Plains Marketing and Transportation, Inc. v. Acting Muskogee Area Director, 37 IBIA 73 (2001)

Appeals from decisions concerning payments for Osage royalty oil under an oil purchasing and marketing agreement.

Vacated and remanded.

Constitutional Law: Due Process--Indians: Mineral Resources: Oil and Gas: Royalties

When the Bureau of Indian Affairs makes an assessment for amounts due to an Indian tribe under an oil purchasing and marketing agreement, due process requires that the party being assessed be provided with some means of verifying the accuracy of the assessment.

These are appeals from an August 28, 1998, decision and a December 28, 1998, decision issued by the Acting Muskogee Area Director, Bureau of Indian Affairs (Regional Director; 1/ BIA), concerning payments for royalty oil under an oil purchasing and marketing agreement (Agreement) between Plains Marketing and Transportation, Inc. (Plains) and the Osage Tribal Council on behalf of the Osage Tribe (Tribe). For the reasons discussed below, the Board vacates the Regional Director's decisions and remands this matter to him for further proceedings.

1/ The Muskogee Area Director is now known as the Eastern Oklahoma Regional Director. He will be called "Regional Director" in this decision.

IBIA 99-9-A, 99-42-A

Background

The Osage mineral estate underlies the Osage Reservation (now Osage County, Oklahoma). It is held in trust for the Tribe and leased under authority of the Osage Tribal Council. At present, there are approximately 12,000 producing oil wells under leases of the Osage mineral estate.

Under section 4 of the Act of June 28, 1906, 34 Stat. 539, 544, the royalties received from leases of the mineral estate are required to be paid into the Treasury of the United States and distributed per capita to the persons on the 1906 tribal roll or their heirs. 2/ The regulations in 25 C.F.R. Part 226 require that royalty payments be made to the Superintendent, Osage Agency, BIA (25 C.F.R. § 226.11(a)(1)), by either the lessee or the purchaser (25 C.F.R. § 226.13(a)). Apparently, these payments have typically been made by the purchaser.

25 C.F.R. § 226.11 recognizes the right of the Tribe to take its royalty in kind. See 25 C.F.R. § 226.11(a)(2) and (3). 3/ In 1995, the Tribe elected to do so, whereupon it entered into the Agreement at issue here. The Agreement is dated October 27, 1995, and was approved by the Regional Director on that date. It provides in part:

1. PURPOSE OF AGREEMENT.

   * * * [Plains] will buy both royalty and working interest barrels of crude oil and condensate produced from the Osage mineral estate in Osage County, Oklahoma. * * * [Plains] will then sell, trade, exchange, transport, or otherwise

   2/ For more background on this requirement, see, e.g., Estate of Vivian M. Rogers v. Acting Muskogee Area Director, 14 IBIA 217, 218 (1986); Cohen's Handbook of Federal Indian Law, 788-97 (1982 ed.).

   3/ 25 C.F.R. § 226.11(a) provides in part:

   "(2) Unless the Osage Tribal Council, with approval of the Secretary, shall elect to take the royalty in kind, payment is owing at the time of sale or removal of the oil * * * and settlement shall be based on the actual selling price, but at not less than the highest posted price by a major purchaser * * * in Osage County, Oklahoma, who purchases production from Osage oil leases.

   (3) Should Lessor, with approval of the Secretary, elect to take the royalty in kind, Lessee shall furnish free storage for royalty oil for a period not to exceed 60 days from date of production after notice of such election.

   IBIA 99-9-A, 99-42-A

   market this product to enhance the value received by the Tribe. This is expected to be a profitable endeavor for both parties hereto. [Plains] shall share all of these marketing profits with Tribe using the formula hereinafter set forth in paragraph 7.(B). * * *

   * * * * * * * *

7. PRICE.

   (A) The purchase price payable by [Plains] to [BIA] for royalty barrels of crude oil sold to [Plains] under this Agreement shall be in accordance with the price established by the Code of Federal Regulations, Title 25, Indians, Section 226.11(a)(2) which requires the payment of the highest posted price.

   In addition thereto, [Plains] will pay to [BIA] for the Tribe's royalty barrels any per barrel premium that the lessee is receiving for sale of its working interest oil where such lessee is selling its oil to entities other than [Plains], provided however, that [Plains] may elect not to purchase either royalty or working interest oil in such instances if the purchase will not result in a profit. * * * In addition to the foregoing amounts [Plains] shall pay to [BIA] each month the net profits as defined in Sub-paragraph (B) below, that [Plains] realizes from the sale, resale, exchange or trading of all royalty interest and all leasehold interest crude oil that is purchased under this Agreement. * * *

   (B) Net profits to be paid to Tribe shall be defined by using the following formula:

   [Formula omitted.]

   Each payment to [BIA] or to the Tribe under this Agreement shall be preceded by [Plains'] computation of the amounts payable and by documentation supporting the revenues and allowable deductible costs as specified above. The Tribe and [BIA] shall be entitled upon written request to [Plains] to all information and records that relate to the verification of the costs. * * * Tribe, [Plains] and the Agency Superintendent will mutually agree upon the precise documentation to be furnished so that each may properly account for all transactions.

8. PAYMENT TERMS.

   Payment for royalty crude oil shall be made in accordance with the Code of Federal Regulations, Title 25, Indians, Section 226.13, and will be paid

   IBIA 99-9-A, 99-42-A

   directly to [BIA] as it shall direct. [4/] Payment for any other crude oil that Tribe may obtain and sell to [Plains] shall be made directly to Tribe * * *. * * * [Plains] will furnish all additional data necessary to enable the Tribe and [BIA] to fully account for all purchases, costs and income to be received under this Agreement. Payments of net profits realized on sales of royalty crude oil and on sales of leasehold interest crude oil, other than for leasehold interest crude oil belonging to Tribe, shall be made directly to [BIA] on or before the 25th day of each month succeeding the sales of the crude oil and the computation of net profits. Payments for net profits realized on sales of leasehold interest crude oil belonging to the Tribe shall be made directly to [the Tribe]. * * *

   Plains began performance under the Agreement in January 1996. It estimated the amount of the premium to be paid under Paragraph 7(A) at 35 cents per barrel, an estimate which the Tribe evidently accepted. Plains' payments to BIA included premium payments based upon that estimate.

   On February 21, 1996, Plains submitted data concerning its payment for January 1996. In a memorandum of the same date, a BIA production analyst noted that certain required information was missing from Plains' submission and indicated that she had spoken to a representative of Plains concerning the problem.

   The next documents in the record are dated May 1997. Those documents reflect communications between BIA and Plains concerning information needed to verify that Plains' payments were correct. The record includes a May 16, 1997, letter from Plains to BIA, referring to a meeting which evidently had already taken place and which had been attended by representatives of Plains, the Tribe and BIA. An attachment to the letter describes tasks to be performed by Plains, the Tribe, and BIA for the purpose of resolving differences concerning the payments. The record does not show whether these tasks were accomplished.

   4/ 25 C.F.R. § 226.13 provides in part:

   "(a) Royalty payments due may be paid by either purchaser or Lessee. Unless otherwise provided by the Osage Tribal Council and approved by the Superintendent, all payments shall be due by the 25th day of each month and shall cover the sales of the preceding month. Failure to make such payments shall subject Lessee or purchaser, whoever is responsible for royalty payment, to a late charge at the rate of not less than 1½ percent for each month or fraction thereof until paid. The Osage Tribal Council, subject to the approval of the Superintendent, may waive the late charges."

   IBIA 99-9-A, 99-42-A

   In September 1997, Plains submitted information to BIA on a computer disk. However, there were discrepancies between the information on the disk and information Plains had submitted earlier. BIA met with a representative of Plains on January 15, 1998, to discuss issues concerning the 1996 payments for the Tribe's royalty oil.

   On February 5, 1998, the Acting Superintendent, Osage Agency (Superintendent), furnished Plains with BIA's initial calculation of underpayment for the Tribe's royalty oil for 1996, as well as its calculation of late charges. BIA calculated the amount of underpayment at $297,428.87 and the amount of late charges at $82,494.08. Noting that the calculations did not include profit paid by Plains, the Superintendent explained: "It is our opinion that profit payment may not be used to defray royalty deficiencies, since changes in the amount paid for royalty will of necessity alter the amount of profit owed. The monthly profit will have to be recalculated due to the difference in royalties due."

   On February 23, 1998, Plains wrote to the Superintendent, stating: "To date, Plains has not been advised by the Tribe or the BIA of any lease where the Lessee is selling its production at a higher price than the price paid for the Royalty oil by Plains. * * * Plains formally requests the detail on any leases that appear to be receiving a higher price." Plains' Feb. 23, 1998, Letter at 1. Plains stated that it was requesting that information for the purpose of making its marketing decisions for March 1998. It also asked to review the manner in which BIA had arrived at its figures. On March 6, 1998, Plains again wrote to the Superintendent, arguing that it owed the Tribe no...