A Louisiana producer has challenged a decision by the InteriorBoard of Land Appeals (IBLA) that held it owes royalties not onlyon the sale of its production to a marketer at the wellhead, butalso on the amount paid to the marketer for selling that productiondownstream.

Taylor Energy of New Orleans, LA, asked the IBLA last week toreconsider the decision issued in February of this year, while theIndependent Petroleum Association of America (IPAA) weighed in withan amicus brief in support of the company’s position.

Even though the sale between Taylor Energy and PSI Gas MarketingInc. was an arms-length transaction, the IBLA and the MineralsManagement Service (MMS) insist “the amount of money that PSI made[from Taylor for marketing the gas] over and above what it paid toTaylor [for the gas] should have been part of Taylor’s grossproceeds because it was the board’s view the buyer was performingmarketing services which Taylor should have performed at no cost tothe government,” said L. Poe Leggette, an attorney for IPAA.

“It is the lessee’s duty to perform that [marketing] service atno cost to the lessor. That means that the lessor’s royalty is notreduced by the costs of finding a market for the gas, in this case,the 3% payment to PSI,” the IBLA said in its February decision. ButTaylor Energy argued that it actually sold the gas to PSI GasMarketing, and, therefore, shouldn’t be liable for royalties onthat 3% marketing commission.

With a growing number of producers selling energy to marketersat the wellhead, this “duty-to-market issue is probably the mostcontentious issue there is right now between federal lessees andthe Department of Interior,” Leggette said. “The department hasbeen promoting some methods of valuing royalty that go as fardownstream as the department feels it can get away with, and thenonly deducts some of the lessees’ costs in getting the oil or gasthere. So the result is an inflated or synthetic value on which MMSwants royalties to be paid.”

Separately, the IPAA and two major gas producers challenged alower court’s decision that rejected their earlier motions dealingwith royalty treatment of natural gas take-or-pay settlementpayments.

Specifically, the IPAA asked the D.C. Court of Appeals to reviewa February decision by U.S. District Court Judge Royce Lamberththat held it lacked jurisdiction in a lawsuit challenging theInterior Department’s collection of royalties on lump-sum paymentsmade by producers to get out of their gas contracts with pipelines.The IPAA lawsuit led to a 1996 ruling by the D.C. appellate courtin favor of gas producers.

But the February decision by Lamberth took the wallop out of the victory scored by producers in the appellate court. By denyingjurisdiction to the IPAA, Lamberth, in effect, refused to grantproducers industry-wide injunctive relief that would prohibitInterior from levying royalties on lump-sum contract payments madeby pipelines to producers. He limited the thrust of the appellatedecision to only one producer – Samedan Oil, which was used as atest case in the IPAA lawsuit. Other producers, if hit with royaltybills on contract payments, would be forced to fight their battleswith Interior on their own.

Texaco Inc. and Shell Offshore filed separate petitions askingthe higher court to review Lamberth’s decision striking down theirchallenges to Interior orders requiring them to pay royalties onlump-sum settlement payments. Lamberth held that the producers hadfailed to exhaust administrative appeals at Interior before seekingcourt review.

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