RULES AND REGULATIONS BOARD OF LAND COMMISSIONERS

Chapter 7

Disposition of State In-Kind Royalty Oil

Section 1. Authority

These rules and regulations govern the procedures to be followed in the distribution to eligible refiners and responsible bidders of royalty oil taken in kind from production on lands under the jurisdiction and control of the Board of Land Commissioners. These rules and regulations are made and established by authority of W.S. 36-2-107 and W.S. 36-6-101.

Section 2. Definitions

In these rules and regulations the following terms shall have the meaning herein given:

1. (a) “Board”: The Board of Land Commissioners.
2. (b) “Director”: The Director of the Office of State Lands and Investments.
3. (c) “Eligible Refiner”: An “eligible refiner” is a refiner whose refining operations are conducted entirely within the State of Wyoming and who is unable to purchase sufficient crude oil to operate the refinery at its rated capacity. Neither the refiner nor any of its related companies may be engaged in exporting crude oil from the State of Wyoming. The refiner must be one which produces eligible products as a part of its total output.
4. (d) “Eligible Products”: Includes gasoline, kerosene, diesel fuel, and such other refined products as the Board may determine to be in demand within the State of Wyoming forming a part of the total output of an eligible refinery.
5. (e) “Lessee”: The person, firm, association, or corporation in whose name an oil lease appears on record in the Office.
6. (f) “Market Price”: The market price for royalty oil taken in kind is the highest price offered in an open bid/negotiation process by an eligible refiner or responsible bidder.
7. (g) “Office”: The Office of State Lands and Investments.
8. (h) “Purchaser”: Eligible refiner and/or responsible bidder to whom the Board has awarded an in-kind royalty oil contract.
9. (i) “Responsible Bidder”: One who routinely buys and sells crude oil in the market place that can demonstrate financial and performance responsibility related to the volumes of royalty oil bid.
10. (j) “Royalty Oil”: That amount of crude oil and lease condensate from gas wells taken in kind when the state exercises its authority to take its royalty from the lessees of state lands in kind rather than in cash payment.
11. (k) “State Lands”: All subsurface resource lands under the jurisdiction and control of the Board.
12. (l) “Beneficiaries”: The State Land Trust and any other entity specifically designated as the beneficiary of lands administered under this chapter.

Section 3. General Provisions

In disposing of in-kind royalty oil, the Board may exercise wide powers of discretion. The disposition of such royalty oil shall be at all times in such manner and to such parties as shall, in the judgment of the Board, inure to the greatest benefit of the beneficiaries.

Section 4. Policy

It shall be the policy of the Board in the disposition of royalty oil to benefit the state and the beneficiaries. Such disposition shall be undertaken in a manner to provide, whenever possible, new employment opportunities for citizens of the state, a greater supply of needed environmentally acceptable refined oil products to consumers of the state, expanded and more efficient refinery capacity within the state, and a greater royalty income than would be achieved if royalty oil continued to be marketed by the State’s lessee. The promotion of these objectives is determined by the Board to be in the best interest of the state and the beneficiaries.

Section 5. Eligibility and Allocation

1. (a) Oil available for disposition, pursuant to these rules and regulations, may be sold to “eligible refiners” and “responsible bidders” as defined herein, and all such sales will be made at the “market price”.
2. (b) If applications are filed by two or more eligible refiners for the same oil, the Director will determine how the oil is to be allocated so that the best interest of the state will be served. In making his determination, the Director will consider, among other things, how much crude oil each applicant needs in order to operate its refinery at capacity, the size of the refinery, whether the refinery is able to produce the types of refined products needed in the state and how much of the refinery’s product is presently sold in the state. The Director may (or will) if necessary, solicit information from the eligible refiners to facilitate prorata allocations when required. The Director’s decision must be presented to the Board for final approval.

Section 6. Resale Prohibition

Except in the circumstances defined in Sections 7 and 8, all royalty oil purchased by an eligible refiner must be refined in that refiner’s facility within the state and may not be resold in kind.

Section 7. Exchange Agreements Agreements providing for the exchange of royalty oil purchased by eligible refiners under these rules and regulations, for other crude oil may be permitted only if these exchange agreements operate to minimize transportation, distribution and handling costs, and do not serve to reduce the amount of refined products for existing available markets within the state or the market value of the oil delivered. Exchange agreements will not be effective until approved by the Director.

Section 8. Processing Arrangements

Agreements providing for the processing and refining of royalty oil purchased by eligible refiners under these rules and regulations may be permitted only if justified by reason of operational interruption or to minimize transportation, distribution and handling costs, and do not serve to reduce the amount of refined products for existing available markets within the state. Processing agreements will not be effective until approved by the Director.

Section 9. Notice of Proposed Royalty Oil Sales

1. (a) Any eligible refiner who is interested in purchasing state royalty oil may file with the Office a request to be notified of any state royalty sales. After the Board has determined that state royalty oil will be sold, all eligible refiners who have made this request will receive a notice of the proposed sale.
2. (b) For royalty oil bid sales to responsible bidders, the Office will solicit bids under the terms and conditions, and for the royalty production only, as set out in its bid package. When bidding out in- kind royalty oil, the Board reserves the right to reject any or all bids, and to waive any informality or technical defect regarding any bid. The Board will award bid contracts to the most responsive and responsible bidders. No bidder will be allowed to withdraw its bid for a period of the earlier of forty-five
3. (45) days having expired or until the successful bidder has entered into a contract with the Board.
4. (c) Submission of a bid will indicate acceptance by the bidder of the provisions and terms contained in the applicable State royalty oil sales contract contained in the bid package. The successful bidder will be required to enter into a formal contract with the Board.

Section 10. Eligible Refiner Applications For In-Kind Royalty Oil

1. (a) An eligible refiner may file an application to purchase state royalty oil within thirty (30) days after the Director has, upon the direction of the Board, determined that state royalty oil should be sold to eligible refiners within the state. An application, which shall be filed at the Office, shall include the following information:

   1. (i) The full name and address of the applicant; the location of his refinery; a complete disclosure of applicant’s affiliation or association with any other refinery, if such relationship exists; and concise statement outlining the manner in which the award of state royalty oil to applicant will serve to accomplish the policies of the Board as herein outlined.
   2. (ii) A certified statement that the applicant meets all of the requirements of the eligible refiner definition herein.
   3. (iii) A certified statement with volumetric substantiation that the applicant will make diligent efforts to market the products of the state royalty oil within the state.
   4. (iv) The capacity of the refinery to be supplied, the amount of state royalty oil requested by the applicant, the kinds of refined products the applicant presently produces and where such products are being or will be marketed.
   5. (v) The amount of additional crude oil needed to meet either existing refining capacity or the amount needed to meet the additional capacity which is projected to come on stream during the period of the royalty oil sale contract.

Section 11. Applications for the Purchase of Royalty Oil

Applications will be received in the Office for thirty (30) days after a decision to sell royalty oil has been made by the Board. After this thirty-day period has elapsed, the Director shall have fifteen (15) days to determine which eligible refiner applicant or applicants will receive the state royalty oil. The Director will report his decision to the Board at its next regular meeting for approval.

Section 12. Director’s Duties

1. (a) The Director shall examine each application filed by an eligible refiner pursuant to these rules and regulations and, where he finds that the showing submitted is inadequate or unsatisfactory, may request additional showing as he deems necessary.
2. (b) The Director shall allow or disallow, subject to the approval of the Board, each application for royalty oil submitted by an eligible refiner and shall report his decision to the Board for its approval at its next regular meeting or special meeting held for consideration of the sale of royalty oil to an eligible refiner.
3. (c) The Director shall specify or approve the form of the contract to be used in such sale of royalty oil to an eligible refiner. The Director shall execute the contract, or contracts, of sale of royalty oil on behalf of the state upon approval of the Board.

Section 13. Notices

The Office shall notify each lessee or operator under the state oil leases involved of the requirement, at least thirty (30) days in advance of the effective date of that requirement, that it is directed to deliver its royalty oil in kind and in what manner the delivery of that royalty oil in kind will take place.

This notice requirement will be in full accord with the existing lease contracts for the production of oil and gas on state lands.

Section 14. Provisions of the Royalty Oil Contracts

1. (a) General. The provisions of the royalty oil sale contracts shall be consistent with these rules and regulations.
2. (b) Duration. Contracts for the sale of royalty oil to the eligible refiner within the state shall be for a maximum term of three (3) years, and for oil bid sales to responsible bidders, the purchase term shall be for six months from the contract effective date, and monthly thereafter by agreement of both parties, in writing, subject to Board approval. All in-kind royalty oil contracts are terminable by the Board upon notice for any default under the contract, these rules or related Wyoming statutes.
3. (c) Changed Circumstances. The eligible refiner contract holder shall report to the Office any changed circumstances from its initial application within ten (10) days of their occurrence. The eligible refiner contract holder shall provide copies to the Office of any exchange or processing arrangements within ten (10) days of their execution. A detailed statement on the need for such agreements, in full compliance with Sections 7 and 8 of these rules and regulations, shall be provided to the Office.
4. (d) Termination. If the eligible refiner contract holder fails to comply with the terms of the contract or these rules and regulations, the Director shall notify him of these deficiencies. If the contract holder does not correct these deficiencies within ten (10) days after being notified, the contract will terminate. The Director shall prepare an informational board matter pursuant to Chapter 1.
5. (e) Financial Responsibility. Eligible refiners must provide a performance and payment bond in a sum sufficient to cover the estimated monthly production for three (3) months of all of the State’s crude oil royalty in-kind volume contracted. Such bond may be raised at the discretion of the Board.
6. (f) The eligible refiner contract holder may relinquish or surrender the contract by providing notice to the Office, the termination to be effective sixty (60) days thereafter.

Section 15. “Responsible Bidder” Sales Conditions

1. (a) The successful responsible bidder shall purchase the State of Wyoming’s entire monthly crude oil/condensate in-kind royalty available from the leases and/or wells contracted, during the term of the contract.

2. (b) Unless waived by the Board, the successful responsible bidder must furnish performance and payment bonds guaranteeing the faithful performance of the contract and the payment thereunder.

   Said bonds are to be in a sum sufficient to cover the estimated monthly production for three (3) months of all of the State’s crude oil/condensate royalty taken in-kind as bid. Said bond, in form, shall be approved by the Office and the Wyoming Attorney General.

3. (c) The Office may make such investigation as it deems necessary to determine the ability of bidder to make payment and the bidder shall promptly furnish to the Office all such information and data for this purpose as the Office may request. If the bidder does not supply information requested by the Office in a timely manner, the Office may determine the bidder is unresponsive and may disqualify the bidder.

Section 16. Responsibilities of Purchasers of State In-Kind Royalty Oil

1. (a) Purchasers are solely responsible for all review and research costs incurred in calculating bid prices per barrel of crude oil/condensate bid.
2. (b) Purchasers must purchase all crude oil/condensate available in the monthly aggregate, from the Board’s in-kind royalty, for the leases contracted for the term of the contract, at the price per barrel stated in the contract.
3. (c) Purchasers are solely responsible for establishing with operators delivering the State’s in- kind royalty in crude oil/condensate production, any required information base for tankage to lease determinations, run scheduling, for taking delivery within thirty (30) days of the month of production, or on the schedule agreed between Purchaser and lease operator delivering State in-kind royalty crude oil/ condensate volumes, and, for transportation, if applicable, away from the delivery tankage, all at Purchaser’s own cost. Regardless of delivery sequencing arrangements between Purchaser and the operators responsible for delivering the State’s crude oil/condensate in-kind volumes, and arrangements between Purchaser and any transporters used, Purchaser must remit payment monthly at the contract price for the State’s total monthly in-kind crude oil/condensate volume available at the delivery point for each month a contract is in effect.
4. (d) Purchaser will be solely responsible for all taxes, if any, imposed or assessed as an incident to Purchaser’s taking, transportation, or resale of the crude oil/condensate.

Section 17. Special Provisions for In-Kind Royalty Bid/Negotiated Sales

1. (a) It shall be expressly understood and agreed that the State volumes are estimated, and the Board does not promise, guarantee or otherwise obligate itself to deliver a specific quantity, or any volume at all. Quantity is entirely dependent upon the deliverable production from, or allocated to, the contracted leases.
2. (b) The Board’s entitled quantity of crude oil/condensate purchased must be calculated based upon and documented by, either truck or pipeline run tickets/statements issued by producing/gathering companies, and provided by the Purchaser.
3. (c) The Purchaser must, with each payment, provide the Office any documentation deemed necessary or requested by the Board to verify the accuracy of payment amounts or for other accounting purposes.
4. (d) All in-kind royalty crude oil will be delivered to Purchaser at the leases or at the tankage provided by the unit or pooled area operator for allocation to the contracted leases. Title to crude oil/ condensate and risk of loss, including, but not limited to evaporation and deterioration of all in-kind royalty crude oil and condensate subject to sale, and all liability concerning the same, will pass to Purchaser at the flange by which production passes in transfer from storage tanks to the pipeline or other transportation medium which Purchaser designates for transport of production away from the storage tanks.

Section 18. Events of Default Under Bid/Negotiated In-Kind Royalty Sales

1. (a) The following will be considered by the Board as events of default and subject the existing contract to immediate termination:

   1. (i) Purchaser ceases to continue the business of purchasing crude oil, is insolvent, or files for protection under any bankruptcy law;
   2. (ii) If Purchaser is a partnership, the Partnership is dissolved;
   3. (iii) Failure of Purchaser to maintain financial assurance as required by the Board as of the effective date of the contract;
   4. (iv) A circumstance exists that allows the Board to draw upon the performance and payment bond;
   5. (v) Failure of Purchaser to pay any amount due under its contract with the Board within ten (10) days after it is due; or
   6. (vi) Failure of Purchaser to perform any other obligation under its contract with the Board within ten (10) days after notice from the Board specifying such failure.