Laws, Regulations & Annotations

M

590.0000 MINES AND MINERALS

Annotation 590.0015

590.0015 Oil Well Royalty Rates. Royalty payments are amounts paid to a mineral-rights owner for the right to produce oil in paying quantities. The payment is one of several expenses a producer (working interest) encounters in determining whether or not continued production is economically feasible. When economic operating conditions precipitate the abandonment of a property, it has reached the end of its economic life.

Generally speaking, the concept of "economic" rent (royalties) is not applicable to oil and gas properties, nor is the appraisal principle of substitution. The royalty amount negotiated is usually the best indicator of a proper rent for the property, which, in turn, is a reliable indicator of economic life.

In determining the value of the mineral right, as contrasted with determining the period of time the working interest will operate the well, royalty payments are the equivalent of rent; and as it provided in Property Tax Rule 8(c), they do not qualify as "gross outgo", which is subtracted from "gross return" in the income approach to value. LTA 8/6/1992 (No. 92/52).