PROPOSAL TO DISMANTLE MMS DRAWS CRITICISM

April 3, 1995
A Clinton administration plan to dismember the Minerals Management Service has sparked a flurry of protests by U.S. petroleum associations and key congressmen. Sen. Frank Murkowski (R-Alaska), energy committee chairman, told Oil & Gas journal last week, "We need MMS. We're going to fight to keep it." The administration, under President Clinton's program to reinvent government, proposed to abolish MMS and transfer its royalty collection function to 38 producing states and 29 Indian

A Clinton administration plan to dismember the Minerals Management Service has sparked a flurry of protests by U.S. petroleum associations and key congressmen.

Sen. Frank Murkowski (R-Alaska), energy committee chairman, told Oil & Gas journal last week, "We need MMS. We're going to fight to keep it."

The administration, under President Clinton's program to reinvent government, proposed to abolish MMS and transfer its royalty collection function to 38 producing states and 29 Indian tribal governments by Oct. 1, 1997.

The plan also would shift the Bureau of Land Management's lease inspection function to states and tribes.

After MMS's royalty collection operations were transferred, Interior would fold MMS and give another bureau its oil and gas leasing functions (OGJ, Mar. 27, p. 31).

Interior also proposed to "streamline" offshore royalty collections by directly selling its royalty share of production--a pilot project is selling gas production-or by allowing offshore operators to buy out their future federal royalty obligations.

Interior said, "This would return to the Treasury a fair market value for resources while ultimately allowing alternatives to the current federal royalty collection and audit functions."

Clinton told a Washington press conference, "We're allowing companies who have offshore oil leases to prepay the taxpayers. Believe it or not, a lot of them really want to do it. That brings in billions of dollars and means we don't need battalions of auditors to make sure we're getting our money's worth."

In other action, Interior proposed to wipe out the Office of Territorial and international Affairs and reduce programs at the Bureau of Indian Affairs, Bureau of Reclamation, and U.S. Geological Survey, where 10 programs would be cut. Interior estimated its proposals would save $3.8 billion and eliminate 2,000 full time jobs during 5 years.

MMS FUNCTIONS

Interior pointed out that MMS has two major functions. It:

  • Manages petroleum and mineral resources on the Outer Continental Shelf.

  • Collects, verifies, and disburses royalties, rentals, bonuses, and other payments associated with petroleum and minerals on federal and Indian acreage.

Interior Sec. Bruce Babbitt said, "We've tried to determine programs that are uniquely federal. Those programs that did not meet the standard were targeted for elimination or devolution to the states. And with those programs that only the federal government can do, we're focusing on providing better service."

He said the analysis of MMS concluded, "The states can handle most of those functions for onshore oil and gas leases. And the royalty streams that come from the leasing process, particularly leasing in the Gulf of Mexico and elsewhere, in many cases can be sold.

"A continuing out-year royalty stream can be auctioned for its current value, leading to a much more efficient process (than) collection in out years.

"That analysis led to a proposal to abolish that agency by spinning off the functions in some measure to the states, in other aspects to the private sector."

The idea to shift royalty collection from the federal government to states was prompted by Wyoming's 1993 proposal that it could do this more cheaply and more efficiently than the federal government.

Babbitt said "The leasing function is a core federal function on shore, on federal land, and on the OCS. Those functions, subject to review by Congress, would presumably be transferred to the Office of Surface Mining or to the Bureau of Land Management where, indeed, those functions originated and were processed prior to 1980."

HOW IT WORKS

MMS currently collects onshore federal royalties and splits them 50-50 with the states and tribes. MMS assumes 75% of the cost of collecting royalties and deducts 25% from the states' and tribes' share.

The producing states have parallel collection systems for collecting royalties from state land. If, after negotiations, producing states agree to assume MMS collection duties, the federal government would continue to get 50% of its royalties but has offered to let states and tribes deduct 50% of collection costs.

MMS said states or tribes would have to agree to collect royalties and would be reimbursed so the proposal is not an unfunded mandate.

Interior said if an Indian tribe declined to collect royalties for the federal government, the job would go to the Bureau of Indian Affairs or whatever Interior agency assumes the offshore royalty collection duties.

The unnamed Interior agency would assume MMS's inherently federal functions such as royalty adjudication, policy and regulatory development, valuation interpretations, enforcement, and oversight of onshore royalty collections.

Interior said eliminating MMS would save $69 million and 708 full time jobs during 5 years. Most of the reductions would occur in the Denver royalty management office.

It also proposed shifting BLM's postlease inspection and enforcement to states and tribes.

BLM will require industry to conduct prelease compliance activities. In addition, BLM will try to improve interagency coordination of road maintenance. These actions will result in estimated savings of about $31 million and 180 jobs during 5 years.

Interior said it will aggressively pursue the sale of offshore royalty streams.

It said, "Alternative ways for selling these streams are being analyzed and will be worked out cooperatively with industry and Congress.

"Some of these may include direct negotiation with existing lessees or some form of competitive auction. Possible revenues from this proposal are estimated at $3 billion during 5 years."

An MMS spokesman said if a lessee did not want to buy out the royalty stream, a method would have to be found to sell it to another party without disclosing the lessee's proprietary information.

REACTIONS

Alaska's Murkowski said, "MMS was created in response to the Linowes Commission report, which suggested there needed to be a better accounting of royalties due to the U.S. from minerals produced on the public domain.

"After the Internal Revenue Service, the MMS is the second largest collector of revenue in the federal government. It also is the agency with responsibility for administering the OCS lands program. MMS plays an important role in our national energy policy and in our fiscal management.

"Now, people may have problems with the way MMS nit-picks royalty issues or its approach to oil and gas development on the OCS, but carving up the agency and delegating its responsibilities is not the way to go.

"Dismantling MMS is not the way to address royalty management issues, and it is not the way to stimulate oil and gas exploration and production on the OCS."

Robert Stewart, National Ocean Industries Association President, said he is baffled by several aspects of Interior's proposal.

"It seems to me, of all the agencies at Interior, MMS should be used as a model for what an agency should look like after reinventing government, not a victim of it.

"My feeling is that Interior has announced something before they were really ready, before they thought it through."

Stewart said, "I'm very concerned about the future management of the OCS program. I doubt that whatever agency that assumes MMS duties will bring to the OCS program the focus that MMS has brought to it."

He said if Interior sells its royalty streams, "it will have to be at huge discounts. The ultimate recovery by the Treasury will be diminished very significantly by those discounts. I'm going to be very interested to see the numbers that lie behind the $3 billion Interior says it's going to save.'

Carla Wilson, Rocky Mountain Oil & Gas Association director of tax, finance, and accounting, said Rmoga is "extremely disappointed" with Interior's plan.

She said, "Even though they said they would consult broadly and consider all opinions, we feel they disregarded our comments. We can only believe this decision has been made in haste.

"We're going to urge Congress to conduct oversight hearings. This proposal is lacking in specifics so far, but we don't think the savings are there."

Barry Williamson, Texas Railroad Commission chairman and MMS director in the Bush administration, called the proposal to eliminate MMS "a blatant display of Clinton's disregard for the nation's energy industry'

Williamson said, "This is one federal program that actually is necessary and successful. The potential for error and red tape among 67 government agencies (38 states and 29 tribes) trying to work in concert is terrifying."

He said killing MMS would hurt Texas producers. "So many of our wells are marginal producers anyway, and an increase in the operational expense and labor this move will produce could force producers to plug their wells."

Copyright 1995 Oil & Gas Journal. All Rights Reserved.