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Oil Royalty and Valuation Update (5-11-00)

The Minerals Management Service (MMS) announced at the end of 1995 its intent to change the valuation rules for oil and natural gas produced on federal lands.  Since 1995, MMS, Congress, the states, environmental groups, and the oil industry have been in battle over the implementation of these rules.  This high-profile issue for the oil and gas industry involves several billion dollars in royalties shared by federal and state government, and as such has attracted attention from every Congress since MMS's announcement a little over four years ago.  In the last Congress, fair oil valuation was a hot topic of both chambers, especially in the western controlled Senate Energy and Natural Resources Committee and the House Resources Committee, but in the 106th Congress the topic has cooled off some, as members of Congress principally have sought to defer the MMS regulations from being enforced.  Once again, the budget process hosted the implementation debate, but the last-minute omnibus appropriations bill limited the moratorium that has stalled the MMS regulations in the past.

Most Recent Action
Representative Barbara Cubin (R-WY), Chair of the House Resources Subcommittee on Energy and Mineral Resources, has reopened the Project on Government Oversight (POGO) controversy.  According to EENews, "the Resources Committee leadership may pursue a contempt of Congress full-committee vote in order to punish [POGO] for refusing to turn over tax forms related to the payments [to two federal employees involved in an interagency task force that investigated allegations of underpayments in federal leases in California]."  More information is available off the hearing charter from the May 4th event.  Another hearing is scheduled for May 18th.

Action in the 106th Congress
The debate on fair royalty payments to the US Treasury for oil and gas leases on federal lands is a two-prong issue.  One prong is establishing a method by which the value of the oil extracted is rightly valued, a question that has been the basis for much of the debate surrounding the proposed MMS valuation regulations.  The other prong is implementing a royalty-payment system that is just to all parties and simple, a topic that brought about most of the debate during the 105th Congress on developing a royalty-in-kind (RIK) system. In the last Congress, Representatives Barbara Cubin (R-WY) and Mac Thornberry (R-TX) were principal advocates for a national royalty in-kind (RIK) system, a move strongly supported by the oil industry.  Thornberry introduced H.R. 3334, the Royalty Enhancement Act of 1998, during the 105th Congress, which quickly became the rallying call for the oil industry and other pro-RIK supporters.  The RIK effort lost steam, however, after the General Accounting Office (GAO) reviewed the bill and reported strongly against a mandatory, national RIK program.  This report and a new Congress helped to change the focus of the debate on revising MMS valuation regulations and providing tax incentives for oil producers.

Minerals Management Service's Proposed Rules
A 1996 report by the House Government Reform and Oversight Committee, entitled Crude Oil Undervaluation: the Ineffective Response of the Minerals Management Service, found that undervaluation of federal royalties had shortchanged the US Treasury by millions of dollars.  In response to the report and frequent disputes and litigation with oil and gas companies, the Minerals Management Service (MMS) issued revised valuation regulations in 1998.  According to the 1999 Environmental & Energy Issues Guidebook, "The Interior Department says the intent of the rulemaking effort is to reduce reliance on posted prices for royalty valuation, reflect the true market value, provide certainty to all involved, and provide maximum flexibility to adapt to changing market conditions."  More information on the history of the rulemaking process is available in AGI's 105th Congress summary on Roaylty-In-Kind.

A legislative rider to the fiscal year (FY) 1999 Interior Appropriations bill placed a moratorium on the MMS rules release.  In an Emergency Supplemental Appropriations Act that was signed by the President on May 21, 1999, the Senate Appropriations Committee included language in the bill that extended the moratorium to the end of FY 1999.  During the debate on FY 2000 Interior Appropriations, a legislative rider supported by Senator Kay Bailey Hutchison (R-TX) that would delay the release of the rules until 2001, was tacked onto the appropriations bill.  After last-minute debate between Republican leadership and White House staff, the moratorium was limited to last only until March 15, 2000.  MMS, in response to the new date, re-opened a comment period on the proposed regulations, which is due to end on January 31, 2000.  Information on the oil valuations regulations and on how to submit comments is available at the MMS Royalty Management Program website.

On March 15, 2000, MMS published the final rule for the valuing crude oil produced on federal lands that will take effect on June 1, 2000.  A complete copy of the rule is available in the March 15th Federal Register.  According to the MMS press release, the new rule would increase government revenues by nearly $67.3 million per year and would share close to $2.4 million of these revenues with California, Wyoming, New Mexico, Louisiana, North Dakota, Texas, Montana, Colorado, and Utah.  "About 90% of the additional revenues will come from the major integrated oil companies.  There are administrative savings in the new rule, therefore, the net increase to the industry will be an estimated $63.5 million."  The new rule would allow independent producers to sell under arm's-length contracts as they did under the 1988 rule.  After the June 1 effective date, companies will have a three month interest-free grace period to allow them to make system chance needed to implement the new rule.

Oil Valuation Legislation Introduced in the 106th Congress
Several bills on the royalty issues have been introduced, but few of them have seen much action after their introduction.  On May 19, 1999, the House Subcommittee on Government Management, Information, and Technology held an oversight hearing to look at the Minerals Management Service's royalty valuation program.  Other than a couple of hearings in May 1999, the oil valuation debate seems to be hottest in appropriations bills.


Controversy Surrounding MMS Oil Valuation Rulemaking
The Mineral Management Service's (MMS) proposed oil royalty rule, already mired in Congressional moratoriums and oversight, has hit another brick wall amongst allegations of impropriety.  The controversy arose from payments of $350,000 from the Project on Government Oversight (POGO) to two federal employees, Robert Bermen of the Interior Department and Robert Spier, a former employee of the Department of Energy.  The two men were members of an interagency task force that investigated allegations of underpayments in federal leases in California, and the payments were a reward from POGO when it won a settlement over oil royalty issues.  The two were known to support the current MMS oil royalty rule, and their potential role in the rulemaking has three members from the Senate Committee on Energy and Natural Resources asking the Department of the Interior to suspend oil valuation rulemaking until the investigation of the two employees is complete.  Senators Frank Murkowski (R-AK), Pete Domenici (R-NM), and Don Nickles (R-OK) said in a recent press release, "To now discover that the two federal employees integrally involved in the rule change, have financially benefited from their advocacy strikes at the heart of the department's rule and calls into question the propriety of the department's administrative process."  In a hearing on May 18, 1999, before the the Senate Energy Research, Development, Production, and Regulation Subcommittee, Thomas Kitsos, Deputy Director of MMS, stated that to his knowledge neither of the two men had any role whatsoever in the current rule. The transcript and complete written testimony of the panelists is available in PDF off to Senate Energy and Natural Resources Minority website.

Background
In the nearly three years since President Clinton signed the Federal Oil and Gas Royalty Simplification and Fairness Act into law, the Minerals Management Service (MMS), oil industry, and Congress have been engaged in a debate over how to develop regulations from the law. The debate involves determining what constitutes fair valuation of oil and gas royalties and how to simplify the collection of royalties from federal lands. Central to the debate is the choice of a collection system -- whether to take royalties in-kind or in-value. Many in the oil industry support a royalty-in-kind system. Although MMS regulations allow the agency to receive royalties in-kind, the agency is reluctant to take all royalties that way, especially in remote regions and from low-yield marginal wells. More information on events in the 105th Congress is available at the AGI summary on royalty-in-kind.

Sources: Environmental and Energy Study Institute Weekly Bulletin, Department of the Interior, Thomas: The Library of Congress website, Hearing Testimony


Please send any comments or requests for information to the AGI Government Affairs Program at govt@agiweb.org.

Contributed by Kasey Shewey White and Margaret Baker, AGI Government Affairs, and AGI/AIPG Geoscience Policy Intern Scott Broadwell.

Posted June 24, 1999; Last updated May 11, 2000


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