Sunday, March 15, 1998

Oil royalty collections costing untold millions

By Jim Polk

The United States has an opportunity to fix a broken system that is costing taxpayers millions of dollars and causing a morass of litigation.

The system at issue deals with the collection of royalties paid to the federal government by oil companies that drill oil on federal land.

Currently, royalties are paid to the government based on a calculation of its value. A complex and confusing system is required today to calculate those royalty payments. To do this, the U.S. Department of Interior's Minerals Management Service must maintain an army of federal bureaucrats.

But all this government waste is unnecessary. Instead of trying to track billions of oil molecules and the price they receive in the marketplace, the MMS could receive oil as payment. This is known as taking royalty payment "in-kind."

Even that agency's own consultants have said, "The only way to be absolutely certain that a fair market value is received for royalty oil is to take the oil in-kind for sale by the agency."

Not only would the government be sure it was receiving what it's due, it would also mean smaller and more efficient government.

A royalty in-kind program was first proposed as part of the Clinton administration's "reinventing government" proposal. That proposal targeted "big government" programs that could better serve the taxpayers by being streamlined and privatized.

Cynthia Quarterman, the Minerals Management Service's director, has publicly stated that the adoption of a royalty in-kind program could be "workable, revenue positive and administratively more efficient for all parties."

It costs the MMS about $60 million annually to administer its royalty collection program. Model programs based on royalty in-kind systems in Texas and Alberta, Canada, have demonstrated major cost savings for those governments.

It takes several hundred employees to oversee the MMS royalty program, compared with the 33 employees necessary to administer Alberta's royalty in-kind program. Alberta's program doesn't need hundreds of accountants and auditors to calculate complex formulas to make sure its government receives its fair share.

Interior Secretary Bruce Babbitt has always had the right to collect royalty in-kind, but the department continues to hesitate.

Why? It would mean a major reduction in the size of the Interior Department.

Broad, sweeping reform to make government less costly, cumbersome and frustrating doesn't come easily to those government agencies that have reigned over their domains for decades.

Abilene oilman Jim Polk is a member of the Independent Petroleum Association of America.