Skip to Main Content
Project on Government Oversight
 

 

 

 

Fact Sheet on Royalty-in-Kind in H.R. 2436, the Energy Security Act

June 24, 2001 

 

New Oil Rule Collects $70 Million More Annually - Stops Cheating. In June 2000 the Department of Interior implemented a final rule that collects $70 million more annually from companies drilling oil from federal and Indian lands. As a result, the oil industry's decades-long practice of shortchanging the taxpayers ended. The rule came after years of public debate and litigation that forced the industry to settle with the Justice Department for $425 million.

Oil Industry Pushes Royalty-in-Kind (RIK). During the oil rule battle, the industry promoted RIK - where companies pay royalties in, for example, barrels of oil rather than dollars - as their alternative to paying fair market value under the proposed rule.

RIK Pilot Programs Have LOST Money. Interior has completed two royalty-in-kind pilot programs. Both failed, losing significant revenues compared to dollars received from programs collecting cash. According to Interior, the first pilot program to collect gas royalties-in-kind lost $4.7 million.1 Earlier this year, a second pilot program to collect oil royalties-in-kind lost $3 million, in spite of Interior's claim that it made $800,000. An independent economist discovered that Interior used old valuation standards in estimating the profit.

Expansion Of RIK Pilots Can Only Lead to Further Losses for the Taxpayer
. The two pilot programs failed despite the fact that the Interior Department selected oil and gas leases most likely to succeed in generating comparable income. Expansion of royalty-in-kind programs to leases less likely to succeed will only lead to additional revenue losses for the American people.

GAO Says RIK Won't Work For Federal Royalties. In 1998, the General Accounting Office analyzed the prospect for a successful federal RIK 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 RIK on all federal leases will cost the government $140 million to $367 million annually.2

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 manipulated the volume and heating content of gas taken from public lands in order to avoid paying royalties. The allegations call into question the wisdom of accepting any payments in-kind - until the allegations are fully investigated.

    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. Ibid. 


    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.

    # # #