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Wyoming's Powder River Basin: A Case Study in Federal Royalty Valuation

Thomas F. Reese, Drake D. Hill, Federal and Indian Oil & Gas Royalty Valuation and Management (2004)

The past several years have seen a proliferation of litigation relating to royalty valuation and the deductibility against royalty interests of certain post-production costs. This litigation has been driven by attorneys for private royalty owners attempting to find ways of shifting the costs onto the producers that, historically, royalty owners have shared under their leases.

Private royalty owners have focused their arguments on lines exempted from Federal Energy Regulatory jurisdiction (“FERC”) as non-jurisdictional “gathering” lines. The focus of royalty litigation has been whether these lines and other costs incurred away from the lease line are production related expenses that private royalty owners are not obligated to share in, or whether they are post-production costs that are chargeable to royalty owners.

Like private royalty owners, the Minerals Management Service (“MMS”) has recently demonstrated its desire not to share in certain downstream transportation costs. The MMS has not taken the position of private royalty owners that the “gathering” lines that find exemption from FERC jurisdiction are production related gathering costs in which the MMS should not be required to share. The MMS, rather, argues that coalbed natural gas is marketable at or near the well for purposes of the transportation allowance, but is not marketable for some down stream t