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Crude Oil Royalty Valuation: The Growing Controversy Over Posted Prices and Market Value

Gary B. Conine , Proceedings of 43d Annual Rocky Mountain Mineral Law Institute (1997)

During the last half of the twentieth century, royalty disputes in the petroleum industry have focused primarily on the gas royalty clause. Controversies involving market value, take-or-pay payments, and the deduction of post-production costs have had an important impact on the industry, resulting in many adjustments to the way the industry conducts business.

Litigation over the oil royalty clause, although common in the early part of this century, has been relatively dormant for many years. With the advent of posted price litigation, however, this has changed. Serious questions are being posed about the traditional manner in which royalty oil has been handled.

Under most oil and gas leases, royalty oil is owned by the lessor and may be used or sold at the royalty owner's discretion. In most instances, the royalty owner has no particular use for the physical volume of oil that belongs to him and sale of the oil is arranged by the royalty owner, or by the producer acting on the royalty owner's behalf. These sales transactions may involve several different types of buyers, including those that are affiliated or unaffiliated with the producer and even the producer itself.

Traditionally, most of these sales have been based on posted prices.1 When used as the pricing term in division orders that [18-3] served as sales contracts terminable at will by the b