Fun_People Archive
1 May
Government's Slick Deal for Oil Industry

Date: Mon,  1 May 95 13:11:58 PDT
From: Peter Langston <psl>
To: Fun_People
Subject: Government's Slick Deal for Oil Industry

[Fun, fun, fun...  -psl]
Forwarded-by: Janice Shields <>

C O R P O R A T E   W E L F A R E -- Policy Notes   May 1, 1995


  The Project on Government Oversight (POGO) has released this report:



   POGO has compiled substantial evidence that indicates the federal
government is owed more than 1.5 billion dollars in uncollected royalties,
interest and penalties from seven of the largest oil companies -- Texaco,
Shell, Mobil, ARCO, Chevron, Exxon and Unocal -- for their production of
crude oil from federal lands in California.

   POGO has also obtained a draft Department of Interior (DOI) Inspector
General report that concludes that over a four year period, royalties alone
"may have been underpaid by as much as $29.5 million from 1990 through 1993
and may continue to be underpaid as long as pipelines continue to operate as
private carriers."

   Crude oil is produced on federal lands by both "integrated" and
independent producers.  The seven companies identified are "integrated" --
which means they produce crude, in all but one case (Exxon) they own the
pipelines that transport the crude to the refineries, and they own the
refineries themselves.  The only way for any oil producer to transport the
crude to refineries efficiently is through the intrastate pipelines owned by
these integrated oil companies.  For decades, these companies have
artificially depressed the price of crude oil, though their refined product
prices are comparable to those in the rest of the nation.  As a result, it
makes economic sense for the integrated companies to push their profits
downstream to the refinery end.  This way the integrated companies squeeze
out competition from the independent producers and refiners, and pay the
government less in royalties, as royalties are based on the price of the
crude oil.

   The June 1994 language accompanying the congressional appropriation for
DOI's FY-95 budget required DOI to come up with a plan "for recovering
royalties and interest from supposed undervaluations" when submitting the DOI
FY-96 budget request in April 1995.  The House Report language concludes,
"every effort should be made to act as quickly as possible on this issue to
avoid further losses due to the Statute of Limitations."  After a year, the
only action the DOI has taken is to take another six months to prepare to
audit two California companies for three selected years.

   DOI, the agency responsible for collecting these royalties, is a willing
partner in this corporate welfare program.  In addition to the forthcoming
Inspector General report, DOI has ignored the following:

  The U.S. Department of Commerce -- "It seems that all we have seen to this
point clearly establishes that there is a problem. . . MMS (DOI's Mineral
Management Service) needs to do something now to avoid creating the
impression that these events have not occurred!"

  The U.S. DOI Office of Policy Analysis -- "I suggest that the Department
proceed immediately to ascertain the amount of additional royalties due,
including interest and criminal penalties, if any, and initiate collection

  The U.S. DOI Minerals Management Service (MMS) -- "We have evidence that
the major California oil producers may have undervalued California oil
production by keeping posted prices low and thus underpaying the royalties
based on them.  .  . The various available court documents, out-of-court
settlements, discussions with attorneys, and the work of consultants lead us
to conclude that we should pursue potential Federal royalty underpayments."

  These oil companies have already settled for over $350 million with the
State of California for royalties owed to the State for the same reasons
money is owed to the Federal Treasury.  However, all the evidence used by the
State to retrieve this money has been sealed by the courts at the request of
the oil companies who feared "potentially prejudicial pretrial publicity."

   Despite all of the evidence, the Department of Interior is still looking
for excuses not to collect the money from these big oil corporations.

  The DOI's attitude is revealed by an official in an internal memo writing
he is, "hoping for some sort of 'motherhood' statement I can give the team --
I have stalled this issue long enough."

  DOI has even gone so far as to mislead Senator Dale Bumpers (D-AR).  In one
example, MMS assured the Senator that when they recently waived the
government's right to collect royalties from Exxon, DOI did so with the State
of California's approval.  Yet the State's attorney wrote in a scathing
letter, ". . . representatives from MMS and the Solicitor's office have
indicated to others that Interior. . . is justifying this approach based on
the approval of that language by (California).  If such representations are
indeed being made, they are simply false."  The misleading DOI memo was sent
to Senator Bumpers mid-November, 1994 even though an internal briefing paper
prepared for Secretary Babbitt by MMS dated one month earlier -- October 16
-- admitted "Certain State officials recently contacted DOI, asserting that
they do not wish MMS to use the same language in settlements now pending."

  The Bureau of Land Management (BLM) has also asked DOI's Office of the
Solicitor for a legal ruling as to BLM's ability to enforce common carrier
requirements in California.  The December 1994 draft Inspector General report
states that, "On June 7, 1991, the Bureau (BLM) requested an opinion from the
Solicitor to clarify the Bureau's specific authorities under the Act.
 However, a member of the Solicitor's office said that the opinion had not
been issued because of other priorities within the office."

   The Department of Interior must produce clearer regulations and enforce
the Mineral Leasing Act's provision requiring pipelines crossing federal
lands to be operated as common carriers.  This would begin to create a more
open market for crude oil, where prices would more closely reflect value.  In
itself, however, this change is not enough.

   The 1988 regulations regarding the collection of royalties (30 CFR
Chap. 206 Sec. 101-102) are currently subject to interpretation.  In order
to avoid future adverse interpretations, these regulations should include
at least two new provisions.  The first provision should allow MMS to
cross-check and challenge prices posted or paid to ensure that those
prices comport with the market value of crude.  The second should provide
that all documents in the possession of the oil companies regarding prices
should be available to government auditors. Currently, government auditors
do not have full access.

   Perhaps the most important, although the most difficult, change will be
to convince the Department of Interior to reverse its mind-set from trying
to find reasons not to collect money from the big oil companies, to
trying, instead, to figure out how to retrieve this windfall for the
American people.

   The White House and Secretary Babbitt have recently recommended
eliminating MMS -- the office that has failed to collect this money.  The
proposal is to turn the responsibility of collecting royalties due the
federal government over to the States and to the Native American Tribes
instead.  Perhaps this change would be a step in the right direction.

   Recovering the $1.5 billion is equivalent to 1/3 of all President
Clinton's proposed budget savings for FY 1996 -- and would not require any
cuts of programs or any tax increases.

Reports are $20.00
Please Make Checks Payable to: The Project on Government Oversight

2025 Eye Stree, NW, Suite 1117 Washington,DC 20006-1903
(202)466-5339  Fax (202)466-5596

[=] © 1995 Peter Langston []