The Independent Petroleum Association of America is suing theU.S. Department of the Interior to challenge its new oil royaltyvaluation regulation. The regulation creates new methods of valuingroyalties on oil from federal leases and takes effect June 1.

“IPAA believes Interior’s royalty rule is fatally flawed,” saidIPAA President Barry Russell. Similar to findings in the IPAA v.Armstrong case on natural gas valuation, the oil lawsuit chargesthe government with illegally claiming a larger royalty on oil fromfederal leases. A key element of the suit challenges thegovernment’s claim of royalties for values added downstream of thelease, such as aggregation, marketing fees, storage and transferfees.

IPAA also finds fault with the government for trying to impose aduty to market at no cost to the federal lessor and for arbitrarilyrejecting royalty valuation procedures jointly proposed by IPAA andthe Domestic Petroleum Council. IPAA filed the lawsuit in theUnited States District Court for the District of Columbia onMonday.

“Although some improvements were made in the regulation, it didnot address our core position — oil royalties should be valued atthe lease,” said IPAA President Barry Russell. “To that end, IPAAproposed to the Department of the Interior (DOI) royalty valuationprocedures to ensure that royalties would be set at wellheadvalues, not downstream values; and IPAA fought the departmentsimplied duty to market. DOI rejected IPAA’s views on both counts.

“These are not new issues. On the natural gas rulemaking, wesued the federal government in IPAA v. Armstrong when it illegallytried to inflate the value of royalties owed to the federalgovernment on natural gas produced from federal leases. Two yearslater, on March 28, the court agreed with our position. Itsdecision went to the heart of our argument on oil royalty — theroyalty value should be captured at or near the lease between abuyer and seller, not at a point downstream of the lease at no costto the government.”

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