OIL AND GAS ROYALTY REPORT: "YELLOW LIGHT" FOR FEDS

May 10, 2004
Press Release

WASHINGTON, DC - The General Accounting Office (GAO) has determined that the Department of the Interior's pilot oil and gas program allowing the government to take royalties in barrels of oil rather than cash has produced mixed results, according to U.S. Representatives. Nick J. Rahall (D-WV), who serves as the Ranking Democrat on the House Resources Committee which has jurisdiction over oil and gas development on federal lands, and Carolyn Maloney (D-NY).

The GAO report (PDF of report), one in a series that Congressional watchdogs Rahall and Maloney requested, comes in sharp contrast to Interior's Mineral Management Service's (MMS) public statements trumpeting the financial success of the royalty-in-kind (RIK) pilots in Wyoming and the Gulf of Mexico. It also calls into question why the MMS is indicating that the government is advancing the program past a pilot stage based on limited revenue research.

GAO says MMS's analyses contain "limitations," meaning the program is too new to generate significant data to determine its viability, and thus far, it has a record of "mixed performances."

Reps. Rahall and Maloney have urged extensive studies of RIK before determining its future, because rushing judgment on the performance of this program could cost taxpayers millions.

Rahall asserted, "As this country is suffering record deficits, the government should be taking extra care with taxpayer dollars - not trusting its greedy oil and gas industry friends to share its piggy bank."

"MMS took incomplete and shaky data and ran with it, as if it were a green light," said Maloney. "They should look at GAO's report as a very cautious yellow light - if that."

Maloney continued, "It's taxpayer money they're playing with, so if we aren't absolutely sure that they're generating more revenue with this experimental system, then we should just slow down. I would say to MMS, 'Look at the GAO report, and curb your enthusiasm.'"

MMS has highlighted the positive revenue data from RIK studies to make its case, including data showing that administrative costs are substantially lower under RIK. GAO pointed out that those same studies contain just as much troubling data, such as a $7.2 million loss in revenues compared to cash royalties for Gulf of Mexico oil sales.

Among the findings of the GAO report were:
* MMS incurred a $1.7 million operating cost in FY2003 to conduct RIK sales
* The Minerals Revenue Management organization saw a budget decline of about 7%
* RIK oil sales in Wyoming increased revenues by 2.6%, for a gain of $967,000
* RIK gas sales in the Gulf of Mexico increased revenues by 2%, for a gain of $4 million
* RIK oil sales in the Gulf of Mexico decreased revenues by 5.5%, for a loss of $7.2 million.

Background
In 2000, MMS implemented an oil valuation rule that forces oil companies to pay the federal government fair market value instead of lower "posted prices" set by the industry for oil and gas removed from federal and Indian lands. The rule change resulted in the federal government (and state governments) collecting millions more annually in oil and gas revenues. As a result, the industry's decades-long practice of shortchanging the taxpayers ended. The rule change came after years of public debate and litigation that forced the industry to settle with the Justice Department for $425 million.

During the oil rule battle, the oil industry promoted RIK, under which companies pay royalties in barrels of oil rather than dollars, as their alternative to paying royalties based on fair market value under the rule. In response, MMS has been conducting RIK pilot programs to determine the effectiveness of these proposals.

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