A federal court has rejected an appeal by the American Petroleum Institute (API) of a 2016 rule that steepened royalty payments for natural gas and oil produced on federal property.

The role of natural gas index pricing in determining those royalty obligations featured prominently in the complaint, which the oil and gas trade group filed in the U.S. Court of Appeals for the Tenth Circuit.

At issue is a 2016 modification by the Department of the Interior’s (DOI) Office of Natural Resources Revenue (ONRR) to the royalty valuation regulations for federal oil and gas leases.

Prior to the rule change, ONRR allowed producers selling gas to their own affiliates to value that gas using a multifactor benchmark standard. Following the rule change, producers may use index pricing from...