RIK ruckus

Royalty in-kind is an argument, sprouting from a dispute, which grew from a controversy. No wonder it's such an acrimonious issue. Several years ago, the U.S. government became convinced that some oil companies had underpaid royalties on federal leases because their posted prices didn't reflect the true value of the oil. Lawsuits have ensued. Minerals Management Service responded by proposing a complex rule that would peg royalty value on prices farther downstream.

March 30, 1998

3 min read

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

Royalty in-kind is an argument, sprouting from a dispute, which grew from a controversy. No wonder it's such an acrimonious issue.

Several years ago, the U.S. government became convinced that some oil companies had underpaid royalties on federal leases because their posted prices didn't reflect the true value of the oil. Lawsuits have ensued.

Minerals Management Service responded by proposing a complex rule that would peg royalty value on prices farther downstream.

Oil groups say the rule, already twice revised, promises to be the most cumbersome, unrealistic energy regulation since the era of oil and gas price controls in the mid-1970s.

They have offered what they claim is a better alternative: MMS simply could be required to take its royalty oil, rather than a cash payment. They say by selling its own crude, the government could ensure it's getting fair value.

MMS is not so sure. It figures it lost money in a 1995 RIK pilot for offshore gas, although it admits that test was badly designed. More pilots are planned.

Veto threat

Meanwhile, MMS is opposing RIK legislation with a puzzling obstinacy.

At a recent House resources subcommittee hearing, MMS Director Cynthia Quarterman wasted no time in playing her trump card: If Congress passes the pending RIK bill, Interior would recommend that the President veto it.

Typically, veto threats are reserved for later in the legislative process, when they can be used more judiciously and effectively.

The threat also was wasted. Congress simply won't pass a RIK bill this session; support is too thin, and the short legislative calendar is too crowded. A bill hasn't even been introduced yet in the Senate.

The sponsors of the House bill-Reps. William "Mac" Thornberry (R-Tex.), Kevin Brady (R-Tex.), and Barbara Cubin (R-Wyo.)-told Quarterman they were receptive to any changes MMS might suggest.

But Quarterman replied that MMS is "completely negative" about the bill.

Testimony hit

In a suprising twist, Thornberry claimed Quarterman's testimony focused on an earlier draft bill, not the one introduced.

Cubin, the subcommittee chairman, then told Quarterman that her testimony was "inadequate" and asked her to return to testify at a Mar. 31 hearing.

It was the first time this reporter, who has attended hundreds of Capitol Hill hearings, has ever witnessed a government official testify on the wrong bill.

Quarterman also claimed the RIK legislation could cost the government up to $500 million. When questioned, she had difficulty substantiating that estimate.

Rep. Cubin suggested MMS isn't worried so much about RIK as it's worried about self-preservation. She said RIK would simplify royalty collection and thus force the agency to "give up control, authority, and staff positions."

In recent years, MMS's greatest success has been the $3 billion it collected at the last five Gulf of Mexico lease sales. Those sales were bolstered by incentives provided under the 1995 Deepwater Royalty Relief Act.

Guess what? MMS staunchly opposed that bill, too.