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Project on Government Oversight




Fact Sheet on Royalty-in-Kind in the FY 2002 Interior Appropriations Bill

June 21, 2001 


New Oil Rule Collects $70 Million More Annually - Stops Cheating.
In June 2000 the Department of Interior's Minerals Management Service (MMS) implemented a final rule that collects $70 million more annually from oil companies drilling oil from federal and Indian lands. As a result, the oil industry's decades-long practice of shortchanging the taxpayers was 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.

MMS Conducts Royalty-in-Kind (RIK) Pilot Programs.
During the oil rule battle, the oil industry promoted RIK as their alternative to paying for fair market value under the proposed rule. In response, MMS has been conducting pilot programs to determine if collecting royalty-in-kind (RIK), where companies pay in barrels of oil rather than dollars, would help to end disputes over oil values as the industry claims it would.

Congress Requires Fair Market Value from RIK.
In order to prevent the oil industry from using RIK programs to circumvent the new oil valuation rule, Congress required in the FY 2001 Interior Appropriations bills that MMS sell oil it receives from the RIK programs at a value "equal to or greater than royalty income recognized under a comparable royalty-in-value program."

MMS Used Old Valuation to Gauge its Profit from RIK.
MMS recently completed an RIK pilot program in Wyoming and claimed to have made an $800,000 profit from it. However, an economist discovered that MMS used old valuation standards and actually lost $3 million when compared to fair market values used under the new rule implemented in June 2000.

Rep. Maloney Proposes an Amendment to Ensure that Taxpayers Get Fair Value.
Representative Maloney has proposed an amendment that will prevent MMS from using the old valuation methodology again to compare against its RIK sales - see below.

Current Text of FY 2002 Interior Appropriations Concerning Royalties -- Pages 35-36: "Provided further, that MMS shall analyze and document the expected return in advance of any royalty-in-kind sales to assure to the maximum extent practicable that royalty income under the pilot program is equal to or greater than royalty income recognized under a comparable royalty-in-value program."

Representative Maloney's Amendment: the proposed provision requires the use of publicly available prices for valuing oil (the prices used under the new rule) instead: "Page 36, beginning at line 1 strike 'under comparable royalty-in-value program' and insert 'under the existing royalty in value program, specified in Interior regulation(65 FR 14022--March 15, 2000).'"

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