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Project on Government Oversight




POGO Urges Energy Bill Conferees to Oppose Royalty-in-Kind

July 24, 2002 


Today the Project On Government Oversight (POGO) urged Energy Bill conferees to oppose provisions in the bill aimed at expanding the authority of the Department of Interior to collect in-kind payments from oil and gas companies that drill on federal and Indian lands. According to the letter which follows below, the royalty-in-kind programs "have lost money and proven to be a boondoggle for the taxpayer."

In 2000, POGO and a broad coalition succeeded in getting new Department of Interior regulations put into place to collect fair market value on oil and gas royalties. The regulations had been held hostage by oil industry allies in Congress for more than a year through budget bill riders. Since that time, the oil and gas industry has promoted royalty-in-kind in order to avoid paying full value to Indians and the U.S. Treasury.

Letter to Energy Bill Conferees July 24, 2002
Oppose Royalty-in-Kind in the Energy Bill

For ten years, the Project On Government Oversight mounted an investigation that ultimately generated extensive data showing that the oil industry was cheating on its payments for drilling oil from federal and Indian lands. After the oil industry settled for $1/2 billion in lawsuits alleging the fraud, the federal government's Department of Interior changed its rules for collecting the payments – known as "royalties" – so that the taxpayers would receive fair market value. As a result, $70 million more annually flows to Indians and the federal government.

To get out of complying with these new rules, the oil industry devised a strategy known as "royalty-in-kind" where oil and gas companies pay, for example, in barrels of oil rather than in cash. The Energy Bill now proposes expanding royalty-in-kind programs even though these programs have lost money and proven to be a boondoggle for the taxpayer. The Department of Interior's first pilot program to collect gas royalties-in-kind lost $4.7 million in Wyoming alone.1 In 2001, a second pilot program to collect oil royalties-in-kind lost $3 million compared to what the taxpayer would have received had the program collected cash. A recent Interior report on a third program concluded that Interior did not track its administrative costs and therefore did not know whether it lost money: "MMS cannot draw any conclusions about the effect on its administrative costs at this time."2

In 1998, the General Accounting Office analyzed the prospect for a successful federal royalty-in-kind program and concluded: "According to information from studies and the programs themselves, royalty-in-kind programs seem to be feasible if certain conditions are present...However, these conditions do not exist for the federal government or for most federal leases...." The report also notes that requiring royalty-in-kind on all federal leases will cost the government $140 million to $367 million annually.3

Contrary to industry claims, there is no evidence that royalty-in-kind will end litigation or disputes over how much oil and gas companies should be paying. Pending lawsuits filed by whistleblowers allege that companies have already manipulated the volume of gas taken from federal lands in order to avoid paying royalties. The allegations call into question the wisdom of accepting any royalty payments in-kind until the allegations are fully investigated.

POGO urges the Energy Bill Conferees to strike the "royalty-in-kind" proposal.

1 General Accounting Office, "Federal Oil Valuation: Efforts to Revise Regulations and an Analysis of Royalties in Kind," August 1998, GAO/RCED-98-242.

2 Department of Interior, "Texas General Land Office/Minerals Management Service 8(g) Gas Royalty In-Kind Pilot Draft," March 2002.

3 General Accounting Office, "Federal Oil Valuation: Efforts to Revise Regulations and an Analysis of Royalties in Kind," August 1998, GAO/RCED-98-242.

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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