The End of RIK?

The Royalty-In-Kind (RIK) program that POGO has long criticized and recommended abolishing may be coming to an end. According to The Hill, the Democratic staff of the House Natural Resources committee has crafted a bill to overhaul federal drilling rules that would alter royalty rates, shorten the duration of leases from 10 years to five, and move the leasing function out of the Minerals Management Service (MMS) and the Bureau of Land Management (BLM) into an Office of Federal Energy and Minerals Leasing. I haven't seen the legislation yet, but this last proposal would also seem to address POGO's concern that MMS has an inherent conflict of interest since it is charged with both leasing federal lands for drilling and auditing these leases.

-- Mandy Smithberger

Stimulus Trickles Down to Colorado River

While the stimulus package is expected to boost the economy, we're learning that the programs to do that will go a long way toward improving the environment as well. In 1999, POGO wrote a report on the Atlas Corporation's uranium tailings pile near Moab, Utah, containing approximately 10.5 million tons of uranium mill wastes. The tailings pile is located only 750 feet from the Colorado River, and is seeping from the unlined site into the groundwater and ultimately into the river, a valuable drinking water supply.

After a decade of exposing the issue, POGO was pleased with the Department of Energy's (DOE) decision to relocate the uranium mill tailings predominantly by rail from the banks of the Colorado River to Crescent Junction, Utah. That project was estimated to take 10 or 20 years depending on the government's financial commitment.

Last week, the relocation of the uranium pile began following DOE's decision to try to move the pile sooner rather than later due to the infusion of stimulus money:

Moab ($108 million) - Accelerate removal of uranium mill tailings away from the Colorado River and dispose of an additional two million tons of mill tailings by 2011, accelerating site cleanup by several years. The Recovery Act work will be accomplished by increasing the number of railcars and shipments.

After years of slow progress, it looks like the government is finally doing the right thing. It now has the money to clean up the Atlas site and help restore the Colorado River. And if a few people keep their jobs in this struggling economy, that's an additional benefit. I guess it places an environmental spin on President Reagan's beloved theory of trickle-down economics. Well, with an anti-trickle-down ending...Atlas uranium waste won't be trickling down the Colorado River.

-- Scott Amey

Contractor Misconduct - Earth Day Special

In honor of Earth Day, POGO has combed through the Federal Contractor Misconduct Database (FCMD) to find interesting environment-related facts and figures:

• Environmental violations are the most common of the 18 misconduct categories in the FCMD, comprising nearly 25 percent of the instances and 10 percent of the penalties.
• Of the instances in which a federal department is listed as the enforcement agency, or the authority primarily responsible for investigating or prosecuting the underlying case, the Environmental Protection Agency (EPA) lags slightly behind the Department of Energy as the most common enforcement agency in the FCMD.
• The lion's share of environmental violations by the top 100 contractors have been racked up by four energy companies: BP, Exxon Mobil, Royal Dutch Shell, and Valero. However, Lockheed Martin, General Electric and Honeywell have also amassed a sizable share.
• The largest environmental misconduct penalties in the FCMD each exceed half a billion dollars. BP settled a Clean Air Act lawsuit with the federal government in 2000 for $510 million. Last year, the U.S. Supreme Court ruled that Exxon Mobil owes victims of the Exxon Valdez oil spill $507.5 million in punitive damages (about one-tenth of what the trial court originally awarded).
• While Lockheed Martin leads all contractors in misconduct instances with 50, Exxon has the most instances since 2003 with 32--24 of which involve environmental matters.

-- Neil Gordon

Surveying the Offshore Resources Survey

From the Minerals Management Service (MMS) and U.S. Geological Survey's Survey of Available Data on OCS Resources and Identification of Data Gaps:

"The MMS assessment of the hydrocarbon potential of the OCS is based on the analysis of published information and proprietary geologic, geophysical, and engineering data obtained by industry from operations performed under permits or mineral leases and furnished to the MMS. These estimates of undiscovered technically recoverable resources (UTRR) are subjected to a separate analysis incorporating economic and engineering parameters to estimate the undiscovered economically recoverable resources."

The report primarily relies on MMS's historical data for information for oil and gas resources. But if MMS fails to fulfill its obligations to inspect the tools to measure production and there are virtually no third-party checks on volume accuracy, can we be sure we are getting an accurate picture of what our resource availability is? These numbers may be more accurate than royalty collections are, though--Interior's Bureau of Land Management (BLM) officials told GAO last year that "activities related to drilling, including drilling inspections, take priority over completing production inspections."

-- Mandy Smithberger

Starting the Discussion on Drilling Policy for the Next Five Years

POGO still doesn't take a position on offshore drilling, but I think that Michael Livermore raises some issues worth considering when determining what the Minerals Management Service's (MMS) five-year plan for drilling oil and gas leases should look like. Livermore argues that the public stands to lose a lot of money under the current auction structure because they have not valued the option of waiting to auction drilling leases. In testimony given before Interior Secretary Salazar on Monday, Livermore estimated that the cost of this decision is approximately $600 billion. On a different, but related issue, we've also expressed concerns about whether there is sufficiently competitive to be a good deal for taxpayers.

But as significant as these problems may be, whatever decision the Interior Department makes about the rate of auctioning off leases must include better management of said leases, including restoring collections to be in-value rather than in-kind, removing auditing functions from MMS, and instituting regular auditing of existing Royalty-In-Kind leases.

-- Mandy Smithberger

En Banc to Retrieve Royalties

With all of the news about taxpayer money flying out to the government, it's nice to hear the news that the Department of Justice is continuing to pursue $53 billion in royalties they claim oil companies owe taxpayers from deepwater drilling in the Gulf of Mexico. Today the government filed a petition for rehearing en banc in Kerr-McGee Oil & Gas Corporation v. the U.S. Department of the Interior with the U.S. Court of Appeals for the Fifth Circuit. The government argues that the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 authorized the Secretary of the Interior to collect royalties on production from oil and gas leases issued in the Gulf between 1996 and 2000 when the price of oil and gas exceeded thresholds specified in the leases. A district court and a panel have both agreed with Kerr-McGee that they do not owe royalties, but the government argues that these readings are "inconsistent with the plain language of the statute, inconsistent with the statutory structure, and inconsistent with normal principles of statutory interpretation."

-- Mandy Smithberger

Progress on Improving Royalty Management?

Two quick newsworthy items concerning royalty management:

1. The Senate Energy and Commerce Committee is currently conducting the confirmation hearing for David Hayes to be the Deputy Secretary of the Interior. I'm watching the hearing here and posting some of my reactions on POGO's Twitter feed.

2. Representative Carolyn Maloney (D-NY) just introduced a bill (H.R. 1462) for the National Academy of Engineering to provide a study "regarding improving the accuracy of collection of royalties on production of oil, condensate, and natural gas under leases of Federal lands and Indian lands, and for other purposes." The study will examine whether there needs to be improvements in the meters used to measure production rates for natural gas, addressing issues brought up by industry whistleblowers. To improve the accuracy of collections, "Requiring that for purposes of reporting the royalty value of natural gas, condensate, oil, and associated natural gases, such royalty value must be based upon the natural gas’ condensate’s, oil’s, and associated natural gases’ arm’s length, independent market value, as reported in independent, respected market reports such as Platts or Bloombergs, and not based upon industry controlled posted prices, such as Koch’s"--so fair market value.

The bill also seeks an examination for imposing penalties for intentional non-payment of royalties for natural gas liquids, and a review of royalty payments to "determine whether the correct production standard volume and total heating content analysis was used to calculate such payments" and "determine whether such payments were adequate under the terms of such oil and gas leases, by among other procedures comparing the reported royalty values with respected published market price reports, such as Platts or Bloombergs." This is an important step towards the government determining whether the taxpayers are served by the Royalty-In-Kind program.

-- Mandy Smithberger

Oil and Gas Companies May Ask For Tax Breaks Next

POGO's Top Five Recommendations for Increasing Revenue and Cutting Costs pointed out the need to fix the management of oil and gas royalty collections as one major source for increased revenue for taxpayers. The Government Accountability Office (GAO) also pointed out yesterday that ensuring the accurate collection of royalties remains a major management challenge for the Department of Interior. When testifying before the Interior, Environment, and Related Agencies Subcommittee of the House Appropriations Committee (whose website is remarkably bereft of information--yesterday's testimony hasn't even been posted), the GAO admitted that oil and natural gas companies may come to DOI seeking royalty relief if prices continue to be low.

While we cannot be sure how much money taxpayers are losing through the Royalty-In-Kind program, we are pretty confident about how much taxpayers got ripped off from royalty relief in the 1990s, when the Minerals Management Service (MMS) failed to include price thresholds in leases issued in 1998 and 1999. It cost taxpayers at least $1 billion, according to the most recent GAO estimates. The GAO also found that forgone royalties from leases issued between 1996 and 2000 could total as much as $53 billion.

Admittedly, the likelihood of royalty relief does not seem to be high, especially since President Obama specifically targeted "excessive royalty relief" in his FY2010 budget guidelines.

Interior's acting Inspector General Mary Kendall told the subcommittee that both MMS and the Bureau of Land Management (BLM) still have "incompatible data tracking systems...[putting DOI] at risk of losing millions of dollars in royalties." As a result, "the existing process is heavily reliant upon companies doing the right thing."

So if there's going to be more revenue for taxpayers, in addition to ending the Royalty-In-Kind program, MMS and BLM need to improve their tracking systems, and for the love of God, if oil and gas companies get royalty relief again, please include price threshholds to prevent taxpayers from being ripped off if prices rise again.

-- Mandy Smithberger

POGO Issues Top Five Budget Recommendations

With the release of President Obama's FY 2010 budget--which was delivered along with a promise to "eliminate wasteful and ineffective programs"--POGO has issued its top five recommendations for increasing revenue and cutting costs over the next four to five years.

POGO's recommendations would generate over $100 billion in "easy money" by finding commonsense ways to improve the government's collection of revenue and eliminate failed spending programs. These recommendations include:

• Scaling back on expensive, unproven, and outdated weapons systems;
• Providing IGs and auditors with sufficient funding, which will result in greater savings in the long run;
• Downblending excess highly enriched uranium and selling it as fuel for nuclear reactors;
• Downsizing the nuclear weapons complex; and
• Returning to a market-priced program for collecting royalties from companies that drill on federal lands and waters.

Although there is widespread disagreement on issues like the economic recovery and the Wall Street bailout, nobody wants taxpayer dollars to be wasted and abused. Our recommendations provide a simple way to generate billions of dollars that could be put to better use on more sensible and responsible programs.

-- Michael Smallberg

Good and Less Good News for Interior Department Reform in the President's Budget

As most POGO readers are probably aware, the President Obama unveiled his budget today.  There is more of the good rhetoric concerning oil and gas royalty management that we've heard from Secretary Salazar, and the Department of the Interior (DOI) budget also promises to "provide a better return to taxpayers from mineral management."  In order to do this, there are plans of "closing loopholes, charging appropriate fees, and reforming how royalties are set."  Unfortunately, there is no mention of improving oversight or the effectiveness of royalty collections through increasing the number of auditors to oversee leases, which would be the key reform necessary for DOI to enforce both current and new regulations to provide taxpayers a better return.  Hopefully we'll see that in the more detailed DOI budget.

-- Mandy Smithberger