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Methane and the Transformation of an Indigenous Community in Colorado

This posting is an excerpt from a longer report to which I contributed for the Harvard Project on American Indian Economic Development and published in May, 2014. The full report is available here.

Amidst all the negativity one often reads about the predicament of indigenous communities worldwide, particularly with reference to extractive industries investments on their land, it is important to consider some ingredients of successful stories as well. The Southern Ute Indian Reservation in southwestern Colorado presents some cause for optimism about how extractive industries — in this case coal-bed methane (or coal-seam gas as it is called in Australia and the UK) — can potentially serve a constructive purpose when handled with care and good governance.

The reservation covers an area of 1,059 square miles, with the tribal headquarters located in Ignacio, Colorado. The Tribe is relatively small, with only slightly more than 1,400 tribal members, 1,000 of whom reside on the reservation. Unemployment is lower than the national average for Native residents of reservations, and at $20,400, per capita income is sharply higher than the national Native reservation resident level of $11,400. Half of the 1,500 tribal government employees are enrolled Southern Ute tribal citizens.

This remarkably innovative community is among the most successful tribal natural resources developers, estimated in 1994 to produce 82 percent of the nation’s coalbed methane gas within the borders of the Tribe’s southwestern Colorado reservation.108 In leveraging their role as both mineral titleholder and regulatory authority, the Southern Ute have cultivated “thick” internal capacity and diversified their business interests. Deliberate financial forethought and independent leadership have solidified a degree of “financial sovereignty” yet unrealized by any other major extractive tribe; the self-created Growth Fund and Permanent Fund are reported to have had combined unrestricted cash and investments as of 2012 of $1.88 billion, with a AAA rating by Fitch Ratings.

Such extraordinary success is by no means formulaic. The leadership of Chairman Leonard Burch, who, when first elected, was the youngest leader to hold that office, set a vision and laid a path by which the Southern Ute were able to transition from a passive relationship with the federal agencies in which the Tribe acted merely as a mineral lessor for tribal trust minerals. The alternative path taken by Southern Ute has been to be the active and authoritative force in the development of reservation resources, a force that private companies have come to respect and work with to build long-term, mutually beneficial relationships. As noted by High Country News, “The Southern Ute have achieved cultural, environmental, and economic self-determination through energy self-determination—a feat rarely accomplished, whether by Indians or non-Indians”.

Overcoming Inertia

Like many other Native nations, the Southern Ute were once subject to aggressive federal policy and management of their land and resources. The 1895 Ute Allotment Act assigned much tribal acreage away, and while the subsequent 1934 Indian Reorganization Act returned all non-allotted acreage to the Tribe, it was held in trust by the federal government (some 330,000 of the reservation’s 1 million resource-rich acres). By 1951, all viable trust acreage had been leased to mineral developers and the Tribe realized royalties as the only return on its resources. Royalty rates were typically set at 12.5 percent of value at the point of production, and leases were often held past their term by purposely stalled production.

Upon his election in 1966, Chairman Burch hired an external party to audit these relationships. In 1974, concerned that the Tribe was receiving sub-par royalty rates, Burch and the Southern Ute tribal council called for a moratorium on all leasing. The Bureau of Indian Affairs was surprised by and opposed to this decision, but the Tribe’s refusal to enter into new agreements held.
By 1980, the Southern Ute had established their own Tribal Department of Energy, tasked to build a comprehensive geologic database of the San Juan Basin, collecting all existent data, and building a body of knowledge surpassing any private or federal resource. The Tribe also began to use tax credits and their governmental authority by, for example, granting 42-year rights of way (ROWs) instead of typical 10-year ROWs. This greatly increased the Tribe’s leverage in negotiations. By 1982, the Tribe enacted its own severance tax, which has since resulted in more than $600 million in revenue. Six years later the Tribe had enough of a revenue base to initiate a new development plan and established Red Willow Production Company to extract hydrocarbon resources on tribal land.

Under the leadership of Leonard Burch, Southern Ute then began to buy back interests in previously-leased tracts on the public market. To make this feasible, per capita payments to tribal members were phased out beginning in 1992 in favor of five years of reinvestment into the Growth Fund. Meanwhile, many coalbed methane producers were not interested in increasing production to meet the boom that the Tribe foresaw. In the mid-1990s, Amoco leased numerous oil and gas interests on Southern Ute lands, though it elected to operate only half of the wells. The Southern Ute Tribe filed suit against Amoco, its partners, and the federal agencies responsible for the administration of the oil and gas interests on their lands. The case was eventually settled outside of court, with the Southern Ute receiving a 32 percent stake in coalbed methane deposits on their lands.

Once the Southern Ute had successfully asserted their jurisdiction over the coalbed methane wells, and thus became participants in private oil and gas production, the economics of development changed drastically. Interests that were gained from settlements became the funding vehicle for the Growth Fund. In addition, prior to taking ownership the Tribe could impose taxes only after the federal government, state, and county had taken their cuts, which reduced the overall profits left available for taxation. As the Tribe is, itself, a government and exempt from many of these taxes, overhead was reduced by 30–40 percent. This left more income available for use and reinvestment by the Southern Ute Tribe.

In short, by adopting a strategy of self-management and eschewing reliance on federal decision makers, Southern Ute demonstrated to itself and to the general investment and business community that the institutionally “thick” tribe can readily be fully capable of managing and protecting its own affairs in the minerals arena. The establishment of the Red Willow Production Company also gave the Tribe a much greater sense of connection with the resource base and strong stakes in making it productive.

Go Forth and Diversify: The Southern Ute Growth and Permanent Funds

Tribal members have a direct stake in the business equity of their investments, and each of-age member receives dividends structured as follows (with actual dollar amounts being confidential): From the Growth Fund’s net income, all tribal members age 55+ receive a pension, with 10 percent of the remaining net income paid out as “shareholder” dividends on a sliding scale to tribal members age 21 and above. This approach leaves substantial net income in the Fund for reinvestment and growth. Moreover, notwithstanding the payment of dividends to the adult owners of the Fund (i.e., the tribal citizens), strong and sustained investment by the Southern Ute Tribe in education and the social fabric of the Tribe has encouraged gainful employment of tribal members. As of 2010, the unemployment rate among Southern Utes on the reservation was reported as 14.5 percent. This was lower than the national rate of 19 percent for Native residents of reservations.

In recognition that their economy was wholly dependent on a finite resource, by 1999 the Southern Ute developed a comprehensive financial plan. This plan divided tribal revenues into two funds: a Permanent Fund, to provide for the functions of government, and an independent Growth Fund which would serve as the tribe’s business arm. With sound advice from their investment managers, the Tribe also developed a plan and systems to officially separate governmental operations from the operation of the Growth Fund. The Growth Fund is thus managed by highly qualified professionals and is able to make decisions independent of tribal electoral politics. Initially, revenues from natural resource extraction were split 75/25 (75 percent to the Permanent Fund, 25 percent to the Growth Fund).

This ratio was set to flip once the Permanent Fund was resourced sufficiently, but tribal leadership has now settled on a 50/50 division to give tribal leaders increased room to build the Tribe’s governmental capacity. At startup, the Growth Fund was provided $8 million by the Tribe to “go forth and diversify.” Today, the Growth Fund manages and operates the Southern Ute Tribe’s businesses and business investments, overseeing a portfolio of companies and investments in energy, construction, real estate, and private equity. The late David Lester, long-time director of the Council of Energy Resource Tribes (CERT), accurately described the Southern Ute model: “They’ve converted a non-renewable resource into a renewable financial resource because of the way they are investing and because of their strategy.”