The oil industry is upset that the Obama Administration is cancelling the royalty-in-kind programme the federal government has long used to tax companies for the development of federal oil and gas resources. Jack Gerard, president of the American Petroleum Institute, the national trade organisation, notes that the program collected $6.6bn in oil and gas deliveries in fiscal 2008, as one of the government’s largest sources of non-tax revenue. It does seem strange that the government would pack it in.
But the programme has been riddled with problems. An investigation by the Government Accountability Office said the Minerals Management Service, which oversees the programme, does not provide reasonable assurance it receives its share of gas in the programme, resulting in millions in forgone revenue. The investigation noted that the MMS is owed $21m dollars for past imbalances but lacks the information to calculate the full amount of revenues due; it does not audit gas companies’ production and allocation data, so it cannot verify it is receiving its entitled per centage of gas; MMS has insufficient staff and those it does have are not sufficiently trained.
The investigation followed three separate investigations by the US Department of the Interior into allegations against more than a dozen current and former MMS employees, charging them with accepting a wide array of gifts and gratuities from oil and gas companies with whom they were conducting official business. Substance abuse and promiscuity were also uncovered, again involving both those working for the government and the industry.
There are reasons to look for another system by which to work through. API’s Mr Gerard insists this is the most straightforward and fair way to do it. Here is what he had to say:
Terminating this straight-forward method of handling royalty payments runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production. The government’s Minerals Management Service itself noted administrative efficiencies brought on by the program, and pointed out that another of benefits of RIK is the reduction in costly lawsuits tied to product valuation.
All of that may be true, but the corruption involved in the programme is too hard to overlook. The oil industry should have thought about how efficient the programme was - and easy for them to depend on – before they began unraveling it by offering gifts and gratuities to the government department overseeing the royalty programme. There is a price for everything.
Related links:
US ending oil royalty program after scandal (NY Times, 16/09/09)
