The U.S. Minerals Management Service has declared federal and Indian leases it administers in Oklahoma will not be subject to a state royalty pooling law.
Oklahoma Senate Bill No. 168, which became effective july 1, evolved from a state lawsuit, Shelf Oil Co. vs. Oklahoma Corporation Commission, commonly known as the Blanchard decision.
The bill provides that working interest owners taking and selling oil and gas must pay royalties to a pool shared by all royalty owners in the agreements.
The value of gas production for purposes of payments to the royalty pool is based on each lessee's sales proceeds and terms of lease royalty clauses.
Under the bill, royalty owners receive a payment from the royalty pool, based on their royalty interest, within 90 days after the last day of the month of production. The agreement operator makes the disbursements, although working interest owners may elect to pay royalties directly to royalty owners.
MMS STANCE
MMS met with state officials, oil companies, and royalty owners in March and told them it could not accept the law.
It said the value of a federal or Indian lease entitled share for royalty purposes is to be determined solely on terms and applicable regulations, not on the basis of a royalty pool in which each contributing working interest owner uses its respective lease terms or other guidance to value its royalty share.
MMS also insisted the value of federal and Indian production is to be based on no less than the gross proceeds accruing to the lessee, and the payment is due no later than the end of the month following the month of production.
It noted federal law governs the value of communitized production from federal or Indian leases, and MMS has had a long standing policy that value for royalty purposes be no less than gross proceeds accruing to the lessee under its sales contract.
The Oklahoma law also contained special provisions regarding "subsequently created interests" (SCIs), interests carved from a working interest other than a royalty, such as an overriding royalty.
MMS said treating the federal and Indian royalty interests as SCIs under the bill might satisfy the bill's royalty pooling obligations and alloy federal or Indian lease operators to comply with their lease terms and MMS' royalty requirements.
"Under the SCI methodology, federal and Indian lessors would not share in the royalty pool and their royalty interests would be excluded in the computation of contributions to the royalty pool. However, federal and Indian working interest owners may still be required to pay a royalty portion into the royalty pool under Oklahoma law."
MMS said the SCI issue is outside the scope of its notice objecting to communitized production, and lease operators should contact accountants and oil industry associations for guidance on SCIS.
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