HISTORY OF THE BILL
On September 20, 2024, President Joe Biden signed H.R. 7377 into law, enacting the Royalty Resiliency Act. This bill, introduced by Representative Wesley Hunt (R-TX-38), aimed to provide relief to oil and gas companies by streamlining certain royalty obligations under federal leases. The Act addresses the challenges faced when operating on federal land, when oil and gas companies to enter into joint agreements to develop the leased land owned by the United States, a process that they may not be able to pursue independently. These joint applications allocate costs and royalty payments between participating oil and gas companies.
Introduced to the House in February 2024, the Royalty Resiliency Act was referred to the House Committee on Natural Resources and its Subcommittee on Energy and Mineral Resources. After a brief, 40-minute debate, the House passed the bill by voice vote under suspension of the rules. The Senate subsequently passed the bill without amendment and by unanimous consent.
MECHANICS OF THE ACT
A communitization agreement is a revenue-sharing agreement required to be filed to the Department of the Interior (the “Department”) for the drilling of oil and gas wells that exist under multiple leases. Pending lengthy approval from the Department, companies operating under these communitization agreements had to pay the Department 100% rate on royalty production, even if the Government did not own 100% of the drilled minerals. The money would accumulate in the Department and remain until the determination was settled. Money paid for these extensive royalties could have instead gone back into the industry for the creation of jobs and new projects rather than being withheld pending the Department’s release.
Under the previous framework established by the Federal Oil and Gas Management Act of 1982, the Department was required to issue a determination of allocations for royalty payments on oil and gas production within 120 days of a request. Until such a determination was issued, the first leaseholder to drill would withhold payments for all oil and gas production royalties. This created delays until the Department finalized the proper allocation of royalty payments for each leaseholder. If the Department failed to meet the 120-day deadline, it was required to waive interest on overdue royalty obligations for the period extending until the month following the determination date.
The Royalty Resiliency Act amends the 1982 law to establish a more efficient and transparent system for royalty payments, ensuring timely determinations and reducing financial uncertainty for operators. Leaseholders are now required to pay royalties based on the proposed allocation of production until the Department produces their determination. Once the Department sends their determination for such royalties, the lessee must adjust their royalty payments by the end of the third month after receiving the determination. The Department must waive the interest due on royalty obligations until the end of the third month after providing a complete and accurate determination.
SIGNIFIGANCE
The Royalty Resiliency Act is significant for the oil and gas industry because it ensures that companies producing from federal lands are no longer burdened with paying excess royalties prior to formal determination. This amendment also allows companies to begin drilling more efficiently, as previous law forced the first to drill to pay such royalties until a determination was made. By streamlining the royalty determination process and reducing financial risks associated with delays, the Act is expected to encourage more federal leases to achieve production due to the royalties being configured in a more practical and transparent manner. By not suspending funds in administrative review, this amendment allows operators to allocate more funds toward the expansion of their business through additional projects and jobs, which in turn benefits the American economy as a whole.
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