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Interior Proposes Changing Method for Calculating American Indian Oil Royalties

The U.S. Department of Interior (DOI) has proposed amending its regulations over how it determines the value, for royalty purposes, of oil produced on American Indian leases. If enacted, the department said the change could boost tribal royalties by $20 million annually.

In a statement Wednesday, DOI said its Office of Natural Resource Revenue (ONRR) had conducted numerous meetings with tribal representatives and Indian mineral landowners to gain feedback on proposed changes to regulations governing Indian oil valuation.

DOI added that the Indian Oil Valuation Negotiated Rulemaking Committee -- composed of tribal representatives, individual Indian mineral owner associations, the oil and gas industry, ONRR and the Bureau of Indian Affairs -- formed in 2011 and was tasked with "bringing clarity and consistency to oil valuation regulations" on Indian oil production. The committee met nine times, through 2012 and 2013, before reaching an agreement on the proposal rule.

"Ensuring that tribal communities receive their fair share of oil and gas revenues for energy produced on their own lands is consistent with our trust responsibility to tribes," said DOI Secretary Sally Jewell. "Reflecting the president's strong commitment to tribal sovereignty and self-governance, these updated regulations...will not only help protect and fairly value Indian energy assets, but encourage exploration and development and ensure consistency with current federal oil and gas valuation rules."

Specifically, the proposed rule would require a lessee "to value its oil produced on Indian tribal or allotted lands based on the higher of [either] the lessee's gross proceeds or an index-based major portion (IBMP) value adjusted by a location and crude type differential (LCTD), unique to each designated area and crude oil type."

According to the proposed rule, the LCTD "would assure that the calculated major portion price represents, on average, the equivalent of a 75% major portion price calculated by arraying all of the prices reported in a designated area from the highest to the lowest price and starting from the top of the array to determine that price associated with the 25th percentile by volume plus one barrel of oil."

The proposed rule stipulates that ONRR will base IBMP on the calendar month average of prices the New York Mercantile Exchange (Nymex) sets, less a differential based on the location and crude oil type of the oil. The department said ONRR will generally base the designated areas on reservation boundaries, with some exceptions.

"Each sales month, ONRR would monitor each of the designated areas' reported sales volumes to identify when oil sales volumes reported as a lessee's gross proceeds are either more than 28% or less than 22% of the total volumes sold in that designated area for the specified crude oil type," the proposed rule said. "In months where the volumes in a designated area for a particular crude oil type fall outside 22-28% of the total volumes sold, ONRR would adjust the current month's LCTD up or down by 10%. ONRR would then use the adjusted LCTD, along with the Nymex calendar month average, to calculate the next month's IBMP value.

"ONRR would continue to adjust the LCTD until the percentage of oil sales volumes reported as gross proceeds reflect between [22-28%] of all sales volumes within a designated area for the specified crude oil type. ONRR would publish the monthly IBMP value [online]."

DOI said the current valuation rule has been in place since 1988. The department said it would publish the proposed rule in Thursday's edition of the Federal Register, and accept public comments on the proposal for the next 60 days.

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