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Steve Colby

Steve Colby

Posted: October 3, 2008 05:39 PM

Drilling Would Help No One But Mismanaged Oil Industry

Oil companies pump millions of barrels of oil from US Federal lands... While American Taxpayers receive pennies in return. Why?

Listening to oil industry TV commercials and some campaign speeches, it's easy to get the impression drilling for oil and gas on US public lands is a "no brainer".

Facts are bandied about American support for drilling new oil wells and the quantities of oil and gas that lay under America.

With all the hoorah, what you don't hear is claims that new oil and gas wells will reduce the price of gas at the pump or your home heating bills.

Since the oil industry is not known for magnanimous gestures, we're left with the question "What's in it for them?". Here's a little insight:

(1) A 2007 Government Accounting Office (GAO) report on Gas and Oil Royalties found:

"In fiscal year 2006, oil and gas companies received over $77 billion from the sale of oil and gas produced from federal lands and waters, and the Department of the Interior's Minerals Management Service (MMS) reported that these companies paid the federal government about $10 billion in oil and gas royalties. (Royalties are usually about 12.5 % to 16.7% of the final value.)

"Based on results of a number of studies, the U.S. federal government receives one of the lowest government takes (percentage of cash flow) in the world. Collectively, the results of five studies presented in 2006 by various private sector entities show that the United States receives a lower government take from the production of oil in the Gulf of Mexico than do states--such as Colorado, Wyoming, Texas, Oklahoma, California, and Louisiana--and many foreign governments." For example: The states above receive royalties of between 51% to 57%; United Kingdom: 52%; Norway: 76%; Australia: 61% and Alaska: 53%. (GAO-07-676R Oil and Gas Royalties, 2007)

(2) In 1995 Congress passed the Deep Water Royalty Relief Act (DWRRA), which granted a royalty "holiday" to oil and gas companies drilling in deep waters for leases sold between 1996 and 2000. The act reduced the amount of royalties that companies had to pay for drilling in American waters in the Gulf of Mexico. The move was seen by many as an incentive to get petroleum companies to drill for oil and natural gas and keep energy production inside the United States. Further royalty relief came after the Act expired in 2001, with royalty incentives granted to shallow-water producers in 2004. In 2005, President Bush signed an energy bill that contained $2.6 billion in new tax breaks for oil and gas drillers and a modest expansion of the 10-year-old royalty relief program.

(3) In a 2007 report to Congress, the GAO noted Oil and Gas Royalty Relief "Will Cost the Government Billions of Dollars...". Under the DWRRA, companies would not have to pay the normal royalties except when market prices reached $34 a barrel for oil and $4 per thousand cubic feet for natural gas. MMS estimated in October 2004 that foregone royalties on the 1996, 1997, and 2000 leases could be as high as $60 billion." In 1998 and 1999, the MMS issued over 1,000 leases to oil and gas companies which omitted the clause forcing companies to pay royalties if oil prices rose above the price threshold. As of 2007, the error had already cost the federal government over $1 billion, and was estimated to ultimately cost as much as $10 billion. (GAO-07-590R Royalty Relief &

(4) During the mid-1990S, whistle blowers and the Project on Government Oversight (POGO), a government watchdog group, filed suit against sixteen oil companies for failing to pay their required royalties. From 1998 to 2001, a dozen major companies, while acknowledging no wrongdoing, paid $438 million to settle charges that they had intentionally misreported their sale prices for oil (in order to pay lower royalties). POGO eventually issued several reports finding hundreds of millions of dollars in uncollected royalties. (

(5) In the early 2000s, Bobby Maxwell, a seasoned MMS auditor, discovered that Kerr-McGee Oil and Gas Corp. was underpaying its royalties by millions. According to Maxwell, his superiors at the Interior Department discouraged him from pursuing the money from Kerr-McGee. Maxwell filed a lawsuit in 2005 against Kerr-McGee in a Denver, Colo. federal court under the False Claims Act. The suit accused the company of cheating the government out of over $7 million in royalty payments and contended the Interior Department ignored audits which clearly showed Kerr-McGee's wrongdoing. Soon after, the Interior Department eliminated Maxwell's job in what it termed "reorganization."

ExxonMobil, Chevron, Shell and ConocoPhillips all sought to block Maxwell's suit, arguing before an appellate judge that the case would "open the floodgates" to suits by other federal auditors. The court, however, rejected their pleas and a trial was set to begin on January, 2007. A federal jury found that Kerr-McGee Corp. knowingly underpaid the federal government by $7.56 million in royalties. The jury ruled that Kerr-McGee sold oil to the Houston-based petroleum company Texon LP at below-market prices in a deal to reduce its royalty payments to the MMS.

In March 2007, Kerr-McGee prevailed in a post-trial motion which resulted in Maxwell's case being dismissed due to a technicality. (There have been approx. 80 whistle blower cases brought against the oil industry since 1995.)

(6) Under the Bush administration, the MMS expanded its program to take oil and gas royalties-in-kind (RIK). Under the program the government gets a portion of the oil and gas the industry takes from federal lands rather than paying royalties in cash. According to the American Petroleum Institute, approx. 40% of oil royalties are paid in kind and much of the oil taken under this program has been used to fill the federal government's Strategic Petroleum Reserve. While the merits of RIK payments are open to debate, it should be noted that following a two-year investigation, the Interior Department's Inspector General described the MMS RIK agency as a "culture of ethical failure. A GAO study says the department lacks basic procedures for monitoring the oil industry, and that these shortfalls could be cheating taxpayers out of billions of dollars in revenue.

"This report shows that the U.S. has one of the most lenient royalty collection systems in the world and calls into question whether taxpayers are getting a fair return for the resources they own," said Rep. Nick Rahall, D-West Virginia and chairman of the House Natural Resources Committee.

Bottom line... The industry buys our oil cheap and often pays us for it by giving some back... And only then when they feel like it. Sweet deal.

The information above only scratches the surface of royalty mismanagement and oil industry malfeasance. Given their past record, should we assume the oil industry has only our best interests at heart in the future?

One would think the issue of oil and gas royalty underpayment and payment abuse would be good political campaign fodder for Democrats this year but the silence is deafening. (Not so for the Republican enthusiasm for the Drill Here, Drill Now.) John McCain's recent epiphany on offshore drilling, with no stated restrictions, should land him straight in the cross-hairs.

Obama, should he decide to push the issue, can show his creds by touting his sponsorship of S.115 The Oil SENSE Act (01/2007). The bill called for the suspension of royalty relief, the repeal of certain provisions of the Energy Policy Act of 2005, and to amend the Internal Revenue Code of 1986 to repeal certain tax incentives for the oil and gas industry. (The bill died in committee.)

With much of the world's oil moving out of oil company reach through nationalization and competition, it's little wonder the industry is pushing for opening more US public resources. Given all that's at stake, is there any wonder why oil money fills campaign coffers and lobbyist accounts?


U.S. federal oil and gas royalties

GAO-07-590R Royalty Relief
Subject: Oil and Gas Royalties: Royalty Relief Will Cost the Government Billions of Dollars but Uncertainty Over Future Energy Prices and Production Levels Make Precise Estimates Impossible at this Time

GAO-07-676R Oil and Gas Royalties
Subject: Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and Other Resource Owners

POGO: Interior Staff Had Inappropriate Relationships with Oil Industry
Department of Justice, and FBI reportedly mounted criminal investigations into the RIK Program over concerns that senior government officials had been steering huge oil-trading contracts to favored companies.

U.S. inaction on oil royalties suit could have cost millions
McClatchy Newspapers

Energy Independence and Security Act of 2007 (Formerly the CLEAN Energy Act of 2007)

S.115 Oil Subsidy Elimination for New Strategies on Energy Act