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Deductible Transportation and Processing Costs: Some Current and Not-So-Current Issues

L. Poe Leggette, Federal and Indian Oil & Gas Royalty Valuation and Management (2004)

It has long been settled that federal oil and gas lessees' royalties are “to be calculated at values at the wells, not at the pipe line destination . . . .” 1 Most recently, the Department of the Interior's (“Department”) Minerals Management Service (“MMS”) affirmed this principle in its proposed amendments to the 2000 federal oil valuation regulations. 2 As we all know, however, oil and gas cannot always be marketed at the well. 3 Moreover, gas is often not marketed in a raw, unprocessed state, but rather is commonly processed to separate natural gas liquids from the gas stream prior to sale. Accordingly, the Department has long confronted the problem of how to value oil or gas when the first market in which it can be sold is away from the lease at which it is produced and when the value of the raw product has been enhanced through processing.

The Department's long experience with permitting lessees to take transportation and processing allowances has resulted in answers to many of the questions that have arisen regarding what specific kinds of costs may be deducted and what may not. And, where specific questions remain unanswered, or where new issues arise, the body of rules and cases that has developed contains many examples that may be useful in determining whether a particular cost may be deducted or not. As we shall see, the Department's decisions, although not p