This is the second section of an article discussing transportation deductions from mineral royalties earned on allotted lands. The first section introduced an article from the Office of the Solicitor, and began to refute the claims made in it. This is the continuation of that argument, and will go on to explain the contractual problems with transportation deductions, as well as outline the regulations that provide recourse for the landowners.
The Solicitor’s final point on the issue is to re-state the argument that, if the mineral owner will get a higher royalty by the mineral company selling the minerals at a remote location, then the mineral owner should pay a portion of that cost. This brings us to the next problem with transportation deductions.
Transportation costs are already factored into valuation tools, such as the New York Mercantile Exchange (NYMEX), which provides current prices at which minerals are bought and sold in certain markets. This fact was confirmed during a question and answer period at a mineral owner conference in June of 2014 by Lynn Helms, Director of the Department of Mineral Resources. This cost gets passed through the refining process and ends up being factored into the price the end-user pays for the finished product. This can be seen in the Purchased Gas Adjustment - Uniform Clause document, publicly available by the Minnesota Public Utilities Commission. In the document, the calculation used to find the final price is shown, and there it is explained that all applicable transportation costs are factored into that price.
Remember, aside from the dubious legal standing of these regulations, the costs for transportation are already being factored into the price of oil. So when a company chooses to sell the minerals at market, not only do they get a higher price for the minerals, not only is the cost for transporting those minerals already covered, but they also get to take a cut of the mineral owner’s royalties. Unfortunately, it doesn’t stop there.
Royalty percentages, for those unaware, are calculated based upon the quality of the minerals extracted. The better the mineral quality, the higher the royalty percentage paid to the mineral owner. The minerals produced in the Bakken are some of the highest quality minerals in the world. Based upon their quality, mineral owners should be receiving royalties between 14-40% of the sale price. Most of the leases on the Fort Berthold Reservation are around 12%. It’s no wonder that well pads are being paid off faster than ever before.
And now we reach the main point of the case against transportation costs. For argument’s sake, pretend that everything that has been argued until now is untrue. Regulations for transportation deductions have a sound legal basis, are supported by statute and law, don’t unnecessarily overcharge mineral owners, and transportation deductions are applied only when there is no market present at the wellhead. All of this does not mean that transportation deductions are allowed, for one simple reason: if it isn’t in the lease, you cannot deduct it.
Here are a few basics of contract law to illustrate this point. When two parties agree on a contract and sign it, that contract becomes a law specific to those parties. In other words, based on a contract, one party can seek legal action against the other should contract violations or breaches occur.
The next issue is the Preexisting Duty Rule. This explains that, when a contract is signed, one party cannot change the conditions of the contract without the consent of the other. For example, a homeowner signs a contract to have cabinets built and installed. The builder comes to the homeowner and says that additional money is required to complete the project. If the homeowner agrees, then the contract is legally modified to allow for the additional cost. Both parties are required to consent before additional costs can be included in the contract.
This extends beyond amounts discussed in contracts to things that are simply not addressed in a contract. When a mineral lease does not mention transportation deductions, then regardless of any authorized regulation put out by any governing authority, a mineral company cannot deduct them. A regulation may allow for transportation deductions to exist in a contract, but the existence of the regulation does not alter an existing lease.
At this point, any mineral owner reading this may be pausing to try and remember if transportation deductions are mentioned in their leases. It is vital that mineral owners know what is and is not discussed in the leases they sign with mineral companies. If transportation costs are not discussed, as is likely the case with the majority of leases, but have been deducted from royalties, as is almost certainly the case with all leases, then the mineral owner is owed a refund on those deductions.
The North Dakota Department of Trust Lands (NDDTL) has experienced this numerous times. Refunds have been issued on everything from incorrect tax withholding, arms-length agreement issues and, of course, deductions on royalties to cover costs of transportation to other markets. The NDDTL lease agreement specifically forbids the deduction of transportation costs in order to maximize the revenue that their leases will earn. Of course, the state of North Dakota has more bargaining power than the typical allotted landowner.
That’s where the Bureau of Indian Affairs Office of the Special Trustee and Office of Natural Resource Revenue should be stepping in. Even if the regulations that allow for transportation deductions are valid (a claim that requires substantial evidence at this point) they cannot be deducted if they are not specifically discussed in a lease. It is the duty of the BIA to assist allottees in these matters. Additionally, according to existing regulations, interest on erroneous reports for transportation allowances are owed interest on top of refunding the specific amount deducted.
From 30 CFR 206.100:
“(d) Interest assessments for incorrect or late reports and for failure to report. (1) If a lessee deducts a transportation allowance on its Form MMS–2014 without complying with the requirements of this section, the lessee shall pay interest only on the amount of such deduction until the requirements of this section are complied with. The lessee also shall repay the amount of any allowance which is disallowed by this section.
(2) If a lessee erroneously reports a transportation allowance which results in an underpayment of royalties, interest shall be paid on the amount of that underpayment.
(3) Interest required to be paid by this section shall be determined in accordance with 30 CFR 218.54.”
This is where our problem resides. Currently, mineral companies are blatantly influencing the creation and enforcement of regulations to their own benefit. Government agencies charged to prevent this are either incapable of, or unwilling to stop these wrongful deductions from occurring, let alone provide assistance for repayment.
So what recourse is left for the individual allottee? Bringing suit against a mineral company. As mentioned earlier, regardless of any existing regulation, regardless of the validity of those regulations, and regardless of past practices or accepted ways of doing things, a contract is a legally binding document. No regulation can impose conditions into a signed agreement; only agreement by both parties can change a contract’s terms. Even if your lease does specify a transportation deduction, check to see the limits in place. 22 IBLA 124 illustrates the Navajo Tribe of Indians receiving a refund for overpayment for transportation costs.
Monitoring these issues is the responsibility of the Department of the Interior and the Bureau of Indian Affairs and falls under their trust responsibility. Their inability to prevent these deductions, and even their allowance of them, means that a suit can be brought against the federal government for failing in their duties. I have personally been refunded from one oil company for wrongly deducted transportation fees. So has the State of North Dakota. If you exercise your legal rights, you may be able to as well.
Roger Birdbear has a degree in Petroleum Engineering Management and received his Juris Doctor from the Strum College of Law at the University of Denver. He currently practices law on and off the Fort Berthold Reservation in North Dakota. He can be reached through his website, RogerBirdbear.com.