Natural Resources, Forestry, Fire and State Lands

Rule R652-20

Mineral Resources

Notice of Proposed Rule

DAR File No.: 32853
Filed: 07/29/2009

RULE ANALYSIS

Purpose of the rule or reason for the change:

The purpose of the rule change is to establish provisions for phasing out the rental credits for mineral leases on certain leases and making technical changes in the rule that reflect the increase in rental rates on mineral leases.

Summary of the rule or change:

Recent audits have indicated the state is not receiving full value for the public trust resources leased to persons for profit because the companies are receiving a free use of the leased land (rental credit) as long as royalties are paid. The rule amendment phases out rental credits against royalties on mineral leases over four years. Also, the legislature has established rental rates for Division leases and the new rate conflicts with the existing rule. The rule amendment changes the rental rates to match the fee schedule.

State statutory or constitutional authorization for this rule:

• Subsection 65A-6-4(2)
• Section 65A-6-2

Anticipated cost or savings to:

the state budget:

It is anticipated that there will be an increase in revenues because of: a) rental rate increases; and b) reductions in rental credits on mineral leases on those leases that have rental credits in their leases.

local governments:

Local governments do not pay rentals or royalties to the state on any extracted minerals from state lands, so there are no impacts to local governments.

small businesses:

There are currently no producers paying state rentals that are considered small businesses that will be impacted by this rule change.

persons other than business:

This rule amendment only affects a contractual business relationship between a business and the state. No other persons are affected.

Compliance costs for affected persons:

The increase in rental rates will increase rentals by 10% beginning in fiscal year 2010. Generally, the rentals are a fraction of the royalties paid by companies on mineral leases. The phase-out of rental credits will be phased in over four years and the increase will depend on the amount of sovereign lands leased by the state.

Comments by the department head on the fiscal impact the rule may have on businesses:

This rule eliminates the rental credit provision that some mineral leases have, and updates the rule to reflect rental rates approved by the legislature in the Division fee schedule. There will be a four year phase-in period for the rental credits to the businesses that have enjoyed that benefit, and an increase in rental rates for new leases.

Michael R. Styler, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Natural Resources
Forestry, Fire and State Lands
1594 W NORTH TEMPLE
SUITE 3520
SALT LAKE CITY, UT 84116-3154

Direct questions regarding this rule to:

• Jennifer Wiglama at the above address, by phone at 801-538-5495, by FAX at 801-533-4111, or by Internet E-mail at jenniferwiglama@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

09/14/2009

This rule may become effective on:

09/21/2009

Authorized by:

Richard Buehler, Interim Director

R652. Natural Resources; Forestry, Fire and State Lands.

R652-20. Mineral Resources.

R652-20-1000. Rentals and Royalties.

1. Rentals . The Division is obligated to receive full value for the resources leased to persons of profit. This obligation includes obtaining a fair rental for the lands being used for mineral extraction.

(a) Rental rates are established in the Division fee schedule[for the first lease year is at the rate of $1 per acre, or fractional part thereof, per annum, regardless of percentage of state ownership in any given acre of land. Subsequent rental paying] Rental due dates shall be on or before the annual anniversary date of the effective date of the lease, the effective date of the lease being the first day of the month following the date on which the lease is issued.

(b) Any overpayment of advance rental occurring from mineral lease applicant's incorrect listing of acreage of lands described in the application may be credited toward the applicant's rental account.

(c) Minimum annual rental on any mineral lease is $20.

(d) The division shall accept lease payments made by any party, but the acceptance of lease payments shall not be deemed to be a recognition of any interest of the payee in the lease.

(e) Effective January 1, 2010, rental credits will be phased out over a four year period. For the calendar year beginning January 1, 2010, 75% of rentals due can be credited against royalties for those leases that allow rental credits. For the calendar year beginning January 1, 2011, 50% of rentals due can be credited against royalties for those leases that allow rental credits. For the calendar year beginning January 1, 2012, 25% of rentals can be credited against royalties for those leases that allow rental credits. Effective January 1, 2013, rental credits will no longer be allowed on any mineral leases.

2. Royalty Provisions

The following production royalty rates shall apply to all classified mineral leases, as listed in R652-20-200, issued on or after the effective date of the applicable adjusted royalty rate. Mineral leases entered into prior to the effective date of adjusted royalty rates shall retain the royalty rate as specified in the lease agreement.

(a) Royalty rates on substances under oil, gas, and hydrocarbon leases.

 

TABLE

Oil    12-1/2%    -     Sulfur                        12-1/2%

Gas    12-1/2%    -     Other hydrocarbon substances   6-1/4%(1)



 (1) For leases that allow rental credits, the[The] rental

paid for the lease year shall be credited against production

royalties as they accrue for that lease year, but not against advance

or minimum royalties unless allowed by the mineral lease.

 (2) During the first ten years of production and increasing annually

thereafter at the rate of 1% to a maximum of 16-2/3%.

 

(b) Royalty rates on mineral commodities, coal, and solid hydrocarbons.

 

TABLE

Coal                  8%           Phosphate                  5%

Oil Shale (1)         5%           Potash and Associated

                                   Minerals                   5%

Asphaltic/Bituminous               Gypsum                     5%

  Sands (2)           7%

Gilsonite            10%           Clay                       5%

Met. Minerals:                     Geothermal Resources      10%

 Fissionable          8%           Building Stone/Limestone   5%

 Non-Fissionable      4%           (except 2% for calcined lime)

 Gemstone/Fossil(3)  10%           Volcanic Materials         5%

 Magnesium            1-1/2%       Industrial sands           5%

 Salt (Sodium chloride) (4)

                  $0.50/dry ton



 (1) 5% during the first five years of production and

increasing annually thereafter at the rate of 1% to a maximum

of 12-1/2%.

 (2) May be escalated after the first five years of

production at the rate of 1% per annum to maximum of 12-1/2%.

 (3) Requires payment of annual minimum royalty of $5

per acre.

 (4) Beginning January 1, 2001, the royalty rate per ton

will be adjusted annually by the Producer Price Index for

Industrial Commodities as provided under R652-20-1000(e) using

1997 as the base year.

 

(c) Notwithstanding the terms of oil, gas, and hydrocarbon lease agreements, gas and natural gas liquid reports, and their required royalty payments, are required to be received by the division on or before the last day of the second month succeeding the month of production. This extension of payment and reporting time for gas and NGL does not alter the payment and reporting time for oil and condensate royalty which must be received by the division on or before the last day of the calendar month succeeding the month of production, as currently provided in the lease form.

(d) Readjustment of salt royalties on royalty agreements negotiated before July 9, 1992.

i) The division is obligated to receive full value for the public trust resources leased to persons for profit. This obligation includes obtaining a fair royalty for salt produced from the waters of Great Salt Lake. The division shall readjust the royalty rate for sodium chloride on all royalty agreements negotiated prior to July 9, 1992. The royalty rate will be readjusted in accordance with analysis done by the Utah Bureau of Economic and Business Research, Office of Energy and Resource Planning and division staff and with a rule change approved by the Board of State Lands and Forestry on July 9, 1992 to increase the royalty on salt from $0.10 per ton to a rate per ton approximately equivalent to three percent of gross value of dry salt. The division has determined this rate to be $0.50 per dry ton. The royalty rate shall be phased in as provided in Subsections (ii) and (iii).

ii) Effective January 1, 1997, the royalty rate for sodium chloride shall be $0.20 per dry ton. Effective January 1, 1998 and on each January 1 thereafter, the royalty rate for sodium chloride shall be increased by the lesser of $0.10 per dry ton or $0.10 per dry ton times the percent of salt in brine by weight at the point of intake for each lessee divided by the percent of salt by weight derived from samples at sampling point LVG4 as measured by the Utah Geological Survey for the current year. The method for calculating the percent salt in brine from Utah Geological Survey and company data shall be determined by the division, but shall include a weighted average of samples taken at low and high water and of samples taken at different depths at the sampling point. The point of sampling for each producer shall be determined by the division after considering factors including the location of the intake canal, point of diversion for water rights, and placement of intake pumps.

iii) The annual adjustment under Subsection(ii) shall continue until the royalty rate for a lessee is $0.50 per dry ton or an amount per ton as determined under Subsection (e), whichever is greater, at which time subsequent annual adjustments shall be determined in accordance with Subsection (e).

(e) Effective January 1, 2001 or the date on which the royalty paid by a lessee reaches $0.50 per dry ton, whichever is later, the royalty rate for sodium chloride will be adjusted annually by the Producer Price Index for Industrial Commodities using the following formula: $.50 times the Producer price index for Industrial Commodities for the current year divided by the Producer Price Index for Industrial Commodities for 1997.

 

R652-20-1100. Limits to Rental Credit.

For leases that allow rental credits, the[The] rental paid for the lease year shall be credited only against the production royalties as they accrue for that lease year.

 

R652-20-3200. Mineral Salts Leases Within Great Salt Lake.

1. Mineral leases for mineral salts on land within Great Salt Lake, shall be issued pursuant to the provisions of this rule, and other applicable laws and rules governing the issuance of mineral leases on state owned lands or mineral resources.

2. Definitions: The term "state land within Great Salt Lake", as used in this section, shall include all state lands lying within the exterior boundary lines of the meander-line around the lake as surveyed by the United States. The term "salts", as used in this section, shall mean, chlorides, sulphates, carbonates, boratex, silicates, oxides, nitrates and associated minerals existing at the surface and to the extent of their continuous depth, but shall not include the salts and other minerals contained in solution or suspension in the waters of Great Salt Lake as defined in R652-20-3100.

3. All mineral lessees granted a mineral salts lease under this section must have a royalty agreement as provided under R640-20-3100. This royalty agreement shall be a minimum royalty of $10,000.

4. Leases issued pursuant to this rule shall grant the lessee the right to mine, extract, or remove salts from the surface of the lands covered thereby, together with the right to use so much of the surface as is necessary for all purposes incident to the extraction of salts and other minerals from brines of Great Salt Lake or the surface of the lands covered by the lease.

5. [These leases] Leases shall provide for a rental using rates established in the Division fee schedule[of $1 per acre per annum] and shall be coterminous with R652-20-3100.[ Ten years after date of issuance, the rental thereunder shall increase from $1 per acre to $2 per acre per annum.]

6. Leases issued pursuant to this rule shall contain provisions necessary to affect the purpose of this rule, including, the following provisions: the rights of the lessee; the term of the lease; annual rental and royalties; rights reserved to the lessor; bonds; reporting of technical data; operation requirements; lessees consent to suit in any dispute arising under the terms of this lease or as a result of operations carried on under this lease; procedures for notification; transfers of interest by lessee; establishment of water rights and water usage; discovery of other minerals; terms and conditions of lease forfeiture; protection of the state from liability from all actions of the lessee; and all other provisions that the division deems necessary to protect the interest of the state and to fulfill the purpose of this rule.

 

KEY: royalties, salt, primary term, administrative procedures

Date of Enactment or Last Substantive Amendment: [May 26,]2009

Notice of Continuation: April 2, 2007

Authorizing, and Implemented or Interpreted Law: 65A-6-2; 65A-6-4(3)