FED AGENCY MOVES TO MAKE THINGS RIGHT:

Oil Companies Fail To Pay Full Public Royalties

BY KRISTINE HOLLAND

NATIONALLY, oil companies may owe the federal government up to $1.3 billion, according to a report released in August by the Project for Government Oversight (POGO) and U.S. Rep. Carolyn B. Maloney (D-NY).

This non-profit organization and Congresswoman have joined forces to investigate the undervaluation of oil pumped from Government-owned lands. Rep. Maloney says it is time to start collecting the money. "The IRS shows no mercy with us. We should show no mercy to oil companies who are drilling oil from American soil," she said.

According to Maloney, the POGO report shows how the federal goverment has ignored the problem, while states have led the way in gathering oil royalties. Six oil companies paid California $350 million dollars, and Alaska has collected more than $3.7 billion in penalties and fines.

"With very limited resources, the states have done a remarkable job in aggressively going after unpaid oil royalties. At the same time the federal government has been idle," she said. "Yet one of the roles of government is oversight."

Maloney points to the Mineral Management Service (MMS), which manages the country's gas, oil, and other mineral resources and collects and disburses $4 billion annually, but it has failed to collect all that is due to the taxpayers.

Danielle Brian, director of POGO, charges that the MMS doesn't want to change. "They have been protecting the status quo for a long time," she said, "I think their constituents are the oil companies and not the taxpayer. It is only after a lot of pressure that they have started to make progress."

Jim Shaw, associate director of royalty management for MMS, disagrees. "If you look at the record, the number of appeals that have gone to court, I think you'd have trouble making an argument that we've gone to bed with industry," he said. "The companies we've taken to court wouldn't agree with that statement."

He also doubts the accuracy of many of the POGO report's findings. "A number of allegation made by POGO are based on concepts and theories, not on fact. I'd be more concerned if the allegations were made by experts," he said. "Who in POGO is an expert on oil royalty management? Rep. Maloney is certainly not an expert on oil evaluation. I want the expertise of our program given credit."

POSTED PRICES

The problem stems from the difference between the price at which the oil companies say they will sell oil and the price at which they actually sell it.

Oil leasing companies bid for the opportunity to produce oil on private, state, federal, and Native American property. The oil leasing companies give the owners a percentage of the oil's worth as royalty.

Leasing companies often use "posted prices" as a way to judge the price of royalties. These posted prices are often below market prices. Many companies manipulate the market by selling oil at the posted price with bonuses.

Before the 1980's it was hard to tell if the posted prices were accurate. In 1983, the oil companies began to trade on the New York Mercantile Exchange. It became apparent that the posted prices were different than the actual market value of the oil.

POGO and Rep. Maloney advocate the use of the Alaskan Slope Prices, which have been consistent for a number of years. The MMS is currently considering how to measure prices in the future.

Most of the oil companies contracted by The Sentinel gave no comment on the posted oil price issue. However, Paul Weedity, spokesperson for Texaco, said, "This is a extremely complex issue involving many companies. In the MMS interagency study on California, they indicated in their first report that there were a wide variety of alternatives to evaluate royalties." He also said that Texaco disagreed with a number of the findings from the report although he wouldn't state which ones.

THE HISTORY

During the 1970s, oil royalties were collected by the Geological Survey. Unfortunately, most of the people employed were technically minded and not trained to be collectors in the decentralized organization.

Earlier, when oil's value was lower-two dollars a barrel-the collection was less important. However, when oil prices began to skyrocket in 1974 and again in 1979, collection of the large sums of money owed by oil companies became more of an issue.

There have been huge problems with oil theft and general accountability of funds.

During the Carter administration, a blue ribbon commission decided to make a number of changes, including creating a separate entity , the MMS, a centralized agency run by accountants, in 1982.

Representative Maloney says that during the Reagan and Bush era, oil companies gained greater control and the MMS. During that period critics believe the MMS began to cater to the oil companies' needs. According to Rep. Maloney, the MMS has only recently begun to crack down on oil companies.

"Many MMS employees consider oil companies [to be]clients," she alleges. "Collectors need to be unbiased. There are still so many people from Reagan and Bush's administration in the MMS, and they are resisting aggressively a stand against oil companies."

In response, Shaw says, "It may be a fair argument to say that during '80's with the Republicans in power and with the many interpretations of the rules, we may have been somewhat on the industries side. And nationally it's probably fair to say that we were slow to pick up that the posted rate was different then the premiums."

"Sometimes goverment agencies are slow to pick up on changes. We don't buy and sell in the market places. However, as a government agency we are obligated to follow our own rules."

According to Shaw, the rule has been that businesses trading at arm's length-businesses that are non-related-would have to pay the posted price or premiums, whichever was higher. However, with companies that were not at arm's length, companies selling internally, MMS used a series of benchmarks to regulate the price. The first benchmark used has been the posted price.

Currently, according to Shaw, MMS is in the process of changing this rule so that market prices such as the Alaskan Slope price can regulate the industry. Until the rule is changed they must follow the old rule.

"We probably could have changed the rule earlier but we are changing it now," he said.

DIFFERENCE IN FINDINGS

In POGO's first report, focusing on California. they stated that oil companies owed the federal goverment $856 million. In turn, MMS submitted their own report that concluded that oil companies owned $440 million. The reasons for the price difference have been debated by POGO and MMS.

In the introduction to their new report, POGO said, "We commend the Department of the Interior for this initial effort to collect unpaid royalties, yet the $440 million is just a portion of the total amount [owed]."

The price difference is due to several factors, said Shaw. First, the years covered by the reports are different. POGO's covers 1978-1993 and MMS covers 1980-1997.

Secondly, from 1980-1988 the rules for MMS were ambiguous so MMS has more leeway in interpreting, but the rule became very specific after 1988. As it is, the courts may not agree to follow their new interpretation from 1980-1988, he says. Finally, two companies reached settlements in 1998 and 1994 before th issue of oil royalties came to the forefront.

GLOBAL SETTLEMENTS

"Global settlements," which resolve all the issues a company is facing, have been a source of contention for POGO, and Rep. Maloney. Rep. Maloney says that such settlements have kept American taxpayers from getting the money due from oil companies because the settlements didn't include the issue of unpaid royalties. "The problem with global settlements is that undervalued oil issues are not addressed, so we sign away our right to millions of owed dollars," says Rep. Maloney.

In 1994, Exxon signed a global settlement for $44 million. However, Rep. Maloney says that $200 million in undervalued oil was not considered in the negotiations. Shaw, however, maintains that $44 million was an excellent amount to settle for considering that Exxon had been to court before and won.

When Shaw started working for MMS in 1992 he says there were thousands of cases in appeals and no settlements. MMS didn't have enough lawyers to cover all the cases. In 1993 MMS decided to try alternative dispute resolution, or ADR, which allows MMS to bypass extensive legal processes and do global settlements.

Through global settlement MMS has won large sums from oil companies; one was for $150 million. Because the unpaid oil royalties have become a big issue, the MMS decided as of April of this year to abolish global settlements and rely on issue-specific settlements that won't close the time period of issues.

NATIVE AMERICAN TRIBES

While several states have made great strides in recovering oil royalties, the Native American tribes have had less success because of their lack of funds. According to Brian, the responsibility to collect these funds falls back on the Federal government.

"It is the Federal government's responsibilities to collect on behalf of the Indian tribe. In fact there is more concrete responsibility to them than to the state or taxpayer," said Brian from POGO.

In a letter addressed to David Guzy of MMS, the Navajo Nation stressed that the federal government has a trust responsibility with the Indian Nations from treaties, statutes, orders, legal decisions, and historical relations. "The Trust Responsibility imposes on the Federal Government the duty to remain faithful to, and advance the interest of ,Indian Nations," the letter said.

John Smith, Chairman of the Tax Commission on Wind River Reservation in Wyoming, says that the MMS hasn't been very helpful. "It is a big bureaucracy that doesn't take into consideration the needs of the local people," he said.

In the last quarter he has sent out demand letters for $300,000. He claims that almost every oil provider underpays. Most of the work to gather the money falls on his office, he says. He believes MMS favors industry, instead of them.

"They are soft on industry," he said. "The MMS leans a little more to appeasing industry than meeting our needs."

MMS held a meeting in August to discuss the concerns of the Indian tribes. However, Smith says that the meeting was a new event.

Shaw says that while there may be a few tribes disgruntled by the MMS's role in collecting oil royalties, the majority are satisfied. He remembers when the Secretary of the Interior pledged to abolish the MMS in 1995. Many Indian tribes showed up to speak on behalf of MMS.

According to Shaw, on September 23, the MMS proposed a new natural gas rule for Native American land that will allow the tribes to use published indexed prices. "This is the first time that MMS has declared a separate rule for Native American land than Federal," he said. "This was done to address the kinds of concerns that people have been raising."

CHANGES AT MMS

Based on information given in a report released by an interagency team in May, MMS says it will collect undervalued royalties in California from 1980 forward. Since 1980 there have been more than 100 oil companies working in California, but 20 of them account for 97 percent of the oil production from federal property. MMS had decided to focus on this top twenty list. MMS is starting to issue bills and expects to conclude all audits and billings within a year after all information comes in.

Recently, the MMS announced that there will be several changes nationwide. In June of 1996 the MMS instructed its auditors to consider oil valuation issues in all its audits, leave audits open, and consider the premiums instead of posted price for evaluating royalties. They will also hire private consultants to study oil valuation outside California to see whether posted prices are valid.

Bob Bob armstrong, Assistant Secretary for Land and Minerals Management, says that MMS is committed to addressing issues. "This department and administration do not shy away from the issues, and we are moving forward to resolve this matter. We asked the interagency team to tackle a difficult issue," he said.

"With the cooperation of the State of California and with access to previously court-sealed documents, the team was able to look at the issue in a way that had not previously been possible. We believe this is the best course of action to make certain the American public and California get what is due."

Congress also recently made changes when it passed the Oil and Gas Royalty Reform Bill, which poses a seven-year limit on the time period that the MMS can collect undervalued oil. It is not retroactive. "I objected to the bill. They changed it and took out the seven-year restriction in the past but kept it for the future," said Ms. Maloney. "I still think the seven-year restriction is bad for the future. What happens if we find a problem seven years after it happened?"

Right now Rep. Maloney is working on changes of her own for the MMS. Rep. She says she is planning a bill to move the collection of oil royalties from the MMS to the non-tax division of the Department of the Treasury. Moving the collection from MMS to the Treasury probably wouldn't change things much, according to Shaw. "We can move our program anywhere. This idea has been talked about for years."

Monies collected from the oil companies will go into the federal government's general fund and will conceivably offset revenue needs from income taxes. But on the other hand, the oil companies may pass on their extra expenses from increased government royalties to the public in the form of higher prices for oil and gas products, which in turn could inflate the costs of goods made using those products. Assuming these two effects occur from fair royalty payments, then citizens who consume (or cause to consume) least oil and gas shouldbenefit the most.


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This story was published on Thursday, October 3, 1996.