MMS to alter valuation of oil on Indian lands

The U.S. Department of the Interior's Minerals Management Service is proposing to change the way it establishes the value of oil produced on Indian lands. MMS collects oil royalties for many tribes. The regulation is similar to one the agency recently proposed for oil production from federal leases (OGJ, Feb. 16, 1998, p. 36). MMS Director Cynthia Quarterman said, "This rule, which is a cooperative effort between MMS and Indian representatives, follows the general concepts of the federal

Feb. 23, 1998

3 min read

The U.S. Department of the Interior's Minerals Management Service is proposing to change the way it establishes the value of oil produced on Indian lands.

MMS collects oil royalties for many tribes. The regulation is similar to one the agency recently proposed for oil production from federal leases (OGJ, Feb. 16, 1998, p. 36).

MMS Director Cynthia Quarterman said, "This rule, which is a cooperative effort between MMS and Indian representatives, follows the general concepts of the federal oil rule and goes a step further, as required by the specific terms of the Indian leases.

"The Indian lease terms require lessees to pay royalties based on the highest price paid or offered for a major portion of like-quality oil in a given area, regardless of the lessee's contract price."

Revision

The rule requires royalty value to be based on the highest price among three methods: arm's-length gross proceeds, average of the five highest New York Mercantile Exchange prices for the production month (adjusted for location and quality), and MMS-calculated "major portion" value.

MMS said, "This rule reduces reliance on posted prices and increases the use of index pricing. Because of the 'major portion' provision, this rule exceeds the valuation standards proposed for federal leases."

The agency is accepting comments on the proposed regulations until Apr. 13.

MMS said current federal and Indian royalty rules establish the value of crude by using posted prices or prices paid under arm's-length sales.

"Recently, posted prices have become increasingly suspect as a fair measure of market value. As a result, for federal lease production, MMS proposed new valuation rules that place substantial reliance on crude oil futures prices on the Nymex."

It said most Indian leases include a major portion provision, which sets value at the highest price paid or offered at the time of production for the major portion of oil production from the same field.

MMS said, to lessen the current reliance on posted prices and to better accommodate the major portion provision, the new rule would use the highest of the three measures: Nymex futures prices, the lessee's or its affiliate's gross proceeds (adjusted for transportation costs), or "an MMS-calculated major portion value, based on prices reported by lessees and purchasers in MMS-designated areas typically corresponding to reservation boundaries."

The agency said the rule offers guidelines on applying valuation criteria to the large quantities of Indian oil that is disposed of through exchange agreements. MMS said that 6 months after the rule takes effect, it will decide whether the values determined under the rule are replicating actual market prices and satisfying Indian lease terms.