Oil Royalties Underpaid, Report Says

A House committee said Wednesday that the Interior Department has failed to collect as much as $2 billion in royalties from oil companies drilling on government land and waters.

The failure represents “a serious hole in the federal budget deficit,” says a report by the House Government Reform and Oversight Committee. The $2-billion figure is an estimate for potential underpayments on a nationwide basis from 1978 to 1993, and the largest total yet in the growing controversy over royalty collections.

The report, based on hearings earlier this year dealing with royalty collections, calls on the federal Minerals Management Service to aggressively pursue the oil companies to ensure they are paying proper amounts of money. The minerals agency, a division of the Interior Department, had announced previously that it hopes to collect $440 million for underpayments in California alone.

Oil companies for many years “were able to use complex transactions” to disguise the true value of the crude oil they pumped from federal leases, and pay insufficient royalties, the committee report says.

In California, where the records of 20 oil companies are under review, the government has issued subpoenas to Chevron, Mobil and Shell for refusing to supply the requested records, the minerals agency disclosed Wednesday. The process of audit and collection may take a year or more.

The agency does not have an estimate for the potential collections on a nationwide basis, and cannot confirm the $2-billion estimate of the committee report, said Lyn Herdt, the agency’s chief of communications.

Many of the findings and recommendations of the House committee “are being acted on,” she said, noting that the agency has cooperative audit agreements with 10 states and seven Indian tribes as part of its nationwide probe of oil prices.

In California, the critics say, the government should skip the audits and instead use the price of oil from Alaska shipped to California as a measure of true market values. The government should calculate the underpayment as the difference between the price of Alaskan oil and the prices originally posted by the companies, according to the congressional critics.

California and the city of Long Beach collected $345 million from six oil companies in 1991 in a settlement of court actions by the state and city alleging underpayment for oil pumped from state waters.

The federal government should emulate California and take a more aggressive approach to collecting royalties, according to Rep. Steve Horn (R-Long Beach), chairman of the Subcommittee on Government Management and Technology, which held the June hearings. He has urged Interior Secretary Bruce Babbitt to accelerate the effort to collect royalties.

Rep. Carolyn Maloney (D-N.Y.), the subcommittee’s ranking Democrat, also wants a tougher stance. “We should send out bills immediately,” she said.

The committee report released Wednesday was welcomed by the Project on Government Oversight, a research organization that first disclosed confidential reports about royalty underpayments. The House report “tells it like it is about the ongoing rip-off of the American public by big oil,” said Danielle Brian, the organization’s executive director.