Legal Challenges to Recent ONRR Regulations; Pursuing Claims for Overpayment Interest PASO 2017 Royalty Audit / Compliance Workshop Peter J. Schaumberg Beveridge & Diamond, P.C. Washington, D.C. February 8, 2017 PASO 2017 Royalty Audit / Compliance Workshop

Learning Objective Upon completion of this course, attendees will be familiar with: (1) the most significant issues raised in recent litigation challenging ONRR’s revision of the federal oil, gas, and coal royalty valuation regulations; and (2) recent statutory modifications related to royalty overpayment interest.

ONRR Valuation Rule Challenge The American Petroleum Institute filed a petition in the U.S. District Court for the District of Wyoming on Dec. 29, 2016 challenging ONRR’s final oil, gas and coal valuation regulations issued July 1, 2016 (81 Fed. Reg. 43,338). API v. DOI, No. 16-cv-316 (D. Wyo. filed Dec. 29, 2016). PASO 2017 Royalty Audit / Compliance Workshop

API v. DOI Principal Issues API submitted detailed comments on ONRR’s proposed valuation rule (80 Fed. Reg. 608 (Jan. 6, 2015)). The final regulation was substantively unchanged. PASO 2017 Royalty Audit / Compliance Workshop

API v. DOI Principal Issues 1. The “Default Provision” Broad authority to retroactively increase the royalty owed, even for arm’s-length contracts. Triggers include: “Misconduct.” ONRR cannot determine if the lessee properly paid royalty. Lessee’s arm’s-length sales price is 10% below the “lowest reasonable price.” Transportation or processing allowances are 10% higher than the “highest reasonable measures” of such costs. Metrics: ONRR may use valuation standards lessees cannot use. Lack of transparency. Eliminates “certainty,” a key feature of the prior valuation regulations, and a stated aim of the new rules. PASO 2017 Royalty Audit / Compliance Workshop

API v. DOI Principal Issues 2. All Contracts and Revisions Must be In Writing Internally inconsistent with the definitions of “contract” and “arm’s-length contract.” ONRR may unilaterally determine value under the “default provision.” PASO 2017 Royalty Audit / Compliance Workshop

API v. DOI Principal Issues 3. Transportation and Processing Allowance Constraints ONRR’s guiding principle is that value should be determined at the lease. Final rule reverses 15 years of guidance and categorizes deepwater subsea movement of oil and gas (which could be distances as great as 50 miles) as non-deductible gathering. Artificial caps on transportation and processing allowances. Terminates all existing exception agreements. Particular concern for LNG and crude oil exports. PASO 2017 Royalty Audit / Compliance Workshop

API v. DOI Principal Issues 4. Index Pricing Requires the lessee to use the “highest” reported monthly index price at the market center. If gas could theoretically flow to multiple index pricing points, must use highest among those index pricing points to determine value, regardless of whether gas could physically flow to that index pricing point. PASO 2017 Royalty Audit / Compliance Workshop

Pursuing Claims for Overpayment Interest In 1996, the Royalty Simplification and Fairness Act (“RSFA”) amended the Federal Oil and Gas Royalty Management Act (“FOGRMA”) to allow ONRR to pay interest on royalty overpayments: 30 U.S.C. § 1721(h) Lessee or designee interest Interest shall be allowed and paid or credited on any overpayment, with such interest to accrue from the date such overpayment was made…. On Dec. 4, 2015, the Fixing America’s Surface Transportation Act (“FAST Act”), Pub. L. 114-94, removed 30 U.S.C. § 1721(h) from the federal code, prohibiting ONRR from paying interest on royalty overpayments. FAST Act amendment did not (and could not) extinguish preexisting overpayment interest debt! PASO 2017 Royalty Audit / Compliance Workshop

Pursuing Claims for Overpayment Interest How to recover interest on royalty overpayments made before Dec. 4, 2015? Relief is available from the U.S. Court of Federal Claims. PASO 2017 Royalty Audit / Compliance Workshop

Questions? Thank You! Peter Schaumberg Principal Washington, D.C. Federal lands and mineral resources pschaumberg@bdlaw.com (202) 789-6043 This presentation is not intended as, nor is it a substitute for, legal advice. You should consult with legal counsel for advice specific to your circumstances. This presentation may be considered lawyer advertising under applicable laws regarding electronic communications.