Federal Legislative Update: Mineral Royalty Valuation Policy

August 26, 2020 — In an effort to bolster America’s position in energy independence, the U.S. Department of Interior proposed a new rule to ease its regulation on how royalties for minerals, such as oil, gas and coal from federal lands, are calculated. The proposal would amend portions of the Office of Natural Resources Revenue (“ONNR”) regulations to lift certain royalty restrictions and restore pre-2016 policies that favor historical practices on valuation.

According to a statement by the U.S. Secretary of Interior David L. Bernhardt, “this proposal provides regulatory certainty and clarity to States, Tribes and stakeholders, removing unnecessary and burdensome regulations for domestic energy production.”

In 2016, the ONNR regulations were updated by the 2016 Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule (“2016 Valuation Rule”), which eliminated the benchmark approach used since the 1980s that allowed companies to pay royalties on non-arm’s length or captive transactions. Under the 2016 Valuation Rule, royalties would be calculated at arm’s-length transactions to determine market value, thereby closing a loophole and restricting revenue[1]

Since implementing the 2016 Valuation Rule, multiple executive orders have been issued that are inconsistent with the rule’s framework, including Promoting Energy Independence and Economic Growth (Executive Order 13783)[2]Implementing an America-First Offshore Energy Strategy (Executive Order 13795)[3], and Secretary’s Order 3350[4]. During the Trump administration, the ONNR suspended the rule and then repealed it. Two courts later struck down the ONNR’s repeal for failure to provide a reasoned explanation and determined the 2016 Valuation Rule would remain in effect.

In response to the executive orders, recent litigation and desire to reduce the burden on the energy industry, the new proposal would return several provisions to their pre-2016 valuation rule language, including provisions regarding transportation costs, allowances and processing limitations. The new rule would also lift restrictions on coal and further clarify civil penalties for violations, among other changes.

The proposed rule is available for viewing here, and public comments are accepted for 60 days from the date of publication before the final rule is published.

[1] https://www.doi.gov/pressreleases/interior-department-announces-final-regulations-ensure-american-public-receives-every

[2] https://www.federalregister.gov/documents/2017/03/31/2017-06576/promoting-energy-independence-and-economic-growth

[3] https://www.federalregister.gov/documents/2017/05/03/2017-09087/implementing-an-america-first-offshore-energy-strategy

[4] https://www.doi.gov/sites/doi.gov/files/press-release/secretarial-order-3350-offshore-508.pdf

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