Interior's credibility

Allegiance to an antidevelopment agenda makes U.S. Interior Sec. Bruce Babbitt dysfunctional as a regulator. His recent tirade on television over royalty reform provides chilling context to an otherwise welcome proposal to offer oil and gas leases in the National Petroleum Reserve-Alaska (NPR-A).

Babbitt, lest anyone forget, is the cabinet officer who branded as "un-American" those oil company representatives who question the Clinton administration's extreme assertions about global warming. He long ago promised to oppose leasing of the Arctic National Wildlife Refuge Coastal Plain.

Now, after 18 months of study, Babbitt has seen fit to lease 4 million acres in NPR-A's northeast quadrant (OGJ, Aug. 10, 1998, Newsletter). While any leasing on Alaska's North Slope is a leap forward, there are problems.

Strict limits

One problem is that acreage likely to be attractive for exploration is unleasable or subject to strict limits on surface activity. Policy-making under Babbitt pays only lip service to technical advances that reduce surface disturbances of drilling and production.

The other problem is that the new NPR-A management plan creates consultative systems certain to stand in the way of economic activity. In Babbitt's Department of Interior, consultation tends to be fiercely one-sided.

It certainly has been so in the case of royalty reform, a wild goose chase by Interior's Minerals Management Service. Initially, MMS raised legitimate questions about production values and the timing of valuation, which are perpetual areas of dispute between royalty owners and producers. The attention underscored a need to adapt royalty valuation methods to changes in the way the market works.

Then MMS went berserk, proposing to index the value of physical production to futures prices. The industry argued that this would be a move away from sound valuation. MMS at first acted attentive to the concern, delaying implementation of its proposal and agreeing to listen to industry objections.

But discussion has come to naught. MMS still plans to implement the loony futures-market link. And it steadfastly opposes the recommendation of industry that the government answer valuation worries by taking its royalty in kind.

Objection by MMS and its parent agency to this suggestion has been perplexing. And a recent statement by Babbitt makes it appear motivated by a compulsion to bash industry.

"What they have done," Babbitt said in a "Fleecing of America" segment on NBC News, "is create a fraudulent system of pricing oil lower than the real market price solely for the purpose of minimizing their royalty obligations to the federal government (OGJ, Aug. 10, 1998, p. 26)."

That's outrageous. If producers were systematically undervaluing oil and gas, the solution would be to do what Babbitt and his minions at MMS so vigorously resist: Take physical possession of and sell royalty production. It's the way to get the value right.

Yet MMS insists the government would lose money if it took its royalty in kind. The position conflicts with Babbitt's assertion that the government is being cheated.

Interior thus is commandeering both sides of a debate that it won't allow to influence policy. The industry has tried to discuss the issue. It has offered a reasonable and fair alternative to the unworkable MMS proposal. In return, it receives a policy-making snub from an imperious MMS and Babbitt's self-contradictory scolding on television.

Fair treatment?

The secretary's sophomorism has cost Interior its credibility. Because he's popular with environmentalists, however, President Clinton won't do anything about the problem.

So Congress needs to stop MMS from bollixing royalty valuation. And the oil industry needs to tread very carefully on issues, such as leasing of NPR-A, that require consultation with Interior or any of its departments. From the activist crowd now in charge, it cannot expect fair treatment.