NO. 95-101 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1996 

MONTANA DEPARTMENT OF STATE LANDS, 

Plaintiff and Appellant, 

v. 

BALCRON OIL COMPAIifY I a Kentucky 9k~n q,k.svPnEMe @tWk 8); Nl~~tt-rqlt,j Defendant and Respondent. 

APPEAL FROM: District Court of the Ninth Judicial District, 

In and for the County of Pondera, 

The Honorable Marc G. Buyske, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Tommy H. Butler, Special Assistant Attorney 

General, Montana Department of State Lands, 

Helena, Montana 

Filed: 

Submitted on Briefs: February 8, 1996 

Decided: February 22, 1996 
Justice Terry N. Trieweiler delivered the opinion of the Court. 

Pursuant to Section I, Paragraph 3(c), Montana Supreme Court 

1995 Internal Operating Rules, the following decision shall not be 

cited as precedent and shall be published by its filing as a public 

document with the Clerk of the Supreme Court and by a report of its 

result to State Reporter Publishing Company and West Publishing 

Company. 

On May 17, 1988, the Montana Department of State Lands filed 

a declaratory judgment action in the Ninth Judicial District Court 

in Pondera County to legally verify the amount of royalties owed to 

the State of Montana on Montana Oil and Gas Lease No. 14,049-72, 

leased by Balcron Oil Company (Balcron) . On September 11, 1990, 

the District Court issued an order in which it (1) granted partial 

summary judgment to the Department of State Lands on the basis of 

its conclusion that Balcron could not take deductions from the 

State's royalties for its operating costs, and (2) concluded that 

Balcron owed no royalty on its Montana Power Company tax 

reimbursements. The Department of State Lands appeals that part of 

the District Court's order which concluded that no royalty was due 

on Balcronls tax reimbursements. We reverse that part of the 

District Court's order. 

FACTUAL BACKGROUND 

On September 12, 1972, the Montana Department of State Lands 

issued Oil and Gas Lease No. 14,049-72 to Mountain Fuel Supply 

Company. On November 20, 1981, Mountain Fuel Supply Company 

assigned to Balcron Oil Company all of its rights in the lease 
"from the surface of the ground to the total depth drilled (1033 

feet) in Assignee's No. 1E-16 State Well. I' Balcron sold natural 

gas from the lease to the Montana Power Company pursuant to a 

January 1, 1978, gas purchase contract for a price equivalent to 

the Canadian Border Price with adjustments for pressure base, BTU 

content, and currency adjustments. On December 13, 1983, Balcron 

and the Montana Power Company amended the earlier gas purchase 

contract in a letter agreement. Pursuant to the amended agreement, 

the Montana Power Company agreed to pay Balcron tax reimbursements 

on production taxes paid on the working interest share of gas 

produced and sold on the well. 

The gas produced from Balcronls lease was subjected to 

gathering and compression by Balcron before the gas was sold to the 

Montana Power Company at a point off the leasehold. Balcron did 

not use any gas from the lease to power any gathering, compression, 

or processing functions. The cost of processing the gas to make it 

of pipeline quality, however, did cost Balcron $ .56/1000 cubic feet 

of gas to $.66/1000 cubic feet of gas. The Montana Power Company 

paid between $2.38/1000 cubic feet of gas and $3.28/1000 cubic feet 

of gas for the processed pipeline quality gas. 

The gas produced from Oil and Gas Lease No. 14,049-72 was 

measured and monitored by a wellhead metering device. Balcron paid 

a flat 12% percent royalty payment to the Department of State Lands 

based upon these measurements. Prior to paying its royalties to 

the State, however, Balcron deducted between $.56/1000 cubic feet 

of gas and $.66/1000 cubic feet of gas produced from the lease for 
gathering, compression, processing, and off-lease transportation 

costs. In addition, Balcron did not pay royalties on the 

additional consideration it received from the Montana Power Company 

in the form of tax reimbursements. 

On November 18, 1987, pursuant to audit findings issued by the 

Montana Department of Revenue, the Department of State Lands 

demanded that Balcron pay royalties on all payments it had received 

from the Montana Power Company for purchase of natural gas from the 

#1E-16 well, without any deductions for gathering, dehydration, 

compression, and transportation charges from the royalty money paid 

to the State of Montana. On May 17, 1988, the Department of State 

Lands filed a declaratory judgment action in the Ninth Judicial 

District Court to compel Balcron to pay royalties on both its 

operating costs and on its tax reimbursements. On September 11, 

1990, the District Court granted partial summary judgment to the 

Department of State Lands on the basis of its holding that Balcron 

could not take deductions for gathering, compression, processing, 

or transportation charges from the royalty payment due to the 

State. The court also held, however, that Balcron did not owe the 

State of Montana additional compensation from the Montana Power 

Company reimbursements. 

DISCUSSION 

On appeal the Montana Department of State Lands raises the 

following issue: 

Whether the State of Montana, as Lessor, is entitled to 

receive a royalty of 12H% of all sums received by the 

Lessee, for the sale of gas produced from State of 
Montana Oil and Gas Lease No. 14,049-72, including 

payments designated by the purchaser of the gas as "tax 

reimbursements." 

The Department maintains that both the Montana Code Annotated and 

the Montana Administrative Rules require the remittance of 

royalties on tax reimbursements received by lessees from the 

purchaser of production. In addition, the Department cites 

abundant case law for the proposition that the computation of state 

and federal royalty payments necessarily includes both the gas 

purchase price and the reimbursed severance tax. See, e.g., Mesa Operating 

Ltd. Partnership v. United States Dept. of Interior ( 5 t h Cir . 19 9 1 ) , 9 3 1 F .2 d 3 18 , 

cert. denied ( 19 9 2 ) , 5 0 2 U . S . 1 0 5 8 ; Hoover & Bracken Energies, Inc. v. United States 

Dept. of Interior (10th Cir. 1983) , 723 F. 2d 1488, cert. denied (1984) , 469 

U . S . 8 2 1 ; Enron Oil & Gas Co. v. State, Dept. of Natural Resources (Utah 19 9 4 ) , 8 7 1 

P.2d 508; CitiesServiceOil&GasCorp.v. State (Wyo. 1992), 838 P.2d 146; FMP 

OperatingCo. (1991), 121 IBLA 328; WhelessDrillingCo. (1973), 13 IBLA 21. 

Balcron Oil Company has failed to file a responsive brief and 

has thus failed to address the Department's arguments on appeal. 

Because of Balcron's failure to file a brief, we will assume that 

the Department's claim has merit. Therefore, we reverse that part 

of the District Court 's order which concluded that Balcron owed no 

royalties on its tax reimbursements fromthe Montana Power Company. 

However, whether further amounts are due the State pursuant to this 

decision will still depend on whether actual tax reimbursements 
We concur: 

Chief Justice