If it were true that the US oil industry had profited for many years from underpayment of federal royalties, the industry would surely resist change to the royalty system. But that is not the case.
Indeed, the industry wants a new method for valuing oil for royalty calculations at least as much as the government does and readily supports change. This isn't the behavior of an industry engaged in long-term fleecing of taxpayers.
Contrary to isolated bleatings from Congress, the issue of royalty oil valuation involves no scandal. It involves controversy. It involves litigation. It involves cases in which royalty payers, in fact, did cheat. It also involves cases in which royalty payers accused of cheating, in fact, did not.
The system's problem
Such wide scope for dispute is the current system's main problem. It emerges from modernization of the oil market. The old scheme of refiner postings, the basis for current valuation, has given way to newer trading patterns. Values determined the old way naturally fall subject to increasing question.
Oil companies don't relish the time they must spend in court defending royalty payments based on postings. For that simple reason, they welcome a change in the valuation system. For the same reason, they resist a change that doesn't reduce ambiguity.
Since January 1997, the Department of Interior has been trying to replace an antiquated oil-valuation system with one that won't make values any clearer. First it tried to index oil values to futures contracts on the New York Mercantile Exchange. Now it proposes a scheme based on spot prices at market centers.
The approach doesn't solve the ambiguity problem. There would still be disputes over transportation costs and quality differentials. What's more, moving valuation points downstream of producing leases probably conflicts with leasing law. If Interior imposes the rule as proposed, industry will surely challenge it in court.
Simpler, more-definitive ways of determining oil values at the lease exist. Modern marketing methods make them practicable. But Interior has only reluctantly and partially accommodated the industry's objections to its seriously flawed plan. It has given little consideration to alternatives. And it has overstated benefits of its plan to taxpayers. The supposed savings come only if royalty somehow comes to apply to more value than the law intends.
Interior's unwillingness to fix a bad proposal raised suspicion about its motives when the issue first emerged. And its probably illegal claim to downstream values looks grabby, to say the least.
A compromise between Congress and the White House last week over Interior funding gives the department a chance to restore some of the credibility it has squandered. The compromise allows Interior to act on its proposal in 4 instead of 6 months. It thus can ram the proposal into place come March, implement the plan with changes, or propose a new plan and reopen discussion. The only possible route to valid oil valuation is a reproposal.
Demagoguery
Meanwhile, the industry must endure more of the uninformed demagoguery that Rep. Carolyn Maloney (D-NY) and Sen. Barbara Boxer (D-Calif.) have brought to this controversy. Both lawmakers cheered news of the compromise.
"It is a known fact that the oil companies have been undervaluing the worth of this oil, thereby cheating the taxpayers of hundreds of millions of dollars over the years," Boxer ranted. Maloney said the agreement "will end the sweetheart deal which lets oil companies shortchange American schoolchildren, states, and Indian tribes of millions of dollars in royalty payments each year."
Interior should discourage such irresponsible nonsense. Successful royalty reform requires thoughtful negotiation among knowledgeable adults and public confidence in the outcome. Through no fault of the oil industry, the issue for too long has looked like a playground spat.
