<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:62931.wais]
OVERSIGHT OF THE MINERALS MANAGEMENT SERVICE'S ROYALTY VALUATION
PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MAY 19, 1999
__________
Serial No. 106-90
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
62-931 CC WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications
Mason Alinger, Clerk
Faith Weiss, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on May 19, 1999..................................... 1
Statement of:
Kladiva, Susan, Associate Director, Energy, Resources, and
Science Issues, Resources, Community, and Economic
Development Division, U.S. General Accounting Office;
Sylvia Baca, Acting Assistant Secretary for Land and
Minerals Management, U.S. Department of the Interior; Lucy
Querques Denett, Associate Director, Royalty Management
Program; Robert Williams, Acting Inspector General, U.S.
Department of the Interior; and John Sinclair, Assistant
Inspector General, U.S. Department of the Interior......... 142
McCabe, James, deputy city attorney, city of Long Beach, CA;
Alan Taradash, attorney at law, Nordhaus, Haltom, Taylor,
Taradash & Frye, LLP, Albuquerque, NM; David Deal,
assistant general counsel, American Petroleum Institute;
and Ben Dillon, vice president, Independent Petroleum
Association of America..................................... 32
Letters, statements, et cetera, submitted for the record by:
American Petroleum Institute, the Independent Peroleum
Association of America, the Domestic Petroleum Council, and
the U.S. Oil and Gas Association, prepared statement of.... 61
Baca, Sylvia, Acting Assistant Secretary for Land and
Minerals Management, U.S. Department of the Interior,
prepared statement of...................................... 157
Davis, Hon. Thomas M., a Representative in Congress from the
State of Virginia:
Letter dated February 12, 1999........................... 14
Prepared statement of.................................... 21
Horn, Hon. Stephen, a Representative in Congress from the
State of California:
Flow of royalty chart.................................... 192
Letter dated May 19, 1999................................ 133
Prepared statement of.................................... 3
Kladiva, Susan, Associate Director, Energy, Resources, and
Science Issues, Resources, Community, and Economic
Development Division, U.S. General Accounting Office:
Information concerning an automated system............... 190
Information concerning management of the Indian trust.... 190
Prepared statement of.................................... 145
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York:
Information concerning oil settlements................... 122
Letter dated February 26, 1997........................... 6
Prepared statement of.................................... 11
McCabe, James, deputy city attorney, city of Long Beach, CA,
prepared statement of...................................... 34
Taradash, Alan, attorney at law, Nordhaus, Haltom, Taylor,
Taradash & Frye, LLP, Albuquerque, NM, prepared statement
of......................................................... 39
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 29
Williams, Robert, Acting Inspector General, U.S. Department
of the Interior, prepared statement of..................... 173
OVERSIGHT OF THE MINERALS MANAGEMENT SERVICE'S ROYALTY VALUATION
PROGRAM
----------
WEDNESDAY, MAY 19, 1999
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Davis, Turner, and Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Randy Kaplan, counsel; Bonnie Heald, director of
communications; Mason Alinger, clerk; Faith Weiss, minority
counsel; and Earley Green, minority staff assistant.
Mr. Horn. The House Subcommittee on Government Management,
Information, and Technology will come to order. Today we will
look at the Department of the Interior's management of the
collection, valuation and distribution of revenues, or
royalties, from oil produced on Federal lands.
The Federal Government has been collecting royalties
associated with mineral production on Federal onshore lands
since 1920 and from offshore lands since 1953.
The Minerals Management Service, an agency within the
Department of the Interior, was established in 1982. The
agency, through its Royalty Management Program, ensures that
all royalties from Federal and Indian mineral leases are
accurately collected, accounted for, and disbursed to the
appropriate recipients in a timely manner.
Royalties from oil and gas leases on Federal lands are one
of the largest sources of nontax revenues for the Federal
Government. According to the Minerals Management Service, since
1982, nearly $100 billion has been disbursed from Federal
onshore and offshore leases. In fiscal year 1998, for example,
the Royalty Management Program generated nearly $6 billion from
more than 26,000 mineral leases. Of that amount, $550 million
was distributed to the States and used for schools, roads, and
public buildings.
Given the significance of this program, on June 17, 1996,
this subcommittee held a hearing to examine whether the
government was receiving a fair return from oil leases on
Federal lands. The subcommittee heard from witnesses who
testified that between 1978 and 1993, oil companies had
underpaid royalties on crude oil by as much as $856 million. We
also learned that the Minerals Management Service was not
sufficiently addressing this problem.
Concerns were raised that the Minerals Management Service
had delayed collecting oil royalty revenues and had entered
into global settlements with oil companies that failed to
protect the financial interests of the Federal Government and
the American taxpayer.
In response to recommendations from an interagency task
force convened by the Department of the Interior to study the
undervaluation issue, in 1995 the Minerals Management Service
began an effort to revise its oil valuation regulations.
Currently oil values for royalty purposes are based on gross
proceeds or a series of benchmarks depending on whether or not
the oil is sold in an arm's-length transaction. ``At arm's-
length'' refers to oil that is bought and sold by parties with
competing economic interests, and the price paid establishes a
market value for the oil.
Transactions that are not at arm's length typically involve
a transfer of oil between companies that have both production
and refining capabilities. The price of oil in these
transactions is often a price posted by the buyer, who is often
an affiliated subsidiary of the seller. There is concern that
these posted prices tend to be below fair market value.
Since 1995, the Minerals Management Service has held at
least 17 public workshops and meetings across the country;
received over 4,000 pages of comments from interested parties;
and reopened the comment period at least seven different times.
On two occasions in 1998, Congress passed legislation
temporarily delaying the implementation of a final rule.
Congress attached a third continuance to this year's emergency
supplemental appropriations bill that passed the House of
Representatives on Tuesday. We are having a hard time nailing
this one down.
Today we will hear from a number of experts on the issue.
We will examine whether the Minerals Management Service has
been effective in obtaining a fair return from oil-producing
leases on Federal lands. We will also ask whether the existing
rulemaking process can result in a regulation that simplifies
the process, minimizes disputes and ensures a fair return for
the American taxpayer.
We welcome our panelists, and we look forward to their
testimony.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. I am now delighted to yield time for an opening
statement to the gentlewoman from New York, Mrs. Maloney, who
took a very active interest in the preceding hearing 3 years
ago, and we are delighted to have her with us today. Mrs.
Maloney.
Mrs. Maloney. Thank you so much, Mr. Chairman, and I thank
you very much for holding that hearing 3 years ago and for
today's hearing and for your fine leadership on this and so
many issues.
As you know, this is the second hearing in 3 years that
this subcommittee has held on the issue of the Minerals
Management Service's royalty valuation program. Our first
hearing held back in 1996 explored allegations of
undervaluation of oil by several major oil companies and MMS's
efforts to collect the full amount of royalties that were owed
to the American taxpayer.
Since that time much has changed. MMS has finally decided
that a new oil valuation rule was necessary in order to prevent
big oil companies from continuing to rip off the American
taxpayer. The Justice Department decided that the allegations
against many of these oil companies were so strong and
significant that it intervened in a lawsuit alleging that
companies had violated the False Claims Act by deliberately
undervaluing oil produced on Federal lands as a means of
avoiding royalty payments to the Federal Government.
As a result, one company, Mobil, decided to settle with the
government and paid $45 million. Numerous other companies have
settled similar claims brought by States and private royalty
owners for millions and, in one case, billions of dollars; and
finally, those same oil companies that vigorously defended
posted prices as a legitimate means of determining oil value
have begun to admit that posted prices are not the issue and
are finally negotiating with the Department on a new rule. But
as much as things have changed, I am not sure if we have really
made much progress.
When I was preparing for this hearing, I came across a
letter that I had almost forgotten about, but I think it is
very relevant to this issue before us. It is a letter dated 2
years ago, February 26, 1997, and I would like to put it in the
record.
Mr. Horn. Without objection, it will be put in the record
at this point.
[The information referred to follows:]
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[GRAPHIC] [TIFF OMITTED] T2931.005
Mrs. Maloney. An attorney named Pat Holloway to Bob
Armstrong, the Assistant Secretary of Land and Minerals
Management. Mr. Holloway had the opportunity to participate in
a meeting of the Independent Petroleum Association of America's
valuation task force by phone where members of the IPAA, along
with several lawyers and lobbyists representing Chevron, Amoco,
Conoco and other major companies, discussed how they would
fight Interior's efforts to collect the royalties that the
taxpayers were owed, and I think it is very relevant, and I
want it in the record, Mr. Chairman, because exactly the
strategy which they outlined in this document or in this letter
to stop the government from collecting the rightful amount
owed, the market price owed to the taxpayers, to stop that so
that the oil companies could continue ripping off the American
public by undervaluing their oil.
And I quote from the letter,
The strategy discussed at the meeting was to seek to delay
the regulations as long as possible, and then to file suit
under the name of the independent petroleum--IPAA--independent
producers, to prevent them from becoming effective on whatever
procedural, not substantive--they literally write out, we are
not going to fight them on substantive grounds, we are going to
fight them on procedural grounds. It suggested that the IPAA/
API should consult--this is the worst line--that they should
consult with the tobacco industry on legal tactics since that
industry has so much more experience in litigating against
government regulations than the oil industry.
The letter goes on to explain how a representative from one
major company, Chevron, offered to lend financial support to
the IPAA to fight the proposed rule. It states, ``the strategy
would be to fund opposition, including litigation, against the
proposed regulations in the name of the IPAA,'' the
independents, ``as representatives of the, `small producers,'
rather than in the name of the `giants.' ''
And the letter adds, ``There was talk of using influence on
the Appropriations Committee to block the expenditures needed
to implement the proposed regulations.'' Well, they succeeded
last night in blocking legislation on the floor coming out of
Appropriations.
I must say that they picked a strategy, and they stuck to
it, consulting with the tobacco industry, fighting the rule on
procedural grounds, not substantial or substantive grounds,
using the appropriations process to attach writers, blocking
Interior from implementing the rule, avoid the real issue as
much as possible and doing all of this in the name of the small
producers, despite the fact that MMS has repeatedly stated over
and over and over again that the independents will not be
harmed by this rule. And so far it seems that the strategy is
working, and even if the rule was implemented, they say, don't
worry, we will just go to court and block them in court and
continue to sue them so they can never do anything.
Yesterday some of my colleagues in the Senate held a
hearing on proposed legislation that would amount to a massive
giveaway to the oil industry. At that hearing supporters of the
oil industry once again tried to take attention away from the
real issue through yet another red herring, this time
concerning alleged impropriety on the part of the Interior
official who had nothing whatsoever to do with the rule.
And, Mr. Chairman, this type of attempt to divert attention
from the real issue, I think, is shameless. I'd like to put in
the record the article that appeared in Congress Daily--where
is that article?
Mr. Horn. Without objection, it will be put in the record
at this point.
Mrs. Maloney. Where they--the acting head of MMS stated,
``the employees did not work on the oil valuation change and,
therefore, did not have a conflict.'' That was his quote.
And I--I just have a very lengthy statement. I would like
to put the entire thing----
Mr. Horn. Put it in as read, without objection.
Mrs. Maloney [continuing]. Because I would like to hear
what everyone has to say, unless you really want to hear my
entire statement, Mr. Chairman.
Mr. Horn. We will take your word for it.
Mrs. Maloney. Everybody like to hear my entire statement?
Mr. Horn. It will be in there as if you read it.
Mrs. Maloney. I am afraid it would go on for another 10 or
20 minutes because I have a lot to say on this issue, but I
would rather hear from the Members at hand, and I thank you for
putting the statement in.
Mr. Horn. Thank you.
[The prepared statement of Hon. Carolyn B. Maloney
follows:]
[GRAPHIC] [TIFF OMITTED] T2931.006
[GRAPHIC] [TIFF OMITTED] T2931.007
Mr. Horn. I now yield for opening statement to the
gentleman from Virginia Mr. Davis.
Mr. Davis. Right. Let me just ask if we put in the record a
letter from Martin Frost to the chairman, I think, of the
Democratic conference in the House and Gene Green endorsing
delaying of these standards and put that in the record.
[The information referred to follows:]
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Mr. Davis. And then would just say that recent developments
in a current False Claims Act or ``qui tam'' suit have really
called into question the integrity of the testimony presented
before this subcommittee on June 17, 1996, concerning the
subject before us again today: Federal crude oil valuation.
Danielle Brian of the Project on Governmental Oversight
[POGO], admitted earlier this month that POGO has paid to two
government employees $700,000 for actions they took as Federal
employees to change the Interior Department's interpretation of
its royalty value rules.
In its June 17, 1996, hearing this committee heard
testimony on the subject of oil valuation. Bob Berman of the
Department of Interior's Office of Policy Analysis and Robert
Speir of the Department of Energy were the two star witnesses
who testified that MMS had enabled oil companies to pay
royalties on less than the full value of crude oil from the
Federal leases.
Our own report concerning the 1996 hearing cites Berman as
testifying that either NYMEX or, on the west coast, Alaskan
North Slope [ANS], crude prices provide the best benchmarks for
crude oil prices. In our report, Mr. Berman is also quoted as
having testified that he had initiated a study into whether
posted prices outside of California reflected market value and
that his preliminary finding was that the posted prices might
have understated the market value of crude oil from 3 to 10
percent. Bob Speir, who had been DOE's representative on the
interagency task force which investigated allegations that
Federal crude oil was undervalued in California, also supported
the use of ANS prices for California oil.
We now know that the positions of Berman and Speir were in
secret support of positions being taken by private relators
under the False Claims Act in Federal court in Texas, a case
already filed under seal 4 months before this subcommittee's
June 1996 hearing. POGO later joined in that suit, seeking a
percentage of any recovery the Federal Government might obtain.
In 1996, POGO attempted to have Berman and Speir join in the
suit, although both declined.
We now know that POGO's involvement in the crude oil issue
was prompted in 1993 by the chairman of POGO's board of
directors, a Washington, DC, lawyer representing the State of
California in its dispute against the Interior Department over
Federal royalty issues. At least as early as 1994, Mr. Berman
had frequent contact with POGO and later with POGO's trial
lawyers. We know that POGO's annual budget is only one-third of
the amount of money paid to these two Federal employees. So it
is fair to infer, at least until someone is willing to prove
otherwise, that POGO paid the money with the approval of its
board of directors, apparently still headed by California's
private counsel, and with the approval of POGO's trial counsel.
I should add one qualification to that statement. POGO's
local counsel in Texas did not know of the payments in advance.
He obtained the court's permission to withdraw from the case as
soon as he learned of the payments last month.
The inherent conflicts of interest present in Berman and
Speir's acceptance of the money should have been glaring.
Berman and Speir were central policymaking figures in the
creation and work of the interagency task force that examined
allegations of underpayments in California in 1994-1995. The
government has listed the two as potential witnesses for the
False Claims Act litigation.
Not surprisingly, Bob Berman and POGO are now apparently
under investigation for possible violations of at least two
Federal criminal statutes. At a recent deposition in the civil
case, Berman was asked whether he had informed this
subcommittee when testifying of his personal financial interest
in seeing Interior's interpretations changed. He answered by
asserting his fifth amendment right not to incriminate himself.
But the clouds grow still darker. POGO reports that it told
the U.S. Department of Justice of its intention to make these
payments in October 1998. Although the Justice Department is
specifically authorized by statute to file for an injunction
against prospective payments to Federal employees, it did not
do so. In fact, it did not advise the Federal judge in Texas
that POGO had made these payments until after POGO's Texas
counsel asked the judge for permission to withdraw from the
case. The government knew about POGO's intent to make the
payment for 7 months and did not disclose to the court, the
public or the defendants that they were going to be made. Only
last month did all this come to light when the Federal judge
directed the government to disclose the payments to the
defendant.
It is incumbent on our subcommittee to fully investigate
this situation. The outrageous conduct occurring in the U.S./
Johnson v. Shell qui tam action has raised questions not only
about the integrity of that particular legal action or the
rulemaking that resulted from Berman's and Speir's work on the
interagency task force, but also concerns the integrity of a
hearing held before us today. Until these issues are resolved
and all pertinent facts brought to light, there can be no fair
consideration of the issue of crude oil valuation either in
court, at the MMS or in the Congress.
It appears that the Department of the Interior's proposed
oil valuations regulations may very well have been
substantially tainted by cash payments approaching $1 million
to government officials or former government officials and by
blatant interference by outside parties, including trial
lawyers who could possibly reap millions in proceeds from
pending lawsuits.
If it becomes commonplace for government policymakers in
the Interior Department or other agencies to take large sums of
cash from outside parties who have a financial interest in the
outcome of the government policy in question, we are going to
have a scandalized, corrupted system that has absolutely no
credibility with the public or with Congress.
Mr. Chairman, I look forward to these hearings.
Mr. Horn. I thank the gentleman.
[The prepared statement of Hon. Thomas M. Davis follows:]
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Mr. Horn. I now yield to Mr. Turner, the ranking member on
the subcommittee, for an opening statement.
Mr. Turner. First, I'd like to thank the chairman for
structuring this hearing in a fair manner, and which I believe
will be beneficial to the committee, bringing in all parties to
this issue to be heard before us. This is a very complex issue,
and I think this hearing is very important in terms of trying
to deal with the issue at hand.
I understand we'll be hearing today from representatives of
a city that filed suit against the major oil companies, and
Indian tribes that have also sued the oil companies.
Additionally, we'll have the opportunity to hear from the major
and independent oil companies, and also we'll have testimony
from the Department of Interior and the Inspector General of
Interior, as well as the General Accounting Office.
The focus of the hearing will be on the Minerals Management
Service, with specific regard to their management of the oil
royalty program, their efforts to collect past due royalties
and their progress in finalizing a new regulation on oil
valuation for royalty.
The issue of oil royalty valuation is, as I said,
exceedingly complex, and I have some concern with the latest
proposal issued by the Minerals Management Service, one of
which involves the independent oil companies. There are a
number of independents who operate in my congressional
district, and I am very interested in the Minerals Management
Service proposal and its effect on those independents.
Another point that bears mentioning is that the Department
of Interior is looking to impose these new pricing regulations
on the industry at a time when it is suffering from record low
petroleum prices and sustaining record job losses. Therefore, I
think this committee, the Congress and the agencies should be
very sensitive at this particular time with regard to the
industry.
While the Department of Interior estimates that the new
proposal that is currently on the table will increase revenues
from the oil companies by 66 million each year, it's my belief
that we should proceed with caution and ensure that we
understand the implications of the proposal, especially given
its timing and effect.
My interest also is in assuring that the Department of
Interior focuses on forging a productive and useful
relationship with the oil companies and in reaching a consensus
solution that will both protect the taxpayer and provide a fair
deal for the oil companies. It is time that we look to the
future and try to put past disputes behind us in order that we
might resolve this situation. The current climate of continual
litigation across the country does not benefit anyone,
especially the taxpayer.
To further complicate an already complex matter, a Federal
judge in my congressional district where the litigation is
pending has released, as Mr. Davis referred to, some troubling
information which was recently brought to light.
As the other members of this subcommittee are aware, a
current government employee, as well as a former government
employee, who acted as whistle-blowers in an oil valuation
investigation, accepted extremely large monetary payments from
a public interest group that had a financial stake in the
outcome of the lawsuit alleging royalty underpayments by the
oil companies named in that suit. One such employee is
currently within the Department, and the other is previously at
the Department of Energy. Therefore, I am very concerned about
these relationships and whether these individuals were actually
in a position to intervene in the actions of the government and
perhaps to influence the oil royalty valuation regulatory
changes that are currently on the table.
Certainly we should not allow the propriety of these
payments to obscure the real issue at hand, and I do not intend
to allow that information to unfairly skew my judgment.
However, it is a problem that must be dealt with and resolved
before a final decision can be made with regard to the oil
valuation regulation.
I look forward to the hearing. I look forward to hearing
from all the witnesses, and again, I thank the Chair for
scheduling this hearing and for the manner in which it has been
structured.
Thank you, Mr. Chairman.
Mr. Horn. I thank the gentleman very much.
[The prepared statement of Hon. Jim Turner follows:]
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[GRAPHIC] [TIFF OMITTED] T2931.021
Mr. Horn. And let's see, we have no other Members present
yet. Any other statements will be put in the record as if read.
Let me describe some of the procedure here for the first
panel. We are an investigative subcommittee of the Committee on
Government Reform, and as such, all witnesses are sworn before
they give their statement. We're going to introduce you based
on your position on the agenda that was passed out, and we will
hope that--your full statement automatically goes in the record
at that point, and we would hope you would be able to summarize
it.
Now, we have two panels here, and I don't mind giving you
at least 8 minutes to summarize it. We want to spend the time
with dialog, and with four Members here, there's a lot of
dialog that occurs and questions and answers. I think we get to
things a little faster that way than if everybody just reads
their statement. Don't read it. Summarize it.
So, gentlemen, if you would stand, raise your right hands
and take the oath.
[Witnesses sworn.]
Mr. Horn. The clerk will note all four witnesses have
affirmed the oath, and we will start with you, Mr. McCabe.
We're delighted to have you here again. You are a real expert
in this area, and you're deputy city attorney of the city in
which I happen to live, which is the beautiful city of Long
Beach, CA. I don't know why you would come back here and leave
that environs, but you're here, so we're delighted to have you
again.
STATEMENTS OF JAMES McCABE, DEPUTY CITY ATTORNEY, CITY OF LONG
BEACH, CA; ALAN TARADASH, ATTORNEY AT LAW, NORDHAUS, HALTOM,
TAYLOR, TARADASH & FRYE, LLP, ALBUQUERQUE, NM; DAVID DEAL,
ASSISTANT GENERAL COUNSEL, AMERICAN PETROLEUM INSTITUTE; AND
BEN DILLON, VICE PRESIDENT, INDEPENDENT PETROLEUM ASSOCIATION
OF AMERICA
Mr. McCabe. Thank you, Mr. Chairman. I'm happy also, having
worked on many of the items that have been going on in Long
Beach that have been so positive recently, including the new
convention center and the new----
Mr. Horn. Get that microphone closer to you.
Mr. McCabe. Chairman Horn, members of the subcommittee,
many thanks for your invitation today. I--I won't go on about
Long Beach's experience as I might have in my summary, but we
do have much experience in this area. We have collected over 2
million documents, internal documents, from the major oil
companies in California, detailing how they do business there.
As plainly as I can, the city and State have long believed
that their valuable oil resources should be sold on the open
and competitive oil market. We believe that oil should not be
sold at posted prices, prices which are virtually picked out of
the air by the major oil companies to maximize their profits.
There are publicly quoted markets from which oil prices can be
logically and rationally derived that will ensure that lessors,
be they Federal, State or private companies, receive fair
market value for their oil.
The major integrated companies have long fought this
rational process, advocating that royalties should be based on
prices they pick, which are almost invariably below fair market
price. In order to protect their ability to underpay, lessees
have successfully lobbied Congress to pass moratoria and have
done other things to slow the process up generally.
Our powerful economic system is built on competition in the
marketplace, competition that in the oil industry occurs at
well-known locations in Oklahoma, Texas, California, where oil
is freely traded on the open market, and we believe this is a
rational--the only logical choice for--for a way to price
Federal royalty oil that will be fair to all concerned. Long
Beach has recovered over $320 million on this basis. The State
of Alaska has recovered $3.7 billion for the same reason.
Congressman Turner has pointed out his sensitivity to the
position of the independents. The proposed regulations do not
work to the detriment of the independent oil producers. They
will benefit them because, unlike major oil companies, they do
not enter into complex exchange agreements designed to hide the
true value of crude oil. These companies do not have affiliates
through which oil transactions can be funneled obfuscating the
real value of that crude oil. In contrast, the majors do engage
in exchange agreements, do have affiliates through which they
filter this crude oil, all without this crude oil ever seeing
the light of a competitive market.
As I said, the city has extensive experience with documents
produced by the majors for the period of 1980's. These
documents support the contention that posted prices in
California do not reflect the value of that oil in the open
market. ANS crude is sold in Long Beach at prices which exceed
posted prices for comparable California crude. ANS oil is sold
in--Alaskan North Slope oil is sold in Long Beach for prices
that have ranged from $3 to $5 a barrel above the same grade of
oil produced in Signal Hill, which Congressman Horn knows is a
city entirely encompassed by the city of Long Beach.
Despite the delay tactics of the majors, the problem still
exists. For example, comparable grades of ANS crude still sell
at prices that are substantially in excess of our posted
prices. How can the majors maintain that posted prices reflect
the true market value when higher prices are set by open trades
in the free market at the same time, in the same place? Our
experience proves that we cannot have the major oil companies
pay royalties based on what amounts to an honor system.
I urge both you and the committee to support these
regulations as a logical solution to the undervaluation caused
by prices posted by the major oil companies. I have been to
perhaps a dozen workshops hosted by MMS on this subject, and
virtually no one suggested posted prices have any rational link
to market realities.
I want to thank you for your interest in protecting the
public and, in particular, the schoolchildren of the State of
California who are the beneficiaries of our share of these--of
this oil revenue. Thank you.
Mr. Horn. Thank you very much.
[The prepared statement of Mr. McCabe follows:]
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Mr. Horn. We now go to Mr. Alan Taradash, attorney at law,
Nordhaus, Haltom, Taylor, Taradash and Frye, from Albuquerque,
NM. Thank you for coming.
Mr. Taradash. Thank you, Mr. Chairman, members of the
committee. My name is Alan Taradash, as the chairman indicated.
Our firm is general counsel to the Jicarilla Apache Tribe,
which is currently the largest gas-producing tribe in the
country, and it also produces a fair amount of oil.
Before I go into our concerns in this, I do want to make a
special note that we do appreciate the uniqueness of this
opportunity to address the committee, Mr. Chairman, and rather
than go into a lot of detail on the particulars of the proposed
oil valuation regulations that others will cover, I wanted to
address the committee to the unique situation that the tribal
producers are in, because that all too often is forgotten in
the equation.
We have a situation that most Members of Congress barely
have to deal with where the United States acts on behalf of
Indian tribes with regard to their mineral estate as a trustee,
as well as a government regulator. When the United States, on
the other hand, operates as a regulator and as an owner of its
own resource, it operates in a very different environment with
very different legal obligations.
It is important to remind the Congress, as well as
administrative agencies, of this reality because it is far too
often forgotten, and I would like to go into a few examples of
how that inadvertence, if it is that, adversely affects the
value of the tribal mineral estate and the collections that are
properly due to a tribe from the disposition of its
nonrenewable resources.
I have been involved on behalf of tribes and individual
LITs in litigation in Win River with regard to the oil theft
that occurred there, with regard to the failure of the
government and companies to comply with lease terms in the
context of what is referred to as the Supron case and the case
filed in 1984 against the Secretary to try to get the
Department of the Interior and the Secretary to comply with the
Federal Oil and Gas Royalty Management Act of 1982.
We currently still are engaged on a daily basis in the
details of audit work, along with the tribal auditor, through a
cooperative audit arrangement with the Minerals Management
Service, and I want to state at the outset that notwithstanding
the very critical nature of my remarks and our experience,
there are some very excellent people within the agencies I am
about to criticize as well as our industry partners.
Having said that, however, I think it is important in
looking at these valuation regulations to keep in mind what the
overall objective is. If one is engaged in the disposition of
nonrenewable resources, and one is not interested in the
substance itself, then the only question is the fair and
equitable split of the economic profit that can be gained from
the activity. The royalty, like any other expense to the
operator, is an expense. To the royalty recipient, that is the
lessor of the property, it is not an expense. It is the income
and the only income that is going to be received from that
property.
The whole issue of how to best determine value, if one
really thinks about it in the abstract, there are some inherent
limitations on what the government can do. Availability, the
supply of oil; if we're talking about oil, control over the
supply and control over markets are factors which directly
affect this whole process. On the other side of the dynamic
tension that exists is a government as regulator in a supposed
free market. These are mutually inconsistent things that cause
a great deal of the difficulty in coming to grips with the
problems in proper royalty valuation.
I would ask also that the idea that there are abuses is
something that while obviously it is true, one should not paint
the entirety of the industry with that brush. When we
litigated, for example, the oil theft of Win River, in every
possible way oil was being stolen physically from the field, as
well as through improper reports. When I deposed week after
week many of the operators, employees in that area, they
perjured themselves because we later found out through tracking
down the truckers who have been taking the oil from the field
at night, and through finding the pipelines that bypassed the
lock meter, through finding the resettable lock meter, which
was not supposed to be resettable, through finding the jury-
rigged heater tank valve which could be turned without breaking
the USGS seals, oil was being stolen in every conceivable way
from that field. The USGS at that time, the regulatory agency,
along with the BLM, did nothing, absolutely nothing, to put a
damper on the most outrageous of abuses.
I don't want to go into too much of that detail. I
recognize that there is limited time, but the Linowes
Commission, as you know, covered that. The Federal Oil and Gas
Royalty Management Act was supposed to be therapeutic of these
problems in many ways. In the consent decree in the case that I
did against the Secretary on behalf of the Navajo LITs, Shii
Shi Keyah v. Babbitt in the U.S. District Court for the
District of New Mexico, the court retained superintendent
jurisdiction after the 1989 consent decree was entered to look
at the compliance that was occurring.
In 1992, I received from MMS as part of that settlement
agreement the so-called major portion pricing data. I didn't
bring it with me. It's two volumes. It sits this high. The
government had spent at that point in time in trying to correct
the deficiencies in its system over $100 million on its
computer systems, over $100 million. The error rate in those
reports, that I was provided by the government's Minerals
Management System which processed the information, which means
that it was determined to be accurate, with huge parameters
that I employed for accuracy, was over 46 percent.
Let me give you but one example of the nature of the
erroneous information. These reports have columns because of
the value nature of the report. One column is BTU value. The
other column way to the side is the price per MCF of that
particular BTU quality; zero BTU quality gas listed as having
been sold for 660,000 per MCF. Now, that's not in combustible
air.
My point in raising that is this: I have looked at the GAO
reports. I have looked at the IG reports. They do not do the
auditing that the tribe has begun to do in many of these
instances.
They agree a tribe's rate of recovery, for example, in its
audit work over the last 10 years is four-ninths additional
royalties, and for the tribe that's over $40 million in money
that has never been paid.
My point in raising those issues is this: If the government
is going to look at new systems to employ, it has to look at
and be instructed by its past performance on fundamental
things. If the Congress looks at the Federal Managers'
Financial Integrity Act report that the Secretary has filed in
the past, it sees the admission that there is no onshore fluid,
meaning oil and gas, control, and hence the inability to have a
closed accounting system results in acute deficiency in the
government's ability to determine to a certainty it's been paid
right.
Now, my last point, and I want to close with this, is this:
Congress has passed in 1996 the Royalty Simplification and
Fairness Act, preceded in the prior year by the Deep Water
Royalty Relief Act and the Alaska North Slope Act, which
created new markets for oil that was produced there abroad.
Congress--the Deep Water Royalty Relief Act authorized the
Secretary--has since provided relief in the way of royalty
relief that will exceed hundreds of millions of dollars for
deep water production.
Tribal minerals are being devalued by Federal largesse
that's intended to promote the security of the domestic oil
industry. We do not take issue with the government's policy
decisions to do that, but what we ask of this committee and of
Congress is to recognize that when the government acts on its
own behalf to dispense such largesse, and as a consequence it
reduces the value of the tribal mineral estate, then the
government has to consider ways to level that playing field.
And as I've detailed in my written testimony, which I
understand has been admitted to the record, what we would ask
of this committee in addition to the work that it is doing in
valuation is to seriously consider tax credit relief for our
industry partners, for our reservation oil and gas development
and production, and to the extent that the committee or its
staff may be interested in further exploring that, we would
welcome the opportunity to do so.
I'd be happy to answer any questions, Mr. Chairman, that
you and the members of the committee may have. Thank you.
Mr. Horn. Thank you very much. It's a very helpful
statement. We'll get back to a number of things later.
[The prepared statement of Mr. Taradash follows:]
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Mr. Horn. Mr. David Deal is the assistant general counsel
for the American Petroleum Institute, which is the overriding
group in which all of the petroleum industry is represented, as
I recall. So thank you very much for coming.
Mr. Deal. Thank you, Mr. Horn.
Mr. Chairman and members of the subcommittee, I am David
Deal, assistant general counsel of the American Petroleum
Institute. Joining me today is Ben Dillon, IPAA's vice
president for public resources. Our respective trade
associations--and many others which Mr. Dillon will enumerate
for you--are a blend of State and national trade associations
whose members are actively involved in oil and gas exploration
and production on Federal lands. Our trade associations'
memberships overlap, and together our members are responsible
for the production of virtually all Federal oil and gas
production on Federal lands and virtually all of the Federal
oil and gas royalties paid every month.
Over the course of the MMS crude oil valuation rulemaking,
the MMS has stated it seeks revised valuation regulations that
arrive at the value of production in a way which is simpler and
more certain, which decreases the cost of administration and
leads to less controversy, fewer appeals and less litigation.
We applaud these objectives, and we embrace them. But we
believe the MMS proposal, as it stands right now, falls so much
short of reaching them.
At the core of the rulemaking is the MMS belief that
royalty valuation for most crude oil transactions should begin
downstream of the lease. In a nutshell, industry believes that
a downstream starting point for valuation is the wrong starting
point for most transactions and leads to many problems.
A copy of the cover letter summarizing industry's most
recent comments is attached to our written statement, and we're
submitting for the record today a complete set of the comments
themselves. But today, we can share with you the gist of our
present thinking.
Overall our problems----
Mr. Horn. May I just say, without objection, that exhibit
will be in the record at this point.
[The prepared statement of the American Petroleum
Institute, the Independent Peroleum Association of America, the
Domestic Petroleum Council, and the U.S. Oil and Gas
Association follows:]
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Mr. Deal. Thank you, Mr. Chairman.
Overall our problems stem from the MMS's inclination to use
a downstream starting point for royalty valuation.
What are the problems we see? First of all, starting
downstream is unnecessary given the active market at the lease
and the availability of comparable sales at or near the lease
as a sound measure of value. In lieu of the three different
downstream-skewed methodologies proposed by the MMS, we've
suggested major revisions to the existing valuation rules.
Industry changes would permit full usage of a lessee's own
comparable sales for valuation of non-arm's-length transactions
while eliminating perhaps all of the practical problems the MMS
has identified in the past.
Second, starting downstream isn't wise because it requires
adjustments which inject an inherent complication into the
calculation of value and, in the case of transportation, we
believe, can lead to palpably unfair results. In this case,
industry has suggested, where some sort of netback is required,
specific methodologies for the calculation of transportation,
quality and location adjustments, these would lead to values
closer to the lawful value of production, which leads to my
third point.
Starting downstream can lead to unlawful results. To the
extent valuation through indexing captures postproduction
values, and I emphasize postproduction values, added downstream
of the lease, the MMS proposal leads to an outcome at odds with
the law. Royalty is due on the value of production at the
lease. Postproduction activities associated with marketing can
add value and these values are not properly part of the value
of production. Together, industry's suggestions for better use
of comparable sales and more properly calculated adjustments
can solve this problem.
Fourth, the proposed downstream-skewed approach is shot
through with ambiguities that make compliance unduly difficult
and frustrate the MMS's objective of certainty. To eliminate
this problem, industry has suggested that the MMS adopt
regulations which clarify the term ``affiliate'' to make it
clear up front what valuation pathway a lessee should use.
We've also suggested that the MMS adopt regulations that
preclude the threat of second-guessing good faith marketing
decisions and imposing some indexing requirements simply
because a higher price might have been obtained elsewhere by
some other lessee. Likewise, we have suggested that the MMS
adopt an explicit process by which lessees can early on seek
timely and reliable determinations of value. If the MMS can't
answer these valuation questions, who can we ask?
Notwithstanding these reservations, we think the rule can
be fixed if certain key changes along the lines I've described
are made. Over the course of the rulemaking, industry has
submitted voluminous comments, and the MMS, to their credit,
has made some important changes to the valuation proposal.
Within the last year, we have--industry--has sharpened our
focus on the remaining core issue areas. We've had a common
view on the rulemaking from the outset, but in late 1998 we
formed an industry task force that includes API, IPAA and two
of the other signatories to our written comments, namely, the
Domestic Petroleum Council and the U.S. Oil and Gas
Association.
This task force took a hard look at the present proposal,
and we took a hard look at our own industry concerns. Task
force members presented our recommendations at the MMS
workshops held in March and April this year, and on April 27th
we submitted the detailed written comments I alluded to
earlier. These comments assemble in one package the elements of
industry's point of view, proposed solutions and answers to
many specific questions that arose in the course of our
discussions.
We're frankly encouraged at the MMS staff's willingness to
discuss both sides of the core issues, and we continue to
believe these efforts can lead to a sound resolution of this
rulemaking.
I would conclude by saying overall adoption of industry's
recommendations as a package would move the MMS proposal a lot
closer to realizing a final crude oil valuation rule that
satisfies the MMS' own objectives. A revised rule should and
can be workable and fair. The revised rule should and can
decrease the cost of administration and decrease the appeals
and litigation that have plagued all of us in the past, and a
revised rule must satisfy the legal requirement that royalty
obligation be based on the value of production at the lease.
To this I would add just one other thing--to this we would
add only that Congress and the MMS should continue to explore
an alternative that can avoid altogether many of the
ambiguities inherent in any valuation methodology. If the MMS
were to take its royalty-in-kind at the lease instead of in
dollars, valuation questions could be avoided altogether. The
MMS could try to realize for itself the highest selling price
for the crude oil it has taken, or if the MMS were to assume
the postproduction activities now performed by industry, it
might even be able to increase its revenues.
I'll turn now to my colleague Mr. Dillon. Together we can
answer any questions you have, Mr. Chairman.
Mr. Horn. Mr. Dillon, Ben Dillon is vice-president of the
Independent Petroleum Association of America. You might want to
differentiate what your group's membership is compared to the
American Petroleum Institute.
Mr. Dillon. Thank you, Mr. Chairman, members of the
committee. IPAA, the Independent Petroleum Association of
America, primarily represents some 8,000 independent oil and
gas producers across the country. I'm pleased to be here today,
and I submit for the record a list of some 22 additional State
associations, mostly independents, endorsing the industry's
written and oral statements for this hearing, including, I
might note, the California Independent Petroleum Association.
Mr. Horn. Without objection, they will be put in the
record.
Mr. Dillon. Thank you.
Mr. Chairman, IPAA appreciates the opportunity to appear
here today. Your examination of MMS's oil royalty rules could
not be more timely. The past year has been devastating for
America's oil producers. With record number layoffs and shut-in
wells, approximately $2 billion has been lost in tax and
royalty revenues, part of which is dedicated to education. Even
though prices have recovered somewhat, a number of bold steps
need to be taken to save the domestic oil industry. Prices
remain unstable, and recovery time will be lengthy.
However, fair and certain valuation regulations are needed,
irrespective of the economic climate. Yes, MMS's claim to have
made improvements to the rulemaking is solving a number of
concerns. For this we are grateful. However, the rule as
outlined last August by MMS still significantly impacts
independents. I submit for the record a September 1998 letter
signed by some 272 independent producers discussing how they're
impacted by the rule and how these concerns represent the views
of the vast majority of IPAA's 8,000 members.
Mr. Horn. Without objection, that will be put in the record
at this point.
Mr. Dillon. Thank you.
Consider an excerpt from the letter, ``The rulemaking will
cripple independent producers because the government can
second-guess the proceeds I receive from a third party. If a
government auditor decides my proceeds aren't reasonable or
I've breached newly delivered duties, they will subject me to
their complex and costly bureaucratic formulas.'' The letter
concludes, ``To survive in this business climate when oil
prices are extremely low, I must dedicate my scarce resources
to matters that affect my bottom line. That's not speaking on
behalf of the majors; it's stopping arbitrary regulations that
will harm my business.''
Independents are not asking for more favorable royalty
calculations because of low oil prices. We are simply asking
that the rulemaking, especially during these challenging times,
be fair and predictable and thereby eliminate uncertainty and
reduce litigation.
In a letter to MMS on April 27th, Senator Bingaman
recognized the impact of this rule on independents by proposing
regulatory language that would not allow MMS to reject wellhead
sales when compared to other transactions. We have no
indication that MMS will accept this language unless MMS
reproposes the rule and seeks comment.
In his letter Senator Bingaman discussed another component
of second-guessing creating uncertainty for all producers. MMS
wants to be able to challenge bona fide wellhead sale contracts
in search of what it thinks are hidden marketing costs. The
wellhead producer has no control or knowledge of these costs.
An additional unresolved issue affecting all producers is
binding determinations. Every producer, regardless of size,
wants to be able to ask the Department a simple question: Am I
paying my royalties correctly? They want to receive a timely
answer and an answer that is binding. To date, MMS has stated
it may, not will, issue binding guidance, again creating more
uncertainty.
You may be surprised to learn that many independents are
marketing their production downstream of the lease. The
proposed rule affects them due to MMS's failure to allow proper
deductions and expanded duty to market and the use of index for
the offshore and New Mexico. Even wellhead sellers don't want
to create regulatory disincentives for entering into downstream
businesses. Royalty ought to be paid on the value of production
at the lease regardless of where you produce for the size of
your company.
Independents strongly support and participated in the
development of the industry proposal outlined by Mr. Deal.
During a recent MMS workshop in Washington, DC, public interest
groups seemed bewildered by our endorsement of this proposal.
Unfortunately, the so-called experts left the workshop as soon
as the discussion turned technical and demonstrated how each
component of the industry proposal affects independents.
Mr. Chairman and members of the committee, if all sides are
flexible, we can find a solution that allows implementation of
a final rulemaking in a timely manner. IPAA believes that a
comprehensive royalty-in-kind program with possible valuation
language similar to S. 925 is a permanent solution to the
royalty debate.
I'll be happy to answer any questions you or the committee
may have.
Mr. Horn. Thank you very much. We appreciate that
statement.
We're going to give each Member 5 minutes for questioning.
We'll have another round if it's needed, and I'll start out the
questioning.
Let me ask the whole panel. Have you been satisfied with
the rulemaking process, and if you haven't, what are the major
barriers toward implementing a new rule that is both simple and
fair? Mr. McCabe.
Mr. McCabe. Chairman Horn, on the whole, the rulemaking
procedure has been taxing and long, but, you know, that's
something we're willing to go through. What has been
particularly vexing obviously are the continued moratoria on
any rule at all. We deeply believe that the major oil companies
will agree to no rule at all that references market value at--
at the recognized market centers. You can ask the oil industry
representatives if they care to comment on that. I don't think
they will flat out say they will agree to a market-based
judgment of--of oil prices. It's--it's been hectic but
manageable.
Mr. Horn. Mr. Taradash, what's your answer to that? Are you
satisfied with the rulemaking process, and what are the major
barriers that are implementing a new rule, and how do we get
one that's simple and fair?
Mr. Taradash. Well, the process itself, Mr. Chairman,
initially was very unacceptable. Tribes were called to a
meeting at MMS, and this was on the heels of the tentative
agreement, at least on the Federal oil rulemaking, and we were
asked virtually to respond without any opportunity to examine
the issues as to whether a modified version was acceptable to
us. Now, to its credit, after some objection, MMS did change
that approach. However----
Mr. Horn. How did they change it?
Mr. Taradash. Well, they--they offered more opportunity for
input, and the notion was that expanded time and activity was
functionally equal to a substantive examination of the issues,
which is a falsehood. But nevertheless, the process contained,
the elements of fairness in that sense, but it remains,
however, though--what the committee, I think, really should
address in some way is in looking at the way and the
effectiveness that MMS and the government itself, even before
MMS, has enforced lease terms through regulation and otherwise.
Is it reasonable to expect that venturing off into a different
version of valuation regulations is going to be any more
successful than the past version?
And let me just quickly add, Mr. Chairman, one of our major
producers at Jicarilla filed an extremely large claim for
recoupment a number of years ago which resulted in ultimately
negotiations and a settlement agreement through which a
different valuation methodology other than that which MMS has--
was agreed upon between our industry partner and the tribe.
Instrumental in that at the time was Mr. Dillon, who was
working for MMS, and Albie Moriano, who is its Deputy Director.
The creativity involved in that solution lent certainty,
simplicity and closure, increased tribal royalties over 17
percent, and the company has requested and has been given three
additional amendments to that agreement for the sole purpose of
adding additional leases under a valuation methodology that
they know increases their payment.
My point, Mr. Chairman, is this: In cooperation and with a
little bit of creativity, and in cooperation with industry, and
when MMS can be flexible, we have arrived at different
methodologies that do work, that industry is satisfied with,
that offer certainty and closure.
Mr. Horn. Mr. Deal, what's your answer to the question as
to how satisfied you are with the rulemaking process, and what
are the major barriers toward implementing a new rule that is
both simple and fair?
Mr. Deal. Well, a few thoughts which overlap some of my
colleagues here, like Mr. McCabe. We've certainly found this
rather taxing, rather long. We've submitted, at least by my
count, seven sets of voluminous comments, which I have been
centrally involved in writing. It has been taxing, but it's
been worth it. It was a slow start. It took us a while to
figure out what the rule was about and where it was coming
from. In the course of this, I think we--our initial feeling
was the barrier we were confronting was what we perceived as
the MMS' preoccupation with indexing, indexing, indexing; we
don't want to talk about anything else.
I think in the course of the rulemaking, things have
changed. I think there's been a willingness to--to look at more
information. I think there has been some movement on some key
issues so as to sharpen the issues.
I, like Mr. Taradash, look at the valuation regulations,
and while we have offered suggestions that we think will make
the regulations work, I guess our--if you take us a few steps
away from the rulemaking, we would look at valuation and say no
matter what you do, it's inherently complicated, and that leads
us to believe that perhaps something like royalty-in-kind might
be really the answer we're all looking for.
Mr. Horn. Mr. Dillon, do you want to add anything to that?
Mr. Dillon. Yes, Mr. Chairman. As well we have found the
process to be long and taxing, especially to my members who
typically don't engage in such lengthy rulemaking processes.
However, we've come a long way. We started the proposal in 1997
by saying every producer because of a provision that said if
you buy oil, you will be on NYMEX, and all my members buy oil
for one reason or another. It impacted the entire producing
community. That is no longer the case today. We're down to the
type of concerns that I highlighted in my statement and that
are covered in the industry proposal and find that these last
set of workshops were quite productive.
We are a bit frustrated that the outside critics won't
spend time with us trying to come up with the creative type of
solutions that Mr. Taradash talks about. Every time we go to
these sessions, there's a lot of demagoguing on each side. We
have some proposals out there that we truly believe will
satisfy the independent concerns, and there is no exchange as
to how we can find a compromise in that area. But again, even
though it has been a long process, much improvement has been
made.
Mr. Horn. Thank you.
We're going to increase the question period time to 6
minutes because I went over on that, but any time a Member asks
the panel as a whole, we will finish that out.
I want to ask the gentleman from Texas, Mr. Turner, as to
who the ranking member is today. Is it you or Mrs. Maloney, and
I will call on whoever Mr. Turner says.
Mrs. Maloney. Mr. Turner.
Mr. Horn. OK. I yield 6 minutes to the gentleman from
Texas, Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
This is very troublesome to me, and the only thing I can
really relate it to and maybe most of us can relate to the
valuation of a home for tax purposes. You can always have
different experts come in and give different opinions, and it
seems that what has happened in this particular area, to me, is
that we have had difficulty because there are differing
opinions, and any time we have differing opinions, there's room
for litigation. And, of course, when we're talking about
valuing the biggest house on the block owned by the wealthiest
person the block provides for interesting litigation.
So it does seem to me that it's incumbent upon the Congress
and the agency to try to take a common-sense approach to this
issue and to be sure that we set forth some rules that
everybody can understand that can be followed, and that once a
valuation is set and the taxes are collected, that at some
point the door closes and we move on.
And it seems to me that we may be getting close, but we're
not quite there yet, and I guess maybe I might have one
question, Mr. Deal, for you. You mentioned several things that
you thought were good about the efforts that are being made,
and yet I don't see how the door ever closes, how there's ever
a point where there's not an opportunity to second-guess by
some party that will claim that they haven't gotten their fair
share of royalty payments to come in, file a lawsuit and begin,
once again, the process of going through this very expensive
type of litigation on valuation.
Do you have any suggestions on what we could do or what the
agency ought to be doing to be sure that once they do have a
set of rules that are workable, that the door will shut at some
point where there will be no further litigation?
Mr. Deal. We do have a few suggestions, and I would say on
this issue, I have my fingers crossed here. I hope that we're
close to closure with the MMS on this. This threat of second-
guessing has surfaced among both Ben Dillon's and my own
members, but I'd say especially among the small companies who
would enter into what they believe are good faith, arm's-length
transactions, and they fear an auditor or whomever later on
simply looking at it and perhaps finding a higher price
somewhere that either happened or could have happened, and
using that as the basis to unpack the whole transaction, and
then thrusting the lessee into the morass of indexing and that
sort of thing.
The suggestion we've had is that might there not be some
regulations, something in the regulations themselves, which
creates a more explicit hurdle for this. We're not talking
about anything that in any way undercuts the ability, the
proper ability, of the MMS and its State delegatees to audit.
We're not talking about that, and we're certainly not talking
about anything which in any way shields a lessee from bona fide
misconduct.
All we're asking for is something explicit in the
regulations which would recognize that absent some compelling
evidence of misconduct or some other--well, basically
misconduct, absent evidence, compelling evidence, of that, that
there would be a presumption in favor of the transaction being
an arm's-length transaction. This would permit, I think, those
people who do operate in good faith to move ahead, conduct
their business and pay every penny that's due to the Federal
Government.
Like I say, I have my fingers crossed, but I think we--we
may be close to closure on this. I think the MMS has conveyed
to us that they have no interest in their approach to--to
second-guessing, and I think maybe we need some more assurance
of that. So I hope that answers your question.
Mr. Turner. I understand that at some point the Director of
MMS testified to the Congress that the proposed regulations
were going to be revenue-neutral, and yet now I hear that
they're supposed to generate $66 million more a year. What is
your understanding of the objective here of these regulations?
Mr. Deal. Well, we've heard those numbers, too, of course,
and we are quite mindful of that kind of conflicting reports.
We're a little puzzled, frankly, about the $66 million, or
whatever the number may be. We think the numbers should be
revenue-neutral. We think it should be zero. If indeed the
regulations are intended to clarify the law, it seems to us
they should be revenue-neutral. They shouldn't change the
royalty obligation.
If, on the other hand, the regulations involve a change in
the royalty obligation, well, I think if those regulations, if
those expanded regulations, aren't promulgated, that would be a
loss of revenue, but we would say it's a loss of revenue that
the Federal Government was not entitled to in the first place.
So we think Cynthia Quarterman was right in saying that
these regulations should be revenue-neutral.
Mr. Turner. Mr. Dillon, Mr. McCabe said that these
regulations as now proposed didn't affect the independents, and
I'd stepped out of the room, so I didn't hear your testimony,
and I'd like to ask you, No. 1, if that's the case; and No. 2,
from an independent's perspective, if you end up with
complicated regulations that are hard to enforce or follow, it
seems to me you might end up with a possibility of getting less
Federal revenues than more, and I want you to comment on both
those questions.
Mr. Dillon. To recant what I had said earlier, Congressman,
we have about 20 State associations signing off today on our
statements here, and most of them are independents, and the
reason they're doing that, including the IPAA, is to say, yes,
these rules continue to impact us, they continue to cause
uncertainty.
As I mentioned earlier to the chairman, we started with a
process where they told independents that if they bought oil,
they were on NYMEX. They haven't forgotten that. They wondered
why, why wasn't government accepting their wellhead sale. Well,
they have now said, well, that is not the case unless we come
in and examine your wellhead sale and decide that you have
breached some new duty or that the price is unreasonable.
Well, as you can imagine, that really concerns the
membership because if the government did, in fact, determine
that, and, again, this is very exclusive of fraudulent or
misconduct, we wholeheartedly agree, the wellhead seller has
entered into some fraudulent or misconduct, then obviously the
MMS should take the appropriate action which they already have
available to them today under current law. But just because
they have looked to someone else's sale and said, well, Mr.
Dillon, you didn't get as much as your neighbor, so that's not
a reasonable value, therefore you have to go on a government
formula, you're exactly right. All of a sudden your costs go
up, you're possibly litigating. My members don't have in-house
counsel. They're in the courtroom going through a lengthy
process.
What do they tell me that means to them? Obviously the risk
on developing on Federal lands goes up, and therefore, they'll
try to look elsewhere, and Federal lands become the last course
of action, which would result, in our mind, in a decrease in
Federal royalties to the Treasury.
Mr. McCabe. Congressman, if I might respond very briefly?
Mr. Turner. Yes, sir.
Mr. McCabe. The text of the proposed regulations make it
clear that no one need base the price of their crude oil on a
market basis that Mr. Dillon would object to. No one need use
that system who has affiliates through whom they make exchanges
of crude oil, and no one need be hampered by those regulations
who--excuse me, the question of whether they have affiliates or
whether they engage in other kinds of transactions that could
lead to hiding the value of the oil. The independents don't
have affiliates. They don't have refineries. They are not
impacted by this law. They do not behave in a way that--that
engages the terms of the law.
Mr. Dillon. If I can respond to that. Mr. Congressman, I am
not speaking about affiliates as he is describing. In MMS's
latest proposal of July 16th of last summer, it clearly stated
that, in regulatory language, if you sell at the well, gross
proceeds, not about affiliates, and that MMS decides that that
sale was not reasonable or in good faith or was inappropriate
or substantially below market value, boy, those are subjective
words, you're going to be placed on index. It has nothing to do
with an affiliate, and that is why we continue to be frustrated
with the process because that simple message is not being
received.
Mr. Turner. Mr. Chairman, I don't see the time there, so I
don't think----
Mr. Horn. You've only taken 9 minutes, don't worry. No. We
wanted to round that question out.
So, Mrs. Maloney, you have 6 minutes now. I figure you'll
go to 9.
Mrs. Maloney. Mr. Chairman, again, I want to thank you and
Mr. Davis and my good friend and colleague Mr. Turner for his
very thoughtful questions and statements on this. This is an
issue that's incredibly important to me because I feel that at
the heart of all government is trust, whether or not it's being
done well and honestly. And how I got interested in it was
allegations that major oil companies, not independents, were
valuing their oil at a lower price than--than what they paid
for oil on the market, or when they bought it, or when they
sold it, and that the government lost hundreds of millions,
possibly billions, of dollars that should be going to the
schoolchildren of this Nation. And I think that all of us want
honesty and fairness.
And that is why I have worked on this, because I think the
dollar should go to the people who deserve it, and why should
an oil company get a better price than the taxpayers and the
schoolchildren in this Nation? That's where I'm coming from,
and I just want to put in the record that there were a number
of investigations, litigation reports, that have stated in an
undisputed way that the oil companies were paying less to the
Federal Government than they paid in the open market, and there
have been recent oil settlements based on this premise where
Mobil settled for $45 million; Alaska, $2.5 billion. I'm
talking about the major--various major oil companies, to the
tune of $2.9 billion has been settled in oil royalty payments
on the basis that they were underpaying the schoolchildren or
the Federal Government.
Now, that's a fact. That's an absolute fact, and I want to
put it in the record. I would also----
Mr. Horn. Without objection it will be put in at this
point.
[The information referred to follows:]
Recent Oil Settlements
Mobil (Justice Department): $45 million
Alaska: $2.5 Billion
California: $350 Million
Texas: $17.5 Million
Louisiana: $10 Million
New Mexico: $8 Million
Private Royalty Interests: $15 Million
Total: More Than $2.9 Billion, So Far
Mrs. Maloney. All of the various oil settlements that were
based on undervaluation of oil.
I would also like to put in the record a study on the
California oil undervaluation, and it's a review, an analysis
of the discovery documents that were produced in the Long
Island case--excuse me, the Long Beach case, and it basically--
--
Mr. Horn. We have a Long Beach. You have a Long Island.
Mrs. Maloney. I know, I know. And he's selling all the oil,
and my State's buying it all, but it basically----
Mr. Horn. We want to get you all in taxis in New York.
Mrs. Maloney. But basically what this report shows is that
there are two sets of books. There's one set of books on the
posted prices which the oil companies, and I mean large oil
companies, not independents, pay the Federal Government, and
there's a different set of books that they pay each other, and
this is documented in this, and I'd like this put in the
record.
And I'm sorry that we're being called to a vote, and I'm
sorry that Mr. Davis, my colleague on the other side of the
aisle, is not here with me because we have worked very well on
many other bills before Congress, and we had a task force that
just had a positive conclusion in another committee, and I'd
like a bipartisan task force on the independents because I want
to understand it better myself, because certainly the intent,
as was told to me, by MMS was not in any way to hurt the
independents, but only to hit at the two sets of books.
And basically, oil companies when they sell oil to each
other or when they sell oil, they base it on whatever is the
market price. The market price is usually determined by NYMEX
on the east coast, Alaska North Slope in Alaska and in
California.
So, for me, I think the simplest way to handle this is
let's just go to market prices. Let's not have some complicated
rule that everyone's objecting to. Let's just have the oil
companies pay the Federal Government and the schoolchildren
what they pay each other. I think that's fair, and that's
basically where I'm coming from.
I regret that we've been called to a vote, but I would like
to start with a question, and I really want to understand the
independents' point of view because it was my understanding
they were not hurt. And maybe that's a longer discussion than
what we can go in today, and MMS officials have said that they
in no way touch the independents, so I want to understand that.
But, first, I'd like to ask Mr. McCabe, can you in just
common, everyday language give us an example of how the majors
price oil in California? How does this all work? How do the
majors price oil, and how do the independents price oil? Could
you----
Mr. Horn. I want to say that you are under oath and--and
common, everyday language might be difficult for lawyers. Go
ahead, make your stab at it, Mr. McCabe.
Mr. McCabe. That's a good question. The classic California
case--the largest part of California oil is produced in the San
Joaquin Valley. San Joaquin Valley oil is of little value--San
Joaquin oil is of little value unless you get it to a market in
Los Angeles or San Francisco, and to get it there, you have to
take it through a pipeline, for all practical purposes. And in
the classic case, a producer in the San Joaquin Valley finds
him- or herself at the pipeline saying, I want my oil
transported, and the owner of the pipeline says, no way, you
can sell it to me, or your oil isn't transported at all.
So, they arrive at a price, and the price is the posted
price. There is no negotiation, and the posted price is an
arbitrary number obviously picked out by the major oil
companies.
It is no more accurate to suggest that there is an active
market at that location or--or a free market than it is to
suggest that an inmate in our county jail that's next door to
my office is free because he's free to walk about the cell from
one end to the other. These producers are captives of that
particular market in which they have no choice but to sell at
the posted price. In those instances, under these regulations,
obviously those independent producers aren't held to the higher
price. They only need pay on the price they get from the
majors. But if the major transports that oil to Los Angeles or
San Francisco, we have thousands of documents that suggest the
way they value that oil internally is by comparing it to Alaska
North Slope oil that has already been brought to California.
Mr. Horn. May I ask, what's the sulfur content of San
Joaquin oil versus Alaska North Slope oil?
Mr. McCabe. There is no single answer to that, Congressman,
because obviously there are various sources for that oil, but
the--it is clear from the internal documents of these companies
that San Joaquin Valley oil or heavy or light sulfur are much
more valuable to them than is Alaskan North Slope oil despite
the fact that it's of generally the lighter grade and perhaps
sometimes of the lower sulfur content.
Mr. Horn. Is that simply because they're closer by
transportation and they reduce those costs compared to----
Mr. McCabe. No. When they make those comparisons, all
transportation is netted out. All factors of how good the crude
oil are netted out. It's just clear that under all
circumstances they would rather have California oil than
Alaskan oil.
Mr. Horn. You can get another question or so, then we'll
leave for the floor.
Mrs. Maloney. OK, but I really want to ask Mr. Deal and Mr.
Dillon some questions, but I wanted to followup on what you
said, Mr. McCabe. You talk about your documents. Why can't your
documents from the oil companies be made public so that we can
all study this and get a better understanding of it?
Mr. McCabe. Also a good question. We'd like to make them
public, obviously. There--there is a discovery agreement
entered in long ago under which those are to be kept
confidential within the context of litigation. We're perfectly
willing to--to give up copies of those--those documents. All we
need is the agreement of the major oil companies involved.
Mr. Deal is here. He represents some major oil companies.
Perhaps he could shed some light on that.
Mrs. Maloney. But Mr. Deal actually in his testimony talked
about his commitment to fairness and honesty, too, and
supporting fair audits, and at the very least, if you don't
want to publish to the public, could you release for the oil
companies this information for the audits that are taking place
so that they can use these internal documents on the audits?
Following up Mr. McCabe's----
Mr. Horn. I'm going to let you answer that question, but
we're in recess after that question is answered until 3:45. We
have one vote that's winding down to 15 minutes, and we have
three 5-minute votes following that.
Mrs. Maloney. Thank you, Mr. Chairman. That sounds like a
lively discussion while we go to vote. You can talk about
internal documents and whether or not they can be released for
audits. We're going to be coming back to this panel.
[Recess.]
Mr. Horn. OK. Let me wind up with a few questions here and
then we will move to panel two. Mr. McCabe, could you tell me
under California law what deductions can oil companies take
when determining the price of oil for royalty purposes?
Mr. McCabe. Mr. Chairman, I think I can shed light on that.
We don't deal generally in explicit royalty situations. Our
situation is affected by posted price but is not expressly a
royalty contract.
Nevertheless, we have looked at thousands of pages of
documents from the major oil companies in California. We have
never seen anything to suggest through all of these thousands
of documents that the major oil companies believe that
marketing is a significant item in valuing crude oil. I have
never seen any mention of marketing as a factor.
Under California law, there is a duty of good faith and
fair dealing in all contracts involving crude oil and all
contracts involving any subject. In terms of crude oil, that
obviously implies that the party valuing the crude oil has a
duty of good faith to find, under reasonable effort, the
maximum value that can be got for that crude oil. That's the
lessee's situation; that's for the mutual benefit of the
government and the lessee. The lessee obviously wants to find
the highest possible price for its seven-eighths share of the
oil.
Mr. Horn. Thank you for that answer. Mr. Dillon and Mr.
Deal, Senator Nickles recently introduced S. 924, the Federal
Royalties Certainty Act. This bill would, among other things,
allow the oil companies to be reimbursed by the Federal
Government for their marketing cost. What are typical marketing
costs for oil on a per-barrel basis? Can we calculate it that
way, and do States generally permit lessees to deduct the cost
of marketing oil from the State royalty payments?
Mr. Dillon. Mr. Chairman, I can speak a little bit to some
of the midstream--what we would call marketing or midstream
costs that independents are involved with. I think that is one
of the confusions around this issue.
We have members across the country that have decided to
enter into these markets and take the risks and costs
associated with that activity. They do believe that they are
important and significant. We in comments to MMS on the
record--I'm not going to have the exact number, but have said
these costs as far as a range per barrel might be somewhere in
the area of 7 cents to 15 or to 20 cents per barrel as a
minimum. We have tried to put some numbers around that in a
very quick fashion. They may not be quite accurate.
We have provided MMS lengthy lists of what those activities
entail. I think that we were pleased to hear in some of the
workshops that maybe MMS is going to recognize some of these
activities. They might call it transportation; we might call it
marketing.
I also want to point out that it is not just a per-cent
per-barrel matter. It's a matter of uncertainty about, as you
move downstream away from the lease, what is in and what is out
so that we can bring certainty to that and just give a
calculation.
Given that, given its importance, IPAA has filed a lawsuit
on a similar issue, a similar situation, that MMS has taken in
the gas case called IPAA v. Armstrong.
Mr. Horn. Mr. Taradash, let me ask you this one. In your
testimony you have stated that the oil companies have more
incentives to enter into Federal leases than it does to enter
into tribal leases. The tribes are, therefore, operating at a
disadvantage when competing for industry's business. What are
some of the incentives offered to oil companies on Federal
leases that they do not receive on tribal leases?
Mr. Taradash. Well, if you were to go to the Deep Water
Royalty Relief Act and take a look at the first three grants of
relief given to Amoco----
Mr. Horn. That's the Walter----
Mr. Taradash. The Deep Water Royalty Relief of 1995. It
expressly authorizes the Secretary of the Interior at depths
beyond 200 meters, I believe it is, to grant extraordinary
relief. That has been indeed granted. It's in excess of $100
million calculated for at least one recipient of such relief.
The Secretary has, through the BLM leases on Federal lands,
the authority in those leases anyway to suspend reduced royalty
payments if, in the Secretary's view, there are national
interests that are promoted to do so.
As a trustee under tribal leases, the Secretary has no such
authority. The other disability, however, results from the dual
taxation that the tribes suffer from. States have been
permitted to tax on reservation production of private companies
producing tribal minerals.
Tribes who have now had to stand on their own economically
as a matter of self-sufficiency, have introduced their own
taxes. So the tribal and State taxes cumulatively burden the
economic activity. Federal leases don't suffer from such a
burden.
Mr. Horn. Earlier in your testimony you noted that the
Federal Government and the Department of Interior have failed
their trust responsibility to administers Indian oil and gas
leases. In terms of dollars, how much is owed to the tribes or
individual Indians? Do you have any estimate of that, any work
done on that?
Mr. Taradash. For the period of 1988 to 1998 for the
Jicarilla Apache tribe through the work of its auditor and in
fairness with the cooperation of senior MMS staff and its audit
staff, often times over their objection initially and through a
lot of rocky meetings, we have recovered four-ninths additional
royalties. That means in that period of time, the royalties
paid up front were approximately $91.2 million. The tribe has
recovered almost 42 million additional dollars that the
government had not collected. That amount is to the
underpayment of four-ninths, the royalties that should have
been paid.
Mr. Horn. Are there tribes that have similar situations in
either oil or minerals, whatever? Do they get together and
compare notes? Do their attorneys get together and compare
notes?
Mr. Taradash. Yes and no. But it's very, very difficult for
a lot of complex reasons. The fact is every tribe is affected
by the same institutional deficiencies. By the way, the Federal
Government's systems are exactly the same. So when I'm pointing
out to you systemic errors, these systemic errors also apply to
the lack of ability to account for and properly collect under
Federal leases.
So the complexity of it is such that when we have talked
with people at the GAO, for example, the question was asked
earlier about whether these would be revenue neutral
regulations. In 1987 and early 1988 when MMS was talking about
its new valuation regulations, it then went into effect March
1, 1988. It represented to the GAO and to congressional
oversight committees that those regulations are going to be
revenue neutral.
In the 1991 GAO report entitled Interior Used Reasonable
Measurement--whatever the rest of the title is, MMS admitted to
the GAO at that point--and it's reported in that report that
when it made the representation that the revenue, that the
regulations, were going to be revenue neutral it did so because
it made the assumption based upon some data that there would be
an increase in offshore collection.
It knew there would be a decrease in Indian royalty
collections, but because those two offset one another, they
made the assertion that they were going to be revenue neutral.
The difficulty and the dishonesty in that answer, though, is
that Indian tribes don't get any of the offshore collections.
So it's totally irrelevant from that standpoint.
Mr. Horn. In other words, if they had land up to the sea
coast, you are saying that if the State gets some but the
Indian tribe might co-exist with the State obviously and they
don't get any? Explain that to me some more.
Mr. Taradash. Offshore production is solely a matter of
royalties going to the Federal Government and the appropriate
State. When MMS made the assertion that the regulations be
revenue neutral, it did so, as I said, because it increased--it
understood that there would be an increase in offshore
royalties.
Mr. Horn. The higher proportion?
Mr. Taradash. Yes. The Indian royalty terms which require
highest price paid or offered as the basis of the major portion
price, which is one of the indicia of royalty determinants,
were going to be decreased because the methodology in the
regulations is a median pricing methodology.
But Indian tribes do not get any share in offshore
royalties. To say that these would be revenue neutral is
dishonest because Indian tribes don't get offshore royalties;
and yet there was a known decrease to the Indian tribes and
their royalties.
Mr. Horn. I'm going to ask Mr. Turner if you have
participated yet in this round. So the gentleman from Texas.
Mr. Turner. Thank you, Mr. Chairman. Mr. Deal, maybe you
are the right one to ask at least your initial opinion on this.
Shouldn't there be some procedure in all of these regulations
where at some point the MMS tells the oil companies that we
agree or disagree with the value that you set and actually
advise the oil company as to what they do owe?
Isn't there some way, some circumstance ending up with some
regulations that kind of boxes in the issues a little bit,
rather than leave it just wide open that you pay your tax and
then somebody somewhere wants to challenge the amount that is
paid, they can go do that.
I have practiced a little law in my lifetime. That's a
pretty nice lawsuit to pursue. Big oil company issues opinion,
expert testimony on valuation. I could make something out of
that. It seems to me that as long as we have the system that
gives so much flexibility to the process and has no end point
to it, at least at the administrative level, we are always
going to have these disputes.
I haven't seen anybody produce any numbers on how much
litigation costs everybody here, but it's bound to be rather
expensive. Of course, I know the royalties involved are
billions of dollars over the years, and they are worth
litigation costs. But there seems to me there is something
missing here in terms of the basic procedure.
That's aside from the fact that we have all searched
together for some common rules of valuation which we need, but
the procedures seem to be a little bit fraught with potential
problems.
Mr. Deal. I certainly agree 100 percent. One of our
suggestions is that the MMS adopt regulations where it would
commit to issuing what we call binding determinations. Really,
the better adjective is reliable determinations.
Industries--like you, Mr. Turner--think knowing early on
what the obligation is is just as important for everyone
involved. The regulations by any measure are very complicated.
They are hard to figure out in some places. We would say, ``Who
better than the MMS itself can offer answers to difficult
questions?''
Hence, we have suggested a process not unlike IRS revenue
rulings whereby a lessee could present facts and ask for a
determination. The determination would be limited to those
facts, it would have no Presidential value, it would be limited
to those facts.
To the extent that the MMS at some later point in time
found it necessary to alter its opinion, they could certainly
do that. But it would have no retroactive effect. We think that
it makes sense. As to the points that you made about
litigation, I have never seen a number which aggregates the
dollars spent for litigation. I think we all know it is huge.
One of the very objectives of the MMS rulemaking is to arrive
at certainty and decrease administration costs and litigation
costs.
Mr. McCabe. I might respond briefly to the Congressman as
to litigation. We have initiated litigation and been very
successful with this, acquired something like $320 million for
the school system of California. There has been other large
litigation in this country. None of that litigation has arisen
out of the regulations.
This is all litigation that arises as to private parties;
in our case, Long Beach and others who want greater value out
of their oil. That has been successful. None of that
litigation, to my knowledge, arises out of the regulations or
as to a difference of opinion as to what the regulations mean.
Mr. Deal. Well, there are audits going on right now which
have raised serious questions about past payments and, they are
based on whether or not the companies complied or didn't comply
with the existing regulations. So I guess all I can say is for
API's members, at least the experience that I have seen, isn't
the same as yours, Jim.
We have people who scratch their heads, try to comply with
the regs and sometimes there are disagreements. We would just
like to say up front that we are committed to paying every
penny of royalty that we owe. What would really help the
process is to know up front how many pennies there are
involved.
To the extent that we can avoid audits maybe several years
later where the facts have become a little dusty and maybe even
the individuals involved in making policy decisions are long
gone, if we could avoid that, everybody would be better off.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Horn. The gentlewoman from New York.
Mrs. Maloney. I thought that we were called for another
vote.
Mr. Horn. This will be it for this panel.
Mrs. Maloney. Just following up on what you said, if you
want certainty, what is wrong with paying the government what
the oil companies pay each other when they sell their oil? Why
not just go to market price? That would be certainty. That
would be no litigation. It's very clear. It's on the exchanges.
That seems to me a simple straightforward solution.
I have read the internal documents. When oil companies buy
and sell their oil, they use market prices. I have read them
where on California they use ANS. On the East Coast they use
NYMEX. Why don't we just do that for the school children, the
same standard, market price?
Mr. Deal. Well, there are two observations. One, I think
some of the examples you may be using have alluded to--posted
prices are often alluded to. In the rulemaking we are talking
about early on posted price----
Mrs. Maloney. I am not talking about the rule--my question
was why not just use market prices?
Mr. Deal. I'm leading right up to that, ma'am. In the
rulemaking early on, industry acceded to taking posted prices
off the screen. What we looked at instead was the MMS proposal
which originally was the NYMEX futures price. It was later
changed to a somewhat different index, market centers.
Our observation is that it has a certain allure to it. It
looks simple. But as we have dug into it, we think that it's
simplistic. The reason that we think it is simplistic is when
you use indices, they are by definition averages. We don't
think it renders individual justice to individual lessees.
Plus, when you use an index, you have to adjust back to the
value at the lease which the MMS itself accedes to is the end
point or should be the end point.
As we have looked at even the use of market centers, when
you add to the market center spot prices, the adjustments that
the MMS contemplates, we are finding ourselves still falling
short of getting all of the way back.
Hence, we have emphasized that before one uses an index--
and in some cases you might have to use an index--but before
you use an index, before you get on that slope, our strong
suggestion is to look around to see what is at the top of the
hill already.
We think there is an active market at the lease, often. We
think if the lessee himself or herself hasn't engaged in an
arm's-length transaction, there are often comparable sales.
Those ought to be exploited fully. That is at the least a
market price.
Mrs. Maloney. Then why do the oil companies use the market
price when they sell and buy their oil? I just like to back
variety. I have been called to a vote, and I wanted to ask Mr.
Dillon something. How many companies in the IPAA----
Mr. Horn. Let me just briefly say that I am going to go and
vote and get back here. Mrs. Maloney can continue questioning.
Mrs. Maloney. How many companies are members of the IPAA?
How many companies are members of your independent IPAA?
Mr. Dillon. How many companies just in the industry in
general? We have some 8,000 members.
Mrs. Maloney. How many of them own pipelines?
Mr. Dillon. I would have to guess that it's probably
somewhere in the area of 10 to 15 percent of those companies.
Mrs. Maloney. How many of them own refineries?
Mr. Dillon. Less than probably 1 percent to 2 percent.
Mrs. Maloney. You stated that your organization supports
the industry proposal in its entirety; is that correct?
Mr. Dillon. That's correct.
Mrs. Maloney. So I take it that it's your opinion that your
companies have an interest in every specific provision that
industry has put forward in its proposal?
Mr. Dillon. We find that, as we look at the work and
develop the industry proposal, that in each of the issue areas,
independence in one form or another are affected. So to answer
your with one word, the answer is yes.
Mrs. Maloney. I really feel that most Members of Congress
agree with me that we don't want to do anything that hurts
struggling producers, the real mom and pops. Some of my
colleagues tell me that people have oil rigs in their backyard,
that this is a way of life in some areas of the country. We
just don't want to hurt those types of folks.
So I would like to ask you, what in this rule will harm
these producers? I'm not talking about the entire membership,
just the small producers. What in this proposed rule will harm
them?
Mr. Dillon. I like to sometimes call them, Congresswoman,
the ``well head seller.'' The well head seller doesn't own the
pipe and doesn't go downstream. They sell the production at the
well. I think that is where Congressman Turner is. There are
some issues which I did articulate in my oral statement that
goes specifically to that type of producer. It is a subset of
the issues discussed in the industry proposal.
Mrs. Maloney. I have to go vote. May I ask, because I
really am supportive to the small producers, if my counsel
could continue down my line of questions with you? Is that all
right? Not appropriate they are saying? Can I read my questions
and ask Mr. McCabe to ask them for me? I have got to go vote.
Mr. Dillon. Might I suggest that you just submit them, and
we will respond to them in writing.
Mrs. Maloney. I'm not going to submit them for the record
because I never get the answers back. I am going to give them
to Mr. McCabe. If he could ask them, then I will get them on
the way back.
I can't. I have got to go vote.
Mr. Dillon. I don't think the committee is in session with
no Members. If I may ask for a point of order.
Mr. Kaplan. We will need to recess until the Members
return.
Mr. Dillon. There is no one here from the committee.
Mrs. Maloney. Here is the questions, if you could ask them.
On the duty to market issue, are any of your members private
royalty owners? To the best of your knowledge, do they insist
on a duty to market? Can you name a specific instance when MMS
has second-guessed a bona fide arm-length sale that one of your
companies engaged in simply because another producer obtained a
higher price and how often has this occurred?
Then I have another series of questions that I wanted to
ask Mr. Deal because I certainly support free enterprise. I
know that you are interested in an honest and fair system. I
just wanted to ask you a series, too, but I have got to go
vote. I will be right back. I don't see why we can't have
someone else ask them while we are gone.
Counsel has stated that on the record while we are gone
that you can answer these questions that I just gave. Thank
you. I'm sorry.
Mr. Dillon. Counsel, I would like to suggest that we will
commit to respond in writing. I don't see the purpose of
proceeding since no members of the committee are here. But I
certainly give you my word and promise to the committee that we
will respond in a very timely fashion.
I barely was able to write down her questions. If that's
acceptable, we will work with your staff, and we will have you
a response in the very near future. We won't delay.
Mr. McCabe. I will respond very briefly for the record. I
would like to submit to the committee a list of authority. I
think this issue is a side show where the States uniformly
accept a duty to mark up on the lessee. And I will leave it at
that.
Mr. Dillon. Before we close, I would like to submit a
letter for the record that I just received that I do think the
chairman and the Members of Congress will be interested in. It
is a letter that Chairman Frank Murkowski, Senators Domenici
and Nickles sent to the Department of Interior Secretary, Bruce
Babbitt, today inquiring into the allegations about Bob Berman
and the relationships of POGO. So I just thought the committee
might find that instructive and of some use.
Mr. McCabe. I will also submit a letter from the State of
New Mexico from Commissioner Powell in support of MMS.
Mr. Kaplan. I think technically what we will have to do is
when the Members return request that the chairman insert the
letters into the record.
Mr. Dillon. In fact, I withdraw my request because the
point of order is plain. Given that the chairman is not
present, I withdraw the letter because he would have to
acknowledge the submission of it. I think Jim would have to
respectfully do the same.
Mr. McCabe. I wouldn't respectfully do anything at this
point.
Mr. Dillon. We will be glad, in a serious note, to respond
to the questions from Congresswoman Maloney.
[Recess.]
Mr. Horn. Mrs. Maloney has some questions that she will
write you about. If you would, do the answer if you could in 30
days. We would appreciate it. We would like to put it in the
record at this point. So we thank you all for coming and we
will now swear in the second panel. I know that we have a
logistics problem there.
These are documents that we will put into the record
without objection: one is to Secretary Babbitt, signed by three
U.S. Senators, Pete Domenici, Don Nickles, Frank Murkowski.
Another one is ``Sampling Of Duty to Market Cases Under
State and Federal Law,'' citing Oklahoma, New Mexico, Texas,
Louisiana, and Federal law generally.
And a letter here from the State of New Mexico commissioner
of public lands, who is Ray Powell. That's to the Honorable Don
Nickles, chairman, Energy Research, Development, Production and
Regulation Subcommittee of Senate Energy and Natural Resources
Committee. That will go into the record also.
[The information referred to follows:]
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Mr. Horn. Now, if we have everybody here.
Mrs. Maloney. Before we left I had a series of questions
that I asked. I understand that they didn't even answer those
while I was gone. I feel very frustrated because not one single
question that I asked was ever answered because I also had to
go vote.
Mr. Horn. Let's get it in writing and see what we got. We
can always have another hearing.
You, I think, might have heard the ground rules for panel
one, but essentially as an investigatory subcommittee of
Government Reform, we swear in all witnesses. The minute we
call on you, your statement automatically goes into the record
at that point.
The staff and the Members have had an opportunity to read
them unless we didn't get them until now or something which
sometimes happens with the administration, but I would hope
that it would not happen with this panel.
We will then, if you would, rise, raise your right hands,
and I will swear you in. If anybody, I might add for the
administration, or even the private counsels, if anybody behind
you is going to talk, get them to stand up, too, so I don't
have to do five baptisms, which is what I do at the Pentagon
unless I get them all up.
[Witnesses sworn.]
Mr. Horn. I see one, two, three, four, five, six, seven,
eight, nine witnesses potentially. We thank you.
We will now start with Susan and I'm not sure of the
pronunciation is it Kladiva? Say it real fast.
Ms. Kladiva. Kladiva.
Mr. Horn. Susan Kladiva is the associate director, Energy,
Resources, and Science Issues, Recourses, Community, and
Economic Development Division of the U.S. General Accounting
Office. For those that aren't familiar with the General
Accounting Office, they are an arm of the legislative branch
and conduct wonderful program and financial audits for the
Congress. We are glad to have you here. Usually we start off
the whole hearing with a GAO person. We are doing it a little
backward today.
STATEMENTS OF SUSAN KLADIVA, ASSOCIATE DIRECTOR, ENERGY,
RESOURCES, AND SCIENCE ISSUES, RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE;
SYLVIA BACA, ACTING ASSISTANT SECRETARY FOR LAND AND MINERALS
MANAGEMENT, U.S. DEPARTMENT OF THE INTERIOR; LUCY QUERQUES
DENETT, ASSOCIATE DIRECTOR, ROYALTY MANAGEMENT PROGRAM; ROBERT
WILLIAMS, ACTING INSPECTOR GENERAL, U.S. DEPARTMENT OF THE
INTERIOR; AND JOHN SINCLAIR, ASSISTANT INSPECTOR GENERAL, U.S.
DEPARTMENT OF THE INTERIOR
Ms. Kladiva. Thank you, Mr. Chairman. Mr. Chairman, members
of the subcommittee, we are here today to testify on the
valuation of Federal oil. My statement will summarize the
results of a report that we issued in August 1998 and events
that have happened since then.
Specifically, we will discuss the information MMS used to
justify revising its oil valuation regulations, how MMS
addressed concerns expressed during the development of these
regulations, and the feasibility of the government taking its
oil and gas royalties in-kind.
Current regulations define oil sold at arm's length as oil
that is bought and sold by parties with competing economic
interest. The price paid in an arm's-length sale established
the market value for the oil. For the most part, current and
proposed regulations value oil sold at arm's length in a
similar fashion.
However, about two-thirds of the oil from Federal leases is
not sold at arm's length. It is exchanged between parties that
do not have competing economic interest under terms that do not
establish a price or market value. According to the current
regulations, the price of oil sold in these transactions is
based predominantly on posted prices.
Posted prices, however, are simply offers by purchasers to
buy oil from a specific area. Recent evidence indicates that
oil is now often sold for more than posted prices, suggesting
that the value of oil from Federal leases and the amount of
Federal royalties should both be higher.
Under the proposed regulations, the price of much of the
oil that is not sold at arm's length will be based primarily on
spot prices. MMS estimates that this will increase Federal
royalty collections by about $66 million annually.
MMS's decision to revise the oil valuation regulations
relied heavily on the findings of an interagency task force
consisting of representatives from MMS, Interior's Office of
the Solicitor, the Departments of Commerce and Energy, and the
Department of Justice's antitrust division.
The task force recognized that the city of Long Beach
reached agreement with six major oil companies to accept $345
million to settle a lengthy lawsuit. One of the major issues in
this suit was whether the companies' use of the posted prices
represented the market value of oil.
The task force noted that seven major oil companies
dominated the oil market in California by controlling most of
the facilities that produce, refine, and transport oil in the
State, and that this domination, in turn, suppressed posted
prices.
The task force concluded that the major oil companies in
California inappropriately calculated Federal royalties on the
basis of posted prices, rather than include the premiums over
posted prices that they paid or received.
The task force estimated from 1978 to 1993 the companies
should have paid between $31 million and $856 million in
additional royalties to the Federal Government.
MMS also contracted for studies that examined oil pricing
in other areas of the country to determine how oil is
exchanged, marketed, and sold. The studies concluded that
posted prices do not represent the market value of oil, citing
situations in which oil is bought and sold at premiums above
posted prices throughout the country.
As additional evidence the posted prices are less than
market value, the studies cited the common practice of oil
traders and purchasers quoting a posted plus a premium which is
known as the P-plus market.
In addition, varying States supplied MMS with information
on legal settlements they reached with major oil companies
concerning the undervaluation of oil from State leases. In
general, the States disputed the oil companies' use of posted
prices as the basis for determining royalties.
Settlements resulted in Alaska, Texas, New Mexico,
Louisiana collecting over $1 billion. MMS began soliciting
input to its proposed regulations over 3\1/2\ years ago
starting in December 1995.
Since then, MMS solicited public comments on proposed
valuation changes in seven Federal register notices and in 17
public meetings throughout the country. Comments submitted by
States were often at odds with those by the oil industry.
States generally support the proposed regulations because
MMS anticipates that the royalty revenues which it shares with
the States will increase. The oil industry generally opposes
the proposed regulations because they would increase the oil
companies' royalty payments and administrative burden.
MMS has revised the proposed regulation five times in
response to comments received from both the oil industry and
the States. The recently opened comment period closed on April
27. As an alternative to accepting royalties in cash, some
lessors in the United States and Canada accept royalties in-
kind under certain conditions.
These conditions, however, do not exist for most Federal
leases. More specifically, the Federal Government does not
currently have a statutory or regulatory authority over
pipelines that would ensure relative ease of access for
transporting oil and gas from Federal leases.
In addition, some pipelines are privately owned and the
owners are free to set their own transportation fees. These
fees can be substantial when just a single pipeline is
available.
To be cost effective, royalty in-kind programs must also
have large enough volumes of oil and gas so that sales revenues
exceed the program's administrative costs. The majority of oil
and gas leases on Federal lands, however, produce relatively
small volumes and are geographically scattered, particularly in
the western States.
In addition, many Federal leases produce small volumes of
gas that need to be processed. In certain locations there is
only a single gas processing plant, and the lack of competition
might allow these plants to charge high fees.
Finally, the Federal Government has limited experience in
marketing oil and gas, and marketing experience is a key
ingredient in non-Federal royalty in-kind programs.
Mr. Chairman, this concludes my prepared statement, and I
would be pleased to answer questions.
Mr. Horn. Thank you very much. We will wait until all of
the panelists have had their say.
[The prepared statement of Ms. Kladiva follows:]
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Mr. Horn. I might say to the others, which I didn't say
before, is that don't read us your statement, just summarize
it. I would hope that you could do it within 8 to 10 minutes
because your statements have been read.
We now have Sylvia Baca, the Acting Assistant Secretary for
Land and Minerals Management, U.S. Department of the Interior.
Secretary Baca.
Ms. Baca. Mr. Chairman and members of the subcommittee,
thank you. I appreciate the opportunity to be here today to
provide this subcommittee with an update on the major royalty
management issues on which the Department of Interior and its
Minerals Management Service have been working since we last
testified before you in June 1996.
Much has happened since then, and I would like to briefly
describe the progress that we have made from our Federal oil
valuation efforts to our royalty in-kind initiatives to re-
engineering MMS's entire royalty management program.
My written testimony goes into more detail, and we ask that
this be submitted for the record. As you know, in May 1996 the
interagency task force we created to examine the value of
California crude oil reported that it found significant
evidence that in California posted prices were inaccurate
measures of market value.
In July 1996 the Department announced that it would begin
special reviews of oil valuation in California to determine the
amount of royalty underpayments. The Department targeted the 20
largest royalty payers that accounted for 97 percent of the
State's Federal crude oil production.
As a result of those reviews, the MMS billed companies for
underpayments totaling $277 million for the period of 1980
through 1995. These bills have been appealed and several have
gone into litigation. In two decisions the district for
northern Oklahoma ruled that the statute of limitations barred
the MMS from enforcing the orders and disputes covering the
time period from January 1980 to February 1988. Those decisions
are currently under appeal.
It has been well documented over the past several years
that posted prices no longer reflect market value of crude oil,
not only in California, but in other areas as well. This is not
only the view of the Federal Government. Many private royalty
owners and State governments have brought suit against the oil
industry for underpayment of royalties primarily based on
posted prices. You have been given the amounts and the States.
Chevron has settled for $17.5 million in Texas. The State
of Alaska settled for $2.5 million. Recently it was reported
that several of the largest oil companies settled claims from
private royalty interests across the United States for $193
million.
Further, as many of you know, the Department of Justice has
intervened in qui tam suits involving underpayment of royalties
for oil produced from Federal lands.
One company, Mobil Oil, recently settled with the
government for $45 million. That included California
production. The Department has also taken an active role
outside of California.
In June 1996, MMS issued new guidance for valuing crude oil
production nationwide because of the growing prevalence of
companies paying premium above posted prices to purchase to
crude oil. In August 1996, MMS developed a national crude oil
audit strategy for other States and Federal production in the
Gulf of Mexico's outer continental shelf.
The national strategy targeted 125 companies which produce
about 86 percent of Federal crude. These audits are ongoing.
Since December 1995, we have engaged in a thorough process to
revise our Federal oil valuation regulations.
The current regulations, which rely heavily on posted
prices in valuing oil not sold at arm's length were published
in 1998 and have remained in effect until today. Our proposed
rule would move away from posted prices for the so-called
``non-arm's-length'' transactions in those parts of the country
and would instead use published spot prices established at
major market trading centers.
The spot prices would then be adjusted for transportation,
for location, and for quality to arrive at a fair value. In the
Rocky Mountain region where there is no established spot market
prices, we would use a series of bench marks.
While industry opposes certain aspects of the proposed
rule, it generally agrees that the new rule would not rely on
posted prices to determine value for nonarm's-length
transactions. Over the last 3 years, we have modified the
proposal several times to address the concerns expressed by
many with a direct interest in the rule. We have made
particular efforts to try to resolve industry's concerns.
However, Mr. Chairman, we must hold firm on our basic
principle and our statutory responsibilities to our most
important constituent, the American taxpayer. We want a rule
that is administratively simple, certain, efficient, adaptable
to market conditions and, most importantly, reflective of
today's crude oil market.
It is important to understand that this royalty is not a
tax. It is what is owed to the taxpayers for the minerals
produced from public lands. We owe it to the taxpayers to have
a rule in place that accomplishes these objectives.
Secretary Babbitt has been keenly interested in this
process and recently reopened the comment period for all
interested parties to submit new ideas that would move us
forward toward publication of a final rule. He has also
announced additional workshops so that industry, so that
government, public interest groups, and the States could
discuss ideas informally in an open setting.
Now that the comment period has closed and the workshops
are completed, we are in the process of reviewing the written
comments and deciding on a future course of action. I can
promise you this, however, that we are committed to publishing
a rule that assures the public fair return for the minerals
produced from its land.
Mr. Chairman and the members of the subcommittee, I would
like to take this opportunity to clear up what I think is a
misperception about this issue. The oil rule has nothing to do
with recent low prices that have plagued the industry. In other
words, the royalty is not a tax.
While we are sympathetic with what the industry is
experiencing, we do not believe that compromising the oil
valuation rule is the proper way to address the industry's
concerns. The purpose of these regulations is to fulfill our
statutory responsibility to capture market value for the
public's resources.
When the market goes up, our royalties go up. And when the
markets go down, we suffer in tandem with the industry.
However, regardless of market conditions, we do not think that
compromising the oil valuation rule is the proper way to
alleviate market pressures on industry.
There are two other areas that we are changing how we do
our business and that is in our royalty in-kind programs and
our re-engineering efforts.
Let me say briefly that royalty in-kind test programs have
been quite successful. Our RIK pilot for crude oil in Wyoming
has shown us how to maximize revenues under certain conditions.
And our offshore Texas program has proven that we can take the
royalty portion of natural gas from public land and deliver it
to public facilities for less cost.
In concert with the Department of Energy, we are also
beginning to deliver royalty in-kind production from leases in
the Gulf of Mexico to the strategic petroleum reserve.
Finally, the efforts that we now have under way to re-
engineer the entire royalty management program have been going
smoothly. Under re-engineering design, royalty management
functions will be organized around two core business processes:
financial management and compliance and asset management.
The benefits of re-engineering will be significant for
industry, States, and tribes alike, including reducing the time
to distribute mineral revenues to recipients from 30 days to 24
hours and cutting the business cycle from 6 years to 3 years
and streamlining required reported data by up to 40 percent. We
hope for a one-stop shopping for better overall customer
service.
That concludes my prepared remarks. I would be happy to
answer any questions.
Mr. Horn. Thank you very much. We will hold questions until
Mr. Williams, the Acting Inspector General, finishes his
testimony.
[The prepared statement of Ms. Baca follows:]
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Mr. Horn. Robert Williams is Acting Inspector General, U.S.
Department of the Interior. Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman, members of the
subcommittee. I am pleased to be here today to provide
testimony on our reviews of the Department of the Interior's
royalty management system.
Over the past 5 years my office has issued 24 royalty
related reports, which identified monetary impacts of about
$309 million, and made 63 recommendations, of which 43 have
been implemented, 18 are to be implemented, and 2 are
unresolved.
Our Office of Investigations has initiated 30 cases that
have resulted in civil settlements of about $47 million to
date. The results of these reviews generally found that the
Department was making progress in improving the royalty
management system. However, improvements were needed to ensure
that all royalties due the Government were collected and
accounted for.
I will briefly discuss some of the more significant audits
and investigations by issue area.
In regard to royalty determination collection, and
distribution, we noted that the royalty in-kind pilots in the
Gulf of Mexico to test gas and in Wyoming to test oil will
provide the Minerals Management Service with the knowledge and
experience to implement a permanent royalty in-kind system for
those particular regions and products. However, we concluded
that the pilot program will not provide a conclusive assessment
for all Federal oil and gas production.
The negotiated royalty settlements were not always
conducted in accordance with the Service's settlement
negotiation procedures. For 9 of the 10 settlements that we
reviewed, the Service did not adequately document the reduction
of values from $312 million to $94 million for negotiated
issues.
Royalty payors had deducted transportation and gas
processing allowances that exceeded either the actual cost, the
maximum percentages allowed without the approval of the
Service, or 100 percent of the value of the product. We
estimated about $27 million in additional payments was owed the
Federal Government because of excess allowance deductions.
In the area of the Service's operations, we found that
cost-sharing deductions were computed efficiently and deducted
from the States' mineral leasing receipts in a timely manner.
However, inconsistencies in the methods used to compute the
deductions resulted in excess distributions from some States'
receipts. The Service is in the process of returning, in part,
the excess cost deductions to the respective States. The
Service did not accurately identify the additional royalties
that were allegedly owed the Federal Government for undervalued
California crude oil. As a result, 19 bills for collection were
misstated by at least $185.6 million. Although the Service took
prompt actions to correct the errors and issued revised bills,
we concluded that the revised bills were still overstated.
Regarding onshore oil and gas operations, we found that the
Bureau of Land Management's Inspection and Enforcement Program
did not adequately ensure production accountability for oil and
gas or regulatory compliance for well drilling and well
plugging operations on Federal and Indian leases. As a result,
the Government has plugged 131 orphan wells, at a cost of about
$1.6 million, since 1991 and is presently liable for plugging
more than 300 additional orphan wells, at a cost estimated by
the Bureau to exceed $3 million.
In regard to automated systems, we found that the Minerals
Management Service had established general controls over its
automated information systems but that these controls were
inadequate in certain areas, such as risk assessment, security,
logical access controls, and disaster recovery plans. These
weaknesses increased the risk of unauthorized access to,
modification to, and disclosure of program data; theft or
destruction of software and sensitive information; and
potential loss of system capability in the event of a disaster
or system failure.
The Service was using outdated and inefficient data
structures that were difficult to change and improve, it did
not sufficiently test its application software programs to
ensure their operational effectiveness, and it did not
adequately document the program's automated systems. As a
result of these deficiencies, the program unnecessarily
incurred $3.2 million annually for contractor support and for
additional work to detect and correct errors and deficiencies
in the application process.
For offshore operations, we found that the Service had
implemented our recommendation to evaluate the adequacy of
minimum bonus bids and annual rental fees before lease resale.
As a result, we estimated that leases issued between September
1993 and August 1997 had increased revenues by $141 million and
will generate another $194 million in added revenues through
2001.
This concludes my oral statement. I will be pleased to
answer any questions the subcommittee may have at this time.
[The prepared statement of Mr. Williams follows:]
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Mr. Horn. Thank you very much. The gentleman from Virginia,
Mr. Davis.
Mr. Davis. Thank you very much. Ms. Baca, let me ask, you
are not implying that because someone settled, that it's an
admission of guilt on the part of any company, are you?
Ms. Baca. I'm sorry?
Mr. Davis. Because someone may have reached a settlement
with you and paid a sum of money is not an admission that they
necessarily owed money or were guilty in any way of paying
additional money, is it?
Ms. Baca. We are not implying that.
Mr. Davis. I just wanted to get that on the record. Let me
ask if I can, Mr. Williams, when did you first hear about the
$700,000 in payments at the Project on Government Oversight
made to Bob Berman of DOI and Mr. Speer of DOE from the Mobil
settlement proceeds?
Mr. Williams. If I can, I have with me John Sinclair, my
Assistant Inspector General for Investigations.
Mr. Davis. That would be great. Is he sworn?
Mr. Sinclair. Yes, I am. I will try to answer that question
for you. The issue regarding the sharing of the relator's
payment that came in, we were first notified of that in the
first week of April by the Department of Justice Public
Integrity Section.
Mr. Klein. And we have been actively looking into that
issue with the Department since that time. I can't give you any
specifics. It's an ongoing criminal investigation.
Mr. Davis. But your office is currently investigating the
propriety of the payments?
Mr. Sinclair. Yes, yes, we are.
Mr. Davis. Do you know who's handling the investigation?
Mr. Sinclair. The particular attorney? Yes, I do.
Mr. Davis. OK. Is that a secret?
Mr. Sinclair. Well, I contacted Public Integrity today, and
they asked me to refer everything through their public affairs
office.
Mr. Davis. How long have they known about it?
Mr. Sinclair. They referred it to us the first week of
April.
Mr. Davis. How long have they known about it?
Mr. Sinclair. How long has the Justice Department?
Mr. Davis. Right.
Mr. Sinclair. I can't answer that question.
Mr. Davis. Any idea at all; 2 weeks, 4 months?
Mr. Sinclair. I believe that the allegation and the
information came out of the ongoing qui tam cases, so I would
assume that the information which came from another source than
Public Integrity probably was available and the Justice
Department----
Mr. Davis. But who was handling that decision? You feel
this committee shouldn't know that? Is that your position?
Mr. Sinclair. No. Do you want the name of the attorney?
Mr. Davis. Yeah.
Mr. Sinclair. OK. It's Brenda Morris.
Mr. Davis. OK. Thank you. And normally would you expect
government employees who are offered $350,000 payments from
private plaintiffs in litigation related to their job, wouldn't
you expect them to seek guidance from their ethics offices?
Mr. Sinclair. Well, I would, yes.
Mr. Davis. OK. Have you ever heard of a situation like this
where large cash payments to government officials were proper?
Mr. Sinclair. I think that's the reason the Justice
Department and we are looking into this right now.
Mr. Davis. And you don't know how long the Department of
Justice sat on these payments? My understanding, it was 7
months, but you don't have any----
Mr. Sinclair. I have not heard that number. I couldn't even
speculate as to whether it would have been known that long.
Mr. Davis. OK. Are you investigating the Department of
Justice's nondisclosure of the payments as well?
Mr. Sinclair. No, that's not something that's within our
jurisdiction to look at.
Mr. Davis. And whose jurisdiction would that be in?
Mr. Sinclair. I don't know. It's internal to the Justice
Department. If they have some----
Mr. Davis. To overlook the Department of Public Integrity.
Mr. Sinclair. It would probably go to the Office of
Special, or Office of Professional Responsibility, one of the
internal mechanisms within Justice.
Mr. Davis. In your June 1998--going back to Mr. Williams,
in your June 1998 report that was entitled Mineral Management
Service's Work Regarding Unpricing of California Crude Oil, you
know what I'm talking about?
Mr. Williams. Yes.
Mr. Davis. OK. Your office reported that the Minerals
Management Service failed to accurately identify additional
royalties owed to the Federal Government for undervalued
California crude oil.
You report that the Service did not adequately plan its
work, accurately prepare supporting evidence, exercise due
professional care in performing analyses or have adequate
quality control procedures to ensure the accuracy of its
conclusions. As a result, 19 bills sent to oil companies were
overstated by at least $185.6 million; that correct?
Mr. Williams. Correct.
Mr. Davis. In responding to your report in a letter to this
subcommittee, Service officials stated that due to the nature
of this project, generally accepted government auditing
standards did not apply. Do you agree with the Service's
position, that professional auditing standards would not have
applied in this situation?
Mr. Williams. We responded in the report, and they are
responding back to us as a result of the final report and final
position. But what we stated in the report was that given the
sensitivity and the interest in that particular activity, we
felt that some of the professional standards should have
applied.
Mr. Davis. Let me ask Ms. Baca, what are you--what is the
Department's position on this? Why professional standards
shouldn't have applied?
Ms. Baca. Congressman Davis, I believe that we were up
against a statute of limitations on this particular issue, and
we did not conduct a full-blown audit. We felt that a special
process was warranted.
I think it has been found both by the IG and GAO and has
been affirmed by the Oklahoma decisions that if we had not
acted within the time that we did the statute of limitations
would have run out and the government would not have been able
to make their case.
Mr. Davis. So you just throw it in--I mean, 19 bills sent
to oil companies were overstated. You overstate the case and
move something forward so you didn't lose the statute and then
argue about it later?
Ms. Baca. The bills were sent out based on the best data
that we had, and I believe that what we said is that the
companies could come in at anytime and provide us with
information and we would make adjustments. And we did make
those adjustments.
Mr. Davis. Mr. Williams, I understand the large percentage
of the errors that were found in the billings were due to
computational errors in spreadsheets prepared by the Minerals
Management Service's staff. The IG's report stated that one
reason for this was that the working papers did not show
evidence of any supervisory review. Is there a review of an
auditor's work required by auditing standards?
Mr. Williams. Supervisory reviews? Yes, there is.
Mr. Davis. And I guess it's--my red light's on, so it's my
last question, and Ms. Baca, your position is because you were
up against a time crunch. You just didn't have time to move
supervisory review of these?
Ms. Baca. Well, that was clearly a violation of our own
internal procedures.
Mr. Davis. OK. My time is up, Mr. Chairman.
Mr. Horn. If you would like your own time, I'll yield to
Mrs. Maloney. I, in essence, gave you my time.
Mr. Davis. Oh, all right. Let me just take a couple of more
minutes. I take my time back.
Mr. Turner. Mr. Davis, do you want----
Mr. Davis. Just for a couple more questions. Then you would
agree, Ms. Baca, that it's--we understand what happened in this
situation, but the good business is to adequately plan, review
your work and complete it with professional care, and we won't
see this kind of thing again.
Ms. Baca. No, sir, you will not.
Mr. Davis. OK. I'll stop there. Thank you.
Mr. Horn. OK. Gentleman from Texas, Mr. Turner, the ranking
member.
Mr. Turner. Thank you, Mr. Chairman.
Ms. Baca, I think I heard you correctly. You have several
royalty-in-kind programs that you said were very successful; is
that correct?
Ms. Baca. Under certain circumstances, yes.
Mr. Turner. I guess I noted a little bit of criticism from
the General Accounting Office about the royalty-in-kind
programs in the report that I read. Does it really come down to
the fact that in some cases royalty-in-kind is real good for
the government, and other cases it just doesn't work?
Ms. Kladiva. That's correct, sir.
Mr. Turner. And that's what this really----
Ms. Kladiva. That's correct, sir. In certain circumstances,
they can be very successful.
Mr. Turner. Ms. Baca, in terms of what the government
should get in royalty for its, for its appropriate or portion
of the royalty, is it fair to evaluate the issue based on what
the government would get if it actually took all of its
royalty-in-kind?
Ms. Baca. Well, I think that the pilots that we have looked
at again certainly have found that there are certain
circumstances where it works and it is beneficial, but I'll
cite you an example. In Wyoming--we went in and we did a pilot
with the State of Wyoming, and we found that under
circumstances it worked, but in an area where it involved small
stripper wells where they were transporting the oil by truck,
that was not beneficial to the government. And we maintained
that we will look at royalty-in-kind where it makes sense and
where it's going to benefit the government, but we would like,
and we very much promote, that this is done on a basis that
benefits the government.
Mr. Turner. So, under law, you currently have the authority
to take your royalty-in-kind?
Ms. Baca. Yes, right now, it is voluntary, and that is
certainly the position that we are promoting.
Mr. Turner. In these other instances, where it's really not
in the government's interest, it seems to me that there are
some factors involved there that clearly affect the market
value of that royalty. Are those factors taken into account
under your proposed regulations?
Ms. Baca. I will have to ask Lucy Querques to answer that
question, if that would be all right.
Mr. Horn. Would you identify yourself and your title.
Ms. Querques Denett. Yes. My name is Lucy Querques Denett.
I'm the associate director for the Royalty Management Program.
In the last version of the proposed rule, in fact, normally a
lot of these wells--Ms. Baca referred to a stripperwell and the
production that would come from them.
A lot of those are owned by small, independent companies.
They normally sell arm's length, and we would accept the price
that they would receive if it's a third party arm's-length
contract. So, yes, I think we have taken that into
consideration.
Mr. Turner. There seems to be a lot of progress that has
been made in arriving at some new regulations, and I think it's
important for us to separate the disputes that are in the past
and the litigation that's pending from where we are currently
and where we need to go. But it does seem to be possible, based
on what I'm hearing--I think there was some testimony that
maybe you offered before the Senate yesterday that indicated
maybe the, the agency was going to open up the matter once
again and allow some additional comments before you come to a
final proposal on these rules. Is that where we are right now?
Ms. Baca. I don't know if that was included in any
testimony yesterday, but we just recently opened up the comment
period.
We opened it up March 17th, and we went out and we held
three additional workshops. Where we are in the process right
now is in the process of reviewing those comments, and based on
what those comments reveal, we will make a determination of
whether or not we'll have a final rule or whether or not the
comments change the rule, and therefore, we would have to go
out for a new rule.
So we're in this review stage right now.
Mr. Turner. I guess what I'm looking for here is some sense
of whether, what you're now going through is going to result in
some changes in the current proposal or are you just not able
to commit one way or the other?
Ms. Baca. I'm not able to tell you. The APA doesn't allow
us to go into that right now because we're reviewing the
comments. The comments period just closed and staff is going
through them, and I believe by mid-June we'll have a better
sense of, you know, what sort of changes, if there are any
changes that would be made.
Mr. Turner. Thank you.
Mr. Horn. Has the gentleman completed his questioning?
Mr. Turner. The light went on so I'll wait my next turn.
Mr. Horn. Forget the night, I mean light. No, you want to
finish a few questions?
Mr. Turner. Well, I might ask if you expect to be able to
evaluate all the comments by June, then what's the timetable
for actually coming up with a revised proposal, if, in fact, it
is revised?
Ms. Baca. Well, I think soon after the middle of June we'll
have a good sense of where we're going with this rule. You
know, if we were going to change the rule drastically we would
have to go out for a new rule, a new proposed rule, but if the
comments are not--if they don't warrant us changing the rules
substantially, we would be able to have a final rule which
would be, you know, sometime this summer.
If we go to a new proposed rule, I'm told that we could
probably have a final rule somewhere at the end of the year or
the very beginning of 2000.
Mr. Turner. What's the Department's position on this
suggestion that there be some procedure for some advance ruling
where a set of facts could be presented and the agency would
then acknowledge that that's the appropriate valuation method,
and therefore, the royalty could be paid based on that advanced
ruling?
Ms. Baca. Are you talking about a negotiated rule?
Mr. Turner. No. The earlier testimony--in earlier testimony
we had some reference to the possibility of having some advance
ruling that could be issued by the agency so that the royalty
could then be paid based on those facts, if in fact, it turned
out the factual basis for the Department's ruling was not what
really happened, then, of course, the Department would always
have the right to go back and collect the additional royalty.
Ms. Baca. The issue of binding determination has come up at
the workshops, and the position that we have held, and we held
in our last rule which is out there and circulating, is that we
don't feel that binding determination should be just sort of
blanket-given to the industry out there.
We feel that there may be an opportunity to look at this on
a case-by-case level, but we certainly did not support in our
July 1998 rule that we would be open to just blanket binding
determination. If, in fact, we find there are a set of
circumstances out there where we need to consider those
factors, we would do that on a case by case.
The other thing that was proposed was that if we did not
act on those in 180 days that it would be in favor of the
industry. We certainly can't support anything like that.
Mr. Turner. What's your reluctance to provide some advance
binding determination on what the valuation method should be
under this particular set of facts?
Ms. Baca. Well, we feel that if we got to index prices, you
aren't going to have very many circumstances where binding
determination is going to be needed. If you get to index or
spot pricing here, that is a pretty certain set of
circumstances out there for determining the value of the crude
oil. So having the binding determination isn't, I don't
believe, something that, you know, is going to be warranted.
It may be warranted on a case-by-case basis, and we have
always said that we would be open to case by case.
Mr. Turner. Do you feel that the agency should have the
authority to make the final determination rather than other
third parties who may also be beneficiaries of the valuation
that's set?
Ms. Baca. Well, I think that we have listened to all of the
third parties through these 17 workshops that we've held
throughout the country, and it's up to the Secretary to set--
the law certainly gives the Secretary the authority to set the
royalty values and the regulations for getting there.
Mr. Turner. Do you agree with me that the situation that we
find ourselves in with all the litigation that has occurred
that we'd like to get to a point where these matters are not
continually disputed and in court constantly?
Ms. Baca. Well, litigation certainly is not in the best
interest of anybody here. We would rather that we could all
come to agreement on what a fair value is for the taxpayer and
that we could all get there and not have to be caught up in
litigation.
Mr. Turner. But it also seems to me true that when you're
talking about valuation, you know, experts can always differ
with regard to what that value is, and therefore, the issue is
always going to be unless you put some strict restrictions in
place that will allow you to make a clear determination, it's
always going to be subject to litigation.
And it would seem to me to be preferable to have a set of
regulations that had some certainty to them and that had some
period there within which everybody involved would know if you
want to dispute it, you dispute it now but not later. Because
it seems like if you don't do that, you're going to have
continued lawsuits because the plaintiffs are too high profile,
the number of parties who benefit from the royalties are too
numerous, and it's too politically charged not to expect there
wouldn't be litigation if there's an opportunity to have it.
And I just want to be sure that the Department is sensitive
to those kinds of concerns, and that you try to draw
regulations that will avoid that because it's an area that just
seems to me too easy to have lawsuits.
Ms. Baca. Well, you know, we agree. We prefer not to go
down the litigation course ourselves.
That's why we've had 17 workshops and why we have opened
the rule numerous times trying to accommodate a lot of the
concerns that are out there and to come to a rule that, you
know, hopefully will be fair to all parties interested.
Mr. Turner. Thank you.
Mr. Horn. Thank you. And now we have a problem here. I'm
conscious the Secretary has to be somewhere else, I believe.
Mrs. Maloney has to be somewhere else so we'll start with her
with 5 minutes, and then I want to get in one question, then
I'll be glad to give Mrs. Maloney more time, but right now,
it's 5 minutes.
Mrs. Maloney. I'd like to ask Ms. Baca, industry has argued
and--actually Mr. Davis was asking the same types of questions,
that these lawsuits are caused by the fact that MMS' rules are
simply unclear and that there is no deception involved. Is this
accurate?
Ms. Baca. I'm sorry, could you repeat the question?
Mrs. Maloney. Well, along Mr. Davis' question and industry
argues that all these settlements and lawsuits are because MMS'
rules are simply unclear and that there is no deception
involved. Now, is that accurate?
Ms. Baca. The lawsuits have not been on this regulation.
There is no litigation regarding our regulation right now.
That is not--the lawsuits are based on the States going out
there through the qui tam cases, looking at the royalties that
were paid, and these were settlements that were made out there.
It has nothing to do with rule. Our rule has not been litigated
yet.
Mrs. Maloney. It's based on the theory or the fact that the
oil companies were undervaluing their oil, their payments,
their royalties to the government, which then is the rule that
you're putting forward.
They're saying that the rules are unclear and that's why
they were, ``making this huge mistake.'' But I guess basically
what I'm asking is, are companies paying millions in
settlements, and in one case billions, simply because the rules
are unclear?
Why do you think they're paying millions and billions in
settlements if they weren't, in fact, doing what the cases from
the States are saying, undervaluing their law--their payments,
stealing from the school children of this Nation?
Ms. Baca. Well, there have been settlements, and it has
been--the States and the other interested parties went after
them for undervaluation, and that is a reasonable conclusion.
Mrs. Maloney. But you just testified to Mr. Davis that
there was no deception involved. Undervaluation is deception;
is it not?
Ms. Baca. It is a deception.
Mrs. Maloney. OK. Now, I have a series of questions. I'm
going to put them in writing, but I just want to say one thing.
I opened with this letter that talked about a meeting
between the big oil companies and they were going to get the
independents to front for them, and it goes through it. And
everything they said in this letter has come to pass, that they
would attach riders, that they would go to court, that they
would do everything to stall, and you've bent over backward.
You've opened it up for six times for comments. You have been
detained, delay, delay, delay, delay.
This memo, this letter, I'm going to give it to you and
send a copy to all of you.
It just says delay, delay, delay, and then it ends by
saying, if they finally do get a rule, then we will tie them up
in court so that the rule will never be implemented.
So no matter what you do, and I compliment you and your
predecessor and everybody over there who is trying to get a
just payment for the children, according to their own internal
game plan that was put forward 2 years ago, they've done
everything in it, the rider, the this, the that. We won't pay
what we have to, we're going to stop it, and then it says, if
by some chance there is a rule, we will just sue, sue, sue, it
will never be implemented.
So my point is--and I really am pleading with my colleague,
Mr. Horn, in a bipartisan way, I truly and honestly believe
that no rule will ever be implemented, that we will have to
legislate it. That is the only way it will happen, and again, I
want to ask each and every one of you, we have the internal
documents, that they pay spot prices, market prices when they
sell it to each other.
Why don't we just go back to that? Legislate it? Would that
not take care of the problem? Because I honestly believe that
they will implement their plan. They've been successful for 2
years. They've certainly got more money than anybody else, and
you know, they've already paid $2.9 billion so far in
settlements. It's never going to be implemented.
The only way it will ever happen is through legislation, I
really believe that, and I just wanted to comment. And again,
I'm going to be asking GAO to do a report on how much it's
going to cost the Federal Government to go to an in-kind
payment.
I mean, I find this almost humorous. The Soviet Union, the
former Soviet Union, used in-kind settlements. Government
controls everything, no dollar exchange, no free market, no
market price, in kind, and now what we--you know, we conquer
with this free enterprise system the Soviet Union with our
strong economy and then I hear union--I mean private sector
officials arguing to go to the in-kind payment system.
I mean, I find it almost unbelievable to a system that has
been, in the history of other countries, burdensome, creates
more Federal bureaucracy, more paperwork, more internal
problems, and I just, I just find the whole thing very
frustrating, and I feel that--I just feel that there's been a
lot of manipulation and deception, not only to the school
children but to this Congress, to the MMS, to the rule, to
anyone who's trying to get a fair payment on this system.
So I just want to ask you--I want to ask the--well, I don't
know. I'm going to just put it in writing, but I just don't
think you'll ever see a rule. If you see a rule, they're just
going to sue, they're going to tie you up in knots. If it ever
comes they got to pay free market, they're then going to go to
in-kind, manipulate that ruling more and you'll just never see
the dollars that are owed to the school children.
So I just think that we have a real challenge, Mr. Horn, to
attempt to legislate it so you get the fair market value to the
taxpayers that the industry is getting for themselves, and
that's what these settlements are about, and that's what all
the lawsuits have been about, and that's really what's going on
here, and anyway----
Mr. Horn. Let me ask you, Madam Secretary, as I remember,
the March 9, 1999, New York Times had an article entitled Poor
Indians on Rich Land Fight a U.S. Maze, the Federal Government
is failing in its responsibility as trust manager for mineral
leases on tribal lands.
As you know, the trust requires the Department of the
Interior as trust manager to value, collect and disburse
royalties from leases on tribal lands, which is what this
hearing is about in part. The article suggests that fees are
collected, but many checks are not sent out because the
government cannot find the beneficiaries.
The article goes on to say that currently there is no
system to track how much money is coming in and how much is
going out. Hundreds of thousands of records are lost, missing
or unaccounted for. According to the article, records, some
covered with rat excrement, have crumbled in riverside
warehouses, been lost to fire, washed away by floods or buried
in salt mines. By some estimates tribes are owed as much as $10
billion.
What are we doing to address that problem?
Ms. Baca. Chairman Horn, the article that you're alluding
to is a problem that the Office of Special Trust within the
Interior Department is addressing. It's a separate entity from
us.
The only involvement that we have in the Indian Federal
leases is that we are responsible at MMS and BLM for making
sure that we provide the Office of Special Trust and the BIA
with accurate information on the amount of oil that is taken
from those leases. We provide that to them. They then take that
information and they post it to the accounts, and they are
responsible for making sure that it reaches the individual
tribesmen.
Mr. Horn. So you deal with the tribes, too, though, don't
you?
Ms. Baca. Yes, we do, and what we do is we make sure that
whatever oil or gas that is coming from their properties is
reported to the BIA and to the Office of Special Trust. They
are the ones who are responsible for posting it to the accounts
and making sure that it goes to the proper allottees and
beneficiaries.
Mr. Horn. Now, in other words, you don't check, and let's
get the Inspector General in GAO in on this one, you don't
check whether the tribe has the check because you're sending it
to what, the Bureau of Indian Affairs?
Ms. Baca. Yeah. We just send the information on how much
oil, how much gas, how much mineral production was taken off of
those leases. They then are responsible for posting it and
making sure that it is disbursed.
Mr. Horn. Well, let's hold a hearing then on the other
group. What's the name of that group within Interior?
Ms. Baca. We collect the royalties is what I'm told and we
pass it on, and it is the office of special trust.
Mr. Horn. Office of special trust or trusts?
Ms. Baca. Indian trusts.
Mr. Horn. There's not an S on there or is there?
Mr. Williams. Office of the Special Trustee.
Mr. Horn. Special Trustee?
Mr. Williams. Right.
Mr. Horn. OK. Has the Inspector General ever reviewed what
they're doing? Did they see this article in the New York Times?
Mr. Williams. To the best of my knowledge, the Department
has a massive effort--the High Level Implementation Plan--I
believe is addressing----
Mr. Horn. Could you get that microphone a little closer.
Mr. Williams. Sure. I think the GAO is providing oversight
of this as well, and we are like a technical advisor in terms
of the High Level Implementation Plan that is addressing what
is considered the major problems with royalties going to the
individual Indians and the tribes.
Mr. Horn. So you're looking at that now or do you have a
study already?
Mr. Williams. No, we are in the process of participation in
sort of roundtable discussions. We are looking at aspects of
it, but more so, GAO has been there from the beginning, so
we've coordinated our efforts. Where GAO may be looking at the
implementation of an automated system or a particular program,
we would back off and allow GAO to review it, and if there was
something that we would do jointly, we would go in and do that.
Mr. Horn. Well, is the General Accounting Office going to
move in on that situation?
Ms. Kladiva. I'm specifically aware of the work that we may
be doing on an automated system, probably from our accounting
and information management division, but I will be pleased to
provide, for the record, information on what GAO has underway.
[The information referred to follows:]
Since the beginning of 1994, GAO's Accounting and
Information Management Division has issued 15 reports and
testified 7 times on the Department of Interior's management of
the Indian Trust Funds, reporting most recently in April 1999.
That report, INDIAN TRUST FUNDS: Interior Lacks Assurance That
the Trust Improvement Plan Will Be Effective (GAO/AIMD-99-53,
April 28, 1999) examined whether the Interior's High-Level Plan
for improving Indian trust operations provides an effective
solution for addressing its long-standing management weakness
and whether its acquisition of a new asset and land records
management service will cost effectively satisfy trust
management needs. This report is available on GAO's homepage at
www.gao.gov.
Ms. Kladiva. Within our group, the energy resources and
sciences group, we have looked at management of the Indian
trust and have found it to be problematic. I could also provide
information on that.
[The information referred to follows:]
In our report entitled MAJOR MANAGEMENT CHALLENGES AND
PROGRAM RISKS: Department of Interior (GAO/OGC-99-9, pp. 23-29,
January, 1999) we noted that management of the $3 billion
Indian trust fund has long been characterized by inadequate
accounting and information systems, untrained and inexperienced
staff, poor recordkeeping and internal controls, and inadequate
written policies and procedures.
Mr. Horn. What does the word ``problematic'' mean, mean not
stealing or disposing it or what?
Ms. Kladiva. Their interests are not being well served by
the individuals within the government who are responsible for
seeing that they are well served.
Mr. Horn. OK. Now, are you the right division of GAO to go
investigate that?
Ms. Kladiva. Yes, sir, we are the right division.
Mr. Horn. OK. You are going to investigate it?
Ms. Kladiva. I will pass this back to the correct person
within our division.
Mr. Horn. Our staff director, Mr. George, will be in touch
with you, and I would assume you'd both work together on that
because we ought to really look at that one.
I don't know if it's the Indian tribes doing it or Interior
doing it. But if this article is correct and tribes are owed,
now whether they're just generalizing from all tribes across
the country or they're dealing with the one or two that they
discussed, but it just seems to me we ought to get to that very
rapidly.
And I guess I would ask is, what accounting system is being
used to track the royalties collected from Indian leases to
ensure that they collect it and disburse it in a timely and
efficient manner? Is that your shop when the accounting
system----
Ms. Kladiva. It's within our office, sir. I'll pass the
information on.
Mr. Horn. No, I'm thinking of Interior. In whose shop is
the accounting system problem on tracking royalties? Who knows?
Mr. Williams. It would be in the Bureau of Indian Affairs.
Mr. Horn. OK. So--and yet I thought you found out what the
royalties should be, you sent the check to the Indian Affairs
to send to the tribe. Maybe we ought to knock the middleman out
of that, just send it to the tribe and audit them.
Ms. Querques Denett. Did you want an answer on that?
Mr. Horn. Yes, right.
Ms. Querques Denett. The MMS, the royalty management
program does collect the royalties from the production on
Indian land.
Mr. Horn. Right.
Ms. Querques Denett. And we account for it, and then we
disburse it out to the BIA and the Office of Special Trustee,
who then in turn provides it to the special accounts, the
allottees or the tribes, but we collect it and account for it
and audit the leases to make sure the proper payment has been
received.
Mr. Horn. And you don't send it to the tribe directly?
Ms. Querques Denett. Correct.
Mr. Horn. You send it to, what, let's go over it again, the
Bureau of Indian Affairs and they send it to the special
trustee, is that----
Ms. Querques Denett. The accounting, it's the Office of the
Special Trustee that receives the--I believe the money. They
have what are called IIM accounts, individual--all the money
goes to them, they account for it, and they in turn cut the
checks to the Indian allottees.
Mr. Horn. OK. Now, that would be the Indian individual
beneficiaries, or are you saying those are the tribes?
Ms. Querques Denett. I believe both.
Mr. Horn. Both. Well, what I would like is for you all to
get together in Interior and send us a nice chart and an
explanation, and it will go without objection into the record
at this point of the hearing.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T2931.138
[GRAPHIC] [TIFF OMITTED] T2931.139
[GRAPHIC] [TIFF OMITTED] T2931.140
[GRAPHIC] [TIFF OMITTED] T2931.141
Mr. Horn. One last question, Ms. Secretary, and you can
then leave. I guess what bothers me a little bit is when I hear
about the accusations of individuals who, in essence, were
blowing the whistle, and I guess I'd be bothered by that. I
know Mr. Davis went over some of this on the $45 million
settlement and so forth and so on. And, then the Project on
Government Oversight received $1.2 million, and according to
April 30, POGO released--Project On Government Oversight--two
Federal Government employees were each paid $350,000. How did
those payments to those two people, who I believe were on the
Interagency Task Force Report, weren't they?
Ms. Baca. Sir, no.
The individual from the Department of Energy was on the
task force, but the individual who works for the Department of
Interior was not on the task force.
Mr. Horn. OK. So it wouldn't affect the reliability of the
Interagency Task Force report then, right?
Ms. Baca. No, we don't believe that at all. This person was
not in any way involved in the writing of this regulation. He--
--
Mr. Horn. OK. Well, that's what I'm saying, the individual
is clear of any conflict of interest with the regulation.
Ms. Baca. The individual did not work with the MMS to put
this regulation together, and he did not serve on the
interagency task force.
Mr. Horn. OK. So you would agree then that he has had no
impact on the reliability of the Interagency Task Force?
Ms. Baca. We don't believe he's an impact in the
Department, no.
Mr. Horn. Right, OK.
That's what I wanted to hear. It's either one way or the
other. So it isn't because of the alleged conflict of interest.
It's--the fact was he had no interest in it.
Ms. Baca. The IG and the Department of Justice are looking
into it, but we feel that because he did not serve on the
Interagency Task Force and he was not involved in the writing
of the regulation that there's not a conflict of interest.
Mr. Horn. Thank you. I wanted to get that in the record
because I don't think people should be implying things about
other people unless we know what the facts are.
So, I don't have any other questions, but I'll say this to
the three participants here. If you have any question you want
to raise or a point you want to raise about each other's
testimony, I'd be glad to put it in the record at this point.
Do you have any thoughts, Inspector General?
Mr. Williams. No.
Mr. Horn. You're happy, OK. Madam Secretary, you got any
thoughts?
Ms. Baca. Mr. Chairman, we are just very anxious to get our
rule out. We have, you know, labored on this for many years.
We have opened the comment period several times to
accommodate numerous requests. We have come a long way. We've
been criticized by all sides on this issue, and all we're
trying to do is get a regulation out there that's going to
protect the taxpayers and get a fair value. The congressional
moratorium has really hurt us, and we would really hope that
the congressional riders would not be extended and that we
would be able to move forward and have our rule out on the
street.
Mr. Horn. General Accounting Office have any thoughts on
this?
Ms. Kladiva. Well, just to say, sir, that, you know, that
the General Accounting Office is not too prone to be
complimentary of agencies when we do work, but I do want to say
that in--specifically in looking at the process that MMS has
followed in working toward the regs to this point that we
believe that they've been deliberate and that they have taken
all due care to include the positions and to respond to the
positions that have been put forth by the State, as well as the
industry.
It's taken a long time because they have been that
thoughtful in approaching it, a year to do the studies about
how the oil marketing process works so that they could
understand the industry they were regulating; a year and a half
to solicit and to deal with public comments; and then the last
year has been specifically at the behest of a Congress to
continue to work with the industry and try to negotiate the
regs.
So it appears to be a long time, but we believe that it has
been thoughtfully approached.
Mr. Horn. Well, that's a good recommendation. I just want
to tell you where I'm coming from.
I'm coming from the fact that if you have to auction it or
whatever, get the highest competitive price and base your
royalties on that in some way--because I agree, the taxpayers
have something and all of the local units of government also
have something depending on the law and the relationship. So,
we would welcome any comments any panel member has of the first
panel or second panel. We'll put them in the record at this
point so we get it spread out completely and with that we
adjourn this hearing.
I would like to thank the following people: J. Russell
George, staff director and chief counsel; Randy Kaplan,
counsel; Bonnie Heald, director of communications; Mason
Alinger, clerk; Faith Weiss, minority counsel; Early Green,
minority staff assistant; and Melinda Walker and Randy
Sandefer, court reporters.
[Whereupon, at 6 p.m., the subcommittee was adjourned.]
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