UPDATE: On Thursday, after the deadline for Arkansas Business’ Sept. 23 print edition, an administrative law judge granted a request to delay the Arkansas Oil & Gas Commission’s scheduled meeting to consider royalty rates for lithium mineral rights owners. The hearing had been scheduled for 9 a.m. Tuesday, Sept. 24. But the judge, Charles Moulton, ruled that he would ask AOGC Director Lawrence Bengal to “reschedule the September hearing to a date agreeable to all parties.”
Attorney Alan Perkins doesn’t know what the Arkansas Oil & Gas Commission will decide tomorrow about royalties for lithium rights owners in the south of the state, but he thinks he’s made a half-dozen solid legal arguments against a 1.82% rate that a handful of industry leaders proposed.
Perkins, of PPGMR Law in Little Rock, filed a formal objection to the commission on Sept. 10, and the panel will consider it at its regular meeting tomorrow, Sept. 24, in El Dorado. The meeting will be streamed live starting at 9 a.m. on the Arkansas Department of Energy & Environment’s YouTube page.
“The commissioners could all disagree with me and set the royalty rate just like the companies ask for,” Perkins said. “It’s sort of like trying to predict what a jury will decide. But I certainly and firmly believe that the legal positions I’ve set out in this objection are valid, or I wouldn’t have made them.”
Perkins represents the South Arkansas Minerals Association, a not-for-profit corporation formed to “educate, promote, develop and encourage best practices and standards” in the state’s brine minerals industry.
Until recently, only bromine has been refined profitably from the brine running deep below the surface of the Smackover Limestone Formation. But as lithium became a more valuable mineral for batteries in electric vehicles and other devices, companies like Standard Lithium, Albemarle Corp., Lanxess, Tetra Technologies and Saltwerx, a subsidiary of Exxon Mobil, have been racing to lead a new direct lithium extraction industry.
One Size: Does It Fit?
The mineral rights involved are in Columbia, Lafayette, Miller and Union counties, where the above-mentioned companies are operating or seeking to operate. The publicly traded companies combined forces this year to file a joint application to the commission to set what Perkins called a “minimal 1.82% royalty rate on Arkansas brine minerals owners” without offering any financial justification for any single project.
“The one-size-fits-all approach by the Big 5, however, is in hopeless conflict with Arkansas law,” Perkins wrote. In a Sept. 13 interview, Perkins outlined his case.
The Arkansas Brine Conservation Act of 1979 requires the commission to set a “fair and equitable royalty” rate on “additional” substances other than bromine, but it must first be convinced that the substance can be extracted profitably. The five companies have not provided adequate financial information to support their proposed rate, Perkins said, and without that data, commissioners cannot determine a fair rate.
Perkins argues that without this data, it’s impossible to determine if the rate is fair and equitable. “The thing that triggers the Oil & Gas Commission’s duty to set a royalty is to determine that an additional substance will be profitably extracted.”
The current application before the commission includes no profitability evidence, Perkins noted.
He said the data is out there and should be included in the commissioners’ deliberations.
Standard Chart
In fact, his objection includes a chart from Standard Lithium’s preliminary feasibility report on its Southwest Arkansas Project that shows a posttax internal rate of return of 32.2% with a 1.82% royalty rate factored in. That rate of return falls to 30.8% with a 6.25% royalty rate, 29.5% with a 10% royalty and 26.1% with a royalty rate as high as 20%.
“We were aware of the feasibility report on Standard Lithium’s property over in Lafayette and Columbia counties,” Perkins said. “It’s different from their pilot plant in Union County at the Lanxess facility. So we wanted to use an example based on what they are saying publicly that the profitability of that project would be, and see what impact different royalty rates would have on their profitability.” He said claims that higher royalties would make deep cuts in profitability “don’t seem to ring true over in the area where most of these operators are planning to create [brine] units.”
Royalty Sensitivity – Standard Lithium SWA Project
| Royalty Percentage | Posttax NPV (8% Discount Rate) | Posttax IRR |
Royalty per Tonne
|
| Base Case – No Li Royalty | $3,089,299,000 | 32.80% | 0 |
| 1.82% | $2,998,884,385 | 32.20% | $546 |
| 6.25% | $2,778,810,195 | 30.80% | $1,875 |
| 10.00% | $2,592,517,146 | 29.50% | $3,000 |
| 12.50% | $2,468,321,779 | 28.70% | $3,750 |
| 20.00% | $2,095,735,680 | 26.10% | $6,000 |
Source: Standard Lithium report. NPV is net present value; IRR, internal rate of return.
The association’s objection includes an exhibit of south Arkansas brine leases setting a royalty rate of up to 10% for the value of lithium extracted on owners’ land. The evidence of higher current rates in the area challenge the fairness and equity of the proposed 1.82% rate, Perkins said.
The five companies’ application, filed July 26 by attorney Thomas A. Dailey of the Dailey & Woods law firm in Fort Smith, seeks to base all Arkansas brine royalties on the lithium carbonate equivalent price index, with rights owners getting 1.82% of the market price of lithium products derived from their lands.
“Establishing a connection between a market price and royalty, as opposed to a mere per-acre payment, ensures the alignment of interest and proportional value sharing between developers and brine royalty owners throughout the life of a Development,” the application says.
Objection No Surprise
Carol Booth, chief of communications for the Arkansas Department of Energy & Environment, said in an email that procedures and rules for Oil & Gas Commission hearings anticipate the filing of objections.
“All documents will be presented to the hearing officer and the Commissioners for consideration of the matter,” Booth wrote. The AOGC is a division of the Department of Energy & Environment.
Several applicant companies did not respond to requests for comment about the application or the objection. But Jesse Edmondson, Standard Lithium’s director of government relations, told Arkansas Business that he is aware of the objection, and expects the Oil & Gas Commission to weigh it.
In a written statement last week, he said: “We believe it is up to the AOGC to make a decision as to the merits of the objection. It is our opinion that the application we have filed meets statute requirements, and presents a fair and equitable royalty for all parties.”
In an email exchange last month, Edmondson described the 1.82% rate as “within the range of comparable lithium royalties.”
The rate “enables Arkansas to be competitive both globally and regionally, and it also provides certainty for all potential lithium producers in Arkansas to make an investment decision thus supporting local job growth, opportunities for local service providers and small businesses, and an increased tax base,” he said.
In a separate statement, Albemarle said the application presents a “clear and transparent framework for compensating brine royalty owners” and a “consistent approach” for the industry in Arkansas. “The application proposes a rate that incentivizes investment while also fairly compensating royalty owners.”
Parting Shot
All the companies agree that lithium concentrations vary in different brine areas, and that levels in Lafayette and Columbia counties are stronger.
That fact argues against setting a single royalty rate across the region, Perkins said. But putting logic aside, he said, state law requires that brine mineral royalties be set on a unit-by-unit basis.
To hammer home that point, the conclusion of Perkins’ objection quoted Standard Lithium and Lanxess’ application to establish a royalty in a filing from July 2023: “…[T]he economics underlying the determination of a fair and equitable royalty will vary from one brine producing unit to another. Each brine producing unit has its own unique characteristics and should be considered on its own merits. …”
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