Texas Administrative Code › Title 31 - NATURAL RESOURCES AND CONSERVATION › Part 1 - GENERAL LAND OFFICE › Chapter 9 - EXPLORATION AND LEASING OF STATE OIL AND GAS › Subchapter D - PAYING ROYALTY TO THE STATE › Section 9.51 - Royalty and Reporting Obligations to the State

Current through Reg. 49, No. 28; July 12, 2024
(a) In-kind royalties and reports. Producers
				  meeting their royalty obligations by delivering the state's royalty in-kind
				  shall contact the General Land Office (GLO) for specific instructions for
				  making and reporting in-kind royalties. Purchasers of the state's oil or gas
				  in-kind must make the payment for this oil or gas separately from any payment
				  of monetary royalty.
(b) Monetary
				  royalties and reports.
(1) Basis for
				  computing royalties.
(A) Gross proceeds.
				  Lessees shall compute and pay oil and gas royalties due under each lease on the
				  gross proceeds received by the seller, including amounts collected to reimburse
				  the seller for severance taxes and production-related costs. Lessees shall not
				  deduct production or severance taxes, or the cost of producing, processing,
				  transporting, and otherwise making the oil, gas, and other products produced
				  from the premises ready for sale or use.
(B) Volume subject to royalty.
(i) General. Royalties are due and payable by
				  all lessees on 100% of each lease's gross production of oil and gas unless the
				  lease contains language expressly exempting certain dispositions of oil and/or
				  gas from state royalties.
(ii) Oil
				  sales and stocks. As a matter of convenience, during periods of regular sales,
				  the GLO will permit lessees to pay monthly oil royalties based on the number of
				  barrels sold (or otherwise disposed of) in a given month rather than on the
				  gross production as may be required by the lease. Unless the lessee is
				  otherwise notified by the GLO, no royalties are payable on lease stocks until
				  such stocks are disposed of either by sale or otherwise. The GLO reserves the
				  right to require at any time, or from time to time, that lessees pay royalties
				  on gross production rather than on barrels sold. The GLO requires that lessees
				  pay royalties on existing stocks when there have been no sales from such stocks
				  for several months.
(C)
				  Plant products. Lessees shall calculate the volume and value of plant products
				  subject to state royalty in accordance with the lease under which the gas is
				  produced and processed and this volume and value shall never be less than the
				  minimum percentage specified in the lease. In cases where the lease does not
				  specify the manner in which lessees are to calculate plant product royalties,
				  then the volume and value of plant products subject to state royalty shall be
				  that volume and value for which settlement is being made to the producer, under
				  a gas contract prudently negotiated between the producer and processor. When
				  gas is processed for the recovery of liquid hydrocarbons or other products,
				  lessees shall pay royalties on residue gas and plant products in an amount not
				  less than the royalties which would have been due had the gas not been
				  processed.
(D) Market value.
				  Nothing in this subsection shall limit or waive the right of the state to
				  receive its royalties based on market value of the oil and gas produced, if
				  authorized by the lease, unit agreement, judgment, or other contract authorized
				  by law.
(E) Determination of market
				  value.
(i) For the purpose of computing and
				  paying royalties to the state based on market value, the market value shall be
				  presumed to be the gross proceeds received pursuant to a bona fide contract
				  entered into at arm's length between nonaffiliated parties of adverse economic
				  interests.
(ii) If a contract is
				  not negotiated at arm's length, or was between affiliated parties, the
				  presumption that market value is equal to gross proceeds shall not apply. In
				  this situation, the lessee has the burden to establish that royalties paid to
				  the state are based on market value.
(iii) The commissioner may overcome the
				  presumption established under clause (i) of this subparagraph and assess
				  additional royalties due by establishing a different price based on other sales
				  in the general area which are comparable in time, quality, volume, and legal
				  characteristics. If some of this information is not available to the
				  commissioner, an assessment will be based on the best information
				  available.
(iv) A lessee may
				  challenge an assessment of additional royalties due by submitting information
				  which establishes the prices used for comparison by the commissioner involve
				  products of significantly different quality; were based on contracts to deliver
				  significantly different volumes or for different terms; were not from a
				  relevant market; were derived from an area in which deliverability is
				  significantly different; or by presenting any other information which could
				  establish a more accurate market price. However, under no circumstances will
				  the state's royalty be computed on less than gross proceeds received, including
				  reimbursements received for severance taxes and production-related
				  costs.
(v) Parties are affiliated
				  under this subsection if they are related by blood, marriage, or common
				  business enterprise, are members of a corporate affiliated group, or where one
				  party owns a 10% or greater interest in the other.
(vi) The term "general area," as used in this
				  subsection, means the smallest geographical area which contains sufficient data
				  to establish a market price. Examples include a unit, a field, a county, or the
				  applicable RRC district.
(vii) For
				  the purpose of computing and paying oil royalties to the state based upon a
				  market value determined by the highest posted price, that phrase is defined as
				  the greater of:
(I) the highest price
				  available to the producer; or
(II)
				  the gross price posted by the purchaser of the oil, less a reasonable
				  transportation allowance after sale and delivery if the price bulletin reflects
				  on its face that the purchaser will deduct a marketing or transportation
				  allowance, and a transportation allowance is actually deducted by the purchaser
				  from its gross price.
(viii) For the purposes of clause (vii)(I) of
				  this subparagraph, a price will be presumed to be available to the producer if
				  it is offered in the field where the lease is located at the time of sale. A
				  producer may overcome the presumption by submitting evidence that the price is
				  not actually available to the producer. The terms "available" and "actually
				  available," as used in this subsection, mean that a price is being offered to
				  nonaffiliated parties by posting, contract listing or amendment, or otherwise
				  and that if a producer presented a barrel of oil to an entity offering said
				  price, assuming all quality specifications for the price were met, that
				  producer would, in fact, receive that offered price.
(ix) Clause (vii) of this subparagraph shall
				  not be construed to allow the lessee, when calculating royalties to the state,
				  to make any deductions for the cost of producing, processing, or transporting
				  the oil prior to its sale and delivery.