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Federal Natural Gas Valuation

John L. Price, Judith M. Matlock, Bud Hum, Federal and Indian Oil & Gas Royalty Valuation and Management

This topic concerns the question of how to value natural gas production from a federal lease when the production is not sold pursuant to an arm's-length contract. Although the Minerals Management Service (“MMS”) has adopted index-based valuation regulations for certain natural gas production from Indian leases2 and published values for certain oil production from federal leases,3 it has not adopted similar published values for natural gas production from federal leases, although it has considered the topic as recently as 2005.4 Unless and until the MMS adopts index-based valuation for natural gas production from federal leases, at least as to non-arm's-length transactions, the benchmark valuation regulations adopted in 1988 apply.

However, two relatively recent decisions have changed the analysis of non-arm's-length transactions: the decision by the United States Court of Appeals, District of Columbia Circuit, in Fina Oil and Chemical Co. v Norton5 (“Fina”) and the Interior Board of Land Appeals decision in Vastar Resources, Inc.,6 (“Vastar”). Fina puts renewed emphasis on the application of the benchmark valuation regulations. Vastar puts renewed emphasis on what constitutes an arm's-length contract in the first place.

This paper will provide an overview of the administrative and court decisions involving non-arm's-length sales of federal producti