SPEAKERS CONTENTS INSERTS
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49–151 CC
1998
HEARINGS ON H.R. 3334, THE ROYALTY ENHANCEMENT ACT OF 1998
HEARINGS
before the
SUBCOMMITTEE ON ENERGY
AND MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
MARCH 19 AND MAY 21, 1998, WASHINGTON, DC
Serial No. 105–92
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Printed for the use of the Committee on Resources
HEARINGS ON H.R. 3334, THE ROYALTY ENHANCEMENT ACT OF 1998
HEARINGS
before the
SUBCOMMITTEE ON ENERGY
AND MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
MARCH 19 AND MAY 21, 1998, WASHINGTON, DC
Serial No. 105–92
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Printed for the use of the Committee on Resources
HEARINGS ON H.R. 3334, THE ROYALTY ENHANCEMENT ACT OF 1998
COMMITTEE ON RESOURCES
DON YOUNG, Alaska, Chairman
W.J. (BILLY) TAUZIN, Louisiana
JAMES V. HANSEN, Utah
JIM SAXTON, New Jersey
ELTON GALLEGLY, California
JOHN J. DUNCAN, Jr., Tennessee
JOEL HEFLEY, Colorado
JOHN T. DOOLITTLE, California
WAYNE T. GILCHREST, Maryland
KEN CALVERT, California
RICHARD W. POMBO, California
BARBARA CUBIN, Wyoming
HELEN CHENOWETH, Idaho
LINDA SMITH, Washington
GEORGE P. RADANOVICH, California
WALTER B. JONES, Jr., North Carolina
WILLIAM M. (MAC) THORNBERRY, Texas
JOHN SHADEGG, Arizona
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JOHN E. ENSIGN, Nevada
ROBERT F. SMITH, Oregon
CHRIS CANNON, Utah
KEVIN BRADY, Texas
JOHN PETERSON, Pennsylvania
RICK HILL, Montana
BOB SCHAFFER, Colorado
JIM GIBBONS, Nevada
MICHAEL D. CRAPO, Idaho
GEORGE MILLER, California
EDWARD J. MARKEY, Massachusetts
NICK J. RAHALL II, West Virginia
BRUCE F. VENTO, Minnesota
DALE E. KILDEE, Michigan
PETER A. DeFAZIO, Oregon
ENI F.H. FALEOMAVAEGA, American Samoa
NEIL ABERCROMBIE, Hawaii
SOLOMON P. ORTIZ, Texas
OWEN B. PICKETT, Virginia
FRANK PALLONE, Jr., New Jersey
CALVIN M. DOOLEY, California
CARLOS A. ROMERO-BARCELÓ, Puerto Rico
MAURICE D. HINCHEY, New York
ROBERT A. UNDERWOOD, Guam
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SAM FARR, California
PATRICK J. KENNEDY, Rhode Island
ADAM SMITH, Washington
WILLIAM D. DELAHUNT, Massachusetts
CHRIS JOHN, Louisiana
DONNA CHRISTIAN-GREEN, Virgin Islands
RON KIND, Wisconsin
LLOYD DOGGETT, Texas
LLOYD A. JONES, Chief of Staff
ELIZABETH MEGGINSON, Chief Counsel
CHRISTINE KENNEDY, Chief Clerk/Administrator
JOHN LAWRENCE, Democratic Staff Director
Subcommittee on Energy and Mineral Resources
BARBARA CUBIN, Wyoming, CHAIRMAN
W.J. (BILLY) TAUZIN, Louisiana
JOHN L. DUNCAN, Jr., Tennessee
KEN CALVERT, California
WILLIAM M. (MAC) THORNBERRY, Texas
CHRIS CANNON, Utah
KEVIN BRADY, Texas
JIM GIBBONS, Nevada
CARLOS ROMERO-BARCELÓ, Puerto Rico
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NICK J. RAHALL II, West Virginia
SOLOMON P. ORTIZ, Texas
CALVIN M. DOOLEY, California
CHRIS JOHN, Louisiana
DONNA CHRISTIAN-GREEN, Virgin Islands
——— ———
BILL CONDIT, Professional Staff
MIKE HENRY, Professional Staff
DEBORAH LANZONE, Professional Staff
C O N T E N T S
Hearing held March 19, 1998
Statements of Members:
Brady, Hon. Kevin, a Representative in Congress from the State of Texas
Cubin, Hon. Barbara, a Representative in Congress from the State of Wyoming
Dooley, Hon. Calvin, a Representative in Congress from the State of California
John, Hon. Chris, a Representative in Congress from the State of Louisiana
Romero-Barceló, Hon. Carlos A., a Representative in Congress from Puerto Rico
Prepared statement of
Tauzin, Hon. W.J. (Billy), a Representative in Congress from the State of Louisiana
Additional material submitted by
Thornberry, Hon. William M. (Mac), a Representative in Congress from the State of Texas
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Additional material submitted for the record
Statements of witnesses:
Geringer, Hon. Jim, Governor of Wyoming
Prepared statement of
Hawk, Philip J., President & CEO of EOTT Energy Corp.
Prepared statement of
Leggette, Poe, Esq., Jackson & Kelly; representing the Independent Petroleum Association of America and the Domestic Petroleum Council
Prepared statement of
Quarterman, Cynthia, Director, Minerals Management Service, U.S. Department of the Interior, Washington, DC
Prepared statement of
Schaefer, Hugh V., Director, Welborn, Sullivan, Meck & Tooley, Denver, Colorado; Chair, Royalties Committee, Independent Petroleum Association of Mountain States
Prepared statement of
Additional material supplied:
American Petroleum Institute, Mid-Continent Oil and Gas Association, The National Ocean Industries Association and The Rocky Mountain Oil and Gas Association, prepared statement of
Memorandum to Members and Staff of Subcommittee
MMS Second Supplementary Proposed Rule, Feb. 6, 1998
Royalty Enhancement Act of 1998, H.R. 3334, Section-by-Section Analysis
Text of H.R. 3334
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Hearing held May 21, 1998
Statements of Members:
Cubin, Hon. Barbara, a Representative in Congress from the State of Wyoming
Thornberry, Hon. William M. ''Mac,'' a Representative in Congress from the State of Texas, prepared statement of
Statements of witnesses:
DeGennaro, Ralph, Executive Director, Taxpayers for Common Sense
Prepared statement of
Hagemeyer, Fred, Coordinating Manager, Marathon Oil Company
Prepared statement of
Kalt, Joseph P., Ford Foundation Professor of International Political Economy, John F. Kennedy School of Government, Harvard University
Prepared statement of
Leggette, Poe, Esq., Jackson and Kelly
Prepared statement of
McCabe, James, Deputy City Attorney, City of Long Beach, California accompanied by M. Brian McMahon, McMahon and Speigel
Prepared statement of
Neufeld, Bob, Vice President, Environmental and Government Relations, Wyoming Refining Company
Prepared statement of
Quarterman, Cynthia, Director, Minerals Management Service
Prepared statement of
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Additional material submitted by
Smith, Lin, Managing Director, Barents Group
Prepared statement of
True, Diemer, Partner, The True Company
Prepared statement of
Vicenti, Rodger, Acting President, Jicarilla Apache Tribe
Prepared statement of
Wallop, Malcolm, a former United States Senator from the State of Wyoming, and Chairman, Frontiers of Freedom Institute
Prepared statement of
Additional material supplied:
Mauro, Garry, Commissionar, Texas General Land Office, additional material submitted by
Powell, Ray, M.S., D.V.M., Commissioner of Public Lands, New Mexico, prepared statement of
Additional material submitted by
Reid, Spencer L., Texas General Land Office, additional material submitted by
Shively, John T., Commissioner, State of Alaska, Memorandum submitted by
HEARING ON H.R. 3334, THE ROYALTY ENHANCEMENT ACT OF 1998
THURSDAY, MARCH 19, 1998
House of Representatives, Subcommittee on Energy & Mineral Resources, Committee on Resources, Washington, DC.
The Subcommittee met, pursuant to notice, at 2 p.m., in room 1334, Longworth House Office Building, Hon. Barbara Cubin (chairman of the Subcommittee) presiding.
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Members present: Representatives Cubin, Tauzin, Thornberry, Brady, Romero-Barceló, Dooley, and John.
STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WYOMING
Mrs. CUBIN. The Subcommittee on Energy and Mineral Resources will come to order.
The Subcommittee is meeting today to hear testimony on H.R. 3334 to provide certainty for, reduce administrative and compliance burdens associated with, and streamline and improve the collection of royalties from Federal and outer continental shelf oil and gas leases, and for other purposes.
The Subcommittee meets today to hear testimony on H.R. 3334, a bill—oh, excuse me, H.R. 3334, the Royalty Enhancement Act of 1998 is sufficiently complex that I believe two days of testimony will be necessary to fully consider the bill.
At this time, I have scheduled a second hearing date for Tuesday, March 31, to focus on issues not covered today. Also, some of the witnesses that were scheduled to testify here today were unable to, due to snow at the Denver airport were unable to be here, so it is all the more important that we have the hearing on the 31st.
[The text of the bill may be found at end of hearing.]
Mrs. CUBIN. Obviously, significant changes in the manner in which some $4 billion of oil and gas royalties are collected each year must be scrutinized very, very carefully. I fully recognize this, but I am not willing to sit back and do nothing while states such as mine are asked to bear a portion of the Federal Government's cost to administer the Federal Leasing Act.
Our states are given little to say—little or nothing to say actually—in the management of what is clearly a broken system for the valuation of crude oil and natural gas. I know what a difficult issue this is because when I served in the Wyoming state legislature I was on the committee where we recodified all of the state statutes on mineral valuation, taxation and point of taxation.
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It is very complicated, but there is no doubt in my mind that this system that MMS is using is fatally broken. I do not say that lightly as I understand the magnitude of the dollars in dispute in various venues around the country, especially with respect to crude oil.
I would note emphatically at the outset that this bill in no way—in no way—forecloses the opportunity for private royalty owners, states or the Federal Government to litigate questions of alleged undervaluation and payment of royalties owed.
What Mr. Thornberry has done by introducing H.R. 3334 is to move us down the road toward designing a system which may dramatically reduce the costs of collecting royalties. At the same time, this bill provides an opportunity for adding value to the public's royalty oil and gas by aggregating volumes and aggressively marketing the product downstream from the traditional valuation point which, as we know, is the wellhead or the lease boundary.
I commend my colleague for the thought that his staff working with the Subcommittee staff have put into drafting this bill in an effort to have a fair and equitable bill ocean everyone.
Did we take advice from the oil and gas industry in the preparation of this bill? Absolutely. Yes, we did. However, you will find that prior to introduction the bill was scrutinized for potential scoring impacts and modified, where in our view a departure from current practice would have negative consequences for revenues to the states and to the Federal Treasury.
Let me reiterate this bill is an attempt to fix a broken royalty-in-value system which requires extraordinarily expensive audit and litigation costs upon the government and on industry alike. Costs which range in tens of millions of dollars annually. Costs which are factored into the net receipts sharing formula whereby MMS will reduce payments to Wyoming by over $7 million in one fiscal year alone.
The Governor told me yesterday that the state legislature, which just adjourned in Wyoming because there was a $14 million shortfall, almost had to stay in session another week. Well, saving this $7 million a year would have taken care of that and could have avoided the problem altogether.
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Costs which are factored into the net receipt sharing formula whereby MMS will reduce payments to Wyoming by $7 million a year just simply is not acceptable. I do not need to remind my colleagues about the testimony that we heard from Ms. Maloney of New York City at our oversight hearing last July where she spoke of lost revenues for California school children from alleged underpayment of royalties.
Well, guess what? Wyoming school kids are being denied $7 million under current law, and there are a whole lot fewer of them to absorb that loss than there are kids in California. In fact, no state receives a larger percentage of its annual budget from Federal mineral receipts than does Wyoming. Therefore, no state has more to win or to lose than Wyoming does.
Therefore, I am very confident that Governor Geringer, who is with us today, would not risk revenues due to the state just to make a few oil producers happy. I know him. I know he would not do that, nor would I. He and I both will demand accountability of the industry and the MMS to be sure revenues are maximized.
I will say now that I have no intention of moving any bill which does not score positively under the rules of the CBO, and those rules do not give credit for what should be a greatly diminished Federal budget for audit and enforcement of an R-I-K program, I might add. This R-I-K program will replace several thousand payors on the MMS computer system with, perhaps, a mere couple of dozen qualified marketing agents.
Furthermore, we have asked for the Interior Department's input from back in March 1996, when Mr. Thornberry first sought to have Texas take its Section 8(g) OCS royalty share in-kind. But, the administration has been unwilling to even contemplate statutory changes, let alone recommend language saying again and again that the secretary has all the authority that he needs. So here we are again in an adversarial position on this issue. It is an issue that begs for mutual understanding, cooperation in a relationship between the states and the Federal Government to get it right for the benefit of the American people.
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I am the eternal optimist, so I am willing to ask one more time—or maybe two or ten more times, whatever it takes—for the administration's cooperation and commitment to work with this Subcommittee and with the states to fashion a workable system. I will not take personally any criticism of our efforts to date and I believe my colleagues from Texas will not either, but neither will I settle for continued foot dragging by the MMS on the premise that ongoing valuation lawsuits somehow compel Congress not to act prospectively.
The chair now recognizes the Ranking Member, Mr. Romero-Barceló.
STATEMENT OF HON. CARLOS A. ROMERO-BARCELÓ, A DELEGATE IN CONGRESS FROM PUERTO RICO
Mr. ROMERO-BARCELÓ. Thank you, Madam Chair.
We are pleased to welcome the distinguished guests before the Subcommittee today. The Minority has not expressed a position on our colleague, Representative Mark Thornberry's legislation, H.R. 3334, but we would like at the outset to commend him for tackling the thorny issue of Federal royalty management.
It is a very dry and technical area and he needs to be congratulated for making this effort. It is much more difficult to be creative than to be critical. Instead of simply attacking the Federal royalty program, Mr. Thornberry has devised some comprehensive and innovative alternatives. We owe him a serious and careful analysis of the bill. So we will not offer a position at this time.
Instead, we will strive to keep an open mind while listening to our witnesses discuss the strengths and the weaknesses of the Thornberry legislation. However, I am compelled to note that the administration is strongly opposed to this bill, and would go as far as to recommend a veto if it were presented to the President. Since Mr. Thornberry has assured us that this bill is simply a starting point, we look forward to working with him to craft a bill that is acceptable to our employers, the American people.
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Such a bill will protect the rights and interests of the United States, and will fulfill the guiding principle of any royalty program to assure the receipt of the full amount due. Such a bill will balance the rights of the United States and its lessors. Such a bill will not relieve lessees of duties only to unfairly place new obligations on the United States. Finally, such a bill will be, at least, revenue neutral.
We do have many questions. Preliminary estimates indicate that the bill, as currently drafted, would cost the government hundreds of millions of dollars each year. If this is correct, then the bill must be revised so that we will not lose the revenues. The Federal oil and gas leasing program is now raising more than $6 billion a year. Clearly, we cannot jeopardize those funds.
In that vein, I have asked the Congressional Budget Office to prepare a preliminary estimate on costs and benefits of H.R. 3334 as introduced, so that we may have the benefit of their expertise as we in the Subcommittee move forward marking up the bill. With your concurrence, Madam Chair, I would like to submit my letter for the record.
I must comment that I appreciate the fact that Madam Chair has already indicated that it will take CBO's estimates into consideration, which is something that we must do. That concludes my opening statement, so we look forward to this afternoon's hearings.
Thank you, Madam Chair.
Mrs. CUBIN. Mr. Thornberry, do you have an opening statement? I bet you do.
[The prepared statement of Mr. Romero-Barceló follows:]
STATEMENT OF HON. CARLOS ROMERO-BARCELÓ, A DELEGATE IN CONGRESS FROM THE STATE OF PUERTO RICO
Madame Chair, we are pleased to join you in welcoming our distinguished guests before the Subcommittee today.
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The Minority has not expressed a position on our colleague, Rep. Mac Thornberry's legislation, H.R. 3334. But we would like, at the outset, to commend him for tackling the thorny issue of Federal royalty management. It is a very dry and technical area, and he is to be congratulated for making this effort. It is much more difficult to be creative than to be critical. Instead of simply attacking the Federal royalty program, Mr. Thornberry has devised a comprehensive and innovative alternative. We owe him a serious and careful analysis of the bill. So, we will not offer a position at this time.
Instead, we will strive to keep an open mind, while listening to our witnesses discuss the strengths and weaknesses of the Thornberry legislation. However, I am compelled to note that the Administration is strongly opposed to the bill, and would go so far as to recommend a veto if it were presented to the President. Since Mr. Thornberry has assured us that his bill is simply a ''starting point''—we look forward to working with him to craft a bill that is acceptable to our employers—the American people.
Such a bill will protect the rights and interests of the United States, and will fulfill the guiding principle of any royalty program—to assure the receipt of the full amount due. Such a bill will balance the rights of the United States and its lessors. Such a bill will not relieve lessees of duties only to unfairly place new obligations on the United States. And finally, such a bill will be, at least, revenue neutral.
We do have many questions. Preliminary estimates indicate the bill, as currently drafted, would cost the government hundreds of millions of dollars each year. If this is correct, then the bill must be revised so that we will not lose revenues. The Federal oil and gas leasing program is now raising more than $6 billion a year. Clearly, we cannot jeopardize those funds.
In that vein, I have asked the Congressional Budget Office to prepare a preliminary estimate on the costs and benefits of H.R. 3334 as introduced, so that we may have the benefit of their expertise as we in the Subcommittee move toward marking-up the bill. With your concurrence, I would like to submit my letter to the record.
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That concludes my opening statement, we look forward to this afternoon's hearing.
The Hon. JUNE E. O'NEIL,
Director, Congressional Budget Office,
Ford House Office Building
Inside Mail
DEAR DIRECTOR O'NEIL:
The Subcommittee on Energy and Mineral Resources is holding hearings this month on H.R. 3334, a bill to change the current Federal oil and gas royalty system from a percentage of production as a cash payment to a ''
''royalty-in-kind'' payment. Under this scenario, the Federal Government would be required to take all oil and gas royalties as product and have a marketing agent, in turn, sell the oil or gas on behalf of the government.
While we are some time away from requiring an actual score on this proposal by CBO, it would be helpful to receive a preliminary analysis of the legislation from you.
The hearings are scheduled for March 19 and March 31, 1998. Your input prior to the second hearing would be most appreciated. A copy of the bill is enclosed for your convenience.
Should you have questions regarding this request you may call me directly, or your staff may contact Deborah Lanzone, Resources Committee at 6-2311.
Sincerely,
| Carlos Romero-Barceló, |
| Senior Democrat |
| Subcommittee on Energy and Minerals |
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STATEMENT OF HON. WILLIAM M. (MAC) THORNBERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. THORNBERRY. Thank you, Madam Chairman.
I will not take much time. I just want to express my appreciation to you and to the Ranking Member and to all my colleagues on the Subcommittee for their willingness to consider a little different approach to this, and their open mindedness to consider if there couldn't be a better way to do this thing.
I kind of look upon this issue like the tax code mess. It is so big and complicated nobody has confidence in it. Nobody thinks that there is a way to write enough tax code regulations to get proper enforcement. There has got to be a way to cut through that, to have a simpler fairer system that benefits everybody. That was certainly my goal.
When we started talking about this two years ago, I was assured that there was no way that the industry could even come together because you had big majors, you had independents, you had oil, you had gas, you had onshore, you had offshore, and that there was no way that you could have a plan or a proposal that would work for all of those different situations.
I think we have got one that might just do it, but I am certainly open and willing to constructive criticism. I don't have much sympathy for the people who sit out there and put out press releases and throw rocks, but for constructive criticism and improvements I certainly want to hear it from any quarter. So I look forward to working with my colleagues and listening our witnesses to try to do the best for the taxpayers all the way around.
Thank you.
Mrs. CUBIN. Mr. Dooley, would you like to have an opening statement?
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STATEMENT OF HON. CALVIN DOOLEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. DOOLEY. Thank you, Ms. Cubin. I appreciate the Committee allowing me to make an opening statement. I am, unfortunately, going to have to leave to a conference committee very shortly.
I just wanted to say that, you know, I applaud the actions of Mr. Thornberry and the actions of the Committee in giving due consideration to the royalty-in-kind proposal. I want to make it very clear that I am a very strong proponent of the concept which is embraced by royalty-in-kind.
I am so because I think it embraces some principles which we all should be able to support. I mean, we spend a lot of time talking about how do we reinvent government over the last few years and how can we make government to be more responsive to the needs of different constituencies and making sure that the government is getting the greatest return to taxpayers for the investment of the taxpayers' dollars.
I think the royalty-in-kind proposal really can move us down that path because it, in fact, will put, I think, in place the appropriate incentives for people who might be marketing oil that would be given to the government as royalty to maximize the return on that. We will be ensured that they will have a vested interest in getting the greatest return to taxpayers because they are going to have a financial incentive to get the greatest return for themselves.
Right now, I would have to say that our royalty proposal or program doesn't necessarily provide for that incentive. I think that is probably the best protection that the taxpayers of this country could hope for when you put that financial incentive into place.
What I think also is very important and it really gets to the issue that Mr. Thornberry talked about, whether you are a large producer or a smaller producer, is how do you ensure that you have equity. I think that this proposal can also ensure that we are providing equity to producers, to making sure that they are paying a fair rate, a fair royalty for the oil that they are producing. It is also ensuring, I think, we provide equity for the taxpayers, too, because they have certainly a vested interest in getting a return on what is a taxpayer asset. I think this royalty-in-kind proposal moves us in that direction.
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I appreciate the fact that we are having this hearing today, because I think Mr. Thornberry acknowledged that maybe this legislation is not perfect yet. But, hopefully, at the end of the day we will hear from some well-informed people that have some expertise and experience and what are the modifications that we can make that we can, in fact, make those proposals something that the administration and all of us can be very proud of.
So thank you.
Mrs. CUBIN. Yes. Mr. Brady, did you have an opening statement?
STATEMENT OF HON. KEVIN BRADY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. BRADY. Yes. Madam Chairman, I had not intended to speak at this point. But my understanding is that earlier today it was reported that the State of Texas General Land Office is opposed to this bill. Let me tell you as of an hour ago they do not believe that is the case. They are not opposed to H.R. 3334. It would be illegal for the agency to oppose legislation. They have some constructive comments that they are getting to us and working with us on, which I appreciate.
Let me clarify again Texas and the General Land Office is not opposed. Let me clarify, too, any perception about the profits of the Texas program quoting directly from Spencer Reed of the Texas General Land Office. The Texas Program is definitely revenue positive. Parts of the program which sell on the spot market are understandably revenue neutral at times, but the self-consumption is highly profitable.
Being a former state legislator a year removed, I can tell you that the biggest part of our public school fund is derived from oil and gas revenues. We would not trust that important fund to a program that doesn't consistently produce for us. I am not going to speak for the General Land Office. They will be here on March 31 for the hearing, Madam Chairman, and I am looking forward to their comments.
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Thank you.
Mrs. CUBIN. Thank you, Mr. Brady.
Mr. John has been speechless since he found out his wife was going to have triplets.
[Laughter.]
Mrs. CUBIN. So I don't know if he has an opening statement, but he is certainly welcome to make one if he does.
STATEMENT OF HON. CHRIS JOHN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA
Mr. JOHN. Thank you, Madam Chairman.
If I start to repeat myself, on the third time please just stop me.
[Laughter.]
Mr. JOHN. I, too, want to thank my colleague from Texas for tackling such a very complex issue. It is an issue, I think, worthy of lots of debate including this forum here today. I also agree with a lot of the aforementioned comments with my colleague from California and my friend from Puerto Rico.
I have been in constant contact with the state of Louisiana, the secretary of natural resources, trying to understand how this would impact Louisiana, and we are working through that. But I just look very much forward to this debate because the merits of this I am in full support of. It is trying to get through the devils of the details, and that is what we are here for. I thank Mac for trying to get us to that point.
Thanks.
Mrs. CUBIN. Mr. Tauzin, do you have opening comments?
STATEMENT OF HON. W.J. (BILLY) TAUZIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA
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Mr. TAUZIN. Well, I certainly want to take a minute again to congratulate my colleague on what a tremendous triple blessing he and Payton are going to experience very shortly. We just got a new puppy, and there is nothing like that.
[Laughter.]
Mr. TAUZIN. You are going to have to work hard, I promise you, Chris. I did want to comment briefly, Madam Chairman, with reference to this issue because it is one in which it appears to me the government wants to have its cake and eat it too.
The government wants to be able to allege that in the marketplace, that in the real marketplace, that companies who produce oil and gas and other hydrocarbons for their purposes and government purposes on government lands or not accounting properly, and they are challenging in court on that basis, for the fact that they are making more money in the marketplace when they sell those products than they are accounting for to the government in royalty. At the same time, they want to argue this issue that they are going to lose money if they have to take the product in kind and go into that same marketplace and sell it.
It seems to me those two arguments are quite contradictory. If the industry is, in fact, benefiting from selling product in the marketplace, then the government should enjoy that same possibility by taking the product in kind and taking it to that same marketplace, if it disputes the value of the royalties collected.
It seems to me that what we begin today is a very worthwhile discussion of which one of those arguments really holds true in the real world. The bottom line is that government can today, as I understand it, take its product in kind if it wants to. If it really believes that companies can do better in the marketplace, then they should be able to do better as well.
It occurs to me as we debate this we ought to ask those who testify to give us some insight as to what happens from the point of production to the point of sale and what it is about this process that the government feels like companies are benefiting in ways that they could not benefit were they to, in fact, take the royalty in kind and go into that same marketplace and sell their product. I should think that we are going to learn a lot, Madam Chairman, in asking witnesses those kinds of questions, and I look forward to doing so.
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My friend Mr. John, I have done some checking with the authorities in Louisiana as well, and they seem to be sort of waiting before taking any firm position on the issue. They are sort of neutral on it because the state has to collect royalties too. I think they have an interest in knowing a little more about the issue before they come down solidly on one side or the other, and I don't blame them.
That is sort of the position, I think, we ought to be in. We ought to ask the hard questions at this hearing and really learn how this marketplace works, and see whether or not the government is really asking to have its cake and eat it or whether or not the government can and should do better by taking its product in kind and going out in the marketplace and selling it, so that we don't have all of these lawsuits about what is the way to calculate the value because in that world the government gets its value straight out. It goes into that marketplace it claims the company is benefiting so royally from and makes its profit directly in the sale of its product through its own marketing capacity. So this will be an interesting discussion, Madam Chairman. I appreciate the fact that you called this hearing and look forward to it.
Mrs. CUBIN. Thank you, Mr. Tauzin.
Now I would like the first panel to come forward. The Honorable Jim Geringer, Governor of my state and his state—480,000 of us. I want to welcome the Governor. We served in the Wyoming Legislature together in the state house and in the state senate, and now he is the king. But today I am the boss.
[Laughter.]
Mrs. CUBIN. Welcome, Governor Geringer. Cynthia Quarterman, director of the Minerals Management Service of the U.S. Department of Interior, if you please could come forward.
Could I ask you to rise for swearing in. Raise your right hand. We do this for everyone.
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[Witnesses sworn.]
Mrs. CUBIN. Governor Geringer, I would like to call on you first for your testimony.
STATEMENT OF HON. JIM GERINGER, GOVERNOR OF WYOMING
Mr. GERINGER. Thank you, Madam Chairman.
I will at least try to encourage the movement of this at a fairly and significant pace because I am due out of National Airport in just a little over an hour so I might be departing early. If I am not able to answer all of the questions that the Committee might wish to raise, I will see to it that there are answers that are brought back to you.
You know, the issue has been framed fairly well around the table already, Madam Chairman, as to what we are hoping to do through this. If we could find a better way to administer programs through government or through the states or through some other process, then we ought to all look at that, and that is the intent of speaking in favor of H.R. 3334 today.
There are many indications that perhaps this may not be the perfect bill. There seldom has been a bill written perfectly or we wouldn't be back every time year after year to bicker about it. But the concepts that have been illustrated so far, for instance, Wyoming receives about $200 million a year in royalty payments. The Federal Government receives at least that much, and that is part of the contention that we have. I say ''at least,'' because there is more than that accrues to their pocketbook through a process called ''administrative costs.''
To my knowledge, no state nor the Federal Government have has ever taken a company to court for selling something too high. There is always a contention that it has been sold too low or valued too low, and that deliberation goes on and on. It is a very expensive litigation process and appeals process.
I am very pleased that Representative Thornberry has taken it upon himself and co-sponsored with yourself and Representative Brady this particular legislation to move an issue along. It certainly needs remedying.
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In Wyoming, we take the royalty payments and share them 50 percent with the schools and the other half goes to various local governments. So this is something that is definitely the underpinnings of the most fundamental part of our society.
H.R. 3334 would simplify the royalty collection process, decrease administrative cost for both the MMS and industry, thereby increasing the net payment to the state to provide certainty and royalty valuation, and decreases the cost of audits and the subsequent appeals and still achieves a fair and equitable market value for the product.
We have been frustrated for some time that we do not have a simple and fair method to value oil and gas for royalty payments. Some producers and leaseholders work very hard to be objective and above board in the valuation of the product at the lease, others are not as forthcoming, and instead they devise all sorts of third party marketing transactions and camouflage the real market that is out there. It is difficult to tell who is right and who is wrong, and rather than assigning blame why don't we just take a simpler approach. That is what this bill endeavors to do.
We are frustrated also with the charges that are being made from the Federal Government to the states to administer the current system. Wyoming receives its 50 percent share of Federal mineral royalties on a net receipts sharing basis, which means that we suffer a deduction of 25 percent of the cost of administration.
It has not always been that way. It has only been lately that the MMS has assigned that cost to the states because their own costs have increased significantly. We do not like the high cost of Federal administration, and so I propose to Assistant Secretary Armstrong that Wyoming be allowed to take its royalty share in kind rather than in cash and avoid having to pay at least the $7 million per year that we lose from the Federal collection and administration.
Now, if the Federal Government could receive the same or greater income from Federal in-kind royalties as it would receive from traditional royalty payments, it seems like a slam-dunk that we should go forward with this. That is our goal in supporting this particular bill.
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There have been several studies from the General Accounting Office, from the Department of Interior IG's Office within the state of Wyoming to determine the true costs of administration. Wyoming contends that we can accomplish the administration of the royalty program for one-seventh of the cost, that when we have attempted to have detailed disclosure of the cost breakdowns from the MMS we do not get those in a way that we can do a one-on-one comparison.
The GAO stated that we could not compare both programs because their tasks were so completely different. We disagreed with the GAO's conclusion. The task of monitoring leases, production, valuation, and collection of royalties are no different on a state lease or a Federal lease, and we do both.
The state of Wyoming still does the auditing for many of the leases that the Federal Government has undertaken. There will be a written designated agent for the last—I believe it came in in 1983, so about 15 years. In fact, we have saved the Federal Government through our collections and auditing $50 million just in the last 11 years alone, so we already know how to do it.
They have acknowledged that by renewing the contract with the state every year. States know how to do it, and they do do it very well. For whatever was said at the press conference this morning, I think the facts speak for themselves that the states are significantly capable of handling this. One of the proposals for the marketing of the in-kind oil or marketing of anything or to calculate valuation would be based on NYMEX pricing.
As I looked at the oil price this morning as it was posted for Wyoming production, some of the postings are based on a NYMEX price, but most of the Wyoming posted is based on what is called the West Texas intermediate. The Wyoming valuation has dropped significantly. There is another reason, Madam Chairman, for why we in Wyoming are proposing the opportunity to take royalty in kind.
If the state of Wyoming is able to contract with a qualified marketing agent and aggregate all of its production or at least a significant portion of whatever is economically feasible, we could aggregate it because it is going through a third party. It would be truly at arm's length.
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We would encourage a lot of our independent producers in Wyoming who are currently suffering mightily at the drop in oil prices—they are about to shut in their wells—rather than shut in all of these marginal wells, which nationally could amount to 20 percent of the entire production of consumption of the United States' petroleum, if those wells were shut in, they likely would not be brought back in.
That has a significant impact on our national security and our future as far as the control of the costs, or at least the opportunity to have an influence on the cost of that production. If we can keep our small independent operators going through an aggregation process where they can bid in and ask the same agent to aggregate their product and thereby increasing the total volume, the benefits accrue all across the board. We all benefit. So, it is a true partnership that could evolve out of the system. I see so much potential there that it certainly ought to be evaluated, and so I speak in favor of that.
The state should be able to continue to retain its 50 percent, but it should be on a gross proceeds basis rather than net proceeds. We should not have to argue over whose valuation or whose administrative costs are deducted. Let the state have the sole option whether or not it wants to take on the program. The state should be able the use a qualified marketing agent. The state should enjoy all of the benefits of the Federal Government.
The bill, Madam Chairman, does state that on page 10 under Section (b)(1): ''The state shall enjoy all the rights and assume all of the obligations that the United States would otherwise have under this Act.'' That is all that we are asking. It is a pretty easy concept. If the states are willing to take it on and want to do it, let them do it.
The MMS has proposed pilot programs and have proposed one in Wyoming which we have supported, at least in concept. The actual process and procedure we are not in full agreement on, but we ought to acknowledge that there are ways that we could do it to demonstrate whether or not such a program would work.
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I believe that the best chance for success is to let the real experts market the oil and gas in order to get the best price. MMS believes that they should be allowed to do the marketing and I question whether they have the expertise to do that marketing.
I appreciate Cynthia Quarterman's and MMS's intent work with our state in developing a pilot project, but I do point out that there is a big difference between being a joint partner where we jointly develop the process, the procedure, the standards and just being full what it will be, kind of like a take-it-or-leave-it partnership. I like one where we truly benefit from each other's expertise and capability.
In summation, Madam Chairman, as you move the legislation, I urge that you ensure the legislation at least maintains the opportunity for royalty in kind to be allowed by the Federal Government, that the states be able to opt in at their sole discretion, that the Federal Government do contract with a qualified marketing agent so we know we have a true market-oriented transaction, that the option for the states to elect a contract with a qualified marketing agent on behalf of themselves should be maintained.
The intent to keep audit requirements simple and nonduplicative and the goal overall to reduce government costs and increase return to the Federal and state treasuries, that really is our goal. If there were a simpler way to do this, we would be advocating that. Absent any other way to establish valuation for the product that is being considered, I urge you to consider a way to give us that opportunity so that we can determine whether or not we can enjoy greater income for the benefit of both the Federal Government and the state government and certainly for the children who benefit from that allocation to education.
Thank you, Madam Chairman. Oh, Madam Chairman, for the record if there might be any question as to what the Wyoming proposal is on the pilot project, I would like to submit for the record an exhibit that shows as of March 25, 1997, what we have transmitted as the Wyoming proposal to take state share of Federal royalties-in-kind oil. If that could be entered along with my comments, I would appreciate it.
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Mrs. CUBIN. Without objection. Thank you, Governor.
Ms. Quarterman?
[The prepared statement of Mr. Geringer may be found at end of hearing.]
STATEMENT OF CYNTHIA QUARTERMAN, DIRECTOR, MINERALS MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE INTERIOR, WASHINGTON, DC
Ms. QUARTERMAN. Good afternoon. Madam Chairwoman and members of the Subcommittee, I appreciate the opportunity to appear today to present testimony on H.R. 3334 and on our implementation of programs to take oil and gas royalties in kind. I will briefly address the RIK legislation before providing a progress report on our three pilot projects.
At the outset, I would like to make our position on RIK legislation clear. We do not believe that legislation is needed to exercise our contractual rights to take royalties in kind. The Mineral Leasing Act, the Outer Continental Shelf Lands Act and the lease agreement with the producers all grant us the option to take our royalties in kind. The Department, therefore, strongly opposes any legislation mandating the United States to take mineral royalties in kind.
I would like to also clarify our position on RIK implementation. As I testified last year before the Subcommittee, we are genuinely excited by the potential of RIK programs to streamline and improve aspects of our Royalty Management program. Accordingly, we are aggressively working on an ambitious schedule to implement our three RIK pilots.
There is no inconsistency in these two positions. We strongly believe that the realistic test of RIK under actual conditions are needed prior to any legislative decisions on broader implementation. RIK is unproven for the royalty collection in the United States. As stewards of public assets, we must have assurance that the revenue and administrative effects of RIK are at least revenue neutral before moving to implementation.
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I hasten to remind this Subcommittee that the one instance we have of testing, taking royalties in kind resulted in a loss of revenue. A legislatively mandated RIK program would eliminate the value of being able to choose which collection method in-kind or in-value works best in each location.
I will limit my discussion of this bill to just a few general reactions. As a whole, this bill would force the United States to relinquish many of its long-established legal rights as lessor while relieving lessees of many of their equally long-established obligations. The collective result of the bill is to drastically reduce the options and legal rights of the Federal Government. We all must seriously ask ourselves how it is to the advantage of the citizens of the United States to give up these rights, and as a result a substantial part of the value received for our nation's nonrenewable resources.
There are many specific components of this legislation that would act to decrease the value of Federal mineral royalties. While we haven't fully analyzed this bill, we believe the details of the bill will have substantial revenue and legal impacts. The more damaging aspects of this bill to the public interest are, first, the Federal lessor would assume cost of marketing oil and gas in a royalty-in-kind program where production is sold downstream of the lease.
Under in value royalty collections currently in effect, the Federal Government has not participated in such costs. So unless we can somehow make the production more valuable than it is now, royalty revenues to the Federal Treasury will logically and unambiguously decline under RIK.
Second, we have identified several unfavorable conditions under which RIK programs would reduce revenues. These conditions include taking diminimus volumes in remote areas, taking production at less than marketable condition and paying above market rates for transportation. This bill mandates RIK under all of these unfavorable conditions, we believe, ensuring a revenue loss.
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The bill would statutorily adopt many of the positions taken by the oil and gas industry in historic disputes with the Department on valuation gathering, field processing and transportation. Disputes, I might add, that have been consistently won by the Department. This would be an unjustified economic gift to the lessee. We must be careful not to effect legislation or rulemakings, for that matter, that serve only the special interests of either lessee or lessor.
We at MMS regard our program initiatives in valuation and in-kind royalties as completely independent efforts. However, it has become increasingly apparent that some view these efforts as directly related. Specifically, we are told that RIK is needed because MMS is increasingly establishing royalty value at downstream locations and abandoning gross proceeds as a valuation basis.
That is simply not the case. We have taken very seriously the concerns raised on these aspects of our rulemaking. In our recently published crude oil valuation proposal, we have presented five valuation principles we use as our basis including that royalty obligations for arm's length contracts should be based on gross proceeds received under such contracts.
For the record, I just want to clarify the lease requirement that a lessee has a duty to market at no cost the lessor since it has been so often misunderstood. It does not mean that we will second guess a lessee's decision not to market downstream. MMS does not participate in the marketing decisions of the lessees. It does not tell the lessee how to market. Accordingly, it does not participate in its cost.
Now as for our RIK pilot projects, last summer we decided to implement RIK pilot projects in Wyoming, offshore Texas and the Gulf of Mexico. I am pleased to report that we are currently making great progress in implementing those recommendations.
We are on course to begin the Wyoming crude oil pilot this October. From the outset we have been developing the pilot in a close and cooperative partnership with the state of Wyoming. I understand that the state will decide after an early April briefing whether to include state volumes in the project as well. Governor Geringer and I will receive the same decision briefing from the RIK implementation team.
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Governor Geringer, I want to assure you that we will not implement a project, a pilot project, in your state without your support.
Mr. GERINGER. Good.
Ms. QUARTERMAN. Regarding the Texas pilot, we are working with the state concerning implementation of RIK for natural gas from offshore 8(g) leases in the Gulf of Mexico. We also expect that pilot to begin this October.
Lastly, we are quite excited about the prospects of our outer continental shelf in-kind project in which we will take a substantial portion of royalty gas from the Gulf of Mexico and use marketing agents for its management and disposition. The size and complexity of this project dictate that we take another year before we can begin with confidence. The startup date is said to be October 1999.
These projects form a logical, deliberate process that tests RIK across a broad array of Federal lease and production situations. Our hope is that these tests will allow us to implement the already-existing RIK option in the best manner and under the right circumstances. This spells success not only for royalty management, but for the taxpayer as well. In contrast, we strongly believe that implementation of this bill without first discovering its real impacts and actual programs is unwise.
In closing, our message today is that this bill represents a dramatic transfer of cost and obligations from the oil and gas industry to the Federal Government. Our preliminary analysis suggests that the revenue lost would be significant and could be as much as half a billion dollars.
Because of the effect of this bill on the taxpayer and the budget, the Department will recommend that the president veto H.R. 3334 or any bill that requires mandatory RIK.
Thank you, Madam Chairman and members of the Subcommittee. I would be happy to address any of your questions.
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[The prepared statement of Ms. Quarterman may be found at end of hearing.]
Mrs. CUBIN. Thank you, Ms. Quarterman.
I think I will start my questioning with the Governor. We will have two rounds of questioning, so I will just focus on the Governor for right now.
As Chairman of the Interstate Oil and Gas Commission, a compact commission in Wyoming, I understand that you and your staff have taken a look at both the pros and the cons in our RIK program. Can you tell me what the commission has concluded? Have they endorsed a concept for a Federal mandate for royalties in kind?
Mr. GERINGER. Yes. Madam Chairman, the Interstate Oil and Gas Compact Commission represents 36 states either as direct members or as affiliates. We have worked cooperatively since 1935 to address energy conservation and regulation of the industry. That association is very familiar with the cost as well as the process that is involved with oil production and certainly conservation, because we consider our primary role to be one of conserving the resource and not letting it get out of hand.
The commission unanimously approved a resolution in the December meeting to support the development of a comprehensive and flexible royalty-in-kind program for both oil and gas. The resolution also supports allowing a producing state at its sole option to assume those marketing and administrative functions designated to the Federal Government, which this legislation would allow.
The association does not just blindly pass resolutions. It is a tough nut to crack to get a resolution through that organization, but they have indicated their willingness to support this and the 36 members and affiliates spoke in favor of that.
Mrs. CUBIN. In your testimony, you make reference to a study that the state of Wyoming did on the administrative process associated with the collection and distribution of mineral royalties. Can you elaborate a little bit for me on that study and tell the Subcommittee what cost savings your study predicted if a state like Wyoming were to manage its own royalty program?
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Mr. GERINGER. Well, Madam Chairman, it has been a bit of a difficult process because we have never been able to obtain a full accounting for how the Federal deductions come about. We did complete a study of our own as to what we thought the projected cost of administration of a state-operated program would be, so we know what our costs are. They come out to be about one-seventh of what we are being charged by the Federal Government. There must be something that could be learned from a full disclosure as to what the costs are and why the deductions are as high as they are.
In October 1997, the Department of Interior IG's Office issued a report of the MMS Service, the BLM and the USDA Forest Service. They analyzed the expenses that were charged against Federal royalties in the context of net receipts for three fiscal years, 1994 through 1996.
The conclusion of that report was that the states had been overcharged. So there is an IG's report that at least says overcharging does occur. We think that there could be considerably more at stake than what the IG's report turned up, and we have asked the secretary of interior to refund those overcharges to Wyoming. I believe New Mexico has also asked the same thing.
Mrs. CUBIN. Since you do not have any information to the contrary, is it correct for me to say that you assume that the cost savings that the state could make would be comparable in a royalty-in-kind program?
Mr. GERINGER. That is certainly our goal, Madam Chairman. I think any reasonable person would say that based on the indications that we have through our own analysis, through the IG's report and just for the sheer frustration of not being able to consistently come up with an answer to what the value is at the lease—nobody markets at the lease, yet we have to calculate a value at the lease—I guess, as I said earlier, the logic seems to be overwhelmingly in favor of some sort of an RIK program, which if an individual state wants to take it on, it is a reduced cost to MMS. The opportunity to enhance royalties for both the state and the Federal Government is there. I mean, that is a no lose situation.
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Mrs. CUBIN. Ms. Quarterman, can you tell me why the states have not been able to get the information, the statistics, that they need to know exactly what the costs are that MMS spends on collection?
Ms. QUARTERMAN. We have provided the states with detailed accountings of all of our costs.
Mrs. CUBIN. Then why doesn't the Governor understand it?
Ms. QUARTERMAN. I can't answer that one.
Mrs. CUBIN. Do you agree with that, Governor?
Mr. GERINGER. Madam Chairman, if we could have a side-by-side comparison of why the costs are allocated as high as they are and so much higher than what the equivalent costs would be on a state lease, if you take single lease in a unitized field or something that is comparable close by, you ought to be able to have a side-by-side comparison. When Wyoming runs its cost out and it comes up that much higher, why are they that much higher?
Mrs. CUBIN. Could I ask you both here today to make a date to sit down at the table and compare those figures and work that out? I think that is something that is very important for the Committee to know before we would move forward. Would you both commit to doing that?
Mr. GERINGER. I certainly would, Madam Chairman.
Ms. QUARTERMAN. Our figures are open for anyone to look at our costs, absolutely.
Mrs. CUBIN. No, no, no. Would you sit down at the table and go side by side with the Governor and his staff, your staff and make a comparison?
Ms. QUARTERMAN. Oh, certainly.
Mrs. CUBIN. OK. Now it is a date, don't forget. I see that my time is up.
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Mr. Romero-Barceló?
Mr. ROMERO-BARCELÓ. Thank you, Madam Chair.
First of all, I want to welcome the Governor here to the hearing and ask a couple of questions.
Mr. GERINGER. Thank you.
Mr. ROMERO-BARCELÓ. Governor, according to the President's basic budget documents, approximately $7 million that would otherwise go to Wyoming is used to offset the Federal Government cost in order to run the Federal longshore oil and gas leasing from which Wyoming is entitled to an equal share of the gross receipts.
We understand that the state of Wyoming has strong objections to the net receipt sharing program in which the states pay a portion of the Federal Government's cost to administer the onshore oil and gas leasing program. Under H.R. 3334, Wyoming would no longer share in the Federal Government's cost to run the onshore program.
Have you considered the possibility that states could lose even more than they are now paying under the net receipts sharing because the gross revenues would be reduced by paying for things that the Federal Government does not now pay under the current law like marketing, transportation, processing, and aggregating?
Mr. GERINGER. Madam Chairman, if the state of Wyoming had the opportunity to take its product in kind, there would be very little to account for at the Federal level with the 1,800 employees that are currently at MMS. Perhaps in a rather crude analogy or comparison, the Province of Alberta in Canada has 67 employees to administer an in-kind program where they have contracted with a third party to market almost an equivalent amount of product. Sixty-seven employees in Alberta compared to 1,800 employees in MMS, there is probably something in between that could be counted as savings to both parties.
Mrs. CUBIN. Excuse me for interrupting, Mr. Romero-Barceló. The Governor has a plane to catch at 3:30, and so I thought I would ask the panel if they would object to submitting written questions to him if they have any further questions. Would that be all right with the panel and with the Governor?
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Mr. GERINGER. If there is any burning issue that needs to be answered right away, Madam Chairman, I would sure stick around for one or two questions; but, yes, I do appreciate your indulgence in trying to burn a little jet fuel here.
Mrs. CUBIN. Are there any burning questions from the panel?
[No response.]
Mrs. CUBIN. Thank you. Thank you very much for your testimony, Governor Geringer.
Mr. GERINGER. Thank you, Madam Chairman.
Mr. ROMERO-BARCELO. Madam Chair, I have 10 questions that I want to submit in writing.
Mrs. CUBIN. Absolutely. The record will certainly be kept open to get those.
Mr. GERINGER. Madam Chairman, we do want to indicate our willingness to work with MMS, with Ms. Quarterman and with this Committee at whatever markup is done on the bill because I think we can mutually benefit from how we come out of this. This is not a choice of whether the states versus the Federal Government can do a job better. It is an indication of what we might do together that has a mutual benefit for us both. It is not an either/or, but it is how we might mutually benefit from whatever comes out of this legislation. So thank you for the opportunity.
Mrs. CUBIN. Godspeed, Governor.
Mr. Barceló, would you like to—we will add some minutes on to your time since I interrupted you.
Mr. ROMERO-BARCELÓ. No, that is all right. I can submit my questions to Ms. Quarterman also in writing.
Mrs. CUBIN. Well, we are going to have two rounds of questioning, so if you want to start with questioning Ms. Quarterman, that is fine.
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Mr. ROMERO-BARCELÓ. I have got 13 questions here. I think I would just as soon submit them in writing, so we can save some time. We have quite a few members and other panels.
Mrs. CUBIN. OK. Good.
Mr. Tauzin?
Thank you, sir.
Mr. TAUZIN. No questions, Madam Chairman.
Mrs. CUBIN. Mr. Thornberry?
Mr. THORNBERRY. Thank you, Madam Chairman.
Ms. Quarterman, I appreciate you being here. I tell you the truth after you called last night I was a little disappointed in the tone of your remarks of your testimony. I certainly never expected the administration to support a mandatory in-kind bill.
You make it clear on the first page of your testimony, that the issues about whether you have authority to do it or not indicates that you would not accept it. I understand that a mandatory royalty-in-kind bill reduces the size and power and control of MMS. I never had any question about whether that would be something that you or your Agency could support.
I had hoped all through this process that there could be a more constructive dialog about how if there were going to be an RIK program, how it could be done in a way that makes sense for everybody. I have got to tell you I am particularly concerned about some aspects of your testimony that do not appear to have anything to do with the bill that we introduced. There are several instances.
On page 6 of your testimony, you talk about that the bill would mandate RIK programs in areas where unfavorable conditions—and one of the conditions you referred to was taking production at less than marketable condition. That does not apply to our bill. You mentioned that H.R. 3334 would require MMS to pay above market rates for transportation. We changed that. We took from your geothermal regulations the method of computing the transportation costs, so that does not apply.
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On page three of your testimony, you have a number of things listed there that were in the industry draft but were not in my bill as introduced.
The fourth thing you have on page three says that the bill's criteria—that they could sell to themselves, that the companies could sell to themselves, or affiliates are so broad and enforceable that it would be a problem. We let the secretary set up the rules on how that can be done.
I am a little perplexed, I guess, as to whether in your testimony your staff was working off of the industry draft or the bill that was actually introduced. The difficulty is that also makes it somewhat difficult to have a real dialog and constructive comments about how to do this thing in the best interest of the taxpayers and everybody who is involved with it.
Let me get to one issue at least beginning, and that is, this question of whether or not MMS can take royalty-in-kind now under existing authorities. I have got before me ''Minerals Management Service Royalty Gas Marketing Pilot Final Report,'' September 1996, which indicates on page 27 that ''The OCSLA fair market value provisions preclude us from proceeding with a new pilot or program without a change for gas royalties in kind.'' Then I have also got from your September 2, 1997, press release a statement that ''Most Federal mineral leases contain a provision that permits the government to receive its royalty share in kind.''
Now, have your lawyers sorted out whether or not MMS with no existing authorities can require royalty in kind mandatory across the board for all leases?
Ms. QUARTERMAN. Well, first, Mr. Thornberry, I want to assure you that my staff did have a copy of H.R. 3334 before them, and I did note that there were changes between the two bills, the industry version and your version. Attempts may have been made by your staff to correct some of the things that are listed in my testimony; however, they are not corrected in that bill.
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With respect to the statements made both in the report and the press release, lawyers were neither on the team that put together that report or involved in the writing of that press release. It is my understanding that we have legal authority to proceed.
Mr. THORNBERRY. That would be discretionary to you on whether to do it and how to do it currently. These two things are wrong. In your view, you have the discretion on when and how and in what circumstances to take royalty-in-kind?
Ms. QUARTERMAN. It is my understanding the law does give us that discretion.
Mr. THORNBERRY. OK. Madam Chairman, I will reserve until the next line of questions.
Mrs. CUBIN. Mr. John?
Mr. JOHN. Ms. Quarterman, in your testimony you had talked a lot about—well, a little bit about the pilot programs. I saw an optimistic look on your face and in the inflection in your voice. Can you share with us what you see the problems that you are going to encounter that we might be able to learn and incorporate in the piece of legislation that we are proposing or looking at, at this point in time? Because you are in what? Two of 3 years in the Wyoming pilot and progressing in each of the other states?
Ms. QUARTERMAN. Yes.
Mr. JOHN. Give us where you see where we can maybe look at some of the problems?
Ms. QUARTERMAN. We have taken royalty-in-kind. In 1995, the Federal Government took about 6 percent of its gas offshore in kind, and there was an extensive study done—maybe the one that Mr. Thornberry is referring to—that listed some of the problems that we had in that study where we lost 6 percent of our revenues.
Mr. JOHN. Why? Give reasons.
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Ms. QUARTERMAN. There were a number of reasons. I can give you a handful of them, but probably not all of them. I haven't read it recently. One of the things that we thought was problematic was that we took our gas in kind at the beginning of the year. We thought that it would make more sense to do it at the beginning of the heating season.
Secondarily, the way we handled the pilot, we turned it over directly. We, essentially, sold it to a marketer to sell later on in which case we really do not have the opportunity to carry the gas to a further point downstream. We see that as a problem.
Another problem was that we did this very, very quickly. We did have a great deal of involvement by gas marketers, the Gas Supply Association, oil and gas industry associations because we did not really know what we were doing and we wanted to make sure that what we wrote in a contract with a marketer was something that was akin to what an oil and gas company would write in a contract with a marketer. We did not want to put in any hidden ugly things that would cause us to reduce value. Those are some of the things.
Some of the others, transportation cost was another. What we found was that our marketer bid on certain production of gas. When it came time to accept the gas and move it to the marketplace, he had not taken into account the fact that there are many nonjurisdictional pipelines along the way and he would have to negotiate with each individual owner of those pipelines a nonpublic rate along the way, so he had not included those costs. We had a couple marketers drop out after they had submitted bids because they had overbid the situation. Since it was a pilot, we thought it was appropriate to do that.
Mr. JOHN. There are some critics and research on this issue that say some of the problems you have encountered with some of these pilot programs are obviously in the marketing area, and you have touched on that. Are those problems a result of your office trying to be the marketers in those situations?
Ms. QUARTERMAN. We have never tried to be the marketer. We certainly do not have the expertise to do that.
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Mr. JOHN. OK.
Ms. QUARTERMAN. Some might think that is an interesting idea maybe to start a quasi-government corporation that markets oil and gas.
Mr. JOHN. No. That is not what I am suggesting here.
Ms. QUARTERMAN. It is not what we are suggesting either, but it is an idea.
Mr. JOHN. Thank you.
Mrs. CUBIN. Mr. Brady?
Mr. BRADY. Thank you, Madam Chairman.
In your testimony, you identified a figure of a half a billion dollars as the cost to American taxpayers for this bill. I know you are a very knowledgeable executive, so I know I can ask you these questions with confidence.
Those figures, do they include taking advantage of the best practices of current marketing, that is, using qualified marketing agents versus unqualified marketing agents who are in a learning curve?
Ms. QUARTERMAN. Yes. This assumes that the government would hire the best marketers available. I mean, we are talking about an extremely large amount of oil and gas production. I do not think we should settle for anything less than the best in those circumstances.
Mr. BRADY. I am reading the testimony from Governor Geringer and I understand that to date you are not planning to use a qualified marketing agent in that state; is that correct?
Ms. QUARTERMAN. In the Wyoming pilot, we had two options available to us: one was to do a competitive bid, and the second was to do a qualified marketing agent. The team working on that which did include Wyoming representatives thought it was a good idea to try to look at both of those methodologies. I have since learned that the Governor's office does not support the competitive bidding portion of that; and if that is the case, we will drop it out of our pilot.
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Mr. BRADY. The only reason I ask is that obviously the private sector has found that having qualified real experts, as the Governor identified them, marketing is the key to enhancing the value. If past practice from the Agency has been to not use them, it is easily assumable that the estimates used today would be assuming you are not using the best in the field in the future.
Ms. QUARTERMAN. In our pilot where we actually did take gas in kind in 1995, I think you would find that we used the best marketing available.
Mr. BRADY. Within the existing one? Just so I understand, there is one in effect?
Ms. QUARTERMAN. Actually, we haven't started taking any oil in that pilot at this point.
Mr. BRADY. May I ask, have you talked to any qualified marketers in that pilot program?
Ms. QUARTERMAN. Not to my knowledge.
Mr. BRADY. Does the $500 million figure include the reduction in any regulatory auditing or litigation costs as a result of being part of the market versus chasing it?
Ms. QUARTERMAN. I said close to half a billion dollars. That figure includes a deduction of about $6 million, which is MMS's share of net receipt sharing costs that are currently paid by all the states combined as a deduction in terms of increases for administrative costs. I think the chairwoman alluded to earlier those sorts of things are not typically scorable administrative savings.
Mr. BRADY. For the most part, it does not include that reduction?
Ms. QUARTERMAN. I can give you a broad estimate of that. Our current royalty management program costs approximately $60 million. Our best guess at this time is that if this bill were to pass, and I think that it requires a year's time before it is actually implemented, given the Royalty Simplification and Fairness Act that passed a couple of years ago we would probably need to have all of our auditors on board for 7 years beyond the date anything was put in place in order to take care of the statute of limitations period that is currently pending.
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Other than oil and gas production, we do collect royalties on behalf of about 20 tribes and 20,000 allottees that would also have to continue to go on. We collect geothermal, coal, solid minerals, any number of things. Our best guess would be, assuming that everything disappeared in 7 years of those things that are currently associated with oil and gas, about a $32 million reduction.
Mr. BRADY. Does the figure include the acceleration of royalty receipts now lost to the time-consuming delays in litigation and dispute?
Ms. QUARTERMAN. Currently, if a delay occurs because of litigation, the company is required to pay, assuming that we win, if there is a delay they pay interest on that so there is no time value of money loss involved.
Mr. BRADY. You do not collect during that period?
Ms. QUARTERMAN. We do not collect during that period for any moneys that are carried over, correct.
Mr. BRADY. Is it safe to say that is not included in the figure?
Ms. QUARTERMAN. That would not be included in the figure. It would be very small.
Mr. BRADY. A couple of quick questions. I assume you included the risk costs in the analysis. Can you tell us what figure you assigned to the enhanced value of the oil and gas?
Ms. QUARTERMAN. First, I should say that the number that I mentioned is a beginning number in that it only is really associated with the items that I mentioned in my testimony. There are a number of other items that we have not at this point tried to define the value. One included is the cost of risk. I am not sure how we would value such a risk.
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Mr. BRADY. I do not mean to interrupt, but I assume you got $500 million by figuring in certain costs and certain risks and certain expenses associated with it. My question is, What figure did you use as a result of what the real goal of RIK is, which is the enhanced value of the product? I know you want to balance out. You do not want to count just one and ignore the other.
Ms. QUARTERMAN. OK. There is no risk cost yet in that number, so the number would potentially increase in terms of potential loss. As to potential uplift, I do not believe there is any uplift that we can measure at this time. The Federal Government currently has the authority to take its oil and gas in kind at its option, which means that forcing it to do something that it already can do does not include any uplift. If we were to do an estimate, we would have to go back to the natural gas pilot in which we lost money, and that would be a further negative.
Mr. BRADY. You would ignore the reams of real life data occurring in the private market today and would go back to a fairly flawed pilot program in order to ascertain the numbers?
Ms. QUARTERMAN. I am not aware of the data that you are referring to.
Mr. BRADY. Thank you, Madam Chairman.
Mrs. CUBIN. Mr. Tauzin?
Mr. TAUZIN. Madam Chairman.
Ms. Quarterman, I am trying to follow your statement. When you say the results of your pilots would allow you to select the areas where an RIK can produce additional net revenues, and to avoid those areas they will lose revenue. You say that is not an inconsistent—there is no inconsistency in these two positions. Let me see if I can interpret that and you can help me with it.
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What I read is that you are saying where you, as the government, can take royalty in kind and the transportation and marketing costs are low enough risk for you to go out and market it and make more money doing so that you want the right to do that. On the other hand, when the transportation and marketing costs may be too high, you want the right to put that cost on the oil company and to take the value added without taking the risk. Is that a fair assessment of your position?
Ms. QUARTERMAN. Well, I would say a couple of things. You know, in my role as director of the MMS I have not only the Royalty Management program, but also the Offshore Minerals Management Program off of the Coast of Louisiana. As part of the broader picture of things, one of the things I have to balance is not only receiving fair—not maximum, but fair market value on behalf of the taxpayers—but also to lease areas that we think are appropriate for leasing.
Mr. TAUZIN. Ms. Quarterman, I am going to be limited in time. I understand you have got a lot of roles to perform, but I would just like an answer to the question. Am I correct in assessing your statement that you are saying that the government should have the right in cases where transportation and marketing costs may be high to take the value added in terms of royalty calculation without having to pay the cost of transportation and marketing, to put the risk on the oil company? Is that what you are telling us in your statement?
Ms. QUARTERMAN. Sir, what I am telling you is that the government has that right.
Mr. TAUZIN. You are saying that the government has the right under current law——
Ms. QUARTERMAN. Yes.
Mr. TAUZIN. [continuing] to literally tell an oil company that, ''You have to pay all the cost of marketing and transportation and the government will then get the added value at your expense at no risk to the government. But if we want to, we can go in the market where the conditions are more favorable and take that added value at our own expense in transportation and marketing''? In short, you are saying that the government has the right to interpret the contracts you have with oil companies in a way that is most always beneficial to the government; is that correct?
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Ms. QUARTERMAN. We do allow for transportation costs. I just did not want that to get lost there. The government does, both in the OCS Lands Act and the contract with the companies, have the right at its option to take royalty in kind or in value.
Mr. TAUZIN. I understand you have that right. I am saying that you are telling us, as I understand it, that the current law allows you to interpret the contract with the oil company that is drilling on Federal lands and interpret it in such a way as to always interpret it in favor of the government and at the expense of the company?
Here is my problem. My problem is not just with the enormous cost of all of this auditing and the lawsuits that are flowing out of it and the disputes over whether or not marketing costs should be allocated or not allocated in the discussion of royalty payment, the problem I have is that there are three possibilities here.
One is that Congress passes a law clearly defining the rights of the government and the rights of the citizen who is leasing government property for the production of minerals; or the contract specifies those terms is the second option and specifies them very clearly, who is responsible for the cost of transportation and marketing; or the third option is for the bureaucracy of our government to interpret a contract at will, at its discretion, to always take the benefit for the government out of that contract.
It seems to me that that is the least favorable option for us in fairness to the citizens who participate with the government in the production of its minerals, that the best situation is either one or the other two. Either the contracts ought to very clearly say what the right of the government is and what the right of the oil company is in regards to how costs are allocated, or the Congress ought to say it.
What we are being asked to do is to continue a status quo where the government is constantly trying in intricate, complicated rulemaking to determine value as against cost in contracts that are not apparently very clear, that are blind in a lot of these areas, where the government will always try to interpret it to the benefit of the government, and where we end up with diagrams of government rulemaking that look like Dungeons and Dragons to me, if this is an accurate interpretation of what the rule actually requires.
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When we have a choice of doing one or two things, passing a bill that clearly defines the right of government and the oil companies so that there are no more disputes and no more audits necessary, or requiring the government to specify its rights clearly in a contract.
Madam Chairman, I will wrap up. I know my time is up. I simply want to say this. It seems to me untenable for us to continue a process where the government has to keep going to court arguing that costs should be allocated one way or another in the process of fixing values or that values ought to be assessed at some gathering point, at some wellhead, or at some downstream point, at the refinery, or perhaps all the way to the gas station when either the contracts ought to make that clear or we ought to make it clear in the law.
One of the very easy ways to make it clear in the law, to get rid of all of this auditing and all of these lawsuits and all of this conflict between what should be partners, government and citizens in partnership to develop minerals for our country on Federal lands, when the very simple thing to do is to say to the government, ''Take your share of it, hire a marketer and market it yourself and get your value.'' Then, nobody has a complaint anymore about what the value is.
To let the government have the best of all worlds, to take the higher value when it suits you and then force the oil company to eat all the costs when you think that helps your situation is to me an untenable situation that leaves for the bureaucracy the interpretation of what ought to be the law between the parties as defined by the contract or by the law.
Thank you, Madam Chairman. I have gone over.
Mrs. CUBIN. That is fine.
Dr. Quarterman, I want to start out by saying that I have always been very impressed and appreciate your professionalism and your knowledge of the issues and your willingness to work with the Committee to cooperate on information.
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I do want to followup on some of Mr. Thornberry's comments however. I was just kind of amazed because when he started talking about the fact—or the opinion, I guess, that the testimony you have submitted seems more related to the industry draft rather than the bill that is before us, that was exactly what I thought.
As I read through your testimony once and then I read through it again, and it was so nonspecific and it was so vague that to try to gain any kind of way that we could come together to solve problems that are perceived is really impossible. For that reason, I am going to have to ask you to come back on the 31st for the hearing on the 31st.
I realize you probably did not write that, those remarks yourself, but really in my opinion they really are inadequate. For example, you said, ''Well, yes, we did,'' your comment was, ''Oh, yes, we did use the right bill,'' but there was not anything discussed or explained about transportation, gathering costs and return on investments in pipelines.
On the top of page three, you mentioned paying above-market prices for transportation. But as we will discuss at the second hearing as well, definitions of gathering transportation and return on capital investment was significantly modified from the industry's draft, I should say. We view this bill as a return to current practice. It also allows the secretary plenty of discretion on how to disallow deductions on a lease-by-lease basis.
I am disappointed. Since we did not get this, your testimony, until 5:30 last night we did not have the opportunity to get in touch with you and ask for more specifics, things that were more directly related to the bill.
I know that we are likely to disagree here today on the central question of the so-called duty-to-market issue, but we will hear the witnesses to follow you today are quite sure that such a duty is not historical practice as your testimony suggests. They and many others believe that MMS is now seeking to move the valuation point downstream to ensure that the government will receive, as Mr. Tauzin referred, additional revenues without accepting any risks. Could you respond to that for me?
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Ms. QUARTERMAN. I am sorry, what is the question again?
Mrs. CUBIN. Well, there will be witnesses that will be following you that are going to say that there is not a historical practice of duty to market, and that MMS is now seeking to move the valuation downstream to capture added value without accepting any of the risks or associated costs. I would just like your response to that.
Ms. QUARTERMAN. It is my understanding that historically there has always been a duty to market that the government has not born, that lessees have born and that the law is pretty clear on this issue, that there really is not much to argue about. There have been cases related to it, and the government has consistently won them. I am not sure what else there is to say on that one. I am not going to say that I have done any great legal research on this either, because I have not.
Mrs. CUBIN. You said, this is a quote, ''Our preliminary analysis suggests that the revenue loss would be significant and on the order of hundreds of millions at a minimum.'' Again, incomplete information. Over what period of time?
Ms. QUARTERMAN. Per year. If I could, on your earlier statement. I would be happy to come back before the Committee on the 31st or any other time you deem appropriate. One of the things I did mention to Representative Thornberry last night is that we have not had the opportunity to do a detailed analysis of the bill line by line, which is something we want very much to do and are in the process of doing and will have done by the 31st. It was also my understanding that that hearing would deal with transportation issues, technical transportation issues, and those sorts of things. I will be happy to come back. I do not know if I am the best person to talk about that level of detail, but I will try.
Mrs. CUBIN. I can relate to that. Bring your experts along with you. This is the last thing because I am over my time and Mac is giving me the evil eye. It distresses me that the alleged failure to make money in the 1995 gas pilot project in the Gulf keeps cropping up as it has here today.
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You would acknowledge that there are lots of mistakes made in designing that pilot, but I see one big problem, which is that the government took the gas at the lease and then immediately sold it. It did not flip the gas, and therefore did not get the value added from downstream marketing efforts. That is what this so-called uplift which we want to earn for the states and Federal Government is, just for what it is worth.
Mr. John, do you have a second round of questioning?
Mr. JOHN. No, Madam Chairman.
Mrs. CUBIN. Mr. Thornberry?
Mr. THORNBERRY. Thank you, Madam Chairman.
I guess I would like to use my time just to get as much factual information as you have available to you on what basis you made the statement that the potential to lose money in the order of hundreds of millions of dollars. No. 1 is, What baseline did you use, did you operate from? Is it the existing rules? Is it your new proposed rule? Where did you start from?
Mrs. CUBIN. The existing rules.
Mr. THORNBERRY. What is the biggest factor that you included in your estimate that you believe would lose money under an RIK proposal? What loses the most money and what you have looked at so far?
Ms. QUARTERMAN. Transportation costs, I believe.
Mr. THORNBERRY. OK.
Ms. QUARTERMAN. I would have to verify that.
Mr. THORNBERRY. Do you have a figure there handy?
Ms. QUARTERMAN. It is the changes to the transportation provisions between $97.5 million to $246 million.
Mr. THORNBERRY. OK. From $97 million to $246 million is the range?
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Ms. QUARTERMAN. Is the range, yes.
Mr. THORNBERRY. OK. Just briefly, you are talking about an increased cost to the government for transportation costs that the qualified marketing agent would have to assume, or are you talking about a reduction in cost that the government now gets reimbursed by the oil company?
Ms. QUARTERMAN. A reduction in cost over the current rules.
Mr. THORNBERRY. Which the government currently is paid in some fashion?
Ms. QUARTERMAN. In some fashion, yes.
Mr. THORNBERRY. By the oil company. That range is $97 million to $246 million. What is the next item?
Ms. QUARTERMAN. Again, these numbers are very preliminary.
Mr. THORNBERRY. But if you use them, I want to know how you got there.
Ms. QUARTERMAN. Between $61 million to $158 million on processing changes.
Mr. THORNBERRY. This starts to get into at what stage in the marketing chain you sell the product? The change from the current practice, your estimate is that it would be that much of a change?
Ms. QUARTERMAN. Yes.
Mr. THORNBERRY. OK. What is the next item?
Ms. QUARTERMAN. Oh, between $17 million and $46 million on the change to the marketing requirements.
Mr. THORNBERRY. OK. Explain to me the difference in how you calculate the change in processing and the change in marketing?
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Ms. QUARTERMAN. Processing is something that lessees currently have to do to put the product into marketable condition. ''Marketing'' means taking the product to market whatever costs may be associated with aggregating production, that kind of thing.
Mr. THORNBERRY. OK. All right, what is the next item?
Ms. QUARTERMAN. That adds up everything that we have gotten to thus far. There are other things that we do not have a value on at this point.
Mr. THORNBERRY. My understanding from your answer to Mr. Brady's question was that you have no increase in value because of any uplift?
Ms. QUARTERMAN. That is correct.
Mr. THORNBERRY. My understanding is also you have no value in there as a result of reduced administrative costs, litigation costs, and so forth?
Ms. QUARTERMAN. That is correct.
Mr. THORNBERRY. Now, I noticed in your testimony you made some comments about how the cost of marketing would be shifted from the lessee to the Federal Government under an RIK program. Does that argument play into these cost figures that you have given me?
Ms. QUARTERMAN. The item that I listed that said marketing, that is the element.
Mr. THORNBERRY. That is where that fits in?
Ms. QUARTERMAN. That is where it fits in.
Mr. THORNBERRY. OK. When making an assumption like that, what is your assumption on how a qualified marketing agent will be paid or reimbursed for his services? How do you figure that it will happen to get this estimate?
Ms. QUARTERMAN. I do not have the details of that. I would be happy to provide that to you when we get closer to a final number.
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Mr. THORNBERRY. Well, let me just offer this. Did you consider the possibility that some qualified marketing agents may be willing to market the Federal Government's share of oil for nothing so that they can aggregate a larger volume of crude, and therefore have a more valuable product to sell?
Ms. QUARTERMAN. I have heard some put forward that viewpoint. In my experience, people are rarely willing to do something for nothing.
Mr. THORNBERRY. Even if it is of value to them?
Ms. QUARTERMAN. It is a value that is usually taken out of the other person's hide, I would suggest.
Mr. THORNBERRY. The bottom line is we do not know from your estimates how you assumed the marketing costs would be, although you do have a number, a gross number, but we do not know how that has arrived at?
Ms. QUARTERMAN. I cannot tell you now what that number is or what went into that calculation, no, that is correct.
Mr. THORNBERRY. OK. Thank you, Madam Chairman.
Mrs. CUBIN. Mr. Brady?
Mr. BRADY. Madam Chairman, staying on that sheet, if we could, you have identified a number of expenses and costs and reductions. Shifting to the other side of that, can you read me the items and dollar figures for enhanced value and increased revenue under RIK?
Ms. QUARTERMAN. Zero at this point. As I explained earlier, we have the authority to do it at this point in time. I cannot imagine a scenario under which there would be an uplift, given the fact that we have no experience to know that.
Mr. BRADY. Now, in earlier testimony before the Committee, you talked about the potential of RIK and today you talked about the potential of RIK to increase revenues under the right conditions. Is it safe to say that you included no enhanced value? You didn't include the savings of self-consumption by Federal agencies either, which has been very successful in Texas where basically Federal facilities or Federal agencies use the oil and gas in kind to reduce their own costs? Was that on the balance sheet at all?
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Ms. QUARTERMAN. Well, I think the operative word in my testimony has been ''potential,'' we have not in fact seen it. We have in the past spoken with both the Defense Fuel Supply Corporation and the GSA which are responsible for supplying gas primarily to a large segment of the Federal Government to the Defense Department. I spoke with them about the opportunity of taking gas in kind. They really had no interest in taking our gas because they got a better deal elsewhere.
Mr. BRADY. I will finish with this, Madam Chairman.
Just so I understand, is it safe to say you have a completely negative analysis of this impact with absolutely no positive impacts? Ignoring what is occurring in the marketplace, ignoring your earlier testimony about potential, ignoring what states and other entities have received in enhanced value, is it safe to say your analysis while preliminary is completely negative?
Ms. QUARTERMAN. Is it safe to say that, yes.
Mr. BRADY. I do respect your knowledge and your homework. If you could, send us those figures.
Before the next hearing, Madam Chairman, if we could get those in advance so we have an opportunity to review them ourselves that would be a great help. Obviously, we are all trying to get to a point where we increase revenues for taxpayers, and so those numbers are important.
Ms. QUARTERMAN. I would be pleased to provide them.
Mr. BRADY. Thank you. I appreciate that.
Thank you, Madam Chairman.
Mrs. CUBIN. Mr. Tauzin?
Mr. TAUZIN. Well, I would like to make maybe a different point, though, and that is: it is one thing to say the government will not get some money, but it is another thing to say whether or not the government is entitled to that money. If the government does not get some money it is not entitled to, I do not have a problem with that. It is a little bit like, you know, if we had a piece of land we wanted to build a building on and we told the contractor you go build a building and you be responsible for the cost, we will just enjoy the building.
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I do not think the taxpayers of America would appreciate the government treating the contractor that way. What I am saying is you can do an evaluation that says the government may not come out as well if it has to bear some of the cost of marketing and transportation, if it wants the benefits of a higher price at some other point than the point of delivery of the product, but it is another thing to say that the government was entitled to that money without an express agreement by the parties or some law saying that that was going to be the law between the two parties when the lessor and the lessee agreed.
You know, that is my problem, Ms. Quarterman. It is not just a question of what the dollars are, it is a question of what the equities are here, No. 1. No. 2, isn't there a simpler way of doing this than this extraordinarily complex rule for setting values that takes us to court all the time? It is looking more like the IRS. That is my problem. I mean, maybe worse.
If you end up having to have an oil evaluation rule that is so complex because it has to take into account every kind of different scenario in the world—commingling, transportation, aggregation, exchange, and whether or not a company is dealing with an affiliate or a nonaffiliate with its transaction or not—when you start having to deal with so many different scenarios to try to figure out a rule to assess their value, the cost of doing that in regulations, the cost of doing that in disputes or the courts, the cost of deciding in the end what the value is adds up considerably.
I saw you asked for additional moneys for your Department. I would hope the extra $5 million is not just to enforce this rule, but I would think it is probably related. I mean, this is getting pretty complex. It just seems to me that maybe the RIKs are ways in which we can solve this in a more simple, more satisfying way for both the parties if we define who is responsible for cost somewhere along the line. It seems to me that, you know, some definition of what the lessee is responsible for and then where the lessor picks up the product and is responsible from then on is a fair way of doing that.
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In regards to the RIK you have done, the pilots you have done, did you seek the counsel and the advice and the cooperation of the companies in designing these pilots, or did your Agency do them on your own?
Ms. QUARTERMAN. Absolutely, we worked hand in hand with the oil and gas industry in developing these pilots.
Mr. TAUZIN. They were contributors to the design of these pilots? Because I am told otherwise, that they did not have as big a hand as perhaps they might have wanted to have in making sure the pilots were good examples of what might occur. Are you telling me you think they did?
Ms. QUARTERMAN. Oh, absolutely.
Mr. TAUZIN. The pilots that you are running indicate to you that at least on some occasions the government can make money when it takes royalty-in-kind; right?
Ms. QUARTERMAN. Not at this point we have not had that indication. We are extremely hopeful. I would like to think there is an opportunity for RIK, and that is precisely why the government is running these pilots.
Mr. TAUZIN. In fact, I have seen some of your quotes indicating that, in fact, you not only have a lot of hope, that you think it is very logical that the government will do well at least in certain cases where RIKs can work for the benefit of the government; right?
Ms. QUARTERMAN. Yes, there are certain cases that are appealing at least on the face.
Mr. TAUZIN. You are not ready to say that your pilot programs have disproved that yet?
Ms. QUARTERMAN. Our pilot programs haven't started other than the one that we had in 1995 in the Gulf.
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Mr. TAUZIN. You are literally making your projections of losses without the benefit of the knowledge you might gain from these pilot programs?
Ms. QUARTERMAN. We are making our losses based on the legislation versus current situation. As I said, we have nothing other than the 1995 pilot where we lost money to determine whether or not we would make money here or not.
Mr. TAUZIN. There are theoretical losses based upon the notion that if the government had to always take its product in kind from the gathering point and then be responsible for transportation and marketing costs in the process that it would lose money.
My only conclusion, then, you must be saying what I initially thought you said in your report, that you thought it was OK for the government to allow the lessee to bear all of those costs and bear risks and have the government take the benefit of the extra value downstream; is that correct?
Ms. QUARTERMAN. They are not theoretical losses. You know, I want to be clear. We do not think that in taking royalty in kind or in value there is any detriment to the oil and gas industry. They are required by law to allow us to take it either in value or in kind. If we take our oil in value, they must provide us with fair market value unless this Congress decides to change that.
Mr. TAUZIN. Yes, but it is not that simple. The question is when do you value it? Where do you value it? If you insist that you value it at some point downstream after the company has absorbed a lot of cost and risk in marketing as opposed to valuing it at the point when it is deliverable to the government as an in-kind situation, that is a big difference, is it not? Isn't that the difference in your numbers?
Ms. QUARTERMAN. That is not what is in my valuation rulemaking.
Mr. TAUZIN. Isn't that in your numbers of losses?
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Ms. QUARTERMAN. I am sorry?
Mr. TAUZIN. Isn't that difference really where you get your numbers of losses?
Ms. QUARTERMAN. The difference in losses is between the current regulation, the current way things are operating, and the way things would change under RIK because there would be changes in the way we look at transportation, the way we look at processing and other kinds of things.
Mr. TAUZIN. Well, you look at who bears the cost of it is what you are saying?
Ms. QUARTERMAN. Precisely.
Mr. TAUZIN. Thank you.
Mrs. CUBIN. Thank you.
We certainly thank you for your time and your testimony here today. I just want to request one last thing. First of all, I want you to know I think geothermal energy certainly is an absolutely essential part of the nation's overall energy supply. I also realize that far, far less money is at stake in geothermal than in the RIK program that we are talking about.
When we come back on the 31st, I would appreciate it if you would please be prepared to fully discuss why H.R. 3334 provision regarding return investment on transportation, say, like, a pipeline in the Gulf of Mexico isn't fair? We modeled that provision exactly upon the geothermal or what the geothermal gets, which is two times the Standard and Poor BBB return on investments. I would appreciate an explanation of why that is not fair when you come back on the 31st.
Ms. QUARTERMAN. I will be happy to do that. I should say geothermal and the oil and gas industry are different. We do have different standards for valuing transportation costs in the oil and gas industry. We would be happy to provide those figures, so you have an apples to apples comparison.
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Mrs. CUBIN. I certainly realize that it is different. I do not exactly understand why transportation would be different, but we will make that clear on the 31st. Thank you very much for your testimony. Maybe I can be more specific in the information we would like you to provide on the 31st.
Thank you very much.
Now I would like to call the second panel: Mr. Hugh Schaefer, the director of Welborn, Sullivan, Meck and others, the Independent Petroleum Association of the Mountain States; Mr. Poe Leggette of Jackson & Kelly representing the Independent Petroleum Association of America and the Domestic Petroleum Council.
Mr. Hawk, since the witness that was to be on your panel was not able to get here due to weather, I would ask you to join this panel as well. Mr. Phil Hawk, President and CEO of EOTT Corporation.
If you would, stand so that I can swear you in.
[Witnesses sworn.]
Mrs. CUBIN. Thank you.
Let me remind the witnesses that under our rules your testimony, your oral statements should be limited to 10 minutes, but your entire written statement will be included in the record. We will start the testimony with Mr. Schaefer.
STATEMENT OF HUGH V. SCHAEFER, DIRECTOR, WELBORN, SULLIVAN, MECK & TOOLEY, DENVER, COLORADO; CHAIR, ROYALTIES COMMITTEE, INDEPENDENT PETROLEUM ASSOCIATION OF MOUNTAIN STATES
Mr. SCHAEFER. Thank you, Madam Chairman.
My name is Hugh Schaefer. I am chair of the Royalties Committee of the Independent Petroleum Association of Mountain States, which I will refer to simply as ''IPAMS'' throughout the rest of my presentation. IPAMS is a nonprofit, nonpartisan association representing over 700 independent oil and gas producers, service/supply companies, and industry consultants in the Rocky Mountain region.
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IPAMS appreciates the opportunity to appear before you today and present this statement. We believe that there is a distinct need for relief from the current royalty in-value system. There are significant advantages to be gained by requiring the Federal Government to take its oil and gas royalties in kind rather than in value and avoid the wasteful, time-consuming, and complex process that is involved with the determination, payment and auditing of Federal royalty payments.
Until the recent enactment of the Federal Oil and Gas Royalty Simplification and Fairness Act, most audits were not commenced until an average of 4 to 5 years after the royalty payments in question had been made. Thereafter, a lengthy administrative appeal process delayed the final resolution of MMS royalty claims, assuming that the lessee disputed the audit claims and sought administrative relief. This 3 to 4 years was just what it took to get the case through the Department of the Interior.
IPAMS believes that a royalty-in-kind program will eliminated a substantial portion of this time-consuming delay in the resolution of audit disputes. Although the Fairness Act has speeded up the audit process with a 33-month rule, nonetheless the Federal Government still has 7 years in which they can file a royalty claim for underpayment of royalties or be time barred by the statute.
Now, under the current royalty-in-value system, a lessee who appeals a royalty payment has an election either to pay the disputed royalties under protest and subject to appeal or post a surety bond or irrevocable letter of credit. If the lessee elects the later, then any Federal royalty revenues are going to be postponed until the appeal process is exhausted. If the lessee elects to go to court and post another bond, then again Federal royalty revenues are being denied.
Now, I realize that the bonding process requires that there be a bond to cover both principal and interest for one year in advance, but this is a rolling type of bond where each year the accrued interest is rolled up and put into the principal.
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We believe that if the royalty-in-value program remains in place the audit process will become even more exacerbated and difficult to administer, because new and proposed royalty valuation regulations have become more and more complicated and difficult to administer for the small independent oil and gas producer.
They will create more cost and effort to apply these new regulations properly, effectively and efficiently. They will also require the employment of qualified personnel or consultants to do this work for Federal lessees. This additional cost becomes particularly onerous when industry goes through periods of price volatility such as we are experiencing now.
I do not have to tell you, Madam Chairman, that we all know what the price of crude oil, Wyoming sour and Wyoming asphalt is today. It is somewhere between $7 and $8 a barrel. As you mentioned earlier in your opening comments, I can testify my clients are shutting in their fields because this is not an economic return for them.
As you are all aware, the MMS gas transportation allowance regulations have recently been challenged in Federal court. That challenge has been mounted for the very reason of which I have just spoken. It is a complex regulation. It is difficult to administer. As we get new regulations on oil and also on gas valuation, I believe that it is a distinct possibility that these, too, may end up in litigation. Now that is not intended as a threat, but it is just my educated guess.
I want to talk a little bit about these proposals because the whole thrust of my presentation today is that I honestly believe that there is even now in the current regulatory system a shift away from traditional methods of valuing