DEMAGOGUERY OVER ROYALTY REFORM

Over the not-so-complex issue of oil valuation for royalty calculation, US producers have become subject to classic demagoguery.

In what has become a nasty controversy, the federal Department of Interior and its Minerals Management Service have done one right thing and two wrong things.

The right thing is to have acted on questions about the validity of using posted prices as an expression of value on which to base federal royalties.

The first wrong thing is to have proposed an unworkable remedy then refused to make it right.

For all the name-calling over royalty reform, there is not much disagreement over the basics.

The industry agrees that posted prices have lost their utility as indicators of fair market value at the lease, on which royalties are supposed to be based. Market changes have made that so.

Readily acknowledging the problem, therefore, the industry has supported reform of valuation procedures.

What it has opposed is Interior's flawed approach to valuation. The department at first wanted to index oil values to prices of futures contracts traded on the New York Mercantile Exchange. It later changed the value base to spot prices at market centers.

The change doesn't solve the problems of validity and complexity. Values calculated on the basis of proxy crudes adjusted for location and grade would be no more valid and no less subject to challenge than those derived from low-traffic postings.

Furthermore, the Interior scheme fixes the value downstream of the point of production, a money grab that conflicts with the statutory requirement that royalty be based on value at the lease.

Interior has stubbornly clung to its fatally flawed approach. Worse, it has allowed the industry's support for reform to be portrayed as a confession of guilt. That's the second wrong thing it has done in all this-and maybe the worst.

Congress has addressed Interior's intransigence by denying funding for the royalty reform program. When it first imposed the budgetary moratorium, it directed Interior to restudy the issue. The department mostly balked.

So the moratorium comes up annually at budget time, giving demagogues in Congress the chance to flail unfairly at an industry that wants to fix the problem, not replace an old problem with a new one.

Example: The headline of a press release from Sen. Barbara Boxer (D-Calif.) depicts the issue as "Big Oil's 'Rip-off' of Oil Royalties." In a rich demonstration of her misunderstanding of the issue, she rails about making oil companies "pay their fair share of oil royalties when they drill on federal land." Pay royalties when they drill?

Example: Rep. Carolyn Maloney (D-NY) calls the moratorium a "special interest rider." When the Senate early in September approved an amendment, sponsored by Kay Bailey Hutchinson (R-Tex.), extending the funding moratorium, Maloney declared, "I am deeply disappointed that the Senate put the interests of big oil ahead of America's schoolchildren." Schoolchildren?

It is, of course, too much to hope that liberal politicians from New York or California would ever bother to learn anything about the oil business before trashing it for the grandstands.

But Interior's unworkable proposal has provided too convenient a platform for the demagoguery. Its handling of the issue, from the wholesale misconception apparent in the original proposal to the stonewalling of Congress and refusal to budge off an indefensible position, has been irresponsible.

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