GM 14-045

Department of Interior Proposes Changes to Indian Oil Valuation Regulations

On June 19, 2014, the Department of the Interior’s Office of Natural Resources Revenue (ONRR) published a proposed rule in the FEDERAL REGISTER to amend regulations governing the valuation of oil produced from leases of Indian land. ONRR estimates that this proposed rule would result in an increase of roughly $20 million per year in royalties paid to Indian lessors. Comments are to be submitted on or before August 18, 2014. A copy of the press release is attached and the text of the proposed rule is available here:

Context for the Proposed Rule. The proposed rule is the product of tribal consultation and the work of the Indian Oil Valuation Negotiated Rulemaking Committee (Committee) which was composed of representatives of: tribes; individual Indian mineral owner associations; oil companies with interests in Indian lands; oil and gas trade associations; and the United States government. The proposed rule would amend Indian oil valuation regulations found at 30 C.F.R. Part 1206, Subpart B which were first promulgated in 1988. Since 1988, many changes have occurred in the oil market but past efforts to promulgate updates to these regulations have stalled for a variety of reasons. ONRR’s General Description of the Proposed Rule states:

ONRR is mandated to establish regulations concerning Indian oil valuation based on its Federal trust responsibility to Indians, including the duty to maximize revenue for Indian Tribes and Indian mineral owners. . . . Within the context of the Secretary’s Federal trust responsibility, the purpose of this rulemaking is to ensure that Indian lessors receive maximum revenues from their mineral resources.
In addition, this rule provides simplicity, certainty, clarity, and consistency for Indian oil production valuation for Indian mineral revenue recipients and Indian mineral lessees.

The trust duties of the United States arise from the fact that Indian tribes and allottees are the beneficial owners of the mineral interests. The proposed rule adheres to case law which establishes that the United States has a duty to maximize lease revenues and that the Secretary must take the Indians’ best interests into account when making any decision involving leases on tribal lands.

Changes the Proposed Rule Would Make to Existing Regulations. The Committee was primarily convened to clarify the “major portion” valuation requirement found at 30 C.F.R. Part 1206, Subpart B, § 1206.54. The proposed rule would remove the existing text of § 1206.54 and replace it with new language that would require a lessee to value its oil produced on Indian tribal or allotted lands based on the higher of (1) the lessee’s gross proceeds or (2) an Index-Based Major Portion (IBMP) value adjusted by a Location and Crude Type Differential (LCTD), unique to each designated area and crude oil type.

Essentially, it would ensure that Indian lessors receive royalties based on the highest prices paid for a major portion of production of like-quality oil from a field or area. For the purposes of determining “like-quality oil,” the proposed rule would require lessees to report the crude oil type produced. Along the same vein, the proposed rule would add the term “designated area.” Generally, ONRR would use the reservation boundaries where location and crude oil types are similar to each other to establish designated areas. Designated areas would be used for the purposes of calculating LCTD. ONRR initially proposes nine designated areas (for the description of each, see page 35104 of the FEDERAL REGISTER notice).

Application of the Proposed Rule. 30 C.F.R. Part 1206, Subpart B applies to all oil produced from Indian (tribal and allotted) oil and gas leases (except leases on the Osage Indian Reservation, Osage County, Oklahoma). It does not apply to federal leases, including federal leases for which revenues are shared with Alaska Native Corporations. Of the leases to which 30 C.F.R. Part 1206, Subpart B applies, the proposed rule would apply more narrowly—it would apply only to Indian leases that contain a major portion provision for determining value for royalty purposes and to Indian leases that provide that the Secretary of Interior may establish value for royalty purposes.

Impact. ONRR estimates that these proposed changes would, in concert, increase total yearly royalty payments to Indian lessors by $20 million. To put this number in perspective, $20 million is equal to roughly 3.9 percent of total oil royalties paid to Indian lessors in 2012. ONRR estimates that while the projected increase in royalties paid to Indian lessors represents a corresponding decrease in industry profits, the proposed rule would, by virtue of its clarity, significantly decrease audit and litigation costs for industry.

Please let us know if we may provide additional information regarding the Office of Natural Resources Revenue’s proposed rule.