Study renews royalty issue on California crude

The U.S. Interior Department is reviewing an interagency study that suggests 10 oil companies may have underpaid royalties on federal oil produced in California by as much as $856 million during the past 20 years. Bob Armstrong, assistant interior secretary for land and minerals management, and Cynthia Quarterman, director of the Minerals Management Service, will review the findings and recommendations of the study. It was prepared by personnel of the Interior, Energy, and Commerce departments.

May 27, 1996

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Bob Armstrong, assistant interior secretary for land and minerals management, and Cynthia Quarterman, director of the Minerals Management Service, will review the findings and recommendations of the study. It was prepared by personnel of the Interior, Energy, and Commerce departments.

Interior's solicitor, the Justice Department, and California officials also will review the findings.

Armstrong said, "We are reviewing the team's recommendations and will decide on what action we will take as soon as possible."

The findings

The interagency report recommended that MMS focus its collection efforts on about the 10 largest producers of federal crude in California. It did not reveal the names of the producers but cited investigations of Texaco and Shell. A spokesman said Interior could not disclose the names of the firms at this time.

The initial report said, "During the period under review, the bulk of California crude oil production was not sold. Rather, it was moved through intracompany transfers, straight exchanges, and buy/sell contracts."

It also said straight exchanges and buy/sell transfers are not arm's length sales and thus cannot be used to set royalty values.

"A large proportion of California oil production is either exchanged between the major integrated firms or moves internally between their affiliates.

"For the relatively small volume of oil that was sold or purchased outright, payments of premiums above posted prices occurred frequently. Further, auditors informed the team that lessees usually paid royalties on posted prices. To the extent that this is true, lessees' royalty payments on arm's length sales reflected less than their gross proceeds.

"Also, oil not sold under an arm's length contract was often undervalued for federal royalty purposes because, at a minimum, it did not reflect the price received for oil produced from the same field or area and sold under arm's length contracts. Few of the various types of contracts used in the California oil market appear to be arm's length."

How it began

Interior said current concern that oil firms undervalued their oil production for royalty purposes reflects longstanding allegations by California and Long Beach that oil producers acted to keep posted prices unreasonably low, thus lowering royalties paid to the governments.

In the mid-1980s, MMS, the General Accounting Office, and Internal Revenue Service conducted independent investigations. Information available at that time did not prove federal oil was undervalued at posted prices.

But after ARCO, Chevron, Shell, Mobil, Texaco, and Unocal-among seven oil companies involved in California and Long Beach lawsuits-settled out of court in 1993 for $345 million, Interior officials discussed the need for further review with California's commissioner of public land.

Interior formed the interagency team in 1994. Later, the state helped the team obtain company documents from the California lawsuit, which the court had sealed. After examining the records, the team ordered specific audits and retained private consultants to provide more information and insight.