IPAA sues to overturn oil royalty rule

April 17, 2000
The Independent Petroleum Association of America has filed a lawsuit to overturn an oil royalty valuation rule that the US Minerals Management Service issued last month.

The Independent Petroleum Association of America has filed a lawsuit to overturn an oil royalty valuation rule that the US Minerals Management Service issued last month.

The rule, which sets new systems for calculating the value of royalties owed the federal government, is due to take effect June 1 (OGJ, Mar. 20, 2000, p. 25). IPAA has not decided whether to ask the District of Columbia federal court for an injunction to block the rule from taking effect.

The association's suit alleges the Department of the Interior rule would not pay producers for values that producers add downstream of the lease, such as aggregation of oil, marketing fees, storage, and transfer fees.

The suit said the government is trying to impose a duty for producers to market oil at no cost to the federal government. It said MMS arbitrarily rejected royalty valuation procedures that producers proposed.

In a similar case involving natural gas royalties, a court recently ruled in favor of IPAA and the American Petroleum Institute (OGJ, Apr. 3, 2000, Newsletter). That court said producers holding federal and Indian leases did not have a duty to pay the costs of marketing royalty gas downstream of the lease.

IPAA Pres. Barry Russell said, "For 3 years, IPAA has fought to protect the interests of the producer who sells at the wellhead or markets through an affiliate from unwanted burdens under the new oil royalty regulation.

"Although some improvements were made in the regulation, it did not address our core position-oil royalties should be valued at the lease. To that end, IPAA proposed royalty valuation procedures to ensure that royalties would be set at wellhead values, not downstream values, and IPAA fought the department's implied duty to market. Interior rejected IPAA's views on both counts."

Russell said, "IPAA has brought suit quickly to try to prevent the unnecessary disruption of our members' business systems that will result from trying to adapt to this new and unlawful rule. Additionally, we believe this early filing will result in an earlier favorable decision."