Interior issues new royalty rules for oil, gas and coal leasing

The U.S. Department of the Interior on June 30 released final regulations that it said provides clarity and certainty for industry in determining the market value, for royalty purposes, of federal oil and gas, and federal and American Indian coal. 

“These improvements were long overdue and urgently needed to better align our regulatory framework with a 21st century energy marketplace, offering a simpler, smarter, market-oriented process,” said U.S. Interior Secretary Sally Jewell. “As the steward of America’s oil, natural gas and coal production on public lands, Interior has an obligation – and is fully committed – to ensuring that the American taxpayer receives every dollar due for the production of these domestic energy resources.”

Jewell further noted that the oil, gas and coal valuation rule is an important part of the ongoing reform agenda for the federal coal program as it relates to improving transparency and accountability. Interior earlier this year froze federal coal leasing while this review is underway.

“This valuation rule is important because it ensures, in part, that our federal coal program is properly structured to obtain all revenue due to taxpayers,” Jewell said. “The updated rule will increase the effectiveness and efficiency of the valuation process, and provide greater clarity and consistency for lessees and revenue recipients.”

The current oil, gas and coal valuation regulations – originally put in place in the late 1980s – have not kept pace with the significant market changes that have occurred in the domestic energy markets since that time, said Interior. Specifically, the rule reaffirms that valuation, for royalty purposes, is best determined at or near the lease and that gross proceeds from arm’s-length contracts are the best indication of market value. Eliminating the difficult-to-use benchmarks for non-arm’s-length sales (between affiliated companies), the rule replaces them with a simplified method of valuating production by using gross proceeds from the first arm’s-length-sale with applicable allowances. By replacing them with a market-driven mechanism, the rule provides greater efficiency for payors, reducing industry’s cost of compliance as well as the regulatory cost to ensure industry’s compliance. 

The final rule extends the same valuation changes to both federal and American Indian coal, with some minor exceptions, but the two programs will continue to be regulated under separate regimes. In addition to ensuring that American Indian mineral owners continue to receive the maximum revenues from coal resources on their land, the updated rule will add certainty and consistency for companies producing on Tribal and allotted lands, Interior said. 

The final Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule will be published in the Federal Register on July 1, and becomes effective on Jan. 1, 2017.

Interior said this rule’s scope is not broad enough to address the many concerns the commenters have raised about the federal coal program more broadly. For that and other reasons, Interior recently launched a comprehensive review to identify and evaluate potential reforms to the federal coal program in order to ensure that it is properly structured to provide a fair return to taxpayers and reflect its impacts on the environment, while continuing to help meet energy needs.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.