from national security and protection of a stable energy industry to environmental protection. Management of tribal lands, on the other hand, essentially requires consideration of only one factor, what action would be best for the Indian owners of mineral resources.

In order to protect tribal lands from unlawful encroachment, Congress, as early as 1790, prevented the conveyance of tribal land without authorization by Congress.¹ The constitutionally based power of Congress "to regulate commerce ... with the Indian tribes"² and pervasive exercise of that power by Congress over Indian affairs led to early recognition of a corresponding federal trust duty in management of Indian lands.³

Congress authorized the mineral leasing of tribal lands under federal statutes different than

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those governing mineral leasing of public lands.⁴ While Congress delegated administrative authority over the leasing of both Indian lands and public lands to the Department of the Interior, lease approval and operational supervision of Indian leases devolved to the Bureau of Indian Affairs, rather than to public land agencies, such as the Bureau of Land Management.⁵ Despite differences in the leasing statutes and lease terms, however, technical issues regarding product measurement and royalty valuation on both Indian and public lands have generally been handled by the same agency within the Department of the Interior, initially, by the United States Geological Survey ("USGS") and, subsequently, by the Minerals Management Service ("MMS").⁶

Tribal advocates have long argued that, in the absence of separate valuation standards, integration of royalty valuation issues in one agency tends to produce uniformity in royalty valuation policy.⁷ Recognizing the administrative desirability and convenience of uniformity, tribes have feared

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that provisions in their leases designed to maximize royalty revenue, such as major portion analysis and dual accounting, might not be vigorously enforced, if the principal valuation vehicle for public land leases did not also reflect consideration of such provisions.⁸ Further, tribes have been concerned that in adopting uniform valuation policies, the Department of the Interior might well be guided by industry practices and demands affecting public land administration, consideration of which was not necessarily consistent with fulfillment of federal trust duties in administering Indian mineral leases. In 1996, the Secretary of the Interior formally separated Indian gas valuation standards from federal gas valuation standards, although substantively the provisions remained almost identical.⁹

Since the last major revision to gas valuation regulations in 1988, all parties involved with federal and Indian mineral leasing have struggled with the complexities of royalty valuation and reporting. Vice President Gore's National Performance Review provided a significant vehicle to revisit many of the issues debated in the mid-1980s, as well as administrative matters that emerged in the wake of the 1988 regulations. Significantly, commencing in January of 1994, MMS began separate discussion of Indian gas valuation issues,¹⁰ and, ultimately, the agency engaged in parallel

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negotiated rule-making proceedings, rather than discussion of uniform revisions to gas valuation for both public and Indian lands.¹¹ The Indian gas valuation negotiated rulemaking appears to be reaching a conclusion, and this paper discusses the major issues surrounding the new rule and ways in which the negotiators and the Department have attempted to resolve those matters. Specific issues addressed include: major portion analysis; dual accounting, and post-production deductions or allowances.

II. Standard Indian Lease Terms

Until passage of the Indian Mineral Development Act of 1982,¹² which encouraged tribes to negotiate their own mineral leasing and development agreements with third parties, most tribal leases consisted of standard terms drafted by the Department of the Interior under authority of the Indian Mineral Leasing Act of 1938.¹³ Aside from specifying the royalty rate, paragraph 3(c) of such leases indicates that such royalty shall be based on the "value ... of all ... gas produced and saved ...

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except...gas used ... for development and operation purposes on said lease, which...shall be royalty free." (Emphasis added). In determining value, paragraph 3(c) further provides:

"[V]alue...may, in the discretion of the Secretary, be calculated on the basis of the highest price paid or offered...at the time of production...for the major portion of...gas...produced and sold from the field where the leased lands are situated.... The actual amount realized by the lessee from the sale of said products may, in the discretion of the Secretary, be deemed mere evidence of or conclusive evidence of such value....It is understood that in determining the value for royalty purposes of products...derived from the treatment of gas, a reasonable allowance for the cost of manufacture shall be made, such allowance to be two-thirds of the value of the marketable product unless otherwise determined by the Secretary of the Interior...and...royalty will be computed on the value of gas...or on the products thereof...whichever is greater.

Standard lease paragraph 3(c) frames the basic issues associated with Indian gas royalty valuation. First, though the lease terms grant discretion to the Secretary in selection of methodologies for determining lease product value, exercise of that discretion must arguably be made on an informed basis and be in...