Patrick Crow
Energy Policies Editor
The U S. Minerals Management Service in a surprise move last week abandoned its controversial proposal to hand over its royalty collection functions to producing states and Indian tribes.
The only part of a broad "devolvement" proposal that remains on the table is an idea that the federal government sell its royalty interests in future offshore production.
But major changes still loom for MMS, which collects $4.3 billion/year in oil and gas royalties and delay rentals.
Cynthia Quarterman, MMS director, said before the proposal was dropped, "I don't think you'll see the status quo for royalty collections (22496 bytes), even if some of our proposals do not go forward. Whatever comes of this effort, you will see a simplified royalty collection system, if nothing else."
Last March the Clinton administration proposed to devolve MMS onshore royalty collection functions to states and tribes (OGJ, Apr. 3, p. 38).
That idea, based on an outdated Wyoming study, met stiff opposition. For a while MMS officials tried to save the process by seeking a counterproposal from producing states.
Oil producers objected to devolvement, saying they feared that if individual states took over collections, they would have to cope with regulations of a number of governments rather than just one.
MMS discussed devolvement with representatives of industry, states, and tribes during a meeting in Denver last month.
IDEA WITHDRAWN
MMS last week said it will focus on reinventing and streamlining MMS within its existing structure, rather than spinning off functions to states and tribes.
Bob Armstrong, MMS assistant secretary for land and minerals management, said, "We have consulted our stakeholders and we have listened to them. The dialogue from the Denver outreach meeting, added to other comments we have received, provided valuable feedback and constructive information for MMS. It is now time to move on and focus instead on other streamlining initiatives for MMS."
He also said, "MMS will now move forward with its current and planned streamlining initiatives. The bureau
will also continue to work with all constituents to look for new, creative ways to conduct its business better."
Armstrong said MMS has formed a royalty policy advisory committee to help the agency "advance the streamlining options put on the table over the past 4 months."
Quarterman said, "Clearly, stakeholders have agreed that neither the status quo nor the devolution proposal are acceptable. Between these two ends of the spectrum we must forge a program that better meets the needs of all constituents.
"Working with our stakeholders has been an important part of what we have done for the last 3 years. We will keep looking for ways to trim costs, work smarter and more efficiently, and meet our royalty collection responsibilities."
CHANGES OFFSHORE
Still under consideration is the Interior Department's proposal to streamline MMS offshore royalty collections by directly selling its royalty share of production.
As an alternative, Interior might collect offshore oil and gas royalties (21131 bytes) up front by allowing operators to "buy out" their future federal royalty obligations.
It said, "This would return to the Treasury a fair market value for resources while ultimately allowing alternatives to the current federal royalty collection and audit functions."
At an earlier House resources subcommittee hearing, Quarterman said the idea was still under development but could offer no more details.
Although the administration said the idea could save the government $3 billion during 5 years, Quarterman could not substantiate that figure. "I did not help estimate the number, and I'm not aware of anyone in MMS who did."
Subcommittee chairman Ken Calvert (R-Calif.) said the proposal appears to be a "smoke and mirrors approach to deficit reduction." At the least, he said it is an exercise "to boldly go where no government has gone before."
Rep. Neil Abercrombie (D-Hawaii) vigorously attacked the idea.
"This is as much nonsense as I've ever seen in my life," he said. "This is speculation (on the part of the government), and we're not in the business of doing that. I don't know where this idea came from. Someone must have been real tired and eating their pizza the wrong way. I'm deadly serious about this. We should hang this up and go on to something more serious."
Robert Stewart, National Ocean Industries Association president, told the hearing, "The sale of offshore royalties was, is, and remains the most puzzling part of the proposal. From the time it was announced Mar. 27 right up until now, I never have understood just what they were proposing."
REACTIONS
The Interstate Oil & Gas Compact Commission (logcc), which represents most U.S. producing states, had created a task force to examine the MMS proposal and perhaps offer a counterplan. An logcc spokeswoman said that effort will be dropped.
She said, "We're disappointed because we didn't even get the opportunity to fully evaluate the proposal and because we've always been interested in looking at any proposal that puts power in the hands of the states.
"That's not that we thought the devolvement idea was good. We didn't. But it might have led to something. We have many committee members who put a lot of time into it, and that time has been wasted."
NOIA's Stewart said, "We opposed the notion of eliminating MMS from the start, so their decision to withdraw that proposal is good news as far as we're concerned. It's clear what happened is that the proposal simply got buried in an avalanche of criticism."
Carla Wilson, the Rocky Mountain Oil & Gas Association's director of tax, finance, and accounting, said, "What pleases us most is that it appears MMS is going to look at some of the alternatives we proposed."
She said MMS will convene its new royalty policy advisory committee for the first time in September, and the panel will become the catalyst for future change at the agency.
"We've never really had the opportunity before to sit down with MMS officials and discuss the pros and cons of various ideas, taking them step by step to discuss what will work, what won't, and what the alternatives might be."
Calvert said, "It's about time. Interior Sec. Bruce Babbitt must have known for months that the reinvention proposal he outlined Mar. 27 was fatally flawed by not consulting with the affected states prior to his announcement."
Calvert said Interior should abandon "the anticompetitive elements of federal mineral leasing programs and get back into the business of pursuing environmentally sound development of the nation's mineral resources."
WYOMING'S SITUATION
The devolution idea was born in Wyoming, which has a special relationship with federal minerals agencies.
MMS collects more oil and gas royalties for Wyoming than for any other state. In the first 6 months of 1995, Wyoming received $95 million of the $229 million disbursed to 36 states.
New Mexico was second with $56 million. California and Colorado each had $14 million, while Montana and Utah had $12 million. The other 30 states split the remaining $26 million.
The federal government owns 49% of the land in Wyoming, and royalty payments (including coal and minerals) provide half of the state's budget. So royalty collections are a critical facet of the state's economy.
MMS' devolvement plan has its roots in federal law that required MMS to begin charging states in fiscal 1991 for the cost of collecting federal royalties based on the percentage of revenues from federal land in each state.
Former Wyo. Gov. Mike Sullivan complained states were being required to pay for a royalty collection program but had no say in its management. He said MMS was charging Wyoming about $55 per $1,000 collected, while the state's own severance tax program cost less than $5 per $1,000.
The state prepared a study on the subject and in July 1993 proposed that MMS allow it to collect federal royalties. It said that would cost only $7 per $1,000, saving the federal government considerable money and Wyoming $100 million during 5 years.
The new Wyoming administration recently admitted that study is outdated.
Cynthia Lummis, an attorney for the state, told the Denver meeting the state has computerized its royalty operations since the $7 per $1,000 estimate.
She said "We don't have firm numbers yet, but we know it is not substantially higher."
THE PROPOSAL
Vice President Albert Gore and Interior Department officials, looking for ways to "reinvent government," seized upon the Wyoming proposal as the basis for change.
They proposed abolishing MMS by Oct. 1, 1997, and allowing the 38 states with production to collect royalties for the federal government instead of the other way around. Tribes could collect royalties for themselves and keep all the proceeds.
Gore and Interior proposed shifting the Bureau of Land Management's lease inspection functions to states and tribes and giving another Interior bureau MMS's offshore leasing functions.
MMS currently collects onshore royalties and splits them 50-50 with the states. MMS pays about 75% of the cost of collecting royalties and charges the states as much as 25%, averaging 19% recently
Under the plan, the states would collect royalties and pay the federal government 50% after deducting 50% of collection costs.
Because the plan assumed the states could collect royalties more cheaply than the federal government, it assumed both would save money The savings to the federal government were estimated at $69 million during the first 5 years.
Congress would have had to approve devolvement with an amendment to the Federal Oil & Gas Royalty Management Act (Fogrma)(73937 bytes).
One stumbling block was that federal lawyers said Interior could not spin off 'inherently federal functions" that involve either 'the exercise of discretion in applying federal authority or the use of value judgment in making decisions for the government."
Those functions include enforcement of federal law, administrative adjudications, exercise of rulemaking authority, acquisition or disposition of federal property, and collection, control, or disbursement of federal funds.
MMS is a relatively young federal agency It was established in 1982 at the recommendation of a federal task force investigating problems with the federal royalty collection practices.
STATES INTERESTED
Carolita Kallaur, acting MMS deputy director, told industry, state, and tribal representatives at Denver, "The proposal we made Mar. 27 probably will not work, and we need a variation of that proposal."
She conceded "some of the underlying assumptions are no longer valid" and specifically cited the Wyoming study.
She said MMS would seek a consensus among industry, states, and tribes for any changes and said, "If MMS is going to go away, we have to have a way to insure that royalties are collected for all 38 states."
The larger producing states, particularly Wyoming, New Mexico, and Utah, were interested in offering a counterproposal, probably through logcc. The commission represents 29 of the 38 states, and those 29 provide 99% of U.S. domestic oil supply
Christine Hansen, logcc executive director, told the Denver meeting the commission probably would draft a recommendation in the fall.
Earlier, North Dakota Gov. Ed Schafer, logcc chairman, said state control could reduce regulation of industry. "The greatest problem for this nation in oil and natural gas grew out of overregulation in Washington."
Barry Williamson, Texas Corporation Commission chairman, said, "The federal government has become a dangerous threat to the energy industry The only thing greater than their regulatory dominance is their ignorance of energy industry issues.
"It is time we relimit the federal government and give control over the oil and gas industry to the producing states."
State representatives at the Denver meeting said the oil industry should be pleased at the idea of dealing only with states. One said, "The states are very interested in not increasing the reporting burden to industry and keeping oil industry competition in the states healthy and active."
INDUSTRY PESSIMISTIC
Oil groups and Indian tribes said the devolvement proposal showed every sign of being prepared in too much haste (OGJ, July 3, p. 22).
Their position was: If MMS is broken, don't junk it. Fix it.
Marvin Cook of the Southern Ute tribe said, 'MMS is one of the federal government's more effective agencies. There are many more less radical measures the administration could take."
Darrell Gingerich of Conoco Inc. spoke for the Rocky Mountain Oil & Gas Association (Rmoga) and the Council of Petroleum Accountants Societies (Copas) at the Denver meeting.
He warned MMS, "Our experience has been that when you decentralize, expenses increase."
Rmoga and Copas urged MMS to drop the devolvement proposal and concentrate on simplifying its procedures to achieve much of the same savings.
The groups said MMS should ease product valuation problems by using index based valuation of production wherever possible and clarify definitions of gross proceeds from sales.
They recommended a number of ways reporting procedures could be improved, mostly through simplification and elimination of unneeded information. And they said MMS is too picky about very small volumes of production and should raise its thresholds so the cost of reporting does not outweigh the value of production.
The Independent Petroleum Association of Mountain States (Ipams) urged the administration to consider total transfer of the federal mineral and surface estate to the states.
"Rather than attempting any type of limited transfer of functions to state government, we believe the time has come for the federal government to place ownership of the federal surface and mineral estate with the states," Ipams said.
"In the long term, we believe this would lead to simplification of government and economic prosperity for the Rocky Mountain region."
Otherwise, it said, Interior should consider merging MMS and the Bureau of Land Management. "This would eliminate duplicative work, enable the federal government to manage and exploit its minerals to ensure that a maximum recovery occurs, and allow industry a 'user friendly' government agency."
REINVENTING MMS
Although the subject of the Denver meeting was devolvement, MMS officials used much of the time to explain what a good job the agency is doing.
Jim Shaw, associate director, said, "We're basically an accounting organization. Our goal is not to find people making mistakes and zing them. We're not in the business of seeing how much we can collect on penalties. Our goal is to make sure people do it right the first time."
The agency has 670 employees (250 are auditors) and 350 contract workers. It has invested $60 million building the current computerized system.
MMS officials outlined a number of initiatives under way to improve operations: a program in which royalties are paid in kind, a rulemaking to value natural gas production, increased use of electronic reporting, allowing tribes to assume some MMS duties, improving coordination with BLM, streamlining administrative appeals, allowing negotiated dispute resolution, and trimming MMS headquarters staff and field managers.
More changes are planned.
MMS is reviewing options to reduce reporting functions and forms, permit less frequent reporting for marginal leases, renegotiating nonstandard leases, and seeking new ways to cut costs such as dollar rounding in the billing process.
At the Denver session, MMS officials said devolvement would occur only within legal limitations (the inheritently federal functions problem). They said industry, states, and tribes should agree on any changes, and there should be no loss of royalty payments or additional regulatory burden on industry.
They said any proposal should not cost more than the current system and should fulfill the federal trust obligation for Indian leases.
SENATE ROADBLOCK
Devolvement would have required federal legislation, and Congress was not enthusiastic.
Sens. Frank Murkowski (R-Alaska) and Bennett Johnston (D-La.), the chairman and ranking Democrat on the energy committee, respectively, filed a bill to block devolvement. A similar bill was filed in the House of Representatives.
Murkowski said his bill would preserve MMS by making it a permanent agency
The senator said MMS has significantly improved the royalty management program. "It has reduced the number of data related errors and royalty payor mistakes from about 39% in 1982 to less than 5%. It increased the percentage of money distributed on time from 92% to about 99% in a period of about 10 years.
"For its handling of the royalty management functions MMS received an award for management excellence from the President's Council on Management Improvement in 1991 and twice in the last 5 years has been a finalist for Federal Quality Institute awards."
Murkowski said, "MMS is not broken and does not need to be dismembered as proposed by this ill conceived devolution.
"I am concerned that all the good things MMS has achieved will be lost if it is dismantled and its functions are spread to the wind. We are likely to get inconsistent interpretations, rulings, and policies from the states on the few functions they will be given, while we still have the major 'inherently federal functions' retained by the Interior Department. This will lead to costly litigation and an inefficient use of private and public sector resources.
"In addition, if the Outer Continental Shelf minerals management function is absorbed - or more likely buried - elsewhere in the department, who will be the advocate for the offshore oil and gas program? Who will assure that the OCS continues to be a vital contributor to our nation's energy security and energy policy?"
HOUSE PANEL WARY
Murkowski pointedly did not schedule hearings on the devolvement plan.
But the House resources committee's energy and mineral resources subcommittee has held two hearings. At both, congressmen were skeptical.
Meanwhile, the House appropriations committee, in the fiscal 1996 Interior appropriations bill, warned MMS against devolvement.
It said, "The committee strongly urges the department to review carefully the recommendations of the Linowes Commission which resulted in the establishment of the MMS. Those recommendations still apply.
"The royalty management program, in particular, has made tremendous strides over the past few years to improve the effectiveness and timeliness of its activities and has reduced error rates to an admirable extent.
"The committee believes further improvements can and should be made to the royalty management program but, on the whole, the program is very well run and should not be dismantled simply for the sake of change."
The panel did allow MMS to spend up to $375,000 so a management consulting firm could study its onshore minerals leasing related and revenue collection activities.
"The study should identify improvements that could be undertaken to ensure that revenues from federal oil and gas leases are maximized by efficient leasing and collection operations which strive for the lowest administrative costs practicable to the states and federal government," the panel said.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.
