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Washington, D.C. - In response to a new report by the General Accounting Office, U.S. Rep. Nick Rahall (D-WV) and U.S. Rep. Carolyn Maloney (D-NY) are calling for more "checks and balances" and greater accountability in the Bush Administration's Royalty-in-Kind pilot program initiated to allow companies that extract oil and gas on federal lands to pay the government "in kind," with barrels of oil and natural gas, instead of in traditional cash payments.
Rahall, who is the Ranking Member on the House Resources Committee, and Maloney, a senior Member of the Committee on Government Reform, asked the General Accounting Office (GAO) to evaluate the Royalty-in-Kind pilot program amid concerns that the Bush Administration may be yielding to pressure from the oil and gas industry and undercutting future revenues for both state and federal governments. In 2001, oil and gas development on the public lands generated $7.5 billion for the U.S. Treasury. According to the GAO report, "MMS (the Minerals Management Service) will be unable to determine whether RIK (Royalty-in-Kind) sales generate more or less revenue than traditional cash royalty payments; whether MMS obtains fair market value; and hence, whether it should convert the RIK pilots to an operational status." (GAO-03-296 Mineral Revenues, pg. 15) Rahall said he's been a long-time skeptic of the Royalty-in-Kind program, which requires the government to market and sell through an agent its percentage of oil and gas. "The quantities owed to the federal government are often subject to dispute and federal bureaucrats are not readily equipped to market oil and gas. That's a job better left up to the companies," Rahall said. "The companies support a nationwide Royalty-in-Kind program because it would provide more of an opportunity to reduce royalty payments to the federal government through suspicious transfers, accounting and marketing schemes. The traditional cash payment system, on the other hand, requires less administration, isn't as complicated to implement and keeps the federal government out of the oil and gas business," Rahall said. Representative Carolyn Maloney led the successful effort in 2000 to force oil companies to pay the federal government fair market value instead of lower "posted prices" set by the industry. That rule change resulted in the federal government collecting millions more annually in oil and gas revenues. "Talk about the ultimate 'slick' scheme - taxpayers have been giving an enormous gift to the same oil and gas industries that are already substantially profiting off federal lands that belong to the people of this country," Maloney said. "Onshore royalty payments are used by many states to pay for public schools and many other important state priorities. The Bush Administration should demand that the Royalty-in-Kind pilot program continue only when, and if, there is clear proof that production levels are being quantified through strict accounting and oversight procedures that protect the public interest. That is why we are demanding that the Administration stop the expansion of the program until they can ensure that the American people aren't being cheated." Rahall added that the GAO report confirms his concerns and leaves too many unanswered questions about the program. "The GAO concludes that after five years of conducting pilot programs and completing 24 oil and gas pilot sales, the Administration cannot monitor or evaluate its RIK Program, cannot determine the program's overall cost and effectiveness, and cannot ascertain whether RIK generates at least as much revenue as traditional cash royalty payments as required by law," Rahall said. In light of GAO's investigation, Rahall and Maloney said the Bush Administration should not proceed with full implementation of the "Royalty-in-Kind" program until solid data is available to show that the American taxpayers - who own the oil and gas on the public lands -- would be getting a fair deal from the oil and gas industry. "In an era of increasing budget deficits, we cannot afford to give away publicly owned resources to the oil and gas industry," Rahall said. Rahall and Maloney said they plan to work in the 108th Congress to continue oversight of the Royalty-in-Kind program. Background: Congresswoman Carolyn B. Maloney, a long-time critic of waste, fraud, and abuse in government programs, has been a leader in efforts to revise the Interior Department's oil-valuation rules. At her urging, in 1997, the House Subcommittee on Government Management, Information and Technology held two hearings into the Minerals Management Service's (MMS) royalty-collection efforts which were instrumental in getting MMS to re-write its oil-valuation rules. She also worked with the General Accounting Office and the House Resources Committee to bring about stronger oversight of MMS. Representative Maloney led the successful effort in 2000 to force oil companies to pay the federal government fair market value instead of lower "posted prices" set by the industry. Because of her advocacy and the efforts of other good government proponents, in the spring of 2000, the Interior Department's Minerals Management Service released its final oil valuation rule. That rule change resulted in the federal government collecting millions more annually in oil and gas revenues. Highlights from the GAO Report: :GAO Outlines Industry's Strong Support for RIK "The value of the oil and gas, in particular, is often a source of dispute. For example, during MMS's recently completed 4-1/2 year process of promulgating new regulations for valuing oil, the oil industry strongly opposed these regulations primarily because they would increase the industry's royalty payments and increase their administrative burden. In commenting on the regulations, industry officials suggested that instead of accepting cash royalty payments, MMS should accept a percentage of the actual oil and gas produced and sell the percentage itself - known as 'taking royalties in kind.'" [GAO-03-296 Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind Pilots is Needed, p. 1]
In One Year Alone, MMS Collected $7.5 Billion in Royalties in 2001 In fiscal year 2001, oil and gas royalties to MMS totaled about $7.5 billion." [GAO, pg. 1]
Over the Five Year Period, 32% of Oil Royalties Were In Kind "From January 1995 through September 2001, the Minerals Management Service took 178 million barrels of oil and 213 billion cubic feet of gas in kind, or about 32 percent of the federal govern-ment's royalty share of all oil and 3 percent of all gas produced on federal lands..." [GAO, p. 2]
No "Clear Objectives" for RIK Program "To date, MMS has not developed clear strategic objectives linked to statutory requirements or collected the necessary information to effectively monitor and evaluate the Royalty-in-Kind Program. Without clear objectives linked to statutory requirements and the collection of necessary information, MMS cannot systematically evaluate to what extent Royalty-in-Kind should continue." [GAO, p. 3]
MMS Has "Taken Increasing Amounts of Royalties in Kind Since 1995" According to the GAO, the estimated value of the oil and gas taken in kind grew from 462 million dollars in calendar year 1995 to 1.343 billion dollars in calendar year 2000, and $1.121 billion dollars in 2001. [Figures provided by GAO (see supplemental highlights chart). Additional information available on pgs. 5, 7 (Figure 2), 11 (Figure 4) of the GAO report]
Royalty-in-Kind is Scheduled to Go from Pilot to Permanence - But MMS Cannot Answer "Why?" "...MMS has yet to develop several key management control activities and does not plan to develop them until 2004, when it will consider the RIK Program to have changed from a pilot status to a fully operational status. Specifically, MMS has not clearly defined its strategic objectives, linked performance measures to these objectives, and collected the necessary information to monitor and evaluate the RIK Program." [GAO, p. 12]
MMS is "Unable to Determine" if RIK is Better for Taxpayers than Royalty-in-Value "Without objectives to guide agency staff in the quantitative evaluation of the revenue impacts of RIK sales, MMS will be unable to determine whether RIK (Royalty-in-Kind) sales generate more or less revenue than traditional cash royalty payments; whether MMS obtains fair market value; and hence, whether it should convert the RIK pilots to an operational status." [GAO, p. 15]
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