Current Gas Marketing Royalty Issues Minerals Management Service Perspective

This paper will provide a brief background and discussion of the natural gas market during the 1980's, including special marketing programs and the Federal Energy Regulatory Commission (FERC) Order Nos. 94, 436, 451, and 500. Within this context, it will highlight the Federal and Indian royalty implications introduced by the changing gas market. Specific royalty valuation issues will be addressed in the areas of traditional and spot market sales, end user sales, futures trading, and storage.

This paper also provides four examples illustrating how a lessee should value gas for royalty purposes under the current gas valuation regulations (on or after March 1, 1988) for the following situations: pool pricing; gas futures contract trading; buy/sell and exchanges; and stored gas.1

II. BACKGROUND

A. The Changing Gas Market During the 1980's

The natural gas industry in the United States has experienced radical changes during the 1980's in both the market structure and the regulatory environment. These changes can be traced back to industry's acknowledgement that traditional long-term contracts provided no buffer zones for near term market adjustments. In the market environment that developed under the influence of the Natural Gas Policy Act (NGPA) of 1978, natural gas prices rose and increased exploration resulted in the discovery of additional dome