Royalty impasse

An extraordinary attempt by U.S. senators to mediate between the Minerals Management Service and the oil industry regarding a controversial royalty rule has come to naught. MMS is pushing a proposed rule that would revamp the way oil royalties are calculated. Industry says it is unfair and unworkable (OGJ, Feb. 16, 1998, p. 36) and persuaded Congress to block the regulation until the fiscal year ends Oct. 1. Sens. John Breaux (D-La.) and Kay Bailey Hutchison (R-Tex.) tried to resolve the

Aug. 10, 1998

3 min read

Patrick Crow
Washington, D.C.
[email protected]

An extraordinary attempt by U.S. senators to mediate between the Minerals Management Service and the oil industry regarding a controversial royalty rule has come to naught.

MMS is pushing a proposed rule that would revamp the way oil royalties are calculated. Industry says it is unfair and unworkable (OGJ, Feb. 16, 1998, p. 36) and persuaded Congress to block the regulation until the fiscal year ends Oct. 1.

Sens. John Breaux (D-La.) and Kay Bailey Hutchison (R-Tex.) tried to resolve the MMS-industry differences at closed-door meetings in July, but MMS showed little flexibility.

After the first meeting, Bob Armstrong, assistant Interior secretary for land and minerals management, said flatly that MMS would not change its rule on the basis of the discussions.

A few days later, MMS did alter the rule, explaining that the changes had been planned anyway. The key change was that MMS abandoned a broad definition of a producer affiliate company.

Next steps

After their mediation effort, Breaux and other oil-state senators urged Armstrong not to push forward with a rule Oct. 1.

They said that, in the "productive" talks, MMS had indicated "several items could receive additional consideration before a final rule is issued."

The senators said, "We remain concerned that the final rule may not reflect solutions that will work for all parties concerned."

They said MMS should rewrite the regulation again, removing more stumbling blocks. "It is not in anyone's best interest to go forward with a rule containing problems that might have been worked out if everyone had a clear understanding of the issues or if continuing dialogue...could resolve more issues."

An MMS spokeswoman replied that the agency is reviewing the latest round of public comments on the proposed rule but believes "no new issues have been brought to the table."

She said MMS does not intend to revise the rule again and thus delay its implementation another 6-12 months.

NBC slap

Last week, NBC News took a cheap shot at the industry on the royalty issue.

It featured the industry-MMS dispute in its "Fleecing of America" segment, starting with the premise that "Big Oil" was cheating on royalty payments.

In an interview, Interior Sec. Bruce Babbitt said, "What they have done 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."

Babbitt claimed that delaying implementation of the new rule would cost the government $75 million/ year.

That ignores the fact that, if companies underpay royalties, MMS can take steps to collect those amounts, plus interest. If Babbitt is talking about additional collections, then MMS should admit it is using a rule change to increase industry's royalty obligations.

The NBC report focused more on alleged underpayment of royalties than the real issue, whether the royalty rule rewrite is right.

But if MMS can't explain its regulation with many pages of fine print in the Federal Register, you can't expect NBC to do it in 3 minutes on videotape.