DOI Proposes Overhaul Of Federal And Indian Mineral Lease Royalty Valuation Standards

by Beveridge & Diamond PC

On January 6, 2015, the Department of the Interior’s Office of Natural Resources Revenue (“ONRR”) issued a proposed regulation that would substantially modify existing regulations in 30 C.F.R. Part 1206 for the valuation for royalty purposes of oil, gas, and coal from federal leases onshore and on the Outer Continental Shelf.  The proposal also would amend ONRR’s royalty valuation regulations for coal production from Indian leases.  While this proposed rule may have certain benefits for industry, ONRR is proposing to eliminate several existing provisions that will hit existing and future lessees in the pocketbook.  ONRR estimates that its proposed changes will increase royalty revenues for the federal government and Indian lessors by approximately $80 million annually.

The proposal  would amend the valuation procedures for gas produced from federal leases, unchanged since 1988, to make them consistent with current ONRR oil valuation regulations.  To value non-arm’s-length dispositions of gas production, ONRR is proposing to replace the existing “benchmark” system, which looks principally to comparable arm’s-length sales in the field or area as the valuation criterion, with a methodology that relies primarily on published index prices, similar to the methodology ONRR adopted for oil valuation in a 2000 regulatory overhaul.  For valuation of arm’s-length sales of gas production, ONRR is proposing a change that would allow lessees to elect either to pay royalties based on their or their affiliates’ “gross proceeds” (less applicable transportation adjustments) even if that sale occurs in a distant market, or to instead pay based on the new index-based methodology that would be applicable to non-arm’s-length dispositions.  ONRR had adopted a similar option for oil valuation in the 2000 revision to relieve lessees from having to “chase” gross proceeds to distant sales points. 

Among  many other proposed changes to valuation procedures for oil and gas, the most costly  would disallow any transportation deduction to move oil or gas production from deep water completions on the Outer Continental Shelf to the first platform.  Amending  the transportation allowance regulations could cost industry $20 million annually.

ONRR also is proposing to revamp valuation procedures for coal production from both federal and Indian leases.  Under the existing regulations, if a coal lessee transfers production to an affiliate in a non-arm’s-length transaction, then the production would be valued by application of  benchmarks that look first to prices in comparable arm’s-length sales in the same area where the mine is located.  ONRR is proposing instead that if a lessee sells or transfers coal to an affiliate under a non-arm’s-length transaction, and the affiliate ultimately re-sells at arm’s-length, then the affiliate resale price establishes the royalty value.  This proposal would significantly increase royalty obligations, and valuation complexities related to transportation allowances, for coal producers whose marketing affiliates are selling coal under arm’s-length contracts in distant markets.  Unlike for oil and gas, ONRR is not providing coal lessees an option to use the valuation procedure for non-arm’s-length dispositions (that currently looks to values in the area where the mine is located) instead of “chasing” gross proceeds to a distant sales point.  With respect to non-arm’s-length dispositions, ONRR is proposing to replace its benchmark process that relies on comparable sales in the area with a provision that would require the lessee to value coal production based on the price of the electricity generated by the coal.

ONRR is also proposing to adopt what the agency denominates as its “default provision.”  Under this provision, there are multiple opportunities for ONRR to elect not to apply the regulatory valuation standards for oil, gas and coal and to instead unilaterally establish a “reasonable” royalty value on a case-by-case basis using a variety of discretionary factors.  This proposal is likely to stimulate significant interest from industry because it diminishes the certainty in the valuation process provided in the existing oil, gas and coal valuation standards, the single most critical underlying principle in those rules.  On the other hand, it may provide a benefit in circumstances where lessees are uncertain how to apply the prescribed valuation provisions to their particular disposition of oil, gas or coal and avoid risk of penalties for improper reporting.

ONRR is accepting comments on the proposed rule until March 9, 2015.  Any company or organization with existing or future interests in federal or Indian oil, gas, or coal leases has a significant vested interest to weigh in on the proposed rule before it becomes final.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Beveridge & Diamond PC | Attorney Advertising

Written by:

Beveridge & Diamond PC

Beveridge & Diamond PC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.