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Royalty in Kind: The Crude Oil Purchaser's Perspective

Lawrence J. Dreyfuss, Federal and Indian Oil & Gas Royalty Valuation and Management II (1998)

This paper is intended to present the perspective and comments of an independent crude oil purchaser on the sale and valuation of federal royalty oil with emphasis on the government taking royalty oil in kind. By notice of proposed rulemaking published in the Federal Register on January 24, 1997 (62 Fed. Reg. 3742) and September 22, 1997 (62 Fed. Reg. 49460), the Minerals Management Service (MMS) of the U.S. Department of the Interior has proposed rules to establish the value of royalty on federal royalty oil, that is royalty due the MMS for its share of production on federal leases.

The proposed rules have been suggested due to dissatisfaction of the MMS with posted prices set by various producers, refiners and purchasers. Posted prices are the values assigned to oil by industry participants in the marketplace. By these proposed rules, the MMS would substitute its procedure for the marketplace's assignment of value to oil. The MMS states explicitly in the Federal Register the agency's intent and conclusion:

These changes will decrease reliance on oil posted prices and assign a value to crude oil that better reflects market value. 62 Fed. Reg. 3742