The contentious American issue of federal-royalty reform now heads for the courts.
Too bad. It didn't have to reach this point. The Minerals Management Service might have shown serious regard for concerns expressed by the oil and gas industry early in the controversy. In fact, that's how MMS usually operates.
But not this time. MMS started by proposing a regulatory monstrosity and has been grudgingly splitting differences ever since. Its final rules, issued Mar. 15, show great improvement from the January 1997 proposal calling on all producers to use futures prices to determine oil values in royalty calculations. But they still, because MMS wouldn't retreat from its insistence on overhauling a system that only needed repair, create more problems than they solve.
Industry's suits
So on Apr. 16, the Independent Petroleum Association of America filed suit in the US District Court for the District of Columbia against MMS and its parent agency, the Department of Interior. The American Petroleum Institute filed suit in the same court Apr. 21 and said it will coordinate the legal challenge with IPAA.
The suits accuse MMS of exceeding its statutory authority and say that the final rules are, among other things, inconsistent with existing contracts.
A major issue remains aggressive MMS interpretation of the so-called duty to market. The final rules in effect say that the value of much production should be determined for royalty purposes at market locations significantly distant from the wellhead. The producer, in service to the implied obligation to market production on behalf of the royalty owner, thus would pay royalty on costs of moving production to those locations and of effecting sales there.
MMS says the leaseholder's duty to market justifies inclusion of those costs in the value of production. In comments recorded before publication of the final MMS rule, industry representatives argued that leaseholder obligations end at lease boundaries.
So the court will make this important call. The court will settle conflicting claims to significant economic value related to production on federal leases. It shouldn't have come to this. But IPAA and API are right to resort to litigation. MMS wasn't going to budge.
It would be dangerous, however, to expect the controversy to end with the court decision. The trade groups and the industry they represent need to guard their political flanks.
One reason to be wary is that royalty reform has the attention of Congress, where chronic industry detractors have unfairly tried to turn the issue into a scandal. It's not. The industry supports reform and tried to deal constructively with MMS to help bring it about. MMS had other ideas-mostly its own. And it did nothing to quiet shrill demagoguery from the Democratic likes of Sen. Barbara Boxer of California and Rep. Carolyn Maloney of New York. Whatever the outcome in court, royalty reform probably hasn't received its last attention from Congress.
Another reason for concern is that some political groups appreciate regulatory heavy-handedness when it's directed at the oil and gas business. Environmentalist pressure groups certainly fall into this category. Organized labor does, too-if not naturally then by growing association with environmentalists and the factions sprouting up to resist world trade and international businesses. These are core constituencies of Vice-Pres. Al Gore in his run for the US presidency.
And the administration of which Gore is part is doing its level best to score political points for him. Bruises on the oil industry's shins win spontaneous applause from the crowds Gore needs. The Environmental Protection Agency has done its over-reaching part in this regard-and has the legal problems to show for it.
Isolated lurch?
Political grandstanding like that doesn't fit the MMS style. Normally cooperative with the offshore oil and gas industry, MMS regulates effectively without getting in the way.
Here's hoping that its behavior on the royalty reform issue is just an isolated lurch into foul political waters from which the Boxer and Maloney howling made recovery impossible. If that's all it is, here's hoping that the court gives MMS the spanking it deserves and that Congress occupies itself with other crusades.
The alternative possibility, that MMS set a new pattern for itself on the royalty reform question, is too dreadful to ponder.
