California asks DOI to end royalty cutbacks for stripper, heavy oil wells

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Apr. 23 -- A top California state official Tuesday called on the Department of Interior to terminate its royalty rate-reduction program for stripper and heavy oil properties.

In a letter sent to Sec. of Interior Gale Norton, California Controller Steve Westly sharply criticized the program, saying oil prices are now high enough to kill a royalty giveaway and that the program never really boosted domestic production even when oil prices were low.

"Some of California's largest producing properties, which are operated by major oil companies, are eligible for royalty reductions," Westly wrote Apr. 22.

"From California's perspective, the only demonstrable result of these programs has been the dramatic decrease in its royalty income. Under state law, oil royalty receipts are dedicated to funding public education," he said.

Interior officials were not immediately available for comment.

Westly said that he is aware that DOI's Bureau of Land Management has taken the position that rate reductions do increase production. On the basis of an earlier BLM analysis, the original BLM rules allowing royalty incentives for stripper and heavy oil wells were extended indefinitely in 1998.

But Westly said subsequent audits by DOI's Inspector General found further interagency studies on the issue "insufficient." He also charged BLM with "administrative neglect" for not undertaking any "credible" analysis of the heavy oil or stripper rate-reduction program.

Westly noted that under both the stripper well and heavy oil-reduction regulations, the programs may be terminated when the price of West Texas Intermediate exceeds the adjusted regulatory base price for 6 months. He attached a spreadsheet to his correspondence showing that WTI had exceeded the adjusted regulatory base under both the stripper and heavy oil programs during September 2002-February 2003.

"The factual underpinnings of those programs—low crude prices—simply no longer exist. It is time to reinvest in our children," he said.

Contact Maureen Lorenzetti at Maureenl@ogjonline.com.

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