Over the years there have been many reports about the Indian trust and controversial aspects of its management — especially when the subject is oil. Here the Office of Special Trustee shares some of the questions its received from reporters and other outside sources, and the answers:

Why are people receiving such small trust payments, especially if they own oil rights?

Indian Country is peppered with tracts of land that produce minuscule amounts of income for trust beneficiaries. These stories are told time and again — in newspapers and in public forums. The reasons, however, are often incorrectly reported. Frequently, very small payments are the result of what the Department of the Interior calls “land fractionation.” Because of early inheritance laws and probate codes, the ownership of many parcels of Indian trust land is divided, generation after generation, among all eligible heirs. As the land is passed down through descendants, it is divided into smaller and smaller percentages, called “interests.” Funds earned on these lands, therefore, are divided among many owners.

Jim Stockbridge, director of the Federal Indian Minerals Office in Farmington, N.M. (a partnership between the Bureau of Indian Affairs, Bureau of Land Management, and Minerals Management Service) recently provided this example:

 “In June, we are putting up 200 parcels for lease," he said. "One of these parcels is owned by 75 individuals, another is owned by 228 and another by 12. ...We have one parcel in San Juan County that has 1,014 heirs. One owner gets about a penny from the oil royalties.”

Today there is an individual allottee in New Mexico whose percentage of oil royalties is .000004. If that parcel gets about $2,000 a month in royalties, the beneficiary earns less than a penny in income. (Interior rounds up to a penny to deposit in the account.) Of the more than 330,000 Indian trust accounts that Interior manages today, an astounding 49 percent, or about 155,000, receive $10 or less in income each year. Interior is working with Indian Country leaders and Congress to try to solve this vexing problem.

But some trust owners without highly fractionated land receive small checks. Why?

Some individual and tribal Indian trust account holders earn substantial funds from oil leasing on Indian land. Unfortunately, many people (both on and off trust land) receive a small amount of money for their oil for a combination of reasons. Four factors affect oil royalty payments: volume, price, royalty share and the cost to take the product to market.

Volume: Because oil is a depleting asset, oil prices are often calculated on a “decline curve.” As a result, an account holder’s grandparents may have received more royalty payments for their oil than the account holder earns today. Often this occurs because more oil was being extracted from their land at that time. In the first years, oil wells produce a lot of oil; then production declines. When an oil field starts to deplete, a company will begin secondary recovery efforts to squeeze out the remaining oil. This can involve working with BIA to “unitize” a number of parcels of land so the company can extract oil from a wide swath of land. A “unit” is a group or bundle of parcels of land listed in one agreement. Once a unit is established, an oil company may, for example, use one oil well on the unit to push water into an oil field then use another well elsewhere to extract the remaining oil. Oil companies distribute the remaining royalties from an oil field among all land owners in the unit. Units can include tribal land, individual Indian land and fee land. Parcel owners, or BIA, must approve these units.

Price: Reports sometimes show oil hitting a price of, say, $65 per barrel. That price is based on the benchmark West Texas crude. This crude is light and is a higher grade petroleum product. It is used for things such as airplane or car fuel. Heavier oil, with an industrial grade weight, is used for such things as asphalt. The industry calls the different weights the gravity of the oil. Oil extracted from Indian lands can be high or low gravity depending on the location and quality of the oil field. As the quality declines, the price drops from the benchmark.

Royalty share: Federal royalty regulations are established for oil extracted from public and Indian land. On public lands — such as BLM property — oil companies must agree to pay a minimum of 12.5 percent in royalties to BLM. The minimum royalty that can be paid on Indian land is 16 2/3 percent. This is a minimum of at least one-third more in royalties on Indian Land than on federal land. Stockbridge recently bumped up the minimum for Navajo- allotted land leases in his jurisdiction to 18 3/4.“We have successfully negotiated a number of leases at the new rate,” he said.

Leases are often established on a three-fold structure: a signing bonus payment; a “rent” payment until oil begins to be extracted from the land, and then monthly royalties. “We negotiated a lease two weeks ago in an area south of Farmington, N.M.," Stockbridge said. "A company initially offered the family $35 an acre and $15-an-acre bonus. The family that owned the parcel became very involved; and as a result, they got the bonus rate up to slightly over $70 an acre and agreed on an 18 3/4 royalty rate. It was the best deal I’ve ever seen. The family needs to be congratulated for what they did.”

Cost to take the product to market: This cost is based on how much work, and distance, goes into getting the oil to a refinery. If the well is close to a refinery, transportation costs are low. For example, if an oil and gas well is in the middle of a remote section of Utah, transportation costs will be much more expensive.

How does Interior monitor and collect payments for oil on Indian land?

The Minerals Management Service is the agency in charge of oil production on federal land and Indian trust land. It collects oil and gas royalty payments, monitors oil company reports of oil and gas extractions and is responsible for ensuring that correct amounts are received. MMS performs audits on Indian oil and gas leases every year; and if appropriate, the agency assesses penalties. That income is forwarded to the individual Indian trust accounts.

In 2006, MMS collected more than $24 million as the result of compliance efforts on oil leases throughout the country. MMS executes both full-scope compliance reviews and limited-scope reviews. Full-scope compliance reviews are analyses that determine the reasonableness of the four components of the royalty equation. Limited-scope reviews focus on three or fewer specific elements of the equation, for example, price or volume. MMS spends about 20 percent of its budget on Indian land compliance, which accounts for about 4 percent to 5 percent of revenue. Staff at the unique Federal Indian Minerals Office — established to meet the needs of Navajo trust allottees — inspects every well in their jurisdiction at least every year if not more often. Inspections include safety evaluations, spill monitoring, maintenance and more.

Trust beneficiaries with questions about their oil leases should contact their fiduciary trust officer or the Trust Beneficiary Call Center, 1-888-678-6836.