U.S. Scrutinizes Oil Industry’s Royalty System

The Justice Department is conducting a nationwide investigation of the price of crude oil pumped from federal lands and offshore drilling sites over the last 15 years or more to determine if the oil industry underpaid royalties to the government by billions of dollars, federal officials said Monday.

The first focus of the investigation is the conduct of oil companies in California, where a government task force previously estimated that such underpayments have caused potential losses of $856 million.

“The Interior Department has asked us to review the situation, specifically the California situation, and that is what we are doing,” a Justice Department spokesman said.

The Justice Department probe will involve “crude oil valuation across the country,” Cynthia Quarterman, director of the minerals management service at the Interior Department, told a congressional hearing Monday.

The Interior Department, meanwhile, is expanding its own investigation of oil royalty payments beyond the California borders.

Robert Berman, an Interior economist, told the hearing that a preliminary inquiry by his office showed that posted prices, the official prices paid by oil companies for crude oil, were below true market value in Oklahoma and Texas oil fields.

Posted prices, he said, are “not market prices.” Instead, “they are statements by the company . . . like posted prices in a car lot . . . a starting point for negotiations.”

Federal and state governments collect royalties for oil pumped from their lands or waters. California, for example, gets 50% of the money received by the federal government for production on land and 27.5% of the proceeds from offshore oil. Royalties are a percentage of the selling price; if that price is artificially low, the federal and state governments would receive less than their fair share of revenues.

The wide-ranging Justice Department inquiry was prompted by the work of a task force of Interior, Commerce and Energy department experts who have been investigating California royalties for more than two years.

The oil companies have steadfastly refused to comment on the investigations. Their pricing practices on California crude have been the target of investigations and lawsuits dating to the 1970s.

The city of Long Beach and the state sued the companies and collected additional royalties exceeding $320 million in 1992. With this recovery in mind, the Clinton administration began its own inquiry on royalties. It used documents about oil company pricing practices that the city of Long Beach had obtained during its lawsuits.

The task force formally reported last month that the potential losses could range as high as $856 million, if oil shipped from Alaska’s North Slope was used as a benchmark of the real price.

California’s share of that total would be $165 million, and the money would be earmarked for public schools. The funds could pay for the cost of educating 35,000 students for a year, or the pay and benefits of 4,100 teachers, according to the Project on Government Oversight, the research group that first disclosed the underpayments.

The Interior Department should use the Alaska crude price as a yardstick and move quickly to collect as much as possible of the estimated $856 million, said Rep. Steve Horn (R-Long Beach), chairman of the House Government Oversight subcommittee on government management.

“Why are we procrastinating?” he asked. “The only question is whether the administration will do the right thing.”

Despite aggressive questioning, Interior’s Quarterman refused to estimate how much money the government expected to collect or say what standard it would use to calculate the royalty underpayments.

Horn said the committee should have access to oil company documents, now sealed under court order, discussing pricing practices in California. He said he would ask 10 oil companies to submit the documents to the subcommittee.

“It has nothing to do with competitive business secrets,” he said, since the companies have viewed the documents but Congress and the public do not have access to them.

The documents provide strong “evidence of the underpricing of oil,” said M. Brian McMahon, attorney for Long Beach and trustee for the state in the dispute with the oil companies.

Royalty issues are worked out by companies with the individuals or governmental bodies that own the oil, said a spokesman for the American Petroleum Institute, the industry’s trade organization.