MARCH 1998 · VOLUME 19· NUMBER 3

Instead of writing the U.S. government a check for royalties on resources taken from federal land, they want to be able to pay Uncle Sam in oil and gas. The government would then have to hire a private marketer to auction these resources -- including to the same companies that make the resource "payments" in the first place -- with the proceeds going to the treasury.

Representative Mac Thornberry, R-Texas, has sponsored a bill introducing the RIK proposal. An industry task force helped draft the legislation.

Not everyone is hailing the bill as a step in the right direction. Critics such as Representative Carolyn Maloney, D-New York, say the oil and gas companies might manipulate the auction process and thereby cheat the government of its proper royalty payments. She opposes royalty-in-kind legislation, contending that the proposal includes no way of holding the industry accountable and therefore no way of ensuring that the treasury gets a fair return. Danielle Brian of the Project on Government Oversight (POGO) told a congressional panel that the "RIK program locks the federal government into the same powerless condition where we must accept whatever price is offered to us by the companies that control or own local pipelines." Brian said the industry's plan would shortchange taxpayers -- something she says it has been doing for years.

In 1996, POGO reported that oil companies owe the U.S. public between $400 million and $1.3 billion in unpaid royalties accumulated since 1985 -- not including royalties owed separately to the state of California. This translates to significant losses for both federal and state governments, which share royalty revenues equally.

Critics contend that the industry currently undervalues the price of oil and gas when determining royalty payments. Royalty payments are calculated based on "posted prices" -- prices refineries say they will pay for oil and gas they buy from the companies that produce the resources on federal land. In many of these cases the same companies own all the stages of production, so they can sell the oil and gas to a subsidiary at lower prices and then sell it on the market for a hefty profit. The companies make money, say groups like POGO, at the treasury's expense.

The Department of Interior's Minerals Management Services (MMS) oversees the collection of oil and gas royalties. In February, the agency proposed changing the benchmarks for calculating the value of oil -- a change that could increase MMS's revenue from royalty payments by at least $100 million a year. The industry would have to base its payments on commodity market prices, which are beyond the oil companies' control.

Not surprisingly, the industry opposes the MMS proposal, which it says is unworkable. The American Petroleum Institute, the oil industry's main trade group, claims that "many adjustments would be required to estimate the value of each barrel of oil produced."

The industry denies any problem exists with the current royalty payment scheme, but argues that all doubts can be resolved with the RIK approach, with the companies transferring a percentage of their oil and gas take. Then the government will get the full value of the energy resources by selling them on the competitive market.

Armed with their political money arsenal, oil and gas companies are pushing their royalty-in-kind program in Washington. They have distributed at least $4.2 million in PAC, soft money and individual contributions so far in the 1997-1998 election cycle, 74 percent to Republicans. Sixteen of these companies hired Gardere & Wynn, a Texas-based lobbying firm which is home to Patricia Dunmire Bragg, a royalty expert who in 1996 helped the industry win passage of much sought-after legislation streamlining royalties collection. The American Petroleum Institute spent an additional $2 million on lobbying expenses in the first six months of 1997.

States are watching the industry's actions closely. Many have sued oil companies seeking payments for allegedly undervalued oil -- and do not want to see the trend continue. In 1992, the state of California and the city of Long Beach won a settlement exceeding $350 million from seven oil companies, and the Minerals Management Service has billed 19 companies for $345.5 million because of undervalued oil produced in and offshore of California. Company appeals have so far prevented the agency from seeing a penny, however. In 1995, Gary Mauro, the Commissioner of the Texas General Land Office, filed a suit against nine oil companies, charging they were selling to their subsidiaries at below-market prices -- bringing in less money for public education to the state. Last year, Chevron, one of the defendants, reached a preliminary $17.5 million settlement with Texas.

The industry's litigation problems are far from over. Last month the Justice Department announced it was joining a lawsuit filed in U.S. District Court by five individuals and POGO alleging that several oil companies knowingly shortchanged the government on royalty payments. The original suit is against 14 companies, but the Justice Department chose to sue only four. The department said Burlington Resources, Conoco Inc., Shell Oil and Amoco Oil "undervalued hundreds of millions of barrels of oil." The suit was filed under the False Claims Act, which allows recovery of three times the amount of the government's losses plus civil penalties.

"In light of these allegations, the administration recommends that everyone move very, very cautiously before considering any new legislation, such as mandatory royalty in kind, that could decrease the amount of money rightfully due the American people," said Secretary of Interior Bruce Babbitt.

The American Petroleum Institute does not share Babbitt's assessment. On the day that the Justice Department joined the lawsuit, the oil industry trade association issued a report on the benefits of a royalty-in-kind program.      

-- Jennifer Schecter