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Calculation of Geothermal Royalty

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Item Summary

Title: Calculation of Geothermal Royalty
Authors: Tagomori, Manabu
Keywords: leasing
Issue Date: 20 May 1991
Publisher: State of Hawaii, Division of Water Resource Management
Citation: State of Hawaii, Department of Water Resource Managment. 1991-05-20. Calculation of Geothermal Royalty. Hawaii: State of Hawaii, Deparment of Water Resource Management.
Abstract: Memorandum from Manubu Tagomori, Deputy Director to William Paty, Chairperson regarding Calculation of Geothermal Royalty. DLNR Administrative Rule section 13-183-31 (a) provides that "The rate of the royalty to be paid to the State for the production of geothermal resources shall be determined by the board prior to the bidding for or granting of a mining lease, but the rate shall not be less than ten percent nor more than twenty percent of the gross amount or value of the geothermal resources produced under the lease as measured at the wellhead and sold or utilized by the lessee." Section 13-183-31 (b) also states that "For the purpose of computing royalties, the amount or value of geothermal resources produced shall be determined as the gross proceeds received by the mining lessee from the sale or use of geothermal resources produced from the leased land as measured at the wellhead. In the event that geothermal production hereunder is not sold to a third party but used or furnished to a plant owned or controlled by the lessee, the gross proceeds of the production for purposes of computing royalties shall be that which is reasonably equal to the gross proceeds being paid to other geothermal producers for geothermal resources of like quality and quantity under similar conditions after deducting any and all treating, processing, and transportation costs incurred." Ideally, in a situation where steam is sold to a third-party under an "arms-length sale", gross proceeds are computed as follows: Gross Proceeds = (total pounds of steam produced and measured at the wellhead) X (unit value of steam, $/lb). However, the current situation in Hawaii is different from that described above and the calculation of gross proceeds as provided by section 13-183-31(b) for a no-sales or non arms-length arrangement should be as follows: in the event that steam is not sold to a third party and is used by a plant owned or controlled by the lessee, the gross steam proceeds, for purposes of computing royalties, shall be determined by measuring the steam (lb/hr) used by the lessee's facility and multiplying that amount by the steam unit value ($/lb) utilized by other similar geothermal steam producers. A problem arises, however, that although an equivalent unit value of steam ($/lb) equal to that paid to other producers/suppliers of steam of like quality and quantity could be used to calculate gross proceeds, no such "standard" unit value of steam is available for computing gross proceeds. Puna Geothermal Venture's (PGV) geothermal resource mining lease R-2, Section 5, provides that the State shall receive a "royalty of ten (10%) percent of the gross proceeds received by the
Lessee from the sale or use of geothermal resources produced from the leased lands and measured at the wellhead without any deduction for treating, processing and transportation cost, notwithstanding Rule 3.13 b. of Regulation 8" (now identified as Sect. 13-183-31 (b». It should be noted that contrary to the regulation, mining leases R-1, R-2, R-3, and R-4 have language which disallows the deduction of those costs allowed in section 13-183-31(b). Only lease R-5 has language contained therein which allows the deduction of any treating, processing and transportation costs incurred. Notwithstanding any conflict between the regulation and the leases, the PGV 25 MW project is a typical case where the lessee both produces the geothermal resource and utilizes it in its own power plant to generate electricity. In this situation, the electrical energy is sold, and not the geothermal resource (steam). The resultant gross revenue is a function of the sale of electricity generated rather than from the sale or use of steam. Therefore, there is no steam sales transaction by which to measure the value of the geothermal resource and an alternative method must be selected in which to calculate the value of the geothermal resources produced.
Pages/Duration: 13 pages
Appears in Collections:Department of Land and Natural Resources
The Geothermal Collection

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