Federal Oil Valuation

In fiscal year 1998, the Department of the Interior's Minerals Management Service (MMS) collected $3.6 billion in royalties from oil and gas leases on federal lands. The value of these royalties depended upon the price of oil. As an alternative to accepting cash royalty payments, the federal government could have taken a percentage of the actual oil and gas produced and then arranged for its sale, taking what are known as royalties in kind. This testimony discusses (1) the information MMS used to justify the need to revise its regulations; (2) how MMS addressed concerns expressed by the oil industry and the states in developing these regulations; and (3) the feasibility of the government's taking its oil and gas royalties in kind, instead of in cash.

GAO noted that: (1) MMS relied heavily on the findings of an interagency task force to revise its oil valuation regulations; (2) this task force concluded that the major oil companies' use of posted prices in California to calculate federal royalities was inappropriate and recommended that the federal oil valuation regulations be revised; (3) MMS also relied on contracted studies of oil markets and on valuation disputes between the states and oil companies that the oil companies agreed to settle for more than $1 billion; (4) to address concerns of the oil industry and the states, MMS solicited public comments on the proposed regulations in seven Federal Register notices, held 17 public meetings, and revised its regulations five times; (5) proposed changes to the regulations are still pending; (6) concerning the government's taking of its royalties in kind, GAO concluded that this would not be feasible except under certain conditions; (7) these conditions include having easy access to pipelines, leases that produce large volumes of oil and gas, competitive arrangements for processing gas, and expertise in marketing oil and gas; and (8) however, these conditions are lacking for the federal government and for most federal leases.