Federal leases

Dec. 20, 1999
The following statement of API Pres. Red Cavaney quoted on p. 34 of your Oct. 18, 1999, issue is simply false...

The following statement of API Pres. Red Cavaney quoted on p. 34 of your Oct. 18, 1999, issue is simply false:

"He said oil companies' leases with the government require them to pay royalties based on the value of production at the lease, but MMS is tryng to establish royalty values at points downstream."

There never has been any provision in federal leases for valuation of production at the lease.

The OCS leases, which currently account for more than 84% of federal oil production, provide that "[t]he value of production for purposes of computing royalty on production from this lease shall never be less than the fair market value of the production," and "shall not be deemed to be less than the gross proceeds accruing to the lessee from the sale thereof."

These leases also provide that "[t]he value of production shall be estimated reasonable value of the production as determined by the lessor...."

The onshore federal leases likewise have no provision for valuation of production at the lease. Instead, they are made expressly subject to "the Secretary of the Interior's regulations and formal orders...." The controlling regulation is 30CFR Sec. 206.52(h) which provides as follows:

(h) Notwithstanding any other provision of this section, under no circumstances shall the value of production, for royalty purposes, be less than the gross proceeds accuring to the lessee for lease production, less applicable allowances determined under this subpart."

Harrold E. (Gene) Wright
Gene Wright Inc.
Tyler, Tex.