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Royalty Valuation Procedures

Deborah Bahn Price, Christopher G. Hayes, Federal and Indian Oil and Gas Royalty Valuation and Management (1992)

As is discussed more fully below, federal oil and gas royalties, if not taken in kind, are owed on the value of the production saved, removed, or sold from the leased premises. Therefore, to the extent that the DOI has the unilateral authority to establish value, it effectively has the unilateral right to determine the royalty obligation of its lessees. This is an extraordinary right. Indeed, for this reason, the Ninth Circuit rejected a claim by the DOI that it had the implicit authority to establish the value of royalty oil. The Court explained:

[Federal oil and gas leases] are predicated upon large expenditures of money, time and effort in making the required discoveries and [4B-2] in bringing these properties into production. The rights of the lessees are valuable property rights. A contract provision authorizing one party to a contract to fix the obligation of the other party by unilateral action, is so foreign to ordinary contracts and so drastic in its operation that we think it should not be implied in the manner for which the Government is here contending. We think that such a right cannot have been within the contemplation of the parties in the absence of an express reservation to that effect.

Continental Oil Co. v. United States, 184 F.2d 802, 810 (9th Cir. 1950) (emphasis added).

Nevertheless, it is clear that, under certain circumstances