The Interior Department’s Minerals Management Service (MMS) hasissued a final rule for determining royalties for natural gasproduced on Indian lands. Under the new rule, which was publishedin Tuesday’s Federal Register, Indian leases would have the optionto either direct producers to compute royalties on wellhead gasusing a published price index, continue using the existinggross-proceeds method for arms-length contracts, or use the currentMMS benchmark system for non-arms-length sales. If gas isprocessed, Indian tribes then could adopt a “dual accounting”method under which royalties would be based on whichever stage hasthe greater value for gas – before processing or after processing.In most cases, it’s the latter.

Indian tribes can choose the method that will bring them thegreatest royalties. “Surprisingly MMS has found that a lot oftribes…are going to lose money on indexing,” said Larry Cobb, atechnical advisor for MMS. The agency felt that would be”politically incorrect.” That’s why Indian tribes were given the”dual accounting” option – to ensure that they “get the increasedvalue that they’re entitled to after processing.”

The new rule will go into effect Jan. 1, 2000. Prior to then,MMS will provide a list of “acceptable” trade publications thatpublish gas index prices. The rule was developed by the Indian GasValuation Negotiated Rulemaking Committee, whose members includedIndian tribes and allottee associations, industry trade groups, MMSand the Bureau of Indian Affairs.

Natural gas production on Indian lands last year was estimatedat 279 Bcf, according to Cobb. Producers paid about $191 million inroyalties for gas, oil and coal minerals that were extracted fromIndian lands in 1998.

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