U.S. GOVERNMENT PRINTING OFFICE

62–931 CC WASHINGTON : 2000

OVERSIGHT OF THE MINERALS MANAGEMENT

SERVICE’S ROYALTY VALUATION PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

MAY 19, 1999

Serial No. 106–90

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

BONNIE HEALD, Director of Communications

MASON ALINGER, Clerk

FAITH WEISS, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 19, 1999 ............................................................................... 1

Statement of:

Kladiva, Susan, Associate Director, Energy, Resources, and Science

Issues, Resources, Community, and Economic Development Division,

U.S. General Accounting Office; Sylvia Baca, Acting Assistant Secretary for Land and Minerals Management, U.S. Department of the

Interior; Lucy Querques Denett, Associate Director, Royalty Management Program; Robert Williams, Acting Inspector General, U.S. Department of the Interior; and John Sinclair, Assistant Inspector General, U.S. Department of the Interior ......................................................... 142

McCabe, James, deputy city attorney, city of Long Beach, CA; Alan

Taradash, attorney at law, Nordhaus, Haltom, Taylor, Taradash &

Frye, LLP, Albuquerque, NM; David Deal, assistant general counsel,

American Petroleum Institute; and Ben Dillon, vice president, Independent Petroleum Association of America ................................................ 32

Letters, statements, et cetera, submitted for the record by:

American Petroleum Institute, the Independent Peroleum Association of

America, the Domestic Petroleum Council, and the U.S. Oil and Gas

Association, prepared statement of ............................................................. 61

Baca, Sylvia, Acting Assistant Secretary for Land and Minerals Management, U.S. Department of the Interior, prepared statement of ................ 157

Davis, Hon. Thomas M., a Representative in Congress from the State

of Virginia:

Letter dated February 12, 1999 ............................................................... 14

Prepared statement of ............................................................................... 21

Horn, Hon. Stephen, a Representative in Congress from the State of

California:

Flow of royalty chart ................................................................................. 192

Letter dated May 19, 1999 ....................................................................... 133

Prepared statement of ............................................................................... 3

Kladiva, Susan, Associate Director, Energy, Resources, and Science

Issues, Resources, Community, and Economic Development Division,

U.S. General Accounting Office:

Information concerning an automated system ........................................ 190

Information concerning management of the Indian trust ...................... 190

Prepared statement of ............................................................................... 145

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York:

Information concerning oil settlements ................................................... 122

Letter dated February 26, 1997 ............................................................... 6

Prepared statement of ............................................................................... 11

McCabe, James, deputy city attorney, city of Long Beach, CA, prepared

statement of ................................................................................................... 34

Taradash, Alan, attorney at law, Nordhaus, Haltom, Taylor, Taradash

& Frye, LLP, Albuquerque, NM, prepared statement of ........................... 39

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 29

Williams, Robert, Acting Inspector General, U.S. Department of the Interior, prepared statement of .......................................................................... 173

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OVERSIGHT OF THE MINERALS MANAGEMENT SERVICE’S ROYALTY VALUATION

PROGRAM

WEDNESDAY, MAY 19, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Davis, Turner, and Maloney.

Staff present: J. Russell George, staff director and chief counsel;

Randy Kaplan, counsel; Bonnie Heald, director of communications;

Mason Alinger, clerk; Faith Weiss, minority counsel; and Earley

Green, minority staff assistant.

Mr. HORN. The House Subcommittee on Government Management, Information, and Technology will come to order. Today we

will look at the Department of the Interior’s management of the

collection, valuation and distribution of revenues, or royalties, from

oil produced on Federal lands.

The Federal Government has been collecting royalties associated

with mineral production on Federal onshore lands since 1920 and

from offshore lands since 1953.

The Minerals Management Service, an agency within the Department of the Interior, was established in 1982. The agency, through

its Royalty Management Program, ensures that all royalties from

Federal and Indian mineral leases are accurately collected, accounted for, and disbursed to the appropriate recipients in a timely

manner.

Royalties from oil and gas leases on Federal lands are one of the

largest sources of nontax revenues for the Federal Government. According to the Minerals Management Service, since 1982, nearly

$100 billion has been disbursed from Federal onshore and offshore

leases. In fiscal year 1998, for example, the Royalty Management

Program generated nearly $6 billion from more than 26,000 mineral leases. Of that amount, $550 million was distributed to the

States and used for schools, roads, and public buildings.

Given the significance of this program, on June 17, 1996, this

subcommittee held a hearing to examine whether the government

was receiving a fair return from oil leases on Federal lands. The

subcommittee heard from witnesses who testified that between

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1978 and 1993, oil companies had underpaid royalties on crude oil

by as much as $856 million. We also learned that the Minerals

Management Service was not sufficiently addressing this problem.

Concerns were raised that the Minerals Management Service

had delayed collecting oil royalty revenues and had entered into

global settlements with oil companies that failed to protect the financial interests of the Federal Government and the American taxpayer.

In response to recommendations from an interagency task force

convened by the Department of the Interior to study the undervaluation issue, in 1995 the Minerals Management Service began an effort to revise its oil valuation regulations. Currently oil values for

royalty purposes are based on gross proceeds or a series of benchmarks depending on whether or not the oil is sold in an arm’slength transaction. ‘‘At arm’s-length’’ refers to oil that is bought

and sold by parties with competing economic interests, and the

price paid establishes a market value for the oil.

Transactions that are not at arm’s length typically involve a

transfer of oil between companies that have both production and

refining capabilities. The price of oil in these transactions is often

a price posted by the buyer, who is often an affiliated subsidiary

of the seller. There is concern that these posted prices tend to be

below fair market value.

Since 1995, the Minerals Management Service has held at least

17 public workshops and meetings across the country; received over

4,000 pages of comments from interested parties; and reopened the

comment period at least seven different times.

On two occasions in 1998, Congress passed legislation temporarily delaying the implementation of a final rule. Congress attached a third continuance to this year’s emergency supplemental

appropriations bill that passed the House of Representatives on

Tuesday. We are having a hard time nailing this one down.

Today we will hear from a number of experts on the issue. We

will examine whether the Minerals Management Service has been

effective in obtaining a fair return from oil-producing leases on

Federal lands. We will also ask whether the existing rulemaking

process can result in a regulation that simplifies the process, minimizes disputes and ensures a fair return for the American taxpayer.

We welcome our panelists, and we look forward to their testimony.

[The prepared statement of Hon. Stephen Horn follows:]

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Mr. HORN. I am now delighted to yield time for an opening statement to the gentlewoman from New York, Mrs. Maloney, who took

a very active interest in the preceding hearing 3 years ago, and we

are delighted to have her with us today. Mrs. Maloney.

Mrs. MALONEY. Thank you so much, Mr. Chairman, and I thank

you very much for holding that hearing 3 years ago and for today’s

hearing and for your fine leadership on this and so many issues.

As you know, this is the second hearing in 3 years that this subcommittee has held on the issue of the Minerals Management Service’s royalty valuation program. Our first hearing held back in 1996

explored allegations of undervaluation of oil by several major oil

companies and MMS’s efforts to collect the full amount of royalties

that were owed to the American taxpayer.

Since that time much has changed. MMS has finally decided that

a new oil valuation rule was necessary in order to prevent big oil

companies from continuing to rip off the American taxpayer. The

Justice Department decided that the allegations against many of

these oil companies were so strong and significant that it intervened in a lawsuit alleging that companies had violated the False

Claims Act by deliberately undervaluing oil produced on Federal

lands as a means of avoiding royalty payments to the Federal Government.

As a result, one company, Mobil, decided to settle with the government and paid $45 million. Numerous other companies have

settled similar claims brought by States and private royalty owners

for millions and, in one case, billions of dollars; and finally, those

same oil companies that vigorously defended posted prices as a legitimate means of determining oil value have begun to admit that

posted prices are not the issue and are finally negotiating with the

Department on a new rule. But as much as things have changed,

I am not sure if we have really made much progress.

When I was preparing for this hearing, I came across a letter

that I had almost forgotten about, but I think it is very relevant

to this issue before us. It is a letter dated 2 years ago, February

26, 1997, and I would like to put it in the record.

Mr. HORN. Without objection, it will be put in the record at this

point.

[The information referred to follows:]

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Mrs. MALONEY. An attorney named Pat Holloway to Bob Armstrong, the Assistant Secretary of Land and Minerals Management.

Mr. Holloway had the opportunity to participate in a meeting of

the Independent Petroleum Association of America’s valuation task

force by phone where members of the IPAA, along with several

lawyers and lobbyists representing Chevron, Amoco, Conoco and

other major companies, discussed how they would fight Interior’s

efforts to collect the royalties that the taxpayers were owed, and

I think it is very relevant, and I want it in the record, Mr. Chairman, because exactly the strategy which they outlined in this document or in this letter to stop the government from collecting the

rightful amount owed, the market price owed to the taxpayers, to

stop that so that the oil companies could continue ripping off the

American public by undervaluing their oil.

And I quote from the letter,

The strategy discussed at the meeting was to seek to delay the regulations as long

as possible, and then to file suit under the name of the independent petroleum—

IPAA—independent producers, to prevent them from becoming effective on whatever

procedural, not substantive—they literally write out, we are not going to fight them

on substantive grounds, we are going to fight them on procedural grounds. It suggested that the IPAA/API should consult—this is the worst line—that they should

consult with the tobacco industry on legal tactics since that industry has so much

more experience in litigating against government regulations than the oil industry.

The letter goes on to explain how a representative from one

major company, Chevron, offered to lend financial support to the

IPAA to fight the proposed rule. It states, ‘‘the strategy would be

to fund opposition, including litigation, against the proposed regulations in the name of the IPAA,’’ the independents, ‘‘as representatives of the, ‘small producers,’ rather than in the name of the ‘giants.’ ’’

And the letter adds, ‘‘There was talk of using influence on the

Appropriations Committee to block the expenditures needed to implement the proposed regulations.’’ Well, they succeeded last night

in blocking legislation on the floor coming out of Appropriations.

I must say that they picked a strategy, and they stuck to it, consulting with the tobacco industry, fighting the rule on procedural

grounds, not substantial or substantive grounds, using the appropriations process to attach writers, blocking Interior from implementing the rule, avoid the real issue as much as possible and

doing all of this in the name of the small producers, despite the

fact that MMS has repeatedly stated over and over and over again

that the independents will not be harmed by this rule. And so far

it seems that the strategy is working, and even if the rule was implemented, they say, don’t worry, we will just go to court and block

them in court and continue to sue them so they can never do anything.

Yesterday some of my colleagues in the Senate held a hearing on

proposed legislation that would amount to a massive giveaway to

the oil industry. At that hearing supporters of the oil industry once

again tried to take attention away from the real issue through yet

another red herring, this time concerning alleged impropriety on

the part of the Interior official who had nothing whatsoever to do

with the rule.

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And, Mr. Chairman, this type of attempt to divert attention from

the real issue, I think, is shameless. I’d like to put in the record

the article that appeared in Congress Daily—where is that article?

Mr. HORN. Without objection, it will be put in the record at this

point.

Mrs. MALONEY. Where they—the acting head of MMS stated,

‘‘the employees did not work on the oil valuation change and, therefore, did not have a conflict.’’ That was his quote.

And I—I just have a very lengthy statement. I would like to put

the entire thing——

Mr. HORN. Put it in as read, without objection.

Mrs. MALONEY [continuing]. Because I would like to hear what

everyone has to say, unless you really want to hear my entire

statement, Mr. Chairman.

Mr. HORN. We will take your word for it.

Mrs. MALONEY. Everybody like to hear my entire statement?

Mr. HORN. It will be in there as if you read it.

Mrs. MALONEY. I am afraid it would go on for another 10 or 20

minutes because I have a lot to say on this issue, but I would rather hear from the Members at hand, and I thank you for putting the

statement in.

Mr. HORN. Thank you.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

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Mr. HORN. I now yield for opening statement to the gentleman

from Virginia Mr. Davis.

Mr. DAVIS. Right. Let me just ask if we put in the record a letter

from Martin Frost to the chairman, I think, of the Democratic conference in the House and Gene Green endorsing delaying of these

standards and put that in the record.

[The information referred to follows:]

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Mr. DAVIS. And then would just say that recent developments in

a current False Claims Act or ‘‘qui tam’’ suit have really called into

question the integrity of the testimony presented before this subcommittee on June 17, 1996, concerning the subject before us again

today: Federal crude oil valuation.

Danielle Brian of the Project on Governmental Oversight

[POGO], admitted earlier this month that POGO has paid to two

government employees $700,000 for actions they took as Federal

employees to change the Interior Department’s interpretation of its

royalty value rules.

In its June 17, 1996, hearing this committee heard testimony on

the subject of oil valuation. Bob Berman of the Department of Interior’s Office of Policy Analysis and Robert Speir of the Department

of Energy were the two star witnesses who testified that MMS had

enabled oil companies to pay royalties on less than the full value

of crude oil from the Federal leases.

Our own report concerning the 1996 hearing cites Berman as testifying that either NYMEX or, on the west coast, Alaskan North

Slope [ANS], crude prices provide the best benchmarks for crude oil

prices. In our report, Mr. Berman is also quoted as having testified

that he had initiated a study into whether posted prices outside of

California reflected market value and that his preliminary finding

was that the posted prices might have understated the market

value of crude oil from 3 to 10 percent. Bob Speir, who had been

DOE’s representative on the interagency task force which investigated allegations that Federal crude oil was undervalued in California, also supported the use of ANS prices for California oil.

We now know that the positions of Berman and Speir were in secret support of positions being taken by private relators under the

False Claims Act in Federal court in Texas, a case already filed

under seal 4 months before this subcommittee’s June 1996 hearing.

POGO later joined in that suit, seeking a percentage of any recovery the Federal Government might obtain. In 1996, POGO attempted to have Berman and Speir join in the suit, although both

declined.

We now know that POGO’s involvement in the crude oil issue

was prompted in 1993 by the chairman of POGO’s board of directors, a Washington, DC, lawyer representing the State of California

in its dispute against the Interior Department over Federal royalty

issues. At least as early as 1994, Mr. Berman had frequent contact

with POGO and later with POGO’s trial lawyers. We know that

POGO’s annual budget is only one-third of the amount of money

paid to these two Federal employees. So it is fair to infer, at least

until someone is willing to prove otherwise, that POGO paid the

money with the approval of its board of directors, apparently still

headed by California’s private counsel, and with the approval of

POGO’s trial counsel.

I should add one qualification to that statement. POGO’s local

counsel in Texas did not know of the payments in advance. He obtained the court’s permission to withdraw from the case as soon as

he learned of the payments last month.

The inherent conflicts of interest present in Berman and Speir’s

acceptance of the money should have been glaring. Berman and

Speir were central policymaking figures in the creation and work

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of the interagency task force that examined allegations of underpayments in California in 1994–1995. The government has listed

the two as potential witnesses for the False Claims Act litigation.

Not surprisingly, Bob Berman and POGO are now apparently

under investigation for possible violations of at least two Federal

criminal statutes. At a recent deposition in the civil case, Berman

was asked whether he had informed this subcommittee when testifying of his personal financial interest in seeing Interior’s interpretations changed. He answered by asserting his fifth amendment

right not to incriminate himself.

But the clouds grow still darker. POGO reports that it told the

U.S. Department of Justice of its intention to make these payments

in October 1998. Although the Justice Department is specifically

authorized by statute to file for an injunction against prospective

payments to Federal employees, it did not do so. In fact, it did not

advise the Federal judge in Texas that POGO had made these payments until after POGO’s Texas counsel asked the judge for permission to withdraw from the case. The government knew about

POGO’s intent to make the payment for 7 months and did not disclose to the court, the public or the defendants that they were

going to be made. Only last month did all this come to light when

the Federal judge directed the government to disclose the payments

to the defendant.

It is incumbent on our subcommittee to fully investigate this situation. The outrageous conduct occurring in the U.S./Johnson v.

Shell qui tam action has raised questions not only about the integrity of that particular legal action or the rulemaking that resulted

from Berman’s and Speir’s work on the interagency task force, but

also concerns the integrity of a hearing held before us today. Until

these issues are resolved and all pertinent facts brought to light,

there can be no fair consideration of the issue of crude oil valuation

either in court, at the MMS or in the Congress.

It appears that the Department of the Interior’s proposed oil

valuations regulations may very well have been substantially tainted by cash payments approaching $1 million to government officials or former government officials and by blatant interference by

outside parties, including trial lawyers who could possibly reap millions in proceeds from pending lawsuits.

If it becomes commonplace for government policymakers in the

Interior Department or other agencies to take large sums of cash

from outside parties who have a financial interest in the outcome

of the government policy in question, we are going to have a scandalized, corrupted system that has absolutely no credibility with

the public or with Congress.

Mr. Chairman, I look forward to these hearings.

Mr. HORN. I thank the gentleman.

[The prepared statement of Hon. Thomas M. Davis follows:]

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Mr. HORN. I now yield to Mr. Turner, the ranking member on the

subcommittee, for an opening statement.

Mr. TURNER. First, I’d like to thank the chairman for structuring

this hearing in a fair manner, and which I believe will be beneficial

to the committee, bringing in all parties to this issue to be heard

before us. This is a very complex issue, and I think this hearing

is very important in terms of trying to deal with the issue at hand.

I understand we’ll be hearing today from representatives of a city

that filed suit against the major oil companies, and Indian tribes

that have also sued the oil companies. Additionally, we’ll have the

opportunity to hear from the major and independent oil companies,

and also we’ll have testimony from the Department of Interior and

the Inspector General of Interior, as well as the General Accounting Office.

The focus of the hearing will be on the Minerals Management

Service, with specific regard to their management of the oil royalty

program, their efforts to collect past due royalties and their

progress in finalizing a new regulation on oil valuation for royalty.

The issue of oil royalty valuation is, as I said, exceedingly complex, and I have some concern with the latest proposal issued by

the Minerals Management Service, one of which involves the independent oil companies. There are a number of independents who

operate in my congressional district, and I am very interested in

the Minerals Management Service proposal and its effect on those

independents.

Another point that bears mentioning is that the Department of

Interior is looking to impose these new pricing regulations on the

industry at a time when it is suffering from record low petroleum

prices and sustaining record job losses. Therefore, I think this committee, the Congress and the agencies should be very sensitive at

this particular time with regard to the industry.

While the Department of Interior estimates that the new proposal that is currently on the table will increase revenues from the

oil companies by 66 million each year, it’s my belief that we should

proceed with caution and ensure that we understand the implications of the proposal, especially given its timing and effect.

My interest also is in assuring that the Department of Interior

focuses on forging a productive and useful relationship with the oil

companies and in reaching a consensus solution that will both protect the taxpayer and provide a fair deal for the oil companies. It

is time that we look to the future and try to put past disputes behind us in order that we might resolve this situation. The current

climate of continual litigation across the country does not benefit

anyone, especially the taxpayer.

To further complicate an already complex matter, a Federal

judge in my congressional district where the litigation is pending

has released, as Mr. Davis referred to, some troubling information

which was recently brought to light.

As the other members of this subcommittee are aware, a current

government employee, as well as a former government employee,

who acted as whistle-blowers in an oil valuation investigation, accepted extremely large monetary payments from a public interest

group that had a financial stake in the outcome of the lawsuit alleging royalty underpayments by the oil companies named in that

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suit. One such employee is currently within the Department, and

the other is previously at the Department of Energy. Therefore, I

am very concerned about these relationships and whether these individuals were actually in a position to intervene in the actions of

the government and perhaps to influence the oil royalty valuation

regulatory changes that are currently on the table.

Certainly we should not allow the propriety of these payments to

obscure the real issue at hand, and I do not intend to allow that

information to unfairly skew my judgment. However, it is a problem that must be dealt with and resolved before a final decision

can be made with regard to the oil valuation regulation.

I look forward to the hearing. I look forward to hearing from all

the witnesses, and again, I thank the Chair for scheduling this

hearing and for the manner in which it has been structured.

Thank you, Mr. Chairman.

Mr. HORN. I thank the gentleman very much.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. HORN. And let’s see, we have no other Members present yet.

Any other statements will be put in the record as if read.

Let me describe some of the procedure here for the first panel.

We are an investigative subcommittee of the Committee on Government Reform, and as such, all witnesses are sworn before they give

their statement. We’re going to introduce you based on your position on the agenda that was passed out, and we will hope that—

your full statement automatically goes in the record at that point,

and we would hope you would be able to summarize it.

Now, we have two panels here, and I don’t mind giving you at

least 8 minutes to summarize it. We want to spend the time with

dialog, and with four Members here, there’s a lot of dialog that occurs and questions and answers. I think we get to things a little

faster that way than if everybody just reads their statement. Don’t

read it. Summarize it.

So, gentlemen, if you would stand, raise your right hands and

take the oath.

[Witnesses sworn.]

Mr. HORN. The clerk will note all four witnesses have affirmed

the oath, and we will start with you, Mr. McCabe. We’re delighted

to have you here again. You are a real expert in this area, and

you’re deputy city attorney of the city in which I happen to live,

which is the beautiful city of Long Beach, CA. I don’t know why

you would come back here and leave that environs, but you’re here,

so we’re delighted to have you again.

STATEMENTS OF JAMES McCABE, DEPUTY CITY ATTORNEY,

CITY OF LONG BEACH, CA; ALAN TARADASH, ATTORNEY AT

LAW, NORDHAUS, HALTOM, TAYLOR, TARADASH & FRYE,

LLP, ALBUQUERQUE, NM; DAVID DEAL, ASSISTANT GENERAL

COUNSEL, AMERICAN PETROLEUM INSTITUTE; AND BEN

DILLON, VICE PRESIDENT, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA

Mr. MCCABE. Thank you, Mr. Chairman. I’m happy also, having

worked on many of the items that have been going on in Long

Beach that have been so positive recently, including the new convention center and the new——

Mr. HORN. Get that microphone closer to you.

Mr. MCCABE. Chairman Horn, members of the subcommittee,

many thanks for your invitation today. I—I won’t go on about Long

Beach’s experience as I might have in my summary, but we do

have much experience in this area. We have collected over 2 million documents, internal documents, from the major oil companies

in California, detailing how they do business there.

As plainly as I can, the city and State have long believed that

their valuable oil resources should be sold on the open and competitive oil market. We believe that oil should not be sold at posted

prices, prices which are virtually picked out of the air by the major

oil companies to maximize their profits. There are publicly quoted

markets from which oil prices can be logically and rationally derived that will ensure that lessors, be they Federal, State or private companies, receive fair market value for their oil.

The major integrated companies have long fought this rational

process, advocating that royalties should be based on prices they

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pick, which are almost invariably below fair market price. In order

to protect their ability to underpay, lessees have successfully lobbied Congress to pass moratoria and have done other things to slow

the process up generally.

Our powerful economic system is built on competition in the marketplace, competition that in the oil industry occurs at well-known

locations in Oklahoma, Texas, California, where oil is freely traded

on the open market, and we believe this is a rational—the only logical choice for—for a way to price Federal royalty oil that will be

fair to all concerned. Long Beach has recovered over $320 million

on this basis. The State of Alaska has recovered $3.7 billion for the

same reason.

Congressman Turner has pointed out his sensitivity to the position of the independents. The proposed regulations do not work to

the detriment of the independent oil producers. They will benefit

them because, unlike major oil companies, they do not enter into

complex exchange agreements designed to hide the true value of

crude oil. These companies do not have affiliates through which oil

transactions can be funneled obfuscating the real value of that

crude oil. In contrast, the majors do engage in exchange agreements, do have affiliates through which they filter this crude oil,

all without this crude oil ever seeing the light of a competitive market.

As I said, the city has extensive experience with documents produced by the majors for the period of 1980’s. These documents support the contention that posted prices in California do not reflect

the value of that oil in the open market. ANS crude is sold in Long

Beach at prices which exceed posted prices for comparable California crude. ANS oil is sold in—Alaskan North Slope oil is sold in

Long Beach for prices that have ranged from $3 to $5 a barrel

above the same grade of oil produced in Signal Hill, which Congressman Horn knows is a city entirely encompassed by the city of

Long Beach.

Despite the delay tactics of the majors, the problem still exists.

For example, comparable grades of ANS crude still sell at prices

that are substantially in excess of our posted prices. How can the

majors maintain that posted prices reflect the true market value

when higher prices are set by open trades in the free market at the

same time, in the same place? Our experience proves that we cannot have the major oil companies pay royalties based on what

amounts to an honor system.

I urge both you and the committee to support these regulations

as a logical solution to the undervaluation caused by prices posted

by the major oil companies. I have been to perhaps a dozen workshops hosted by MMS on this subject, and virtually no one suggested posted prices have any rational link to market realities.

I want to thank you for your interest in protecting the public

and, in particular, the schoolchildren of the State of California who

are the beneficiaries of our share of these—of this oil revenue.

Thank you.

Mr. HORN. Thank you very much.

[The prepared statement of Mr. McCabe follows:]

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Mr. HORN. We now go to Mr. Alan Taradash, attorney at law,

Nordhaus, Haltom, Taylor, Taradash and Frye, from Albuquerque,

NM. Thank you for coming.

Mr. TARADASH. Thank you, Mr. Chairman, members of the committee. My name is Alan Taradash, as the chairman indicated. Our

firm is general counsel to the Jicarilla Apache Tribe, which is currently the largest gas-producing tribe in the country, and it also

produces a fair amount of oil.

Before I go into our concerns in this, I do want to make a special

note that we do appreciate the uniqueness of this opportunity to

address the committee, Mr. Chairman, and rather than go into a

lot of detail on the particulars of the proposed oil valuation regulations that others will cover, I wanted to address the committee to

the unique situation that the tribal producers are in, because that

all too often is forgotten in the equation.

We have a situation that most Members of Congress barely have

to deal with where the United States acts on behalf of Indian tribes

with regard to their mineral estate as a trustee, as well as a government regulator. When the United States, on the other hand, operates as a regulator and as an owner of its own resource, it operates in a very different environment with very different legal obligations.

It is important to remind the Congress, as well as administrative

agencies, of this reality because it is far too often forgotten, and I

would like to go into a few examples of how that inadvertence, if

it is that, adversely affects the value of the tribal mineral estate

and the collections that are properly due to a tribe from the disposition of its nonrenewable resources.

I have been involved on behalf of tribes and individual LITs in

litigation in Win River with regard to the oil theft that occurred

there, with regard to the failure of the government and companies

to comply with lease terms in the context of what is referred to as

the Supron case and the case filed in 1984 against the Secretary

to try to get the Department of the Interior and the Secretary to

comply with the Federal Oil and Gas Royalty Management Act of

1982.

We currently still are engaged on a daily basis in the details of

audit work, along with the tribal auditor, through a cooperative

audit arrangement with the Minerals Management Service, and I

want to state at the outset that notwithstanding the very critical

nature of my remarks and our experience, there are some very excellent people within the agencies I am about to criticize as well

as our industry partners.

Having said that, however, I think it is important in looking at

these valuation regulations to keep in mind what the overall objective is. If one is engaged in the disposition of nonrenewable resources, and one is not interested in the substance itself, then the

only question is the fair and equitable split of the economic profit

that can be gained from the activity. The royalty, like any other expense to the operator, is an expense. To the royalty recipient, that

is the lessor of the property, it is not an expense. It is the income

and the only income that is going to be received from that property.

The whole issue of how to best determine value, if one really

thinks about it in the abstract, there are some inherent limitations

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on what the government can do. Availability, the supply of oil; if

we’re talking about oil, control over the supply and control over

markets are factors which directly affect this whole process. On the

other side of the dynamic tension that exists is a government as

regulator in a supposed free market. These are mutually inconsistent things that cause a great deal of the difficulty in coming to

grips with the problems in proper royalty valuation.

I would ask also that the idea that there are abuses is something

that while obviously it is true, one should not paint the entirety of

the industry with that brush. When we litigated, for example, the

oil theft of Win River, in every possible way oil was being stolen

physically from the field, as well as through improper reports.

When I deposed week after week many of the operators, employees

in that area, they perjured themselves because we later found out

through tracking down the truckers who have been taking the oil

from the field at night, and through finding the pipelines that bypassed the lock meter, through finding the resettable lock meter,

which was not supposed to be resettable, through finding the juryrigged heater tank valve which could be turned without breaking

the USGS seals, oil was being stolen in every conceivable way from

that field. The USGS at that time, the regulatory agency, along

with the BLM, did nothing, absolutely nothing, to put a damper on

the most outrageous of abuses.

I don’t want to go into too much of that detail. I recognize that

there is limited time, but the Linowes Commission, as you know,

covered that. The Federal Oil and Gas Royalty Management Act

was supposed to be therapeutic of these problems in many ways.

In the consent decree in the case that I did against the Secretary

on behalf of the Navajo LITs, Shii Shi Keyah v. Babbitt in the U.S.

District Court for the District of New Mexico, the court retained superintendent jurisdiction after the 1989 consent decree was entered

to look at the compliance that was occurring.

In 1992, I received from MMS as part of that settlement agreement the so-called major portion pricing data. I didn’t bring it with

me. It’s two volumes. It sits this high. The government had spent

at that point in time in trying to correct the deficiencies in its system over $100 million on its computer systems, over $100 million.

The error rate in those reports, that I was provided by the government’s Minerals Management System which processed the information, which means that it was determined to be accurate, with huge

parameters that I employed for accuracy, was over 46 percent.

Let me give you but one example of the nature of the erroneous

information. These reports have columns because of the value nature of the report. One column is BTU value. The other column

way to the side is the price per MCF of that particular BTU quality; zero BTU quality gas listed as having been sold for 660,000 per

MCF. Now, that’s not in combustible air.

My point in raising that is this: I have looked at the GAO reports. I have looked at the IG reports. They do not do the auditing

that the tribe has begun to do in many of these instances.

They agree a tribe’s rate of recovery, for example, in its audit

work over the last 10 years is four-ninths additional royalties, and

for the tribe that’s over $40 million in money that has never been

paid.

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My point in raising those issues is this: If the government is

going to look at new systems to employ, it has to look at and be

instructed by its past performance on fundamental things. If the

Congress looks at the Federal Managers’ Financial Integrity Act report that the Secretary has filed in the past, it sees the admission

that there is no onshore fluid, meaning oil and gas, control, and

hence the inability to have a closed accounting system results in

acute deficiency in the government’s ability to determine to a certainty it’s been paid right.

Now, my last point, and I want to close with this, is this: Congress has passed in 1996 the Royalty Simplification and Fairness

Act, preceded in the prior year by the Deep Water Royalty Relief

Act and the Alaska North Slope Act, which created new markets

for oil that was produced there abroad. Congress—the Deep Water

Royalty Relief Act authorized the Secretary—has since provided relief in the way of royalty relief that will exceed hundreds of millions of dollars for deep water production.

Tribal minerals are being devalued by Federal largesse that’s intended to promote the security of the domestic oil industry. We do

not take issue with the government’s policy decisions to do that,

but what we ask of this committee and of Congress is to recognize

that when the government acts on its own behalf to dispense such

largesse, and as a consequence it reduces the value of the tribal

mineral estate, then the government has to consider ways to level

that playing field.

And as I’ve detailed in my written testimony, which I understand

has been admitted to the record, what we would ask of this committee in addition to the work that it is doing in valuation is to

seriously consider tax credit relief for our industry partners, for our

reservation oil and gas development and production, and to the extent that the committee or its staff may be interested in further exploring that, we would welcome the opportunity to do so.

I’d be happy to answer any questions, Mr. Chairman, that you

and the members of the committee may have. Thank you.

Mr. HORN. Thank you very much. It’s a very helpful statement.

We’ll get back to a number of things later.

[The prepared statement of Mr. Taradash follows:]

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Mr. HORN. Mr. David Deal is the assistant general counsel for

the American Petroleum Institute, which is the overriding group in

which all of the petroleum industry is represented, as I recall. So

thank you very much for coming.

Mr. DEAL. Thank you, Mr. Horn.

Mr. Chairman and members of the subcommittee, I am David

Deal, assistant general counsel of the American Petroleum Institute. Joining me today is Ben Dillon, IPAA’s vice president for public resources. Our respective trade associations—and many others

which Mr. Dillon will enumerate for you—are a blend of State and

national trade associations whose members are actively involved in

oil and gas exploration and production on Federal lands. Our trade

associations’ memberships overlap, and together our members are

responsible for the production of virtually all Federal oil and gas

production on Federal lands and virtually all of the Federal oil and

gas royalties paid every month.

Over the course of the MMS crude oil valuation rulemaking, the

MMS has stated it seeks revised valuation regulations that arrive

at the value of production in a way which is simpler and more certain, which decreases the cost of administration and leads to less

controversy, fewer appeals and less litigation. We applaud these objectives, and we embrace them. But we believe the MMS proposal,

as it stands right now, falls so much short of reaching them.

At the core of the rulemaking is the MMS belief that royalty

valuation for most crude oil transactions should begin downstream

of the lease. In a nutshell, industry believes that a downstream

starting point for valuation is the wrong starting point for most

transactions and leads to many problems.

A copy of the cover letter summarizing industry’s most recent

comments is attached to our written statement, and we’re submitting for the record today a complete set of the comments themselves. But today, we can share with you the gist of our present

thinking.

Overall our problems——

Mr. HORN. May I just say, without objection, that exhibit will be

in the record at this point.

[The prepared statement of the American Petroleum Institute,

the Independent Peroleum Association of America, the Domestic

Petroleum Council, and the U.S. Oil and Gas Association follows:]

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Mr. DEAL. Thank you, Mr. Chairman.

Overall our problems stem from the MMS’s inclination to use a

downstream starting point for royalty valuation.

What are the problems we see? First of all, starting downstream

is unnecessary given the active market at the lease and the availability of comparable sales at or near the lease as a sound measure

of value. In lieu of the three different downstream-skewed methodologies proposed by the MMS, we’ve suggested major revisions to

the existing valuation rules. Industry changes would permit full

usage of a lessee’s own comparable sales for valuation of non-arm’slength transactions while eliminating perhaps all of the practical

problems the MMS has identified in the past.

Second, starting downstream isn’t wise because it requires adjustments which inject an inherent complication into the calculation of value and, in the case of transportation, we believe, can lead

to palpably unfair results. In this case, industry has suggested,

where some sort of netback is required, specific methodologies for

the calculation of transportation, quality and location adjustments,

these would lead to values closer to the lawful value of production,

which leads to my third point.

Starting downstream can lead to unlawful results. To the extent

valuation through indexing captures postproduction values, and I

emphasize postproduction values, added downstream of the lease,

the MMS proposal leads to an outcome at odds with the law. Royalty is due on the value of production at the lease. Postproduction

activities associated with marketing can add value and these values are not properly part of the value of production. Together, industry’s suggestions for better use of comparable sales and more

properly calculated adjustments can solve this problem.

Fourth, the proposed downstream-skewed approach is shot

through with ambiguities that make compliance unduly difficult

and frustrate the MMS’s objective of certainty. To eliminate this

problem, industry has suggested that the MMS adopt regulations

which clarify the term ‘‘affiliate’’ to make it clear up front what

valuation pathway a lessee should use. We’ve also suggested that

the MMS adopt regulations that preclude the threat of secondguessing good faith marketing decisions and imposing some indexing requirements simply because a higher price might have been

obtained elsewhere by some other lessee. Likewise, we have suggested that the MMS adopt an explicit process by which lessees can

early on seek timely and reliable determinations of value. If the

MMS can’t answer these valuation questions, who can we ask?

Notwithstanding these reservations, we think the rule can be

fixed if certain key changes along the lines I’ve described are made.

Over the course of the rulemaking, industry has submitted voluminous comments, and the MMS, to their credit, has made some important changes to the valuation proposal.

Within the last year, we have—industry—has sharpened our

focus on the remaining core issue areas. We’ve had a common view

on the rulemaking from the outset, but in late 1998 we formed an

industry task force that includes API, IPAA and two of the other

signatories to our written comments, namely, the Domestic Petroleum Council and the U.S. Oil and Gas Association.

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This task force took a hard look at the present proposal, and we

took a hard look at our own industry concerns. Task force members

presented our recommendations at the MMS workshops held in

March and April this year, and on April 27th we submitted the detailed written comments I alluded to earlier. These comments assemble in one package the elements of industry’s point of view, proposed solutions and answers to many specific questions that arose

in the course of our discussions.

We’re frankly encouraged at the MMS staff’s willingness to discuss both sides of the core issues, and we continue to believe these

efforts can lead to a sound resolution of this rulemaking.

I would conclude by saying overall adoption of industry’s recommendations as a package would move the MMS proposal a lot

closer to realizing a final crude oil valuation rule that satisfies the

MMS’ own objectives. A revised rule should and can be workable

and fair. The revised rule should and can decrease the cost of administration and decrease the appeals and litigation that have

plagued all of us in the past, and a revised rule must satisfy the

legal requirement that royalty obligation be based on the value of

production at the lease.

To this I would add just one other thing—to this we would add

only that Congress and the MMS should continue to explore an alternative that can avoid altogether many of the ambiguities inherent in any valuation methodology. If the MMS were to take its royalty-in-kind at the lease instead of in dollars, valuation questions

could be avoided altogether. The MMS could try to realize for itself

the highest selling price for the crude oil it has taken, or if the

MMS were to assume the postproduction activities now performed

by industry, it might even be able to increase its revenues.

I’ll turn now to my colleague Mr. Dillon. Together we can answer

any questions you have, Mr. Chairman.

Mr. HORN. Mr. Dillon, Ben Dillon is vice-president of the Independent Petroleum Association of America. You might want to differentiate what your group’s membership is compared to the American Petroleum Institute.

Mr. DILLON. Thank you, Mr. Chairman, members of the committee. IPAA, the Independent Petroleum Association of America, primarily represents some 8,000 independent oil and gas producers

across the country. I’m pleased to be here today, and I submit for

the record a list of some 22 additional State associations, mostly

independents, endorsing the industry’s written and oral statements

for this hearing, including, I might note, the California Independent Petroleum Association.

Mr. HORN. Without objection, they will be put in the record.

Mr. DILLON. Thank you.

Mr. Chairman, IPAA appreciates the opportunity to appear here

today. Your examination of MMS’s oil royalty rules could not be

more timely. The past year has been devastating for America’s oil

producers. With record number layoffs and shut-in wells, approximately $2 billion has been lost in tax and royalty revenues, part

of which is dedicated to education. Even though prices have recovered somewhat, a number of bold steps need to be taken to save

the domestic oil industry. Prices remain unstable, and recovery

time will be lengthy.

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However, fair and certain valuation regulations are needed, irrespective of the economic climate. Yes, MMS’s claim to have made

improvements to the rulemaking is solving a number of concerns.

For this we are grateful. However, the rule as outlined last August

by MMS still significantly impacts independents. I submit for the

record a September 1998 letter signed by some 272 independent

producers discussing how they’re impacted by the rule and how

these concerns represent the views of the vast majority of IPAA’s

8,000 members.

Mr. HORN. Without objection, that will be put in the record at

this point.

Mr. DILLON. Thank you.

Consider an excerpt from the letter, ‘‘The rulemaking will cripple

independent producers because the government can second-guess

the proceeds I receive from a third party. If a government auditor

decides my proceeds aren’t reasonable or I’ve breached newly delivered duties, they will subject me to their complex and costly bureaucratic formulas.’’ The letter concludes, ‘‘To survive in this business climate when oil prices are extremely low, I must dedicate my

scarce resources to matters that affect my bottom line. That’s not

speaking on behalf of the majors; it’s stopping arbitrary regulations

that will harm my business.’’

Independents are not asking for more favorable royalty calculations because of low oil prices. We are simply asking that the rulemaking, especially during these challenging times, be fair and predictable and thereby eliminate uncertainty and reduce litigation.

In a letter to MMS on April 27th, Senator Bingaman recognized

the impact of this rule on independents by proposing regulatory

language that would not allow MMS to reject wellhead sales when

compared to other transactions. We have no indication that MMS

will accept this language unless MMS reproposes the rule and

seeks comment.

In his letter Senator Bingaman discussed another component of

second-guessing creating uncertainty for all producers. MMS wants

to be able to challenge bona fide wellhead sale contracts in search

of what it thinks are hidden marketing costs. The wellhead producer has no control or knowledge of these costs.

An additional unresolved issue affecting all producers is binding

determinations. Every producer, regardless of size, wants to be able

to ask the Department a simple question: Am I paying my royalties

correctly? They want to receive a timely answer and an answer

that is binding. To date, MMS has stated it may, not will, issue

binding guidance, again creating more uncertainty.

You may be surprised to learn that many independents are marketing their production downstream of the lease. The proposed rule

affects them due to MMS’s failure to allow proper deductions and

expanded duty to market and the use of index for the offshore and

New Mexico. Even wellhead sellers don’t want to create regulatory

disincentives for entering into downstream businesses. Royalty

ought to be paid on the value of production at the lease regardless

of where you produce for the size of your company.

Independents strongly support and participated in the development of the industry proposal outlined by Mr. Deal. During a recent MMS workshop in Washington, DC, public interest groups

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seemed bewildered by our endorsement of this proposal. Unfortunately, the so-called experts left the workshop as soon as the discussion turned technical and demonstrated how each component of

the industry proposal affects independents.

Mr. Chairman and members of the committee, if all sides are

flexible, we can find a solution that allows implementation of a

final rulemaking in a timely manner. IPAA believes that a comprehensive royalty-in-kind program with possible valuation language similar to S. 925 is a permanent solution to the royalty debate.

I’ll be happy to answer any questions you or the committee may

have.

Mr. HORN. Thank you very much. We appreciate that statement.

We’re going to give each Member 5 minutes for questioning. We’ll

have another round if it’s needed, and I’ll start out the questioning.

Let me ask the whole panel. Have you been satisfied with the

rulemaking process, and if you haven’t, what are the major barriers

toward implementing a new rule that is both simple and fair? Mr.

McCabe.

Mr. MCCABE. Chairman Horn, on the whole, the rulemaking procedure has been taxing and long, but, you know, that’s something

we’re willing to go through. What has been particularly vexing obviously are the continued moratoria on any rule at all. We deeply

believe that the major oil companies will agree to no rule at all

that references market value at—at the recognized market centers.

You can ask the oil industry representatives if they care to comment on that. I don’t think they will flat out say they will agree

to a market-based judgment of—of oil prices. It’s—it’s been hectic

but manageable.

Mr. HORN. Mr. Taradash, what’s your answer to that? Are you

satisfied with the rulemaking process, and what are the major barriers that are implementing a new rule, and how do we get one

that’s simple and fair?

Mr. TARADASH. Well, the process itself, Mr. Chairman, initially

was very unacceptable. Tribes were called to a meeting at MMS,

and this was on the heels of the tentative agreement, at least on

the Federal oil rulemaking, and we were asked virtually to respond

without any opportunity to examine the issues as to whether a

modified version was acceptable to us. Now, to its credit, after

some objection, MMS did change that approach. However——

Mr. HORN. How did they change it?

Mr. TARADASH. Well, they—they offered more opportunity for

input, and the notion was that expanded time and activity was

functionally equal to a substantive examination of the issues,

which is a falsehood. But nevertheless, the process contained, the

elements of fairness in that sense, but it remains, however,

though—what the committee, I think, really should address in

some way is in looking at the way and the effectiveness that MMS

and the government itself, even before MMS, has enforced lease

terms through regulation and otherwise. Is it reasonable to expect

that venturing off into a different version of valuation regulations

is going to be any more successful than the past version?

And let me just quickly add, Mr. Chairman, one of our major producers at Jicarilla filed an extremely large claim for recoupment a

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number of years ago which resulted in ultimately negotiations and

a settlement agreement through which a different valuation methodology other than that which MMS has—was agreed upon between our industry partner and the tribe. Instrumental in that at

the time was Mr. Dillon, who was working for MMS, and Albie

Moriano, who is its Deputy Director. The creativity involved in that

solution lent certainty, simplicity and closure, increased tribal royalties over 17 percent, and the company has requested and has

been given three additional amendments to that agreement for the

sole purpose of adding additional leases under a valuation methodology that they know increases their payment.

My point, Mr. Chairman, is this: In cooperation and with a little

bit of creativity, and in cooperation with industry, and when MMS

can be flexible, we have arrived at different methodologies that do

work, that industry is satisfied with, that offer certainty and closure.

Mr. HORN. Mr. Deal, what’s your answer to the question as to

how satisfied you are with the rulemaking process, and what are

the major barriers toward implementing a new rule that is both

simple and fair?

Mr. DEAL. Well, a few thoughts which overlap some of my colleagues here, like Mr. McCabe. We’ve certainly found this rather

taxing, rather long. We’ve submitted, at least by my count, seven

sets of voluminous comments, which I have been centrally involved

in writing. It has been taxing, but it’s been worth it. It was a slow

start. It took us a while to figure out what the rule was about and

where it was coming from. In the course of this, I think we—our

initial feeling was the barrier we were confronting was what we

perceived as the MMS’ preoccupation with indexing, indexing, indexing; we don’t want to talk about anything else.

I think in the course of the rulemaking, things have changed. I

think there’s been a willingness to—to look at more information. I

think there has been some movement on some key issues so as to

sharpen the issues.

I, like Mr. Taradash, look at the valuation regulations, and while

we have offered suggestions that we think will make the regulations work, I guess our—if you take us a few steps away from the

rulemaking, we would look at valuation and say no matter what

you do, it’s inherently complicated, and that leads us to believe

that perhaps something like royalty-in-kind might be really the answer we’re all looking for.

Mr. HORN. Mr. Dillon, do you want to add anything to that?

Mr. DILLON. Yes, Mr. Chairman. As well we have found the process to be long and taxing, especially to my members who typically

don’t engage in such lengthy rulemaking processes. However, we’ve

come a long way. We started the proposal in 1997 by saying every

producer because of a provision that said if you buy oil, you will

be on NYMEX, and all my members buy oil for one reason or another. It impacted the entire producing community. That is no

longer the case today. We’re down to the type of concerns that I

highlighted in my statement and that are covered in the industry

proposal and find that these last set of workshops were quite productive.

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We are a bit frustrated that the outside critics won’t spend time

with us trying to come up with the creative type of solutions that

Mr. Taradash talks about. Every time we go to these sessions,

there’s a lot of demagoguing on each side. We have some proposals

out there that we truly believe will satisfy the independent concerns, and there is no exchange as to how we can find a compromise in that area. But again, even though it has been a long

process, much improvement has been made.

Mr. HORN. Thank you.

We’re going to increase the question period time to 6 minutes because I went over on that, but any time a Member asks the panel

as a whole, we will finish that out.

I want to ask the gentleman from Texas, Mr. Turner, as to who

the ranking member is today. Is it you or Mrs. Maloney, and I will

call on whoever Mr. Turner says.

Mrs. MALONEY. Mr. Turner.

Mr. HORN. OK. I yield 6 minutes to the gentleman from Texas,

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

This is very troublesome to me, and the only thing I can really

relate it to and maybe most of us can relate to the valuation of a

home for tax purposes. You can always have different experts come

in and give different opinions, and it seems that what has happened in this particular area, to me, is that we have had difficulty

because there are differing opinions, and any time we have differing opinions, there’s room for litigation. And, of course, when we’re

talking about valuing the biggest house on the block owned by the

wealthiest person the block provides for interesting litigation.

So it does seem to me that it’s incumbent upon the Congress and

the agency to try to take a common-sense approach to this issue

and to be sure that we set forth some rules that everybody can understand that can be followed, and that once a valuation is set and

the taxes are collected, that at some point the door closes and we

move on.

And it seems to me that we may be getting close, but we’re not

quite there yet, and I guess maybe I might have one question, Mr.

Deal, for you. You mentioned several things that you thought were

good about the efforts that are being made, and yet I don’t see how

the door ever closes, how there’s ever a point where there’s not an

opportunity to second-guess by some party that will claim that they

haven’t gotten their fair share of royalty payments to come in, file

a lawsuit and begin, once again, the process of going through this

very expensive type of litigation on valuation.

Do you have any suggestions on what we could do or what the

agency ought to be doing to be sure that once they do have a set

of rules that are workable, that the door will shut at some point

where there will be no further litigation?

Mr. DEAL. We do have a few suggestions, and I would say on this

issue, I have my fingers crossed here. I hope that we’re close to closure with the MMS on this. This threat of second-guessing has surfaced among both Ben Dillon’s and my own members, but I’d say

especially among the small companies who would enter into what

they believe are good faith, arm’s-length transactions, and they fear

an auditor or whomever later on simply looking at it and perhaps

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finding a higher price somewhere that either happened or could

have happened, and using that as the basis to unpack the whole

transaction, and then thrusting the lessee into the morass of indexing and that sort of thing.

The suggestion we’ve had is that might there not be some regulations, something in the regulations themselves, which creates a

more explicit hurdle for this. We’re not talking about anything that

in any way undercuts the ability, the proper ability, of the MMS

and its State delegatees to audit. We’re not talking about that, and

we’re certainly not talking about anything which in any way

shields a lessee from bona fide misconduct.

All we’re asking for is something explicit in the regulations

which would recognize that absent some compelling evidence of

misconduct or some other—well, basically misconduct, absent evidence, compelling evidence, of that, that there would be a presumption in favor of the transaction being an arm’s-length transaction.

This would permit, I think, those people who do operate in good

faith to move ahead, conduct their business and pay every penny

that’s due to the Federal Government.

Like I say, I have my fingers crossed, but I think we—we may

be close to closure on this. I think the MMS has conveyed to us

that they have no interest in their approach to—to second-guessing, and I think maybe we need some more assurance of that. So

I hope that answers your question.

Mr. TURNER. I understand that at some point the Director of

MMS testified to the Congress that the proposed regulations were

going to be revenue-neutral, and yet now I hear that they’re supposed to generate $66 million more a year. What is your understanding of the objective here of these regulations?

Mr. DEAL. Well, we’ve heard those numbers, too, of course, and

we are quite mindful of that kind of conflicting reports. We’re a little puzzled, frankly, about the $66 million, or whatever the number

may be. We think the numbers should be revenue-neutral. We

think it should be zero. If indeed the regulations are intended to

clarify the law, it seems to us they should be revenue-neutral. They

shouldn’t change the royalty obligation.

If, on the other hand, the regulations involve a change in the royalty obligation, well, I think if those regulations, if those expanded

regulations, aren’t promulgated, that would be a loss of revenue,

but we would say it’s a loss of revenue that the Federal Government was not entitled to in the first place.

So we think Cynthia Quarterman was right in saying that these

regulations should be revenue-neutral.

Mr. TURNER. Mr. Dillon, Mr. McCabe said that these regulations

as now proposed didn’t affect the independents, and I’d stepped out

of the room, so I didn’t hear your testimony, and I’d like to ask you,

No. 1, if that’s the case; and No. 2, from an independent’s perspective, if you end up with complicated regulations that are hard to

enforce or follow, it seems to me you might end up with a possibility of getting less Federal revenues than more, and I want you to

comment on both those questions.

Mr. DILLON. To recant what I had said earlier, Congressman, we

have about 20 State associations signing off today on our statements here, and most of them are independents, and the reason

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they’re doing that, including the IPAA, is to say, yes, these rules

continue to impact us, they continue to cause uncertainty.

As I mentioned earlier to the chairman, we started with a process where they told independents that if they bought oil, they were

on NYMEX. They haven’t forgotten that. They wondered why, why

wasn’t government accepting their wellhead sale. Well, they have

now said, well, that is not the case unless we come in and examine

your wellhead sale and decide that you have breached some new

duty or that the price is unreasonable.

Well, as you can imagine, that really concerns the membership

because if the government did, in fact, determine that, and, again,

this is very exclusive of fraudulent or misconduct, we wholeheartedly agree, the wellhead seller has entered into some fraudulent or misconduct, then obviously the MMS should take the appropriate action which they already have available to them today

under current law. But just because they have looked to someone

else’s sale and said, well, Mr. Dillon, you didn’t get as much as

your neighbor, so that’s not a reasonable value, therefore you have

to go on a government formula, you’re exactly right. All of a sudden

your costs go up, you’re possibly litigating. My members don’t have

in-house counsel. They’re in the courtroom going through a lengthy

process.

What do they tell me that means to them? Obviously the risk on

developing on Federal lands goes up, and therefore, they’ll try to

look elsewhere, and Federal lands become the last course of action,

which would result, in our mind, in a decrease in Federal royalties

to the Treasury.

Mr. MCCABE. Congressman, if I might respond very briefly?

Mr. TURNER. Yes, sir.

Mr. MCCABE. The text of the proposed regulations make it clear

that no one need base the price of their crude oil on a market basis

that Mr. Dillon would object to. No one need use that system who

has affiliates through whom they make exchanges of crude oil, and

no one need be hampered by those regulations who—excuse me,

the question of whether they have affiliates or whether they engage

in other kinds of transactions that could lead to hiding the value

of the oil. The independents don’t have affiliates. They don’t have

refineries. They are not impacted by this law. They do not behave

in a way that—that engages the terms of the law.

Mr. DILLON. If I can respond to that. Mr. Congressman, I am not

speaking about affiliates as he is describing. In MMS’s latest proposal of July 16th of last summer, it clearly stated that, in regulatory language, if you sell at the well, gross proceeds, not about

affiliates, and that MMS decides that that sale was not reasonable

or in good faith or was inappropriate or substantially below market

value, boy, those are subjective words, you’re going to be placed on

index. It has nothing to do with an affiliate, and that is why we

continue to be frustrated with the process because that simple message is not being received.

Mr. TURNER. Mr. Chairman, I don’t see the time there, so I don’t

think——

Mr. HORN. You’ve only taken 9 minutes, don’t worry. No. We

wanted to round that question out.

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So, Mrs. Maloney, you have 6 minutes now. I figure you’ll go to

9.

Mrs. MALONEY. Mr. Chairman, again, I want to thank you and

Mr. Davis and my good friend and colleague Mr. Turner for his

very thoughtful questions and statements on this. This is an issue

that’s incredibly important to me because I feel that at the heart

of all government is trust, whether or not it’s being done well and

honestly. And how I got interested in it was allegations that major

oil companies, not independents, were valuing their oil at a lower

price than—than what they paid for oil on the market, or when

they bought it, or when they sold it, and that the government lost

hundreds of millions, possibly billions, of dollars that should be

going to the schoolchildren of this Nation. And I think that all of

us want honesty and fairness.

And that is why I have worked on this, because I think the dollar

should go to the people who deserve it, and why should an oil company get a better price than the taxpayers and the schoolchildren

in this Nation? That’s where I’m coming from, and I just want to

put in the record that there were a number of investigations, litigation reports, that have stated in an undisputed way that the oil

companies were paying less to the Federal Government than they

paid in the open market, and there have been recent oil settlements based on this premise where Mobil settled for $45 million;

Alaska, $2.5 billion. I’m talking about the major—various major oil

companies, to the tune of $2.9 billion has been settled in oil royalty

payments on the basis that they were underpaying the schoolchildren or the Federal Government.

Now, that’s a fact. That’s an absolute fact, and I want to put it

in the record. I would also——

Mr. HORN. Without objection it will be put in at this point.

[The information referred to follows:]

RECENT OIL SETTLEMENTS

Mobil (Justice Department): $45 million

Alaska: $2.5 Billion

California: $350 Million

Texas: $17.5 Million

Louisiana: $10 Million

New Mexico: $8 Million

Private Royalty Interests: $15 Million

Total: More Than $2.9 Billion, So Far

Mrs. MALONEY. All of the various oil settlements that were based

on undervaluation of oil.

I would also like to put in the record a study on the California

oil undervaluation, and it’s a review, an analysis of the discovery

documents that were produced in the Long Island case—excuse me,

the Long Beach case, and it basically——

Mr. HORN. We have a Long Beach. You have a Long Island.

Mrs. MALONEY. I know, I know. And he’s selling all the oil, and

my State’s buying it all, but it basically——

Mr. HORN. We want to get you all in taxis in New York.

Mrs. MALONEY. But basically what this report shows is that

there are two sets of books. There’s one set of books on the posted

prices which the oil companies, and I mean large oil companies, not

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independents, pay the Federal Government, and there’s a different

set of books that they pay each other, and this is documented in

this, and I’d like this put in the record.

And I’m sorry that we’re being called to a vote, and I’m sorry

that Mr. Davis, my colleague on the other side of the aisle, is not

here with me because we have worked very well on many other

bills before Congress, and we had a task force that just had a positive conclusion in another committee, and I’d like a bipartisan task

force on the independents because I want to understand it better

myself, because certainly the intent, as was told to me, by MMS

was not in any way to hurt the independents, but only to hit at

the two sets of books.

And basically, oil companies when they sell oil to each other or

when they sell oil, they base it on whatever is the market price.

The market price is usually determined by NYMEX on the east

coast, Alaska North Slope in Alaska and in California.

So, for me, I think the simplest way to handle this is let’s just

go to market prices. Let’s not have some complicated rule that everyone’s objecting to. Let’s just have the oil companies pay the Federal Government and the schoolchildren what they pay each other.

I think that’s fair, and that’s basically where I’m coming from.

I regret that we’ve been called to a vote, but I would like to start

with a question, and I really want to understand the independents’

point of view because it was my understanding they were not hurt.

And maybe that’s a longer discussion than what we can go in

today, and MMS officials have said that they in no way touch the

independents, so I want to understand that.

But, first, I’d like to ask Mr. McCabe, can you in just common,

everyday language give us an example of how the majors price oil

in California? How does this all work? How do the majors price oil,

and how do the independents price oil? Could you——

Mr. HORN. I want to say that you are under oath and—and common, everyday language might be difficult for lawyers. Go ahead,

make your stab at it, Mr. McCabe.

Mr. MCCABE. That’s a good question. The classic California

case—the largest part of California oil is produced in the San Joaquin Valley. San Joaquin Valley oil is of little value—San Joaquin

oil is of little value unless you get it to a market in Los Angeles

or San Francisco, and to get it there, you have to take it through

a pipeline, for all practical purposes. And in the classic case, a producer in the San Joaquin Valley finds him- or herself at the pipeline saying, I want my oil transported, and the owner of the pipeline says, no way, you can sell it to me, or your oil isn’t transported

at all.

So, they arrive at a price, and the price is the posted price. There

is no negotiation, and the posted price is an arbitrary number obviously picked out by the major oil companies.

It is no more accurate to suggest that there is an active market

at that location or—or a free market than it is to suggest that an

inmate in our county jail that’s next door to my office is free because he’s free to walk about the cell from one end to the other.

These producers are captives of that particular market in which

they have no choice but to sell at the posted price. In those instances, under these regulations, obviously those independent proVerDate 11-MAY-2000 10:40 Jul 11, 2000 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6633 C:\DOCS\62931.TXT HGOVREF1 PsN: HGOVREF1
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ducers aren’t held to the higher price. They only need pay on the

price they get from the majors. But if the major transports that oil

to Los Angeles or San Francisco, we have thousands of documents

that suggest the way they value that oil internally is by comparing

it to Alaska North Slope oil that has already been brought to California.

Mr. HORN. May I ask, what’s the sulfur content of San Joaquin

oil versus Alaska North Slope oil?

Mr. MCCABE. There is no single answer to that, Congressman,

because obviously there are various sources for that oil, but the—

it is clear from the internal documents of these companies that San

Joaquin Valley oil or heavy or light sulfur are much more valuable

to them than is Alaskan North Slope oil despite the fact that it’s

of generally the lighter grade and perhaps sometimes of the lower

sulfur content.

Mr. HORN. Is that simply because they’re closer by transportation and they reduce those costs compared to——

Mr. MCCABE. No. When they make those comparisons, all transportation is netted out. All factors of how good the crude oil are

netted out. It’s just clear that under all circumstances they would

rather have California oil than Alaskan oil.

Mr. HORN. You can get another question or so, then we’ll leave

for the floor.

Mrs. MALONEY. OK, but I really want to ask Mr. Deal and Mr.

Dillon some questions, but I wanted to followup on what you said,

Mr. McCabe. You talk about your documents. Why can’t your documents from the oil companies be made public so that we can all

study this and get a better understanding of it?

Mr. MCCABE. Also a good question. We’d like to make them public, obviously. There—there is a discovery agreement entered in

long ago under which those are to be kept confidential within the

context of litigation. We’re perfectly willing to—to give up copies of

those—those documents. All we need is the agreement of the major

oil companies involved.

Mr. Deal is here. He represents some major oil companies. Perhaps he could shed some light on that.

Mrs. MALONEY. But Mr. Deal actually in his testimony talked

about his commitment to fairness and honesty, too, and supporting

fair audits, and at the very least, if you don’t want to publish to

the public, could you release for the oil companies this information

for the audits that are taking place so that they can use these internal documents on the audits? Following up Mr. McCabe’s——

Mr. HORN. I’m going to let you answer that question, but we’re

in recess after that question is answered until 3:45. We have one

vote that’s winding down to 15 minutes, and we have three 5-

minute votes following that.

Mrs. MALONEY. Thank you, Mr. Chairman. That sounds like a

lively discussion while we go to vote. You can talk about internal

documents and whether or not they can be released for audits.

We’re going to be coming back to this panel.

[Recess.]

Mr. HORN. OK. Let me wind up with a few questions here and

then we will move to panel two. Mr. McCabe, could you tell me

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under California law what deductions can oil companies take when

determining the price of oil for royalty purposes?

Mr. MCCABE. Mr. Chairman, I think I can shed light on that. We

don’t deal generally in explicit royalty situations. Our situation is

affected by posted price but is not expressly a royalty contract.

Nevertheless, we have looked at thousands of pages of documents

from the major oil companies in California. We have never seen

anything to suggest through all of these thousands of documents

that the major oil companies believe that marketing is a significant

item in valuing crude oil. I have never seen any mention of marketing as a factor.

Under California law, there is a duty of good faith and fair dealing in all contracts involving crude oil and all contracts involving

any subject. In terms of crude oil, that obviously implies that the

party valuing the crude oil has a duty of good faith to find, under

reasonable effort, the maximum value that can be got for that

crude oil. That’s the lessee’s situation; that’s for the mutual benefit

of the government and the lessee. The lessee obviously wants to

find the highest possible price for its seven-eighths share of the oil.

Mr. HORN. Thank you for that answer. Mr. Dillon and Mr. Deal,

Senator Nickles recently introduced S. 924, the Federal Royalties

Certainty Act. This bill would, among other things, allow the oil

companies to be reimbursed by the Federal Government for their

marketing cost. What are typical marketing costs for oil on a perbarrel basis? Can we calculate it that way, and do States generally

permit lessees to deduct the cost of marketing oil from the State

royalty payments?

Mr. DILLON. Mr. Chairman, I can speak a little bit to some of the

midstream—what we would call marketing or midstream costs that

independents are involved with. I think that is one of the confusions around this issue.

We have members across the country that have decided to enter

into these markets and take the risks and costs associated with

that activity. They do believe that they are important and significant. We in comments to MMS on the record—I’m not going to

have the exact number, but have said these costs as far as a range

per barrel might be somewhere in the area of 7 cents to 15 or to

20 cents per barrel as a minimum. We have tried to put some numbers around that in a very quick fashion. They may not be quite

accurate.

We have provided MMS lengthy lists of what those activities entail. I think that we were pleased to hear in some of the workshops

that maybe MMS is going to recognize some of these activities.

They might call it transportation; we might call it marketing.

I also want to point out that it is not just a per-cent per-barrel

matter. It’s a matter of uncertainty about, as you move downstream away from the lease, what is in and what is out so that we

can bring certainty to that and just give a calculation.

Given that, given its importance, IPAA has filed a lawsuit on a

similar issue, a similar situation, that MMS has taken in the gas

case called IPAA v. Armstrong.

Mr. HORN. Mr. Taradash, let me ask you this one. In your testimony you have stated that the oil companies have more incentives

to enter into Federal leases than it does to enter into tribal leases.

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The tribes are, therefore, operating at a disadvantage when competing for industry’s business. What are some of the incentives offered to oil companies on Federal leases that they do not receive

on tribal leases?

Mr. TARADASH. Well, if you were to go to the Deep Water Royalty

Relief Act and take a look at the first three grants of relief given

to Amoco——

Mr. HORN. That’s the Walter——

Mr. TARADASH. The Deep Water Royalty Relief of 1995. It expressly authorizes the Secretary of the Interior at depths beyond

200 meters, I believe it is, to grant extraordinary relief. That has

been indeed granted. It’s in excess of $100 million calculated for at

least one recipient of such relief.

The Secretary has, through the BLM leases on Federal lands, the

authority in those leases anyway to suspend reduced royalty payments if, in the Secretary’s view, there are national interests that

are promoted to do so.

As a trustee under tribal leases, the Secretary has no such authority. The other disability, however, results from the dual taxation that the tribes suffer from. States have been permitted to tax

on reservation production of private companies producing tribal

minerals.

Tribes who have now had to stand on their own economically as

a matter of self-sufficiency, have introduced their own taxes. So the

tribal and State taxes cumulatively burden the economic activity.

Federal leases don’t suffer from such a burden.

Mr. HORN. Earlier in your testimony you noted that the Federal

Government and the Department of Interior have failed their trust

responsibility to administers Indian oil and gas leases. In terms of

dollars, how much is owed to the tribes or individual Indians? Do

you have any estimate of that, any work done on that?

Mr. TARADASH. For the period of 1988 to 1998 for the Jicarilla

Apache tribe through the work of its auditor and in fairness with

the cooperation of senior MMS staff and its audit staff, often times

over their objection initially and through a lot of rocky meetings,

we have recovered four-ninths additional royalties. That means in

that period of time, the royalties paid up front were approximately

$91.2 million. The tribe has recovered almost 42 million additional

dollars that the government had not collected. That amount is to

the underpayment of four-ninths, the royalties that should have

been paid.

Mr. HORN. Are there tribes that have similar situations in either

oil or minerals, whatever? Do they get together and compare notes?

Do their attorneys get together and compare notes?

Mr. TARADASH. Yes and no. But it’s very, very difficult for a lot

of complex reasons. The fact is every tribe is affected by the same

institutional deficiencies. By the way, the Federal Government’s

systems are exactly the same. So when I’m pointing out to you systemic errors, these systemic errors also apply to the lack of ability

to account for and properly collect under Federal leases.

So the complexity of it is such that when we have talked with

people at the GAO, for example, the question was asked earlier

about whether these would be revenue neutral regulations. In 1987

and early 1988 when MMS was talking about its new valuation

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regulations, it then went into effect March 1, 1988. It represented

to the GAO and to congressional oversight committees that those

regulations are going to be revenue neutral.

In the 1991 GAO report entitled Interior Used Reasonable Measurement—whatever the rest of the title is, MMS admitted to the

GAO at that point—and it’s reported in that report that when it

made the representation that the revenue, that the regulations,

were going to be revenue neutral it did so because it made the assumption based upon some data that there would be an increase

in offshore collection.

It knew there would be a decrease in Indian royalty collections,

but because those two offset one another, they made the assertion

that they were going to be revenue neutral. The difficulty and the

dishonesty in that answer, though, is that Indian tribes don’t get

any of the offshore collections. So it’s totally irrelevant from that

standpoint.

Mr. HORN. In other words, if they had land up to the sea coast,

you are saying that if the State gets some but the Indian tribe

might co-exist with the State obviously and they don’t get any? Explain that to me some more.

Mr. TARADASH. Offshore production is solely a matter of royalties

going to the Federal Government and the appropriate State. When

MMS made the assertion that the regulations be revenue neutral,

it did so, as I said, because it increased—it understood that there

would be an increase in offshore royalties.

Mr. HORN. The higher proportion?

Mr. TARADASH. Yes. The Indian royalty terms which require

highest price paid or offered as the basis of the major portion price,

which is one of the indicia of royalty determinants, were going to

be decreased because the methodology in the regulations is a median pricing methodology.

But Indian tribes do not get any share in offshore royalties. To

say that these would be revenue neutral is dishonest because Indian tribes don’t get offshore royalties; and yet there was a known

decrease to the Indian tribes and their royalties.

Mr. HORN. I’m going to ask Mr. Turner if you have participated

yet in this round. So the gentleman from Texas.

Mr. TURNER. Thank you, Mr. Chairman. Mr. Deal, maybe you

are the right one to ask at least your initial opinion on this.

Shouldn’t there be some procedure in all of these regulations where

at some point the MMS tells the oil companies that we agree or

disagree with the value that you set and actually advise the oil

company as to what they do owe?

Isn’t there some way, some circumstance ending up with some

regulations that kind of boxes in the issues a little bit, rather than

leave it just wide open that you pay your tax and then somebody

somewhere wants to challenge the amount that is paid, they can

go do that.

I have practiced a little law in my lifetime. That’s a pretty nice

lawsuit to pursue. Big oil company issues opinion, expert testimony

on valuation. I could make something out of that. It seems to me

that as long as we have the system that gives so much flexibility

to the process and has no end point to it, at least at the administrative level, we are always going to have these disputes.

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I haven’t seen anybody produce any numbers on how much litigation costs everybody here, but it’s bound to be rather expensive. Of

course, I know the royalties involved are billions of dollars over the

years, and they are worth litigation costs. But there seems to me

there is something missing here in terms of the basic procedure.

That’s aside from the fact that we have all searched together for

some common rules of valuation which we need, but the procedures

seem to be a little bit fraught with potential problems.

Mr. DEAL. I certainly agree 100 percent. One of our suggestions

is that the MMS adopt regulations where it would commit to

issuing what we call binding determinations. Really, the better adjective is reliable determinations.

Industries—like you, Mr. Turner—think knowing early on what

the obligation is is just as important for everyone involved. The

regulations by any measure are very complicated. They are hard to

figure out in some places. We would say, ‘‘Who better than the

MMS itself can offer answers to difficult questions?’’

Hence, we have suggested a process not unlike IRS revenue rulings whereby a lessee could present facts and ask for a determination. The determination would be limited to those facts, it would

have no Presidential value, it would be limited to those facts.

To the extent that the MMS at some later point in time found

it necessary to alter its opinion, they could certainly do that. But

it would have no retroactive effect. We think that it makes sense.

As to the points that you made about litigation, I have never seen

a number which aggregates the dollars spent for litigation. I think

we all know it is huge. One of the very objectives of the MMS rulemaking is to arrive at certainty and decrease administration costs

and litigation costs.

Mr. MCCABE. I might respond briefly to the Congressman as to

litigation. We have initiated litigation and been very successful

with this, acquired something like $320 million for the school system of California. There has been other large litigation in this

country. None of that litigation has arisen out of the regulations.

This is all litigation that arises as to private parties; in our case,

Long Beach and others who want greater value out of their oil.

That has been successful. None of that litigation, to my knowledge,

arises out of the regulations or as to a difference of opinion as to

what the regulations mean.

Mr. DEAL. Well, there are audits going on right now which have

raised serious questions about past payments and, they are based

on whether or not the companies complied or didn’t comply with

the existing regulations. So I guess all I can say is for API’s members, at least the experience that I have seen, isn’t the same as

yours, Jim.

We have people who scratch their heads, try to comply with the

regs and sometimes there are disagreements. We would just like to

say up front that we are committed to paying every penny of royalty that we owe. What would really help the process is to know

up front how many pennies there are involved.

To the extent that we can avoid audits maybe several years later

where the facts have become a little dusty and maybe even the individuals involved in making policy decisions are long gone, if we

could avoid that, everybody would be better off.

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Mr. TURNER. Thank you, Mr. Chairman.

Mr. HORN. The gentlewoman from New York.

Mrs. MALONEY. I thought that we were called for another vote.

Mr. HORN. This will be it for this panel.

Mrs. MALONEY. Just following up on what you said, if you want

certainty, what is wrong with paying the government what the oil

companies pay each other when they sell their oil? Why not just

go to market price? That would be certainty. That would be no litigation. It’s very clear. It’s on the exchanges. That seems to me a

simple straightforward solution.

I have read the internal documents. When oil companies buy and

sell their oil, they use market prices. I have read them where on

California they use ANS. On the East Coast they use NYMEX.

Why don’t we just do that for the school children, the same standard, market price?

Mr. DEAL. Well, there are two observations. One, I think some

of the examples you may be using have alluded to—posted prices

are often alluded to. In the rulemaking we are talking about early

on posted price——

Mrs. MALONEY. I am not talking about the rule—my question

was why not just use market prices?

Mr. DEAL. I’m leading right up to that, ma’am. In the rulemaking

early on, industry acceded to taking posted prices off the screen.

What we looked at instead was the MMS proposal which originally

was the NYMEX futures price. It was later changed to a somewhat

different index, market centers.

Our observation is that it has a certain allure to it. It looks simple. But as we have dug into it, we think that it’s simplistic. The

reason that we think it is simplistic is when you use indices, they

are by definition averages. We don’t think it renders individual justice to individual lessees.

Plus, when you use an index, you have to adjust back to the

value at the lease which the MMS itself accedes to is the end point

or should be the end point.

As we have looked at even the use of market centers, when you

add to the market center spot prices, the adjustments that the

MMS contemplates, we are finding ourselves still falling short of

getting all of the way back.

Hence, we have emphasized that before one uses an index—and

in some cases you might have to use an index—but before you use

an index, before you get on that slope, our strong suggestion is to

look around to see what is at the top of the hill already.

We think there is an active market at the lease, often. We think

if the lessee himself or herself hasn’t engaged in an arm’s-length

transaction, there are often comparable sales. Those ought to be exploited fully. That is at the least a market price.

Mrs. MALONEY. Then why do the oil companies use the market

price when they sell and buy their oil? I just like to back variety.

I have been called to a vote, and I wanted to ask Mr. Dillon something. How many companies in the IPAA——

Mr. HORN. Let me just briefly say that I am going to go and vote

and get back here. Mrs. Maloney can continue questioning.

Mrs. MALONEY. How many companies are members of the IPAA?

How many companies are members of your independent IPAA?

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Mr. DILLON. How many companies just in the industry in general? We have some 8,000 members.

Mrs. MALONEY. How many of them own pipelines?

Mr. DILLON. I would have to guess that it’s probably somewhere

in the area of 10 to 15 percent of those companies.

Mrs. MALONEY. How many of them own refineries?

Mr. DILLON. Less than probably 1 percent to 2 percent.

Mrs. MALONEY. You stated that your organization supports the

industry proposal in its entirety; is that correct?

Mr. DILLON. That’s correct.

Mrs. MALONEY. So I take it that it’s your opinion that your companies have an interest in every specific provision that industry

has put forward in its proposal?

Mr. DILLON. We find that, as we look at the work and develop

the industry proposal, that in each of the issue areas, independence

in one form or another are affected. So to answer your with one

word, the answer is yes.

Mrs. MALONEY. I really feel that most Members of Congress

agree with me that we don’t want to do anything that hurts struggling producers, the real mom and pops. Some of my colleagues tell

me that people have oil rigs in their backyard, that this is a way

of life in some areas of the country. We just don’t want to hurt

those types of folks.

So I would like to ask you, what in this rule will harm these producers? I’m not talking about the entire membership, just the small

producers. What in this proposed rule will harm them?

Mr. DILLON. I like to sometimes call them, Congresswoman, the

‘‘well head seller.’’ The well head seller doesn’t own the pipe and

doesn’t go downstream. They sell the production at the well. I

think that is where Congressman Turner is. There are some issues

which I did articulate in my oral statement that goes specifically

to that type of producer. It is a subset of the issues discussed in

the industry proposal.

Mrs. MALONEY. I have to go vote. May I ask, because I really am

supportive to the small producers, if my counsel could continue

down my line of questions with you? Is that all right? Not appropriate they are saying? Can I read my questions and ask Mr.

McCabe to ask them for me? I have got to go vote.

Mr. DILLON. Might I suggest that you just submit them, and we

will respond to them in writing.

Mrs. MALONEY. I’m not going to submit them for the record because I never get the answers back. I am going to give them to Mr.

McCabe. If he could ask them, then I will get them on the way

back.

I can’t. I have got to go vote.

Mr. DILLON. I don’t think the committee is in session with no

Members. If I may ask for a point of order.

Mr. KAPLAN. We will need to recess until the Members return.

Mr. DILLON. There is no one here from the committee.

Mrs. MALONEY. Here is the questions, if you could ask them. On

the duty to market issue, are any of your members private royalty

owners? To the best of your knowledge, do they insist on a duty to

market? Can you name a specific instance when MMS has secondguessed a bona fide arm-length sale that one of your companies enVerDate 11-MAY-2000 10:40 Jul 11, 2000 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 C:\DOCS\62931.TXT HGOVREF1 PsN: HGOVREF1
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gaged in simply because another producer obtained a higher price

and how often has this occurred?

Then I have another series of questions that I wanted to ask Mr.

Deal because I certainly support free enterprise. I know that you

are interested in an honest and fair system. I just wanted to ask

you a series, too, but I have got to go vote. I will be right back.

I don’t see why we can’t have someone else ask them while we are

gone.

Counsel has stated that on the record while we are gone that you

can answer these questions that I just gave. Thank you. I’m sorry.

Mr. DILLON. Counsel, I would like to suggest that we will commit

to respond in writing. I don’t see the purpose of proceeding since

no members of the committee are here. But I certainly give you my

word and promise to the committee that we will respond in a very

timely fashion.

I barely was able to write down her questions. If that’s acceptable, we will work with your staff, and we will have you a response

in the very near future. We won’t delay.

Mr. MCCABE. I will respond very briefly for the record. I would

like to submit to the committee a list of authority. I think this

issue is a side show where the States uniformly accept a duty to

mark up on the lessee. And I will leave it at that.

Mr. DILLON. Before we close, I would like to submit a letter for

the record that I just received that I do think the chairman and

the Members of Congress will be interested in. It is a letter that

Chairman Frank Murkowski, Senators Domenici and Nickles sent

to the Department of Interior Secretary, Bruce Babbitt, today inquiring into the allegations about Bob Berman and the relationships of POGO. So I just thought the committee might find that instructive and of some use.

Mr. MCCABE. I will also submit a letter from the State of New

Mexico from Commissioner Powell in support of MMS.

Mr. KAPLAN. I think technically what we will have to do is when

the Members return request that the chairman insert the letters

into the record.

Mr. DILLON. In fact, I withdraw my request because the point of

order is plain. Given that the chairman is not present, I withdraw

the letter because he would have to acknowledge the submission of

it. I think Jim would have to respectfully do the same.

Mr. MCCABE. I wouldn’t respectfully do anything at this point.

Mr. DILLON. We will be glad, in a serious note, to respond to the

questions from Congresswoman Maloney.

[Recess.]

Mr. HORN. Mrs. Maloney has some questions that she will write

you about. If you would, do the answer if you could in 30 days. We

would appreciate it. We would like to put it in the record at this

point. So we thank you all for coming and we will now swear in

the second panel. I know that we have a logistics problem there.

These are documents that we will put into the record without objection: one is to Secretary Babbitt, signed by three U.S. Senators,

Pete Domenici, Don Nickles, Frank Murkowski.

Another one is ‘‘Sampling Of Duty to Market Cases Under State

and Federal Law,’’ citing Oklahoma, New Mexico, Texas, Louisiana,

and Federal law generally.

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And a letter here from the State of New Mexico commissioner of

public lands, who is Ray Powell. That’s to the Honorable Don Nickles, chairman, Energy Research, Development, Production and Regulation Subcommittee of Senate Energy and Natural Resources

Committee. That will go into the record also.

[The information referred to follows:]

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Mr. HORN. Now, if we have everybody here.

Mrs. MALONEY. Before we left I had a series of questions that I

asked. I understand that they didn’t even answer those while I was

gone. I feel very frustrated because not one single question that I

asked was ever answered because I also had to go vote.

Mr. HORN. Let’s get it in writing and see what we got. We can

always have another hearing.

You, I think, might have heard the ground rules for panel one,

but essentially as an investigatory subcommittee of Government

Reform, we swear in all witnesses. The minute we call on you, your

statement automatically goes into the record at that point.

The staff and the Members have had an opportunity to read

them unless we didn’t get them until now or something which

sometimes happens with the administration, but I would hope that

it would not happen with this panel.

We will then, if you would, rise, raise your right hands, and I

will swear you in. If anybody, I might add for the administration,

or even the private counsels, if anybody behind you is going to talk,

get them to stand up, too, so I don’t have to do five baptisms, which

is what I do at the Pentagon unless I get them all up.

[Witnesses sworn.]

Mr. HORN. I see one, two, three, four, five, six, seven, eight, nine

witnesses potentially. We thank you.

We will now start with Susan and I’m not sure of the pronunciation is it Kladiva? Say it real fast.

Ms. KLADIVA. Kladiva.

Mr. HORN. Susan Kladiva is the associate director, Energy, Resources, and Science Issues, Recourses, Community, and Economic

Development Division of the U.S. General Accounting Office. For

those that aren’t familiar with the General Accounting Office, they

are an arm of the legislative branch and conduct wonderful program and financial audits for the Congress. We are glad to have

you here. Usually we start off the whole hearing with a GAO person. We are doing it a little backward today.

STATEMENTS OF SUSAN KLADIVA, ASSOCIATE DIRECTOR, ENERGY, RESOURCES, AND SCIENCE ISSUES, RESOURCES,

COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION, U.S.

GENERAL ACCOUNTING OFFICE; SYLVIA BACA, ACTING ASSISTANT SECRETARY FOR LAND AND MINERALS MANAGEMENT, U.S. DEPARTMENT OF THE INTERIOR; LUCY

QUERQUES DENETT, ASSOCIATE DIRECTOR, ROYALTY MANAGEMENT PROGRAM; ROBERT WILLIAMS, ACTING INSPECTOR GENERAL, U.S. DEPARTMENT OF THE INTERIOR; AND

JOHN SINCLAIR, ASSISTANT INSPECTOR GENERAL, U.S. DEPARTMENT OF THE INTERIOR

Ms. KLADIVA. Thank you, Mr. Chairman. Mr. Chairman, members of the subcommittee, we are here today to testify on the valuation of Federal oil. My statement will summarize the results of a

report that we issued in August 1998 and events that have happened since then.

Specifically, we will discuss the information MMS used to justify

revising its oil valuation regulations, how MMS addressed concerns

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expressed during the development of these regulations, and the feasibility of the government taking its oil and gas royalties in-kind.

Current regulations define oil sold at arm’s length as oil that is

bought and sold by parties with competing economic interest. The

price paid in an arm’s-length sale established the market value for

the oil. For the most part, current and proposed regulations value

oil sold at arm’s length in a similar fashion.

However, about two-thirds of the oil from Federal leases is not

sold at arm’s length. It is exchanged between parties that do not

have competing economic interest under terms that do not establish a price or market value. According to the current regulations,

the price of oil sold in these transactions is based predominantly

on posted prices.

Posted prices, however, are simply offers by purchasers to buy oil

from a specific area. Recent evidence indicates that oil is now often

sold for more than posted prices, suggesting that the value of oil

from Federal leases and the amount of Federal royalties should

both be higher.

Under the proposed regulations, the price of much of the oil that

is not sold at arm’s length will be based primarily on spot prices.

MMS estimates that this will increase Federal royalty collections

by about $66 million annually.

MMS’s decision to revise the oil valuation regulations relied

heavily on the findings of an interagency task force consisting of

representatives from MMS, Interior’s Office of the Solicitor, the Departments of Commerce and Energy, and the Department of Justice’s antitrust division.

The task force recognized that the city of Long Beach reached

agreement with six major oil companies to accept $345 million to

settle a lengthy lawsuit. One of the major issues in this suit was

whether the companies’ use of the posted prices represented the

market value of oil.

The task force noted that seven major oil companies dominated

the oil market in California by controlling most of the facilities that

produce, refine, and transport oil in the State, and that this domination, in turn, suppressed posted prices.

The task force concluded that the major oil companies in California inappropriately calculated Federal royalties on the basis of

posted prices, rather than include the premiums over posted prices

that they paid or received.

The task force estimated from 1978 to 1993 the companies should

have paid between $31 million and $856 million in additional royalties to the Federal Government.

MMS also contracted for studies that examined oil pricing in

other areas of the country to determine how oil is exchanged, marketed, and sold. The studies concluded that posted prices do not

represent the market value of oil, citing situations in which oil is

bought and sold at premiums above posted prices throughout the

country.

As additional evidence the posted prices are less than market

value, the studies cited the common practice of oil traders and purchasers quoting a posted plus a premium which is known as the

P-plus market.

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In addition, varying States supplied MMS with information on

legal settlements they reached with major oil companies concerning

the undervaluation of oil from State leases. In general, the States

disputed the oil companies’ use of posted prices as the basis for determining royalties.

Settlements resulted in Alaska, Texas, New Mexico, Louisiana

collecting over $1 billion. MMS began soliciting input to its proposed regulations over 31⁄2 years ago starting in December 1995.

Since then, MMS solicited public comments on proposed valuation changes in seven Federal register notices and in 17 public

meetings throughout the country. Comments submitted by States

were often at odds with those by the oil industry.

States generally support the proposed regulations because MMS

anticipates that the royalty revenues which it shares with the

States will increase. The oil industry generally opposes the proposed regulations because they would increase the oil companies’

royalty payments and administrative burden.

MMS has revised the proposed regulation five times in response

to comments received from both the oil industry and the States.

The recently opened comment period closed on April 27. As an alternative to accepting royalties in cash, some lessors in the United

States and Canada accept royalties in-kind under certain conditions.

These conditions, however, do not exist for most Federal leases.

More specifically, the Federal Government does not currently have

a statutory or regulatory authority over pipelines that would ensure relative ease of access for transporting oil and gas from Federal leases.

In addition, some pipelines are privately owned and the owners

are free to set their own transportation fees. These fees can be substantial when just a single pipeline is available.

To be cost effective, royalty in-kind programs must also have

large enough volumes of oil and gas so that sales revenues exceed

the program’s administrative costs. The majority of oil and gas

leases on Federal lands, however, produce relatively small volumes

and are geographically scattered, particularly in the western

States.

In addition, many Federal leases produce small volumes of gas

that need to be processed. In certain locations there is only a single

gas processing plant, and the lack of competition might allow these

plants to charge high fees.

Finally, the Federal Government has limited experience in marketing oil and gas, and marketing experience is a key ingredient

in non-Federal royalty in-kind programs.

Mr. Chairman, this concludes my prepared statement, and I

would be pleased to answer questions.

Mr. HORN. Thank you very much. We will wait until all of the

panelists have had their say.

[The prepared statement of Ms. Kladiva follows:]

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Mr. HORN. I might say to the others, which I didn’t say before,

is that don’t read us your statement, just summarize it. I would

hope that you could do it within 8 to 10 minutes because your

statements have been read.

We now have Sylvia Baca, the Acting Assistant Secretary for

Land and Minerals Management, U.S. Department of the Interior.

Secretary Baca.

Ms. BACA. Mr. Chairman and members of the subcommittee,

thank you. I appreciate the opportunity to be here today to provide

this subcommittee with an update on the major royalty management issues on which the Department of Interior and its Minerals

Management Service have been working since we last testified before you in June 1996.

Much has happened since then, and I would like to briefly describe the progress that we have made from our Federal oil valuation efforts to our royalty in-kind initiatives to re-engineering

MMS’s entire royalty management program.

My written testimony goes into more detail, and we ask that this

be submitted for the record. As you know, in May 1996 the interagency task force we created to examine the value of California

crude oil reported that it found significant evidence that in California posted prices were inaccurate measures of market value.

In July 1996 the Department announced that it would begin special reviews of oil valuation in California to determine the amount

of royalty underpayments. The Department targeted the 20 largest

royalty payers that accounted for 97 percent of the State’s Federal

crude oil production.

As a result of those reviews, the MMS billed companies for underpayments totaling $277 million for the period of 1980 through

1995. These bills have been appealed and several have gone into

litigation. In two decisions the district for northern Oklahoma

ruled that the statute of limitations barred the MMS from enforcing the orders and disputes covering the time period from January

1980 to February 1988. Those decisions are currently under appeal.

It has been well documented over the past several years that

posted prices no longer reflect market value of crude oil, not only

in California, but in other areas as well. This is not only the view

of the Federal Government. Many private royalty owners and State

governments have brought suit against the oil industry for underpayment of royalties primarily based on posted prices. You have

been given the amounts and the States.

Chevron has settled for $17.5 million in Texas. The State of Alaska settled for $2.5 million. Recently it was reported that several of

the largest oil companies settled claims from private royalty interests across the United States for $193 million.

Further, as many of you know, the Department of Justice has intervened in qui tam suits involving underpayment of royalties for

oil produced from Federal lands.

One company, Mobil Oil, recently settled with the government

for $45 million. That included California production. The Department has also taken an active role outside of California.

In June 1996, MMS issued new guidance for valuing crude oil

production nationwide because of the growing prevalence of companies paying premium above posted prices to purchase to crude oil.

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In August 1996, MMS developed a national crude oil audit strategy

for other States and Federal production in the Gulf of Mexico’s

outer continental shelf.

The national strategy targeted 125 companies which produce

about 86 percent of Federal crude. These audits are ongoing. Since

December 1995, we have engaged in a thorough process to revise

our Federal oil valuation regulations.

The current regulations, which rely heavily on posted prices in

valuing oil not sold at arm’s length were published in 1998 and

have remained in effect until today. Our proposed rule would move

away from posted prices for the so-called ‘‘non-arm’s-length’’ transactions in those parts of the country and would instead use published spot prices established at major market trading centers.

The spot prices would then be adjusted for transportation, for location, and for quality to arrive at a fair value. In the Rocky Mountain region where there is no established spot market prices, we

would use a series of bench marks.

While industry opposes certain aspects of the proposed rule, it

generally agrees that the new rule would not rely on posted prices

to determine value for nonarm’s-length transactions. Over the last

3 years, we have modified the proposal several times to address the

concerns expressed by many with a direct interest in the rule. We

have made particular efforts to try to resolve industry’s concerns.

However, Mr. Chairman, we must hold firm on our basic principle and our statutory responsibilities to our most important constituent, the American taxpayer. We want a rule that is administratively simple, certain, efficient, adaptable to market conditions

and, most importantly, reflective of today’s crude oil market.

It is important to understand that this royalty is not a tax. It is

what is owed to the taxpayers for the minerals produced from public lands. We owe it to the taxpayers to have a rule in place that

accomplishes these objectives.

Secretary Babbitt has been keenly interested in this process and

recently reopened the comment period for all interested parties to

submit new ideas that would move us forward toward publication

of a final rule. He has also announced additional workshops so that

industry, so that government, public interest groups, and the

States could discuss ideas informally in an open setting.

Now that the comment period has closed and the workshops are

completed, we are in the process of reviewing the written comments and deciding on a future course of action. I can promise you

this, however, that we are committed to publishing a rule that

assures the public fair return for the minerals produced from its

land.

Mr. Chairman and the members of the subcommittee, I would

like to take this opportunity to clear up what I think is a

misperception about this issue. The oil rule has nothing to do with

recent low prices that have plagued the industry. In other words,

the royalty is not a tax.

While we are sympathetic with what the industry is experiencing, we do not believe that compromising the oil valuation rule is

the proper way to address the industry’s concerns. The purpose of

these regulations is to fulfill our statutory responsibility to capture

market value for the public’s resources.

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When the market goes up, our royalties go up. And when the

markets go down, we suffer in tandem with the industry. However,

regardless of market conditions, we do not think that compromising

the oil valuation rule is the proper way to alleviate market pressures on industry.

There are two other areas that we are changing how we do our

business and that is in our royalty in-kind programs and our reengineering efforts.

Let me say briefly that royalty in-kind test programs have been

quite successful. Our RIK pilot for crude oil in Wyoming has shown

us how to maximize revenues under certain conditions. And our offshore Texas program has proven that we can take the royalty portion of natural gas from public land and deliver it to public facilities for less cost.

In concert with the Department of Energy, we are also beginning

to deliver royalty in-kind production from leases in the Gulf of

Mexico to the strategic petroleum reserve.

Finally, the efforts that we now have under way to re-engineer

the entire royalty management program have been going smoothly.

Under re-engineering design, royalty management functions will be

organized around two core business processes: financial management and compliance and asset management.

The benefits of re-engineering will be significant for industry,

States, and tribes alike, including reducing the time to distribute

mineral revenues to recipients from 30 days to 24 hours and cutting the business cycle from 6 years to 3 years and streamlining

required reported data by up to 40 percent. We hope for a one-stop

shopping for better overall customer service.

That concludes my prepared remarks. I would be happy to answer any questions.

Mr. HORN. Thank you very much. We will hold questions until

Mr. Williams, the Acting Inspector General, finishes his testimony.

[The prepared statement of Ms. Baca follows:]

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Mr. HORN. Robert Williams is Acting Inspector General, U.S. Department of the Interior. Mr. Williams.

Mr. WILLIAMS. Thank you, Mr. Chairman, members of the subcommittee. I am pleased to be here today to provide testimony on

our reviews of the Department of the Interior’s royalty management system.

Over the past 5 years my office has issued 24 royalty related reports, which identified monetary impacts of about $309 million,

and made 63 recommendations, of which 43 have been implemented, 18 are to be implemented, and 2 are unresolved.

Our Office of Investigations has initiated 30 cases that have resulted in civil settlements of about $47 million to date. The results

of these reviews generally found that the Department was making

progress in improving the royalty management system. However,

improvements were needed to ensure that all royalties due the

Government were collected and accounted for.

I will briefly discuss some of the more significant audits and investigations by issue area.

In regard to royalty determination collection, and distribution,

we noted that the royalty in-kind pilots in the Gulf of Mexico to

test gas and in Wyoming to test oil will provide the Minerals Management Service with the knowledge and experience to implement

a permanent royalty in-kind system for those particular regions

and products. However, we concluded that the pilot program will

not provide a conclusive assessment for all Federal oil and gas production.

The negotiated royalty settlements were not always conducted in

accordance with the Service’s settlement negotiation procedures.

For 9 of the 10 settlements that we reviewed, the Service did not

adequately document the reduction of values from $312 million to

$94 million for negotiated issues.

Royalty payors had deducted transportation and gas processing

allowances that exceeded either the actual cost, the maximum percentages allowed without the approval of the Service, or 100 percent of the value of the product. We estimated about $27 million

in additional payments was owed the Federal Government because

of excess allowance deductions.

In the area of the Service’s operations, we found that cost-sharing deductions were computed efficiently and deducted from the

States’ mineral leasing receipts in a timely manner. However, inconsistencies in the methods used to compute the deductions resulted in excess distributions from some States’ receipts. The Service is in the process of returning, in part, the excess cost deductions

to the respective States. The Service did not accurately identify the

additional royalties that were allegedly owed the Federal Government for undervalued California crude oil. As a result, 19 bills for

collection were misstated by at least $185.6 million. Although the

Service took prompt actions to correct the errors and issued revised

bills, we concluded that the revised bills were still overstated.

Regarding onshore oil and gas operations, we found that the Bureau of Land Management’s Inspection and Enforcement Program

did not adequately ensure production accountability for oil and gas

or regulatory compliance for well drilling and well plugging operations on Federal and Indian leases. As a result, the Government

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has plugged 131 orphan wells, at a cost of about $1.6 million, since

1991 and is presently liable for plugging more than 300 additional

orphan wells, at a cost estimated by the Bureau to exceed $3 million.

In regard to automated systems, we found that the Minerals

Management Service had established general controls over its automated information systems but that these controls were inadequate

in certain areas, such as risk assessment, security, logical access

controls, and disaster recovery plans. These weaknesses increased

the risk of unauthorized access to, modification to, and disclosure

of program data; theft or destruction of software and sensitive information; and potential loss of system capability in the event of

a disaster or system failure.

The Service was using outdated and inefficient data structures

that were difficult to change and improve, it did not sufficiently

test its application software programs to ensure their operational

effectiveness, and it did not adequately document the program’s

automated systems. As a result of these deficiencies, the program

unnecessarily incurred $3.2 million annually for contractor support

and for additional work to detect and correct errors and deficiencies

in the application process.

For offshore operations, we found that the Service had implemented our recommendation to evaluate the adequacy of minimum

bonus bids and annual rental fees before lease resale. As a result,

we estimated that leases issued between September 1993 and August 1997 had increased revenues by $141 million and will generate another $194 million in added revenues through 2001.

This concludes my oral statement. I will be pleased to answer

any questions the subcommittee may have at this time.

[The prepared statement of Mr. Williams follows:]

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Mr. HORN. Thank you very much. The gentleman from Virginia,

Mr. Davis.

Mr. DAVIS. Thank you very much. Ms. Baca, let me ask, you are

not implying that because someone settled, that it’s an admission

of guilt on the part of any company, are you?

Ms. BACA. I’m sorry?

Mr. DAVIS. Because someone may have reached a settlement

with you and paid a sum of money is not an admission that they

necessarily owed money or were guilty in any way of paying additional money, is it?

Ms. BACA. We are not implying that.

Mr. DAVIS. I just wanted to get that on the record. Let me ask

if I can, Mr. Williams, when did you first hear about the $700,000

in payments at the Project on Government Oversight made to Bob

Berman of DOI and Mr. Speer of DOE from the Mobil settlement

proceeds?

Mr. WILLIAMS. If I can, I have with me John Sinclair, my Assistant Inspector General for Investigations.

Mr. DAVIS. That would be great. Is he sworn?

Mr. SINCLAIR. Yes, I am. I will try to answer that question for

you. The issue regarding the sharing of the relator’s payment that

came in, we were first notified of that in the first week of April by

the Department of Justice Public Integrity Section.

Mr. KLEIN. And we have been actively looking into that issue

with the Department since that time. I can’t give you any specifics.

It’s an ongoing criminal investigation.

Mr. DAVIS. But your office is currently investigating the propriety of the payments?

Mr. SINCLAIR. Yes, yes, we are.

Mr. DAVIS. Do you know who’s handling the investigation?

Mr. SINCLAIR. The particular attorney? Yes, I do.

Mr. DAVIS. OK. Is that a secret?

Mr. SINCLAIR. Well, I contacted Public Integrity today, and they

asked me to refer everything through their public affairs office.

Mr. DAVIS. How long have they known about it?

Mr. SINCLAIR. They referred it to us the first week of April.

Mr. DAVIS. How long have they known about it?

Mr. SINCLAIR. How long has the Justice Department?

Mr. DAVIS. Right.

Mr. SINCLAIR. I can’t answer that question.

Mr. DAVIS. Any idea at all; 2 weeks, 4 months?

Mr. SINCLAIR. I believe that the allegation and the information

came out of the ongoing qui tam cases, so I would assume that the

information which came from another source than Public Integrity

probably was available and the Justice Department——

Mr. DAVIS. But who was handling that decision? You feel this

committee shouldn’t know that? Is that your position?

Mr. SINCLAIR. No. Do you want the name of the attorney?

Mr. DAVIS. Yeah.

Mr. SINCLAIR. OK. It’s Brenda Morris.

Mr. DAVIS. OK. Thank you. And normally would you expect government employees who are offered $350,000 payments from private plaintiffs in litigation related to their job, wouldn’t you expect

them to seek guidance from their ethics offices?

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Mr. SINCLAIR. Well, I would, yes.

Mr. DAVIS. OK. Have you ever heard of a situation like this

where large cash payments to government officials were proper?

Mr. SINCLAIR. I think that’s the reason the Justice Department

and we are looking into this right now.

Mr. DAVIS. And you don’t know how long the Department of Justice sat on these payments? My understanding, it was 7 months,

but you don’t have any——

Mr. SINCLAIR. I have not heard that number. I couldn’t even

speculate as to whether it would have been known that long.

Mr. DAVIS. OK. Are you investigating the Department of Justice’s nondisclosure of the payments as well?

Mr. SINCLAIR. No, that’s not something that’s within our jurisdiction to look at.

Mr. DAVIS. And whose jurisdiction would that be in?

Mr. SINCLAIR. I don’t know. It’s internal to the Justice Department. If they have some——

Mr. DAVIS. To overlook the Department of Public Integrity.

Mr. SINCLAIR. It would probably go to the Office of Special, or Office of Professional Responsibility, one of the internal mechanisms

within Justice.

Mr. DAVIS. In your June 1998—going back to Mr. Williams, in

your June 1998 report that was entitled Mineral Management

Service’s Work Regarding Unpricing of California Crude Oil, you

know what I’m talking about?

Mr. WILLIAMS. Yes.

Mr. DAVIS. OK. Your office reported that the Minerals Management Service failed to accurately identify additional royalties owed

to the Federal Government for undervalued California crude oil.

You report that the Service did not adequately plan its work, accurately prepare supporting evidence, exercise due professional

care in performing analyses or have adequate quality control procedures to ensure the accuracy of its conclusions. As a result, 19 bills

sent to oil companies were overstated by at least $185.6 million;

that correct?

Mr. WILLIAMS. Correct.

Mr. DAVIS. In responding to your report in a letter to this subcommittee, Service officials stated that due to the nature of this

project, generally accepted government auditing standards did not

apply. Do you agree with the Service’s position, that professional

auditing standards would not have applied in this situation?

Mr. WILLIAMS. We responded in the report, and they are responding back to us as a result of the final report and final position. But what we stated in the report was that given the sensitivity and the interest in that particular activity, we felt that some

of the professional standards should have applied.

Mr. DAVIS. Let me ask Ms. Baca, what are you—what is the Department’s position on this? Why professional standards shouldn’t

have applied?

Ms. BACA. Congressman Davis, I believe that we were up against

a statute of limitations on this particular issue, and we did not conduct a full-blown audit. We felt that a special process was warranted.

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I think it has been found both by the IG and GAO and has been

affirmed by the Oklahoma decisions that if we had not acted within

the time that we did the statute of limitations would have run out

and the government would not have been able to make their case.

Mr. DAVIS. So you just throw it in—I mean, 19 bills sent to oil

companies were overstated. You overstate the case and move something forward so you didn’t lose the statute and then argue about

it later?

Ms. BACA. The bills were sent out based on the best data that

we had, and I believe that what we said is that the companies

could come in at anytime and provide us with information and we

would make adjustments. And we did make those adjustments.

Mr. DAVIS. Mr. Williams, I understand the large percentage of

the errors that were found in the billings were due to computational errors in spreadsheets prepared by the Minerals Management Service’s staff. The IG’s report stated that one reason for this

was that the working papers did not show evidence of any supervisory review. Is there a review of an auditor’s work required by

auditing standards?

Mr. WILLIAMS. Supervisory reviews? Yes, there is.

Mr. DAVIS. And I guess it’s—my red light’s on, so it’s my last

question, and Ms. Baca, your position is because you were up

against a time crunch. You just didn’t have time to move supervisory review of these?

Ms. BACA. Well, that was clearly a violation of our own internal

procedures.

Mr. DAVIS. OK. My time is up, Mr. Chairman.

Mr. HORN. If you would like your own time, I’ll yield to Mrs.

Maloney. I, in essence, gave you my time.

Mr. DAVIS. Oh, all right. Let me just take a couple of more minutes. I take my time back.

Mr. TURNER. Mr. Davis, do you want——

Mr. DAVIS. Just for a couple more questions. Then you would

agree, Ms. Baca, that it’s—we understand what happened in this

situation, but the good business is to adequately plan, review your

work and complete it with professional care, and we won’t see this

kind of thing again.

Ms. BACA. No, sir, you will not.

Mr. DAVIS. OK. I’ll stop there. Thank you.

Mr. HORN. OK. Gentleman from Texas, Mr. Turner, the ranking

member.

Mr. TURNER. Thank you, Mr. Chairman.

Ms. Baca, I think I heard you correctly. You have several royaltyin-kind programs that you said were very successful; is that correct?

Ms. BACA. Under certain circumstances, yes.

Mr. TURNER. I guess I noted a little bit of criticism from the General Accounting Office about the royalty-in-kind programs in the

report that I read. Does it really come down to the fact that in

some cases royalty-in-kind is real good for the government, and

other cases it just doesn’t work?

Ms. KLADIVA. That’s correct, sir.

Mr. TURNER. And that’s what this really——

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Ms. KLADIVA. That’s correct, sir. In certain circumstances, they

can be very successful.

Mr. TURNER. Ms. Baca, in terms of what the government should

get in royalty for its, for its appropriate or portion of the royalty,

is it fair to evaluate the issue based on what the government would

get if it actually took all of its royalty-in-kind?

Ms. BACA. Well, I think that the pilots that we have looked at

again certainly have found that there are certain circumstances

where it works and it is beneficial, but I’ll cite you an example. In

Wyoming—we went in and we did a pilot with the State of Wyoming, and we found that under circumstances it worked, but in an

area where it involved small stripper wells where they were transporting the oil by truck, that was not beneficial to the government.

And we maintained that we will look at royalty-in-kind where it

makes sense and where it’s going to benefit the government, but

we would like, and we very much promote, that this is done on a

basis that benefits the government.

Mr. TURNER. So, under law, you currently have the authority to

take your royalty-in-kind?

Ms. BACA. Yes, right now, it is voluntary, and that is certainly

the position that we are promoting.

Mr. TURNER. In these other instances, where it’s really not in the

government’s interest, it seems to me that there are some factors

involved there that clearly affect the market value of that royalty.

Are those factors taken into account under your proposed regulations?

Ms. BACA. I will have to ask Lucy Querques to answer that question, if that would be all right.

Mr. HORN. Would you identify yourself and your title.

Ms. QUERQUES DENETT. Yes. My name is Lucy Querques Denett.

I’m the associate director for the Royalty Management Program. In

the last version of the proposed rule, in fact, normally a lot of these

wells—Ms. Baca referred to a stripperwell and the production that

would come from them.

A lot of those are owned by small, independent companies. They

normally sell arm’s length, and we would accept the price that they

would receive if it’s a third party arm’s-length contract. So, yes, I

think we have taken that into consideration.

Mr. TURNER. There seems to be a lot of progress that has been

made in arriving at some new regulations, and I think it’s important for us to separate the disputes that are in the past and the

litigation that’s pending from where we are currently and where we

need to go. But it does seem to be possible, based on what I’m hearing—I think there was some testimony that maybe you offered before the Senate yesterday that indicated maybe the, the agency was

going to open up the matter once again and allow some additional

comments before you come to a final proposal on these rules. Is

that where we are right now?

Ms. BACA. I don’t know if that was included in any testimony

yesterday, but we just recently opened up the comment period.

We opened it up March 17th, and we went out and we held three

additional workshops. Where we are in the process right now is in

the process of reviewing those comments, and based on what those

comments reveal, we will make a determination of whether or not

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we’ll have a final rule or whether or not the comments change the

rule, and therefore, we would have to go out for a new rule.

So we’re in this review stage right now.

Mr. TURNER. I guess what I’m looking for here is some sense of

whether, what you’re now going through is going to result in some

changes in the current proposal or are you just not able to commit

one way or the other?

Ms. BACA. I’m not able to tell you. The APA doesn’t allow us to

go into that right now because we’re reviewing the comments. The

comments period just closed and staff is going through them, and

I believe by mid-June we’ll have a better sense of, you know, what

sort of changes, if there are any changes that would be made.

Mr. TURNER. Thank you.

Mr. HORN. Has the gentleman completed his questioning?

Mr. TURNER. The light went on so I’ll wait my next turn.

Mr. HORN. Forget the night, I mean light. No, you want to finish

a few questions?

Mr. TURNER. Well, I might ask if you expect to be able to evaluate all the comments by June, then what’s the timetable for actually coming up with a revised proposal, if, in fact, it is revised?

Ms. BACA. Well, I think soon after the middle of June we’ll have

a good sense of where we’re going with this rule. You know, if we

were going to change the rule drastically we would have to go out

for a new rule, a new proposed rule, but if the comments are not—

if they don’t warrant us changing the rules substantially, we would

be able to have a final rule which would be, you know, sometime

this summer.

If we go to a new proposed rule, I’m told that we could probably

have a final rule somewhere at the end of the year or the very beginning of 2000.

Mr. TURNER. What’s the Department’s position on this suggestion

that there be some procedure for some advance ruling where a set

of facts could be presented and the agency would then acknowledge

that that’s the appropriate valuation method, and therefore, the

royalty could be paid based on that advanced ruling?

Ms. BACA. Are you talking about a negotiated rule?

Mr. TURNER. No. The earlier testimony—in earlier testimony we

had some reference to the possibility of having some advance ruling

that could be issued by the agency so that the royalty could then

be paid based on those facts, if in fact, it turned out the factual

basis for the Department’s ruling was not what really happened,

then, of course, the Department would always have the right to go

back and collect the additional royalty.

Ms. BACA. The issue of binding determination has come up at the

workshops, and the position that we have held, and we held in our

last rule which is out there and circulating, is that we don’t feel

that binding determination should be just sort of blanket-given to

the industry out there.

We feel that there may be an opportunity to look at this on a

case-by-case level, but we certainly did not support in our July

1998 rule that we would be open to just blanket binding determination. If, in fact, we find there are a set of circumstances out there

where we need to consider those factors, we would do that on a

case by case.

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The other thing that was proposed was that if we did not act on

those in 180 days that it would be in favor of the industry. We certainly can’t support anything like that.

Mr. TURNER. What’s your reluctance to provide some advance

binding determination on what the valuation method should be

under this particular set of facts?

Ms. BACA. Well, we feel that if we got to index prices, you aren’t

going to have very many circumstances where binding determination is going to be needed. If you get to index or spot pricing here,

that is a pretty certain set of circumstances out there for determining the value of the crude oil. So having the binding determination

isn’t, I don’t believe, something that, you know, is going to be warranted.

It may be warranted on a case-by-case basis, and we have always

said that we would be open to case by case.

Mr. TURNER. Do you feel that the agency should have the authority to make the final determination rather than other third parties

who may also be beneficiaries of the valuation that’s set?

Ms. BACA. Well, I think that we have listened to all of the third

parties through these 17 workshops that we’ve held throughout the

country, and it’s up to the Secretary to set—the law certainly gives

the Secretary the authority to set the royalty values and the regulations for getting there.

Mr. TURNER. Do you agree with me that the situation that we

find ourselves in with all the litigation that has occurred that we’d

like to get to a point where these matters are not continually disputed and in court constantly?

Ms. BACA. Well, litigation certainly is not in the best interest of

anybody here. We would rather that we could all come to agreement on what a fair value is for the taxpayer and that we could

all get there and not have to be caught up in litigation.

Mr. TURNER. But it also seems to me true that when you’re talking about valuation, you know, experts can always differ with regard to what that value is, and therefore, the issue is always going

to be unless you put some strict restrictions in place that will allow

you to make a clear determination, it’s always going to be subject

to litigation.

And it would seem to me to be preferable to have a set of regulations that had some certainty to them and that had some period

there within which everybody involved would know if you want to

dispute it, you dispute it now but not later. Because it seems like

if you don’t do that, you’re going to have continued lawsuits because the plaintiffs are too high profile, the number of parties who

benefit from the royalties are too numerous, and it’s too politically

charged not to expect there wouldn’t be litigation if there’s an opportunity to have it.

And I just want to be sure that the Department is sensitive to

those kinds of concerns, and that you try to draw regulations that

will avoid that because it’s an area that just seems to me too easy

to have lawsuits.

Ms. BACA. Well, you know, we agree. We prefer not to go down

the litigation course ourselves.

That’s why we’ve had 17 workshops and why we have opened the

rule numerous times trying to accommodate a lot of the concerns

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that are out there and to come to a rule that, you know, hopefully

will be fair to all parties interested.

Mr. TURNER. Thank you.

Mr. HORN. Thank you. And now we have a problem here. I’m

conscious the Secretary has to be somewhere else, I believe. Mrs.

Maloney has to be somewhere else so we’ll start with her with 5

minutes, and then I want to get in one question, then I’ll be glad

to give Mrs. Maloney more time, but right now, it’s 5 minutes.

Mrs. MALONEY. I’d like to ask Ms. Baca, industry has argued

and—actually Mr. Davis was asking the same types of questions,

that these lawsuits are caused by the fact that MMS’ rules are simply unclear and that there is no deception involved. Is this accurate?

Ms. BACA. I’m sorry, could you repeat the question?

Mrs. MALONEY. Well, along Mr. Davis’ question and industry argues that all these settlements and lawsuits are because MMS’

rules are simply unclear and that there is no deception involved.

Now, is that accurate?

Ms. BACA. The lawsuits have not been on this regulation. There

is no litigation regarding our regulation right now.

That is not—the lawsuits are based on the States going out there

through the qui tam cases, looking at the royalties that were paid,

and these were settlements that were made out there. It has nothing to do with rule. Our rule has not been litigated yet.

Mrs. MALONEY. It’s based on the theory or the fact that the oil

companies were undervaluing their oil, their payments, their royalties to the government, which then is the rule that you’re putting

forward.

They’re saying that the rules are unclear and that’s why they

were, ‘‘making this huge mistake.’’ But I guess basically what I’m

asking is, are companies paying millions in settlements, and in one

case billions, simply because the rules are unclear?

Why do you think they’re paying millions and billions in settlements if they weren’t, in fact, doing what the cases from the States

are saying, undervaluing their law—their payments, stealing from

the school children of this Nation?

Ms. BACA. Well, there have been settlements, and it has been—

the States and the other interested parties went after them for

undervaluation, and that is a reasonable conclusion.

Mrs. MALONEY. But you just testified to Mr. Davis that there was

no deception involved. Undervaluation is deception; is it not?

Ms. BACA. It is a deception.

Mrs. MALONEY. OK. Now, I have a series of questions. I’m going

to put them in writing, but I just want to say one thing.

I opened with this letter that talked about a meeting between

the big oil companies and they were going to get the independents

to front for them, and it goes through it. And everything they said

in this letter has come to pass, that they would attach riders, that

they would go to court, that they would do everything to stall, and

you’ve bent over backward. You’ve opened it up for six times for

comments. You have been detained, delay, delay, delay, delay.

This memo, this letter, I’m going to give it to you and send a

copy to all of you.

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It just says delay, delay, delay, and then it ends by saying, if

they finally do get a rule, then we will tie them up in court so that

the rule will never be implemented.

So no matter what you do, and I compliment you and your predecessor and everybody over there who is trying to get a just payment for the children, according to their own internal game plan

that was put forward 2 years ago, they’ve done everything in it, the

rider, the this, the that. We won’t pay what we have to, we’re going

to stop it, and then it says, if by some chance there is a rule, we

will just sue, sue, sue, it will never be implemented.

So my point is—and I really am pleading with my colleague, Mr.

Horn, in a bipartisan way, I truly and honestly believe that no rule

will ever be implemented, that we will have to legislate it. That is

the only way it will happen, and again, I want to ask each and

every one of you, we have the internal documents, that they pay

spot prices, market prices when they sell it to each other.

Why don’t we just go back to that? Legislate it? Would that not

take care of the problem? Because I honestly believe that they will

implement their plan. They’ve been successful for 2 years. They’ve

certainly got more money than anybody else, and you know, they’ve

already paid $2.9 billion so far in settlements. It’s never going to

be implemented.

The only way it will ever happen is through legislation, I really

believe that, and I just wanted to comment. And again, I’m going

to be asking GAO to do a report on how much it’s going to cost the

Federal Government to go to an in-kind payment.

I mean, I find this almost humorous. The Soviet Union, the

former Soviet Union, used in-kind settlements. Government controls everything, no dollar exchange, no free market, no market

price, in kind, and now what we—you know, we conquer with this

free enterprise system the Soviet Union with our strong economy

and then I hear union—I mean private sector officials arguing to

go to the in-kind payment system.

I mean, I find it almost unbelievable to a system that has been,

in the history of other countries, burdensome, creates more Federal

bureaucracy, more paperwork, more internal problems, and I just,

I just find the whole thing very frustrating, and I feel that—I just

feel that there’s been a lot of manipulation and deception, not only

to the school children but to this Congress, to the MMS, to the rule,

to anyone who’s trying to get a fair payment on this system.

So I just want to ask you—I want to ask the—well, I don’t know.

I’m going to just put it in writing, but I just don’t think you’ll ever

see a rule. If you see a rule, they’re just going to sue, they’re going

to tie you up in knots. If it ever comes they got to pay free market,

they’re then going to go to in-kind, manipulate that ruling more

and you’ll just never see the dollars that are owed to the school

children.

So I just think that we have a real challenge, Mr. Horn, to attempt to legislate it so you get the fair market value to the taxpayers that the industry is getting for themselves, and that’s what

these settlements are about, and that’s what all the lawsuits have

been about, and that’s really what’s going on here, and anyway——

Mr. HORN. Let me ask you, Madam Secretary, as I remember,

the March 9, 1999, New York Times had an article entitled Poor

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Indians on Rich Land Fight a U.S. Maze, the Federal Government

is failing in its responsibility as trust manager for mineral leases

on tribal lands.

As you know, the trust requires the Department of the Interior

as trust manager to value, collect and disburse royalties from

leases on tribal lands, which is what this hearing is about in part.

The article suggests that fees are collected, but many checks are

not sent out because the government cannot find the beneficiaries.

The article goes on to say that currently there is no system to

track how much money is coming in and how much is going out.

Hundreds of thousands of records are lost, missing or unaccounted

for. According to the article, records, some covered with rat excrement, have crumbled in riverside warehouses, been lost to fire,

washed away by floods or buried in salt mines. By some estimates

tribes are owed as much as $10 billion.

What are we doing to address that problem?

Ms. BACA. Chairman Horn, the article that you’re alluding to is

a problem that the Office of Special Trust within the Interior Department is addressing. It’s a separate entity from us.

The only involvement that we have in the Indian Federal leases

is that we are responsible at MMS and BLM for making sure that

we provide the Office of Special Trust and the BIA with accurate

information on the amount of oil that is taken from those leases.

We provide that to them. They then take that information and they

post it to the accounts, and they are responsible for making sure

that it reaches the individual tribesmen.

Mr. HORN. So you deal with the tribes, too, though, don’t you?

Ms. BACA. Yes, we do, and what we do is we make sure that

whatever oil or gas that is coming from their properties is reported

to the BIA and to the Office of Special Trust. They are the ones

who are responsible for posting it to the accounts and making sure

that it goes to the proper allottees and beneficiaries.

Mr. HORN. Now, in other words, you don’t check, and let’s get the

Inspector General in GAO in on this one, you don’t check whether

the tribe has the check because you’re sending it to what, the Bureau of Indian Affairs?

Ms. BACA. Yeah. We just send the information on how much oil,

how much gas, how much mineral production was taken off of

those leases. They then are responsible for posting it and making

sure that it is disbursed.

Mr. HORN. Well, let’s hold a hearing then on the other group.

What’s the name of that group within Interior?

Ms. BACA. We collect the royalties is what I’m told and we pass

it on, and it is the office of special trust.

Mr. HORN. Office of special trust or trusts?

Ms. BACA. Indian trusts.

Mr. HORN. There’s not an S on there or is there?

Mr. WILLIAMS. Office of the Special Trustee.

Mr. HORN. Special Trustee?

Mr. WILLIAMS. Right.

Mr. HORN. OK. Has the Inspector General ever reviewed what

they’re doing? Did they see this article in the New York Times?

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Mr. WILLIAMS. To the best of my knowledge, the Department has

a massive effort—the High Level Implementation Plan—I believe is

addressing——

Mr. HORN. Could you get that microphone a little closer.

Mr. WILLIAMS. Sure. I think the GAO is providing oversight of

this as well, and we are like a technical advisor in terms of the

High Level Implementation Plan that is addressing what is considered the major problems with royalties going to the individual Indians and the tribes.

Mr. HORN. So you’re looking at that now or do you have a study

already?

Mr. WILLIAMS. No, we are in the process of participation in sort

of roundtable discussions. We are looking at aspects of it, but more

so, GAO has been there from the beginning, so we’ve coordinated

our efforts. Where GAO may be looking at the implementation of

an automated system or a particular program, we would back off

and allow GAO to review it, and if there was something that we

would do jointly, we would go in and do that.

Mr. HORN. Well, is the General Accounting Office going to move

in on that situation?

Ms. KLADIVA. I’m specifically aware of the work that we may be

doing on an automated system, probably from our accounting and

information management division, but I will be pleased to provide,

for the record, information on what GAO has underway.

[The information referred to follows:]

Since the beginning of 1994, GAO’s Accounting and Information Management Division has issued 15 reports and testified 7 times on the Department of Interior’s

management of the Indian Trust Funds, reporting most recently in April 1999. That

report, INDIAN TRUST FUNDS: Interior Lacks Assurance That the Trust Improvement Plan Will Be Effective (GAO/AIMD–99–53, April 28, 1999) examined whether

the Interior’s High-Level Plan for improving Indian trust operations provides an effective solution for addressing its long-standing management weakness and whether

its acquisition of a new asset and land records management service will cost effectively satisfy trust management needs. This report is available on GAO’s homepage

at www.gao.gov.

Ms. KLADIVA. Within our group, the energy resources and

sciences group, we have looked at management of the Indian trust

and have found it to be problematic. I could also provide information on that.

[The information referred to follows:]

In our report entitled MAJOR MANAGEMENT CHALLENGES AND PROGRAM

RISKS: Department of Interior (GAO/OGC–99–9, pp. 23–29, January, 1999) we

noted that management of the $3 billion Indian trust fund has long been characterized by inadequate accounting and information systems, untrained and inexperienced staff, poor recordkeeping and internal controls, and inadequate written policies and procedures.

Mr. HORN. What does the word ‘‘problematic’’ mean, mean not

stealing or disposing it or what?

Ms. KLADIVA. Their interests are not being well served by the individuals within the government who are responsible for seeing

that they are well served.

Mr. HORN. OK. Now, are you the right division of GAO to go investigate that?

Ms. KLADIVA. Yes, sir, we are the right division.

Mr. HORN. OK. You are going to investigate it?

191

Ms. KLADIVA. I will pass this back to the correct person within

our division.

Mr. HORN. Our staff director, Mr. George, will be in touch with

you, and I would assume you’d both work together on that because

we ought to really look at that one.

I don’t know if it’s the Indian tribes doing it or Interior doing it.

But if this article is correct and tribes are owed, now whether

they’re just generalizing from all tribes across the country or

they’re dealing with the one or two that they discussed, but it just

seems to me we ought to get to that very rapidly.

And I guess I would ask is, what accounting system is being used

to track the royalties collected from Indian leases to ensure that

they collect it and disburse it in a timely and efficient manner? Is

that your shop when the accounting system——

Ms. KLADIVA. It’s within our office, sir. I’ll pass the information

on.

Mr. HORN. No, I’m thinking of Interior. In whose shop is the accounting system problem on tracking royalties? Who knows?

Mr. WILLIAMS. It would be in the Bureau of Indian Affairs.

Mr. HORN. OK. So—and yet I thought you found out what the

royalties should be, you sent the check to the Indian Affairs to send

to the tribe. Maybe we ought to knock the middleman out of that,

just send it to the tribe and audit them.

Ms. QUERQUES DENETT. Did you want an answer on that?

Mr. HORN. Yes, right.

Ms. QUERQUES DENETT. The MMS, the royalty management program does collect the royalties from the production on Indian land.

Mr. HORN. Right.

Ms. QUERQUES DENETT. And we account for it, and then we disburse it out to the BIA and the Office of Special Trustee, who then

in turn provides it to the special accounts, the allottees or the

tribes, but we collect it and account for it and audit the leases to

make sure the proper payment has been received.

Mr. HORN. And you don’t send it to the tribe directly?

Ms. QUERQUES DENETT. Correct.

Mr. HORN. You send it to, what, let’s go over it again, the Bureau

of Indian Affairs and they send it to the special trustee, is that——

Ms. QUERQUES DENETT. The accounting, it’s the Office of the

Special Trustee that receives the—I believe the money. They have

what are called IIM accounts, individual—all the money goes to

them, they account for it, and they in turn cut the checks to the

Indian allottees.

Mr. HORN. OK. Now, that would be the Indian individual beneficiaries, or are you saying those are the tribes?

Ms. QUERQUES DENETT. I believe both.

Mr. HORN. Both. Well, what I would like is for you all to get together in Interior and send us a nice chart and an explanation, and

it will go without objection into the record at this point of the hearing.

[The information referred to follows:]

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Mr. HORN. One last question, Ms. Secretary, and you can then

leave. I guess what bothers me a little bit is when I hear about the

accusations of individuals who, in essence, were blowing the whistle, and I guess I’d be bothered by that. I know Mr. Davis went

over some of this on the $45 million settlement and so forth and

so on. And, then the Project on Government Oversight received

$1.2 million, and according to April 30, POGO released—Project On

Government Oversight—two Federal Government employees were

each paid $350,000. How did those payments to those two people,

who I believe were on the Interagency Task Force Report, weren’t

they?

Ms. BACA. Sir, no.

The individual from the Department of Energy was on the task

force, but the individual who works for the Department of Interior

was not on the task force.

Mr. HORN. OK. So it wouldn’t affect the reliability of the Interagency Task Force report then, right?

Ms. BACA. No, we don’t believe that at all. This person was not

in any way involved in the writing of this regulation. He——

Mr. HORN. OK. Well, that’s what I’m saying, the individual is

clear of any conflict of interest with the regulation.

Ms. BACA. The individual did not work with the MMS to put this

regulation together, and he did not serve on the interagency task

force.

Mr. HORN. OK. So you would agree then that he has had no impact on the reliability of the Interagency Task Force?

Ms. BACA. We don’t believe he’s an impact in the Department,

no.

Mr. HORN. Right, OK.

That’s what I wanted to hear. It’s either one way or the other.

So it isn’t because of the alleged conflict of interest. It’s—the fact

was he had no interest in it.

Ms. BACA. The IG and the Department of Justice are looking into

it, but we feel that because he did not serve on the Interagency

Task Force and he was not involved in the writing of the regulation

that there’s not a conflict of interest.

Mr. HORN. Thank you. I wanted to get that in the record because

I don’t think people should be implying things about other people

unless we know what the facts are.

So, I don’t have any other questions, but I’ll say this to the three

participants here. If you have any question you want to raise or a

point you want to raise about each other’s testimony, I’d be glad

to put it in the record at this point. Do you have any thoughts, Inspector General?

Mr. WILLIAMS. No.

Mr. HORN. You’re happy, OK. Madam Secretary, you got any

thoughts?

Ms. BACA. Mr. Chairman, we are just very anxious to get our

rule out. We have, you know, labored on this for many years.

We have opened the comment period several times to accommodate numerous requests. We have come a long way. We’ve been

criticized by all sides on this issue, and all we’re trying to do is get

a regulation out there that’s going to protect the taxpayers and get

a fair value. The congressional moratorium has really hurt us, and

197

we would really hope that the congressional riders would not be extended and that we would be able to move forward and have our

rule out on the street.

Mr. HORN. General Accounting Office have any thoughts on this?

Ms. KLADIVA. Well, just to say, sir, that, you know, that the General Accounting Office is not too prone to be complimentary of

agencies when we do work, but I do want to say that in—specifically in looking at the process that MMS has followed in working

toward the regs to this point that we believe that they’ve been deliberate and that they have taken all due care to include the positions and to respond to the positions that have been put forth by

the State, as well as the industry.

It’s taken a long time because they have been that thoughtful in

approaching it, a year to do the studies about how the oil marketing process works so that they could understand the industry they

were regulating; a year and a half to solicit and to deal with public

comments; and then the last year has been specifically at the behest of a Congress to continue to work with the industry and try

to negotiate the regs.

So it appears to be a long time, but we believe that it has been

thoughtfully approached.

Mr. HORN. Well, that’s a good recommendation. I just want to

tell you where I’m coming from.

I’m coming from the fact that if you have to auction it or whatever, get the highest competitive price and base your royalties on

that in some way—because I agree, the taxpayers have something

and all of the local units of government also have something depending on the law and the relationship. So, we would welcome

any comments any panel member has of the first panel or second

panel. We’ll put them in the record at this point so we get it spread

out completely and with that we adjourn this hearing.

I would like to thank the following people: J. Russell George,

staff director and chief counsel; Randy Kaplan, counsel; Bonnie

Heald, director of communications; Mason Alinger, clerk; Faith

Weiss, minority counsel; Early Green, minority staff assistant; and

Melinda Walker and Randy Sandefer, court reporters.

[Whereupon, at 6 p.m., the subcommittee was adjourned.]

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