Wednesday, August 10, 2011

Trusting the Trustees to Lease Trust Oil and Gas

While thanks are due to the Wyoming Board of Land Commissioners for approving revisions to lease terms for oil and gas on school trust lands, a few observations are in order.

This new lease form tightens up the process of setting the value of oil and gas for computing royalties, to prevent the liberal deductions producers have taken to reduce the royalties paid to the trust’s permanent land fund. Just to remind everyone, these are trust lands held by the state to be managed for the beneficiaries, our school children.*

The vote by the Land Board last week wasn’t a big surprise. The lease revisions had been in the works for a year and were overdue by a decade. The lease had been in negotiations for several months between the board staff and the oil and gas producers, particularly the Petroleum Association of Wyoming. But four things deserve comment.

Image of Trustee
One is the way some commissioners bristled at the suggestion they weren’t living up to their fiduciary duty as trustees of the school lands, as assigned in Wyoming’s Act of Admission and Constitution. Lori Brand speaking for the Equality State Policy Center and attorney Greg Hacker speaking for the Wyoming Education Association scolded the commission for failing to consider and approve a royalty rate increase and a “Pugh Clause” that is standard in mineral leases to ensure a lease is used.

Gov. Matt Mead and Treasurer Joe Meyer objected to the accusation of foot-dragging or caving in to the powerful mineral lobby. To his credit, Meyer has been a reliable voice for the trust over the years, turning aside requests to put other interests before the school children of this state. One correction, however. He said the Land Commission has been a conscientious trustee since he was elected to statewide office 12 years ago. My memory is that 12 years ago, politics seemed to have equal footing with the beneficiaries, public schools.

The commissioners are justifiably sensitive about their image as good trustees. This is good.

What Did He Say?
The second thing is the confused statements by Bruce Hinchey, director of the Petroleum Association of Wyoming, to deflect arguments for the higher royalty rate and Pugh Clause. He tried to argue that schools didn’t need the money, so we didn’t need to be talking about royalty rates. Anyone with an elementary understanding of trust knows about the fiduciary duty to beneficiaries, which doesn’t change according to their perceived need. If Hinchey wants to argue about school funding, he should take it to the Legislature.

PAW’s spokesman also seemed to forget on this occasion that ad valorem, royalties and severance fees are not just added one on top of the other. Oil and gas producers in Wyoming do not pay severance tax on the amount they pay in mineral royalties.

What the Market Will Bear
Thirdly -- One good way to determine what royalties the market will bear is to see what the market is bearing right now for owners of similar mineral rights in Wyoming and elsewhere. Will the trust lose out with a royalty rate higher than the current 16.66 percent? Other mineral owners are getting 18.75 percent or higher. What are the school trust leases worth? Let’s find out.

Also, this new lease includes many “show cause” provisions so producers can come to the state to ask for exceptions to rules, based on their particular difficulties.

Yes, our state seems to have enough money to cover the school funding formula. That is not relevant to the discussion of a trust obligation, and it completely ignores the reality that royalties will go into the permanent school fund to produce income that will finance our public schools when the minerals are gone.

Hinchey is confused. The commissioners must stay clear-headed, their eyes firmly on their fiduciary duty to current and future school children who will be educated with income from the permanent land fund.  

Now We’re Ready to Talk about Royalties, Pugh Clause
The original lease revisions proposed by the Land Board’s staff at the Office State Lands and Investments (OSLI) a year ago included the higher royalty rate and the Pugh Clause. In response to the outcry from producers, the Land Board took those off the table in order to settle the valuation questions. Now they should go back on the table.

The OSLI staff is a solid, professional crew, and the Board of Land Commissioners can rely on their analyses and recommendations. We are reminded by oil and gas producers that their operations are complicated, but I am confident OSLI has the expertise to sort out the variables and ensure everyone is treated fairly.

I look forward to the discussion, made robust by the land commissioners’ concern that the public recognize their undivided loyalty to the trust beneficiaries, the school children.

And when the oil and gas lease form is finalized, I look forward to a discussion of the outdated lease forms for rare earth minerals and uranium.

*This concept is very fuzzy for legislators and other policy makers. These are trust lands, not state lands. The act of Congress that created the State of Wyoming in 1890 set aside two sections per township for the support of public schools, and Wyoming accepted the role of trustee. The surface and subsurface minerals produce revenue for the trust, not for the state. The trustee has a duty to beneficiaries to make as much money as it can, while preserving the trust assets for current and future generations.