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Royalty Valuation Procedures

Peter J. Schaumberg, Federal and Indian Oil and Gas Royalty Valuation and Management (1992)

Pursuant to his authority under various mineral leasing laws, the Secretary of the Interior administers more than 24,000 producing leases for oil, gas, coal, geothermal steam, and other mineral resources. These leases underlie Federal lands, the Outer Continental Shelf, and Indian tribal and allotted lands. All of these leases require payment to the lessor of a royalty on the production removed from the lease. One of the Secretary's primary responsibilities is to ensure that those royalties are paid properly. See, e.g., section 101 of the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C. 1711.

The producing leases generate over 250,000 report lines of royalty data each month. Obviously, with such an extensive lease universe, it is impossible for the Minerals Management Service (MMS) to review the propriety of royalty payments every month. MMS therefore necessarily relies on an audit and enforcement program that reviews royalty payments previously made to determine the extent of compliance. This paper will review the bases of, and the limitations on, the authority to establish royalty value in the exercise of the Secretary's royalty management responsibility.

I. The Secretary of the Interior's Authority To Determine Royalty Value

The various mineral leasing statutes and lease terms consistently have been construed as vesting in the