                           NO.     95-101
           IN THE SUPREME COURT OF THE STATE OF MONTANA
                                 1996


MONTANA DEPARTMENT OF STATE LANDS,
          Plaintiff and Appellant,
     v.
BALCRON OIL COMPAIifY a Kentucky
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          Defendant and Respondent.



APPEAL FROM:   District Court of the Ninth Judicial District,
               In and for the County of Pondera,
               The Honorable Marc G. Buyske, Judge presiding.


COUNSEL OF RECORD:
          For Appellant:
               Tommy H. Butler, Special Assistant Attorney
               General, Montana Department of State Lands,
               Helena, Montana




                           Submitted on Briefs:        February 8, 1996
                                            Decided:   February 22, 1996
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
     Pursuant to Section I, Paragraph 3(c), Montana Supreme Court
1995 Internal Operating Rules, the following decision shall not be
cited as precedent and shall be published by its filing as a public
document with the Clerk of the Supreme Court and by a report of its
result to State Reporter Publishing Company and West Publishing
Company.
     On May 17, 1988, the Montana Department of State Lands filed
a declaratory judgment action in the Ninth Judicial District Court
in Pondera County to legally verify the amount of royalties owed to
the State of Montana on Montana Oil and Gas Lease No. 14,049-72,
leased by Balcron Oil Company (Balcron).        On September 11, 1990,
the District Court issued an order in which it (1) granted partial
summary judgment to the Department of State Lands on the basis of
its conclusion that Balcron could not take deductions from the
State's royalties for its operating costs, and (2) concluded that
Balcron    owed   no   royalty   on   its Montana   Power   Company   tax
reimbursements. The Department of State Lands appeals that part of
the District Court's order which concluded that no royalty was due
on Balcronls tax reimbursements.         We reverse that part of the
District Court's order.
                           FACTUAL BACKGROUND
    On September 12, 1972, the Montana Department of State Lands
issued Oil and Gas Lease No. 14,049-72 to Mountain Fuel Supply
Company.    On November 20, 1981, Mountain Fuel Supply Company
assigned to Balcron Oil Company all of its rights in the lease
"from the surface of the ground to the total depth drilled (1033
feet) in Assignee's No. 1E-16 State Well. I
                                          '    Balcron sold natural
gas from the lease to the Montana Power Company pursuant to a
January 1, 1978, gas purchase contract for a price equivalent to
the Canadian Border Price with adjustments for pressure base, BTU
content, and currency adjustments. On December 13, 1983, Balcron
and the Montana Power Company amended the earlier gas purchase
contract in a letter agreement. Pursuant to the amended agreement,
the Montana Power Company agreed to pay Balcron tax reimbursements
on production taxes paid on the working interest share of gas
produced and sold on the well.
     The gas produced from Balcronls lease was        subjected to
gathering and compression by Balcron before the gas was sold to the
Montana Power Company at a point off the leasehold.     Balcron did
not use any gas from the lease to power any gathering, compression,
or processing functions. The cost of processing the gas to make it
of pipeline quality, however, did cost Balcron $ .56/1000 cubic feet
of gas to $.66/1000 cubic feet of gas.   The Montana Power Company
paid between $2.38/1000 cubic feet of gas and $3.28/1000 cubic feet
of gas for the processed pipeline quality gas.
     The gas produced from Oil and Gas Lease No. 14,049-72 was
measured and monitored by a wellhead metering device. Balcron paid
a flat 12% percent royalty payment to the Department of State Lands
based upon these measurements.   Prior to paying its royalties to
the State, however, Balcron deducted between $.56/1000 cubic feet
of gas and $.66/1000 cubic feet of gas produced from the lease for
gathering, compression, processing, and off-lease transportation
costs.    In addition, Balcron did not pay       royalties on the
additional consideration it received from the Montana Power Company
in the form of tax reimbursements.
     On November 18, 1987, pursuant to audit findings issued by the
Montana Department of Revenue, the Department of State Lands
demanded that Balcron pay royalties on all payments it had received
from the Montana Power Company for purchase of natural gas from the
#1E-16 well, without any deductions for gathering, dehydration,
compression, and transportation charges from the royalty money paid
to the State of Montana. On May 17, 1988, the Department of State
Lands filed a declaratory judgment action in the Ninth Judicial
District Court to compel Balcron to pay royalties on both its
operating costs and on its tax reimbursements.    On September 11,
1990, the District Court granted partial summary judgment to the
Department of State Lands on the basis of its holding that Balcron
could not take deductions for gathering, compression, processing,
or transportation charges from the royalty payment due to the
State. The court also held, however, that Balcron did not owe the
State of Montana additional compensation from the Montana Power
Company reimbursements.
                            DISCUSSION
     On appeal the Montana Department of State Lands raises the
following issue:
    Whether the State of Montana, as Lessor, is entitled to
    receive a royalty of 12H% of all sums received by the
    Lessee, for the sale of gas produced from State of
      Montana Oil and Gas Lease No. 14,049-72, including
      payments designated by the purchaser of the gas as "tax
      reimbursements."
The Department maintains that both the Montana Code Annotated and
the   Montana      Administrative        Rules    require      the   remittance       of
royalties on tax reimbursements received by lessees from the
purchaser of production.               In addition, the Department cites
abundant case law for the proposition that the computation of state
and federal royalty payments necessarily includes both the gas
purchase price and the reimbursed severance tax. See, e.g., Mesa Operating

Ltd. Partnership v. United States Dept. of Interior ( 5th Cir . 1991) , 931 F .2 318 ,
                                                                                d

cert. denied ( 1992) , 502 U .S . 1058 ; Hoover & Bracken Energies, Inc. v. United States

Dept. of Interior (10th Cir. 1983), 723 F.2d 1488, cert. denied (1984), 469

U .S . 821 ; Enron Oil & Gas Co. v. State, Dept. of Natural Resources (Utah 199 4) , 871

P.2d 508; CitiesServiceOil&GasCorp.v. State (Wyo. 1992), 838 P.2d 146;FMP

OperatingCo. (1991), 121 IBLA 328; WhelessDrillingCo. (1973), 13 IBLA 21.

      Balcron Oil Company has failed to file a responsive brief and
has thus failed to address the Department's arguments on appeal.
Because of Balcron's failure to file a brief, we will assume that
the Department's claim has merit. Therefore, we reverse that part
of the District Court 's order which concluded that Balcron owed no
royalties on its tax reimbursements fromthe Montana Power Company.
However, whether further amounts are due the State pursuant to this
decision will still depend on whether actual tax reimbursements
We concur:




    Chief Justice
