Establishing Oil Value for Royalty Due on Federal Leases

The Minerals Management Service (MMS) is amending its regulations regarding valuation, for royalty purposes, of crude oil produced from Federal leases. MMS is changing the way that oil not sold under an arm's-length contract is valued; providing optional ways for lessees to value their crude oil production if they sell it at arm's length following one or more arm's-length exchanges or one or more transfers between affiliates; changing the way that actual transportation costs are calculated; changing the definition of "affiliate" because of a recent judicial decision; clarifying that it will issue binding value determinations; and adding specific regulatory language regarding the issue of "second-guessing" a sale under an arm's-length contract. These amendments are intended to assure that royalties on Federal oil production are based on a fair value and to otherwise simplify and improve the rule.