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Project on Government Oversight




States and Indian Nations Say "ENOUGH IS ENOUGH" - Let Interior Issue Its Oil Royalty Rule

July 9, 1998 


An amendment to the Senate Interior Appropriations bill bans the Interior Department from using funds in fiscal 1999 to issue rules needed to protect the public's royalty income. The amendment will cost the public at least $66 million a year and probably more than $100 million a year in income used for education and the environment.

Interior's proposed rule would base royalties on real world market prices, rather than prices picked by the companies themselves. The Interior rule would impact the major oil companies -- Big Oil; smaller independents would continue to pay on the basis of their gross proceeds.

Senator Barbara Boxer (D-CA) will introduce an amendment on the floor to strike the ban on issuance of final oil rules from the appropriations measure.

While some states have said that Interior has reached a fair compromise with industry under its proposed rules, others have voiced concern that MMS has already gone too far in accommodating industry requested changes. States have asked MMS to move forward to implement the rules.

Other land owners across the country -- States, private land owners and Native American tribes -- are rising up, in some cases filing law suits, and demanding payment based on value -- the full value owed to the land owners. The State of Texas has completed a settlement with Chevron. Private royalty owners in Alabama have settled with Mobil. ARCO is paying New Mexico and Texas. All of these States are being paid royalties based on the NYMEX. The State of Louisiana is being paid by all leaseholders based on the spot prices at St. James.

The Project On Government Oversight investigates, exposes, and remedies abuses of power, mismanagement, and subservience to special interests by the federal government.

POGO began its work uncovering the underpayment of oil royalties drilled from federal land in 1994. Oil industry lobbyists have been working hard to defeat the Department of Interior's Rulemaking that would end future underpayment of royalties. This POGO Alert is part of our ongoing efforts to force the oil industry to pay what it owes to the federal government.

The views of States and Indian Nations, summarized below, are consistent with the positions being advanced in support of the Boxer amendment by education organizations, environmental organizations, and taxpayer organizations.


The State of Alaska Department of Natural Resources wrote: "We do 'have a dog in this fight.'. . .The proposed rules would establish royalty value using widely published crude oil prices instead of relying on the posted prices set by the lessees themselves. . . The proposed [royalty-in-kind] legislation is a means to circumvent MMS's proposed rules and procedures. . . MMS has attempted to set the value of its royalty against the prices in an independent market where oil is traded competitively. . . The approach taken by MMS to simplify the calculation of royalty value under its proposed rulemaking under the FRSA [Federal Oil and Gas Royalty Simplification and Fairness Act] will better protect Alaska's interests."1


The California State Controller's Office (SCO) wrote: "Throughout this rulemaking, SCO has supported MMS . . . SCO cannot, however, support MMS's current proposal. It is of vastly different character and, indeed, takes a different direction by tipping the balance away from protection of the public's royalty interest in favor of private interests. The beneficiaries of MMS's current proposal are the very companies whose conduct precipitated the need for this rulemaking."2

The City of Long Beach, as Trustee for the State of California testified: "I would like to take this opportunity to commend Senator Barbara Boxer and Robert Armstrong . . . for their efforts to ensure that the federal government and interested states receive market value for crude oil produced from federal leases. . . I am particularly grateful for her efforts to repeal the recently passed rider to an appropriations bill that prevents MMS from instituting changes to its crude oil royalty regulations. . . The major oil companies have created the crisis in crude oil valuation today. The crisis is caused by the failure of the major oil companies to post prices at the market value of crude oil . . . The current crisis was not created by MMS."3


The Louisiana Department of Natural Resources (DNR) wrote: "To sum up, DNR is supportive of MMS's attempt to value NAL [non-arms-length] production in a more certain, timely, and accurate manner than provided in the current regulations. DNR is also supportive of a rule that allows true, legitimate sellers of oil at arm's length to remain on gross proceeds. [As the MMS proposed rule provides.]"4


The Navajo Nation Minerals Department wrote: "The Navajo Nation requests you to take into highest regard, your moral obligation to protect the mineral resources of Indian nations by eliminating any language which bars the MMS from finalizing any proposed crude oil valuation regulations on Indian lands and to prevent any similar language that would bar the MMS from finalizing regulations in the future."5


The State of New Mexico Taxation and Revenue Department wrote: "First and foremost, the Minerals Management Service (MMS) should be commended for the effort they have made in developing oil valuation rules that are fair to all interested parties. They also should be commended for recognizing an issue and following through with it to resolution, in an environment where litigation abounds, unfounded criticism is made public and political mechanisms are used to mandate positions. . . In concluding, the Department requests that the MMS move forward in promulgating this proposal."6

The New Mexico State Land Office (SLO) wrote: ". . .any increases in crude oil revenues that would result from revised valuation methodologies would directly benefit education funding in this state. . . The New Mexico Land Office continues to support the MMS in pursuing its proposed valuation regulations for oil and adamantly supports the discontinuation of posted prices to value federal royalty crude oil.. . . In short, the New Mexico SLO urges the MMS to reconsider regulated use of NYMEX indexing, with appropriate adjustments" [the NYMEX proposal was dropped by MMS at industry's request]."7


The Texas Land Commissioner wrote: "If Senator Hutchison wants to use Texas as the model for this type of policy, then she should support the Mineral Management Service in getting the real market value of the oil and charging royalty rates like we do in Texas. With Secretary Armstrong over MMS, it's clear the oil companies are afraid he will do for the American people what he did for Texans two decades ago. I stood by Armstrong then, and I stand by him now."8


The State of Wyoming Office of the Governor wrote: "Wyoming is again availing itself of the opportunity to comment further on the proposed crude oil valuation rule. The Minerals Management Service must be complimented on its obvious efforts at arriving at a fair and practical solution for this difficult problem."9


1. John Shively, Commissioner of the Department of Natural Resources, Memorandum to the Office of the Governor, State of Alaska, April 27, 1998.

2. Lee Ellen Helfrika and Henry M. Banta, Law Offices of Lobel, Novins & Lamont on behalf of the California State Controller's Office, Letter to Minerals Management Service, March 23, 1998, 11.

3. M. Brian McMahon, Testimony on behalf of the City of Long Beach as Trustee for the State of California before the Subcommittee on Energy Research, Development, Production and Regulation, U.S. Senate Committee on Energy and Natural Resources, June 11, 1998, 1-2.

4. Jack C. Caldwell, Secretary of the Department of Natural Resources of the State of Louisiana, Letter to Minerals Management Service, May 28, 1997, 3.

5. Perry Shirley, Assistant Director of the Navajo Nation Minerals Department, Letter to the Honorable Ralph Regula, Chairman of the U.S. House Interior Subcommittee on Appropriations, June 8, 1998, 2.

6. John Chavez, Secretary of the State of New Mexico Taxation and Revenue Department, Letter to the Minerals Management Service, March 19, 1998.

7. Ray Powell, State of New Mexico Commissioner of Public Lands, Letter to Senator Don Nickles, Chairman of the Subcommittee on Energy Research, Development, Production and Regulation of the Senate Energy and Natural Resources Committee, June 10, 1998.

8. Garry Mauro, Texas Land Commissioner, Letter to the Editor, The Austin American-Statesman, May 12, 1998, A8.

9. Jim Geringer, Governor of the State of Wyoming, Letter to the Minerals Management Service, October 28, 1997.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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