The U.S. Supreme Court heard oral arguments recently on a case pitting an oil producer against the state of New Mexico that could affect oil and natural gas production across the state of Utah.

Cotton Petroleum Co. vs. the State of New Mexico also could bear upon the outcome of a $100 million lawsuit filed by 10 oil companies and another by the Ute Indian Tribe against the state of Utah."It's a very significant, precedent-setting case," said Jim Peacock, Utah Petroleum Association director.

Depending on the court's ruling, "oil companies will have to make that hard decision: Can they afford to continue production and will they invest risk capital in future oil and gas production," he said.

The case questions states' rights to tax oil and gas production on Indian trust land. Cotton is suing New Mexico to gain relief from having to pay severance and other taxes to the state on oil and gas taken from Indian land.

Many other petroleum companies operating in states such as Utah that have Indian reservations inside their boundaries also complain of "double taxation," or having to pay taxes to the state and tribal governments.

"Double taxation" sent 10 oil companies drilling in San Juan County in southeastern Utah to 7th District Court in 1979 to sue the county and the state for tax relief. Exxon Co. was one of those producers.

"It's really a question of double taxation: We pay the tribal tax and we pay the state and county tax," said Exxon attorney Kevin Anderson. Exxon also filed a friend-of-the-court brief in the Cotton case.

Anderson said he would like to see the court issue a ruling prohibiting states and counties from taxing oil and gas production on tribal lands under the 1938 Indian Mineral Leasing Act.

The state of Utah, named as a defendant by San Juan County and the Ute tribe in suits contesting the state's right to tax tribal oil and gas production, would like to see an opposite ruling from the court in the Cotton case.

Utah filed a friend-of-the-court brief in the case "supporting the position that the state taxes are not preempted" by tribal taxation on oil and gas production, Assistant Utah Attorney General Michael Quealy said.

State officials have said the San Juan case holds in the balance more than $100 million in back taxes the companies want refunded. Plaintiffs maintain the figure is roughly $75 million.

Additionally, millions in future tax revenue could no longer be collected by the state and county should the state lose the case, state officials said.

Ute tribal leaders are also awaiting a decision on the Cotton case after they recently approved a 10 percent severance tax - in addition to a 4 percent state severance tax - on oil and gas production on Ute trust land.

The tribe has implemented a sliding-scale version of the tax but is still negotiating with the state other variations on the tax.

"As far as we're concerned, the most favorable ruling would be in favor of Cotton Petroleum, which would preempt the state tax," said Maxine Natchees, member of the tribe's ruling Business Committee.

"The tribe has always maintained that the state is taxing (on the reservation) illegally, thereby creating a double tax," she said.

No matter what the court's ruling, the Ute tribe will retain its right to tax. But oil companies complained to Ute leaders at a October public hearing that tribal and state taxes would make it economically difficult to operate.

Oil and gas production in the Uintah Basin, most of which comes from Ute Reservation land, "is some of the most expensive to produce of anyplace in the country," Peacock said.

If the court fails to issue a ruling eliminating double taxation, and if the tribe and the state fail to reach an agreement that is economical to Uintah Basin producers, they may simply stop drilling in the area, Peacock said.