Federal Oil Valuation

In fiscal year 1997, the Minerals Management Service (MMS) collected $4.1 billion in royalties from 22,000 oil and gas leases on federal lands. By law, the states in which the leases are located receive a share of the royalties collected, which are calculated as a percentage of the value of the oil or gas that is produced. The value of much of the oil from federal leases has been based on posted prices--offers by purchasers to buy oil from a specific area. However, recent evidence indicates that oil is now often sold for more than the posted prices, suggesting that the value of oil from federal leases and the amount of federal royalties should both be higher. Proposed regulations would reduce the use of posted prices to value much of the oil from federal leases and would instead require that other, oftentimes higher, prices be used. According to MMS, the proposed regulations would boost federal royalties by as much as $66 million annually. States generally support the proposed regulations, while the oil industry generally opposes them. As an alternative, the oil industry has suggested that MMS instead be required to accept, as the federal government's royalties, a percentage of the actual oil and gas produced from federal leases, rather than cash royalties based on the value of that oil and gas. MMS would then sell this oil and gas to generate revenues. This report discusses (1) the information used by MMS to justify the need for revising its oil valuation regulations; (2) how MMS has addressed concerns expressed by the oil industry and states in developing these regulations; and (3) the feasibility of the federal government's taking its oil and gas royalties in kind, as indicated by existing studies and programs.

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