The Supreme Court last week refused to review a lower court’s ruling permitting the assessment of royalties on a 1992 gas contract settlement between a Kentucky producer and Enron Gas Marketing.

Century Offshore Management Corp., a small oil and gas producer which has been operating under bankruptcy for the past two years, petitioned for review of the Sixth Circuit Court of Appeal’s decision, which held that a lump-sum settlement that Enron made to the producer in 1992 to get out of its contract was royalty bearing.

The Interior Department encouraged Century Offshore’s petition because while it believed the Sixth Circuit’s decision was the correct one in that particular case, it nevertheless was in direct conflict with an August 1996 ruling handed down by the D.C. Circuit Court of Appeals that barred the assessment of royalties on past, non-recoupable contract settlements between producers and pipelines. A contract settlement payment to a producer is considered non-recoupable if it isn’t used later — post settlement — by the pipeline as a credit toward the purchase of gas from the same producer.

The high court’s decision last week “on balance…was helpful” to the Independent Petroleum Association of America (IPAA), the plaintiff in the D.C. Circuit case, and to Samedan Oil Corp., an Oklahoma-based producer that was used as a test case in the lawsuit, said L. Poe Leggette, a Washington attorney representing both parties. If the Supreme Court had opted to review the Century Offshore case, it could have led to the “undoing” of the D.C. Circuit’s 1996 decision that was favorable to gas producers, which Interior had hoped would occur, he noted.

Within the next few weeks, D.C. District Court Judge Royce C. Lamberth is expected to rule on IPAA’s motion to overturn a July 1997 ruling, which held that the D.C. Circuit’s decision was limited to Samedan because it was the target of Interior’s royalty-collection efforts. The federal court ruled it did not apply to the IPAA, which represents independent producers. The D.C. District Court took this action last year when the IPAA petitioned the court to implement the appeals court decision and halt royalty claims on non-recoupable contract settlements. Its request was denied on the grounds that Interior’s Minerals Management Service (MMS) had never taken any direct action against the trade group.

Unless this decision is overturned, gas producers will be forced to fight individually in court any attempt by the MMS to collect royalties on past take-or-pay, buy-down or buy-out settlements with pipelines, according to Leggette. An unfavorable decision for the IPAA likely could send this case back to the appellate court. Interior also reportedly is awaiting Lamberth’s ruling before deciding whether or not to seek appeal.

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rights reserved.The preceding news report may not be republished or redistributed in wholeor in part without prior written consent of Intelligence Press, Inc.