Current Royalty Valuation Issues on State Lands

Determining the value of production and the propriety of deductions from the selling price under state leases will be an uncertain endeavor for some time to come. Armed with arguments of trust obligation and inspired by the discretion enjoyed by the Minerals Management Service in valuing federal royalties, western mineral-producing states appear increasingly willing to adopt and litigate aggressive, even unprecedented, interpretations of state lease royalty provisions. In the wake of the federal royalty rulemaking, New Mexico has already issued comprehensive draft proposed regulations for production from state lands, and Wyoming is expected to commence a rulemaking later in 1988. If current and past proposed state royalty regulations are any indication, state proposals can be expected to be influenced by federal valuation concepts and methods; to resolve questions of interpretation in favor of increasing royalty values; to pick and choose among favorable court precedent of private royalty; and finally, to propose rules that are intended to be applied uniformly to existing leases even if varying lease royalty provisions exist.

Questions regarding royalty valuation under state leases must be resolved by reference to state statutes, the lease provisions, regulations (if any),1 judicial opinions construing the lease terms (or similar lease terms), and any agency guidelines