Letting oil companies say ‘Trust us’

Ashley Milne-Tyte Jan 15, 2007

TESS VIGELAND: Tomorrow a trial gets underway in Colorado that has a certain David versus Goliath aspect to it.

A former government employee is accusing a big oil company of cheating Uncle Sam — and taxpayers — out of $12 million in oil royalties.

Ashley Milne-Tyte looks at the murky world of royalty payments and why they’re so ripe for dispute.

ASHLEY MILNE-TYTE: Auditor Bobby Maxwell worked for years for the Minerals Management Service, part of the Interior Department. His job was to make sure that oil companies were paying the government the royalties they owed. A few years ago, he claims, he discovered oil company Kerr-McGee was underpaying by millions, but he couldn’t do anything about it.

Beth Daley is with the Project on Government Oversight.

BETH DALEY: We have a really serious problem right now. It’s clear that the auditors are not being allowed to collect money that’s owed to the taxpayers.

Not allowed, she says, because Maxwell put his findings before his government bosses, but says they discouraged him from pursuing Kerr-McGee for the money.The Minerals Management Service wouldn’t talk to Marketplace, but they did issue a statement. It says the service didn’t take up Maxwell’s claims about Kerr-McGee’s underpaid royalties because it did not believe the claims held up.

Democratic Congresswoman Carolyn Maloney says it’s not surprising the Minerals Management Service is soft on oil companies.

CAROLYN MALONEY: Many of the people who work at the Minerals Management Service section of the Interior Department are almost a revolving door with the oil industry — they work in the industry, then they go work at MMS, then they leave MMS and go back to the industry.

Last month, the Interior Department’s inspector general issued a damning report on the department. Among other things, it stated the Interior Department relied too much on oil companies’ word about what they owed, rather than checking themselves.

Beth Daley of the Project on Government Oversight says over the years, there’s been a steady stream of accusations by individuals, Indian tribes and other parties of underpaid oil royalties.

DALEY: Nationwide, we’ve looked at lawsuits and we’ve found that there are billions and billions of dollars in lawsuit settlements over these exact same kinds of allegations.

The vast majority of cases end in settlement. Oil companies never admit wrongdoing. So what is their defense? It comes down to an argument over what constitutes the fair market value of oil.

Companies that drill for oil are meant to calculate how much they owe in royalties based on the market value of their product. But in the early 1980s, the price of oil became more volatile as new, short-term contracts began to gain favor and crude oil began trading on the floor of the New York Mercantile Exchange.

Economist Philip Verleger says despite a more dynamic marketplace, oil companies lagged in changing the way they priced their product.

PHILIP VERLEGER: And it took a long time for the oil industry to be dragged kicking and screaming by MMS into a new methodology of valuing crude oil.

This methodology places a higher value on the oil so companies have to pay higher royalties. But here’s the rub: existing rules also let companies use multiple ways to come up with a market price for oil extracted from federal land. It depends on lots of variables, including where the oil comes from, and transportation costs.

All this, says Verleger, can lead to quarrels over black gold’s true value.

VERLEGER: As long as we have this ownership where the companies producing the crude oil don’t own the reserves but are paying royalties, and as long as crude oil qualities differ, and as long as markets keep changing, we’re gonna have these disputes.

Still, he says, big oil doesn’t help itself. He says it could do a much better job of educating the public about how it does business. But, he says, the industry has chosen a different path — one that simply says, “Trust us.”

In New York, I’m Ashley Milne-Tyte for Marketplace.

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