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What's behind the Valuation Controversy Anyway?

David E. Pierce, Federal and Indian Oil & Gas Royalty Valuation and Management III (2000)

There should not be any dispute among the parties that the MMS can take appropriate action to ensure federal, state, and tribal governments are not being cheated out of the royalty due them under the federal leasing system. The problem is determining what action is appropriate considering the lessee's statutory obligation, and reciprocal right, to pay royalty based upon the “value of the production removed or sold from the lease.” All regulatory and interpretive efforts are built upon the obligation to pay, and the right to pay, the value of production when it is “removed or sold from the lease.” As noted above, the first task will be to define the scope of the lessor/lessee relationship. Once this is determined, the scope of the lessee's marketing obligation can be properly defined, along with the prudent operator standard that will be imposed on federal lessees. The courts may also have to consider, in the obligations/rights context, the validity of contractual lease terms that have been defined by regulations, accepted by lessees, but not necessarily consistent with the governing statutes. Finally, the courts will have to consider the role of corporate law under the Mineral Leasing Act and the other federal leasing statutes, in light of the United States Supreme [1-38] Court's holding in United States v. Bestfoods.132

To date, it appears the MMS's regulations have