Information Used by MMS to Justify Revised Regulations

MMS’ decision to revise the oil valuation regulations relied on the findings of an interagency task force that examined whether the use of posted prices for the purpose of determining federal royalties in California was appropriate. The task force concluded that posted prices were inappropriately used for this purpose and recommended that MMS revise its oil valuation regulations. MMS also initiated audits of two of the seven major oil companies that produced oil from federal leases in California. The company also agreed that it would subsequently value oil from state leases on the basis of NYMEX futures prices. How MMS Has Addressed Industry’s and States’ Concerns

From December 1995 through June 1998, in five Federal Register notices and in 14 meetings throughout the country, MMS solicited public comments on its proposal to change the way oil from federal leases is valued for royalty purposes, and it has revised the proposed regulations three times in response to the comments received. When MMS disagreed with a comment received, the agency provided reasons for not revising the proposed regulations as suggested. In total, MMS solicited comments on 39 major issues and received 183 letters in response. MMS has received 34 letters on its most recent revision of the proposed regulations but has not yet publicly addressed these comments. In particular, the programs seem to be most workable if the lessors have (1) relatively easy access to pipelines to transport the oil or gas to market centers or refineries, (2) leases that produce relatively large volumes of oil or gas, (3) competitive arrangements for processing gas, and (4) expertise in marketing oil or gas. However, these conditions do not exist for the federal government or for most federal leases: The federal government does not currently have relatively easy access to pipelines, has thousands of leases that produce relatively low volumes, has many gas leases for which competitive processing arrangements do not exist, and has limited experience in oil or gas marketing. Comments From the Department of the Interior

Scope and Methodology

To determine what information MMS used to justify the need for revising its oil valuation regulations, we reviewed MMS’ reasons for proposing new regulations as published in Federal Register notices and read all of the comments submitted in response to the first notice that solicited information on oil marketing and the relevance of posted prices. To determine what existing studies and programs indicate about the feasibility of the federal government’s taking its oil and gas royalties in kind, we (1) identified and read two studies—a 1997 study by MMS of the feasibility of royalties in kind and a 1997 analysis by the Congressional Research Service on the oil royalty-in-kind program run by the Canadian Province of Alberta—and interviewed their authors and (2) identified nine royalty-in-kind programs that are currently in operation and interviewed representatives of these programs: the seven oil royalty-in-kind programs operated by MMS, the Canadian Province of Alberta, the City of Long Beach, the University of Texas, and the states of Alaska, California, and Texas; and the two gas royalty-in-kind programs operated by Texas and the University of Texas.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Minerals Management Service's (MMS) efforts to revise its regulations for valuing oil from federal leases, focusing on: (1) the information used by MMS to justify the need for revising its oil valuation regulations; (2) how MMS has addressed concerns expressed by the oil industry and states in developing these regulations; and (3) the feasibility of the federal government's taking its oil and gas royalties in kind, as indicated by existing studies and programs.

What GAO Found

GAO noted that: (1) in justifying the need to revise its oil valuation regulations, MMS relied heavily on the findings and recommendations of an interagency task force--composed of representatives from MMS and the Departments of Commerce, Energy, Justice, and the Interior--assembled in 1994 by Interior to study the value of oil produced from federal leases in California; (2) the task force concluded that the major oil companies' use of posted prices in California to calculate federal royalties was inappropriate and recommended that the federal oil valuation regulations be revised; (3) MMS subsequently determined that in other parts of the country as well, posted prices should not be used as the basis to calculate royalties on oil from federal leases; (4) beginning in 1995, MMS solicited public comments on the proposed regulations in five Federal Register notices; it solicited comments in each notice and revised its proposed regulations three times in response to the comments received; (5) however, the agency did not agree with all the comments it received and in these cases provided reasons for not incorporating the suggested changes, noting that it planned to seek input on this issue through other means; (6) in total, the agency asked for comments on 39 major issues and received 183 letters from states, representatives of the oil industry, and other parties; (7) on its most recent revision of the proposed regulations, the agency received 34 comments but has not yet publicly addressed them; (8) information from studies of royalties in kind, as well as specific royalty-in-kind programs operated by various entities, indicates that it would not be feasible for the federal government to take its oil and gas royalties in kind except under certain conditions; (9) these conditions include having relatively easy access to pipelines to transport the oil and gas, leases that produce relatively large volumes of oil and gas, competitive arrangements for processing gas, and expertise in marketing oil and gas; (10) however, these conditions are currently lacking for the federal government and for most federal leases; and (11) specifically, the federal government does not have relatively easy access to pipelines, has thousands of leases that produce relatively low volumes, has many gas leases for which competitive processing arrangements do not exist, and has limited experience in oil and gas marketing.