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BP Business Economic Loss Claim Appeal 2017-458: Mineral Lease Bonus Spread Over Life of Lease IAW Panel and District Court Decisions

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms


Claimant appeals the amount of its BEL award. Specifically, Claimant contends that the Settlement Program wrongly reallocated a mineral lease bonus over the life of the associated oil and gas lease.

The mineral lease bonus at issue was an approximately $2.8 million payment in September 2008. According to the Claimant, A mineral lease is a lease arrangement between an individual and a property owner that grants the individual the rights to extract minerals, such as iron, copper, oil, or natural gas, from a piece of property, or to explore to determine if these minerals are present, in exchange for predetermined compensation.
Typically when a mineral lease is signed, the mineral owner is given a “Bonus”, which is a sum of money, agreed upon by both the lessor and the lessee. This is a
negotiated amount per acre that covers the primary term (length of time) of the oil and gas lease, usually three years during which the lessee has to achieve a certain result. If the result is achieved then the secondary term in the lease commences and continues for so long as there is oil and gas produced in paying quantities. The $2,829,963.00 was considered a signing bonus in return for the execution of the lease and therefore was considered a paid-up mineral lease during the primary term.
Based on the above, the Program reallocated the payment over 36 months.  Claimant argues that the Program’s lack of knowledge of the Louisiana Mineral Code, and the jurisprudence interpreting it, led to an erroneous result. Without commenting on the Program’s knowledge, this Panel agrees with the following observations on Louisiana law set forth by Claimant:
1. A mineral bonus is money or other property given in consideration for the execution of a mineral lease. The bonus is paid solely for the grant of the lessor’s exclusive right to the lessee for the purpose of exploring for minerals.
2. Although both bonuses and royalties are usually paid on a per acre basis, bonuses are distinguishable based on the absolute obligation of the lessee to pay the lessor
regardless of whether there is production.
3. Claimant held the “executive right” to grant a mineral lease of its mineral rights.
BP analogizes Claimant’s mineral lease bonus to lump sum payments made in the context of commercial leases, and attaches to its Initial Proposal a number of redacted decisions dealing with the allocation of those payments. In all of these decisions, the Appeal Panel (and the District Court in one instance) held that lump sum early termination lease payments must be reallocated over the remaining term of the lease. [It is also noted by this Panel that the District Court has also ruled that late lease payments are to be relocated back to the months in which the rent was originally due.]
Claimant disputes the comparison of lump sum lease termination payments with a mineral lease bonus payment. Claimant argues that “lease termination fees are revenues expected to be earned by the landlord during the term of the lease. The lease bonus payment is actually opposite of a lease termination fee. The lessor, Claimant, does not expect to earn a bonus payment over the life of the lease. The Claimant earned the lease bonus payment the second one of its representative (sic)
signed the lease.”
Claimant also makes an argument put forth by other claimants who have contested the reallocation of revenue pursuant to Policy 495: The Internal Revenue Service requires in most instances that revenue be reported in the tax year that it was received. Yet the Program routinely spreads out revenue over multiple years, including years where no payment(s) were received.
This Panel recognizes the anomalies created by Policy 495. Left to our own devices, this Panel might reach a different conclusion in any number of Appeal Decisions involving the reallocation of revenue. That said, this Panel is bound by the District Court’s decisions regarding revenue reallocation. Our review of those decisions leads this Panel to conclude that the Program properly reallocated Claimant’s mineral lease bonus payment over the life of the associated mineral lease. A recent Appeal Panel Decision (2016-1985) involving the reallocation of a mineral lease bonus summarizes this Panel’s reasoning:
Although the lease bonus may be made in one payment, the compensation is paid in exchange for the 3rd party obtaining the right
to explore for minerals over the 3 year period. It is true that, if there is production, the lease may be extended but this does not obviate
the fact that the compensation is for the authority to exercise a right over a 3 year period, at the least. This is, in fact, directly analogous
to the property lease scenario, where advance rental payments have consistently been spread over the lease period. This treatment by the
Program with property leases has been approved by numerous Panel Decisions, as well as by the District Court, and there is no basis to
distinguish the present circumstances from the property lease situation. . . . Additionally, how this revenue might be handled by the
IRS is not determinative when Policy 495 requires adjustments to the timing of revenue. Further, it is also not relevant that royalty payments
are considered earned when paid. Royalty revenues correlate to monthly production which occurs in close relation to the timing of the
monthly revenue payments. In contrast, where exploration rights are granted for a minimum 3 year period, there is no close correlation to
the timing of a bonus payment and the time period attributable to that revenue.
In light of the above, this three-member Panel unanimously adopts BP’s Final Proposal.

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