On May 1, 2015, the Department of the Interior’s Office of Natural Resources Revenue (ONRR) published a final rule in the FEDERAL REGISTER amending the regulations governing the valuation of oil produced from leases on Indian land. ONRR estimates that this final rule will result in an increase of roughly $20 million per year in royalties paid to Indian lessors. The final rule is largely the same as the proposed rule which we reported on in our General Memorandum 14-035 of June 24, 2014. A copy of the press release is attached and the text of the final rule is available here: http://www.gpo.gov/fdsys/pkg/FR-2015-05-01/pdf/2015-09955.pdf The final rule becomes effective July 1, 2015.
Context for the Final Rule. The final 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 final rule primarily amends the Indian oil valuation regulations found at 30 C.F.R. Part 1206, Subpart B § 1206.54 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. In the Background section of the FEDERAL REGISTER notice ONRR explains:
The purpose of implementing this final rule regarding the valuation of oil production from Indian leases is: (1) To ensure that Indian mineral lessors receive the maximum revenues from mineral resources on their land consistent with the Secretary of the Interior’s (Secretary) trust responsibility and lease terms and (2) to provide simplicity, certainty, clarity, and consistency for Indian oil valuation for Indian mineral revenue recipients and Indian mineral lessees.
Changes the Final Rule Makes 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 final rule removes the existing text of § 1206.54 and replaces it with new language that requires 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 is designed to 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 final rule requires lessees to report the crude oil type produced. Along the same vein, the final rule adds the term “designated area.” Generally, ONRR will use the reservation boundaries where location and crude oil types are similar to each other to establish designated areas. Designated areas are to be used for the purposes of calculating LCTD. ONRR will post these designated areas on its website at: http://www.onrr.gov
Application of the Final 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 changes the final rule makes to § 1206.54 apply more narrowly—§ 1206.54 applies 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 changes will, 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 final rule will, 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 final rule.