[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




   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

                                 ______

                     U.S. GOVERNMENT PRINTING OFFICE
62-931 CC                    WASHINGTON : 2000





                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      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               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 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
                            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

 
   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 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's-length 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.001
    
    [GRAPHIC] [TIFF OMITTED] T2931.002
    
    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:]
    [GRAPHIC] [TIFF OMITTED] T2931.003
    
    [GRAPHIC] [TIFF OMITTED] T2931.004
    
    [GRAPHIC] [TIFF OMITTED] T2931.005
    
    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.
    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:]
[GRAPHIC] [TIFF OMITTED] T2931.006

[GRAPHIC] [TIFF OMITTED] T2931.007

    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:]
    [GRAPHIC] [TIFF OMITTED] T2931.008
    
    [GRAPHIC] [TIFF OMITTED] T2931.009
    
    [GRAPHIC] [TIFF OMITTED] T2931.010
    
    [GRAPHIC] [TIFF OMITTED] T2931.011
    
    [GRAPHIC] [TIFF OMITTED] T2931.012
    
    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 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.013
    
    [GRAPHIC] [TIFF OMITTED] T2931.014
    
    [GRAPHIC] [TIFF OMITTED] T2931.015
    
    [GRAPHIC] [TIFF OMITTED] T2931.016
    
    [GRAPHIC] [TIFF OMITTED] T2931.017
    
    [GRAPHIC] [TIFF OMITTED] T2931.018
    
    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 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.019
    
    [GRAPHIC] [TIFF OMITTED] T2931.020
    
    [GRAPHIC] [TIFF OMITTED] T2931.021
    
    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 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.022
    
    [GRAPHIC] [TIFF OMITTED] T2931.023
    
    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 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 jury-
rigged 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.
    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:]
    [GRAPHIC] [TIFF OMITTED] T2931.024
    
    [GRAPHIC] [TIFF OMITTED] T2931.025
    
    [GRAPHIC] [TIFF OMITTED] T2931.026
    
    [GRAPHIC] [TIFF OMITTED] T2931.027
    
    [GRAPHIC] [TIFF OMITTED] T2931.028
    
    [GRAPHIC] [TIFF OMITTED] T2931.029
    
    [GRAPHIC] [TIFF OMITTED] T2931.030
    
    [GRAPHIC] [TIFF OMITTED] T2931.031
    
    [GRAPHIC] [TIFF OMITTED] T2931.032
    
    [GRAPHIC] [TIFF OMITTED] T2931.033
    
    [GRAPHIC] [TIFF OMITTED] T2931.034
    
    [GRAPHIC] [TIFF OMITTED] T2931.035
    
    [GRAPHIC] [TIFF OMITTED] T2931.036
    
    [GRAPHIC] [TIFF OMITTED] T2931.037
    
    [GRAPHIC] [TIFF OMITTED] T2931.038
    
    [GRAPHIC] [TIFF OMITTED] T2931.039
    
    [GRAPHIC] [TIFF OMITTED] T2931.040
    
    [GRAPHIC] [TIFF OMITTED] T2931.041
    
    [GRAPHIC] [TIFF OMITTED] T2931.042
    
    [GRAPHIC] [TIFF OMITTED] T2931.043
    
    [GRAPHIC] [TIFF OMITTED] T2931.044
    
    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:]
[GRAPHIC] [TIFF OMITTED] T2931.045

[GRAPHIC] [TIFF OMITTED] T2931.046

[GRAPHIC] [TIFF OMITTED] T2931.047

[GRAPHIC] [TIFF OMITTED] T2931.048

[GRAPHIC] [TIFF OMITTED] T2931.049

[GRAPHIC] [TIFF OMITTED] T2931.050

[GRAPHIC] [TIFF OMITTED] T2931.051

[GRAPHIC] [TIFF OMITTED] T2931.052

[GRAPHIC] [TIFF OMITTED] T2931.053

[GRAPHIC] [TIFF OMITTED] T2931.054

[GRAPHIC] [TIFF OMITTED] T2931.055

[GRAPHIC] [TIFF OMITTED] T2931.056

[GRAPHIC] [TIFF OMITTED] T2931.057

[GRAPHIC] [TIFF OMITTED] T2931.058

[GRAPHIC] [TIFF OMITTED] T2931.059

[GRAPHIC] [TIFF OMITTED] T2931.060

[GRAPHIC] [TIFF OMITTED] T2931.061

[GRAPHIC] [TIFF OMITTED] T2931.062

[GRAPHIC] [TIFF OMITTED] T2931.063

[GRAPHIC] [TIFF OMITTED] T2931.064

[GRAPHIC] [TIFF OMITTED] T2931.065

[GRAPHIC] [TIFF OMITTED] T2931.066

[GRAPHIC] [TIFF OMITTED] T2931.067

[GRAPHIC] [TIFF OMITTED] T2931.068

[GRAPHIC] [TIFF OMITTED] T2931.069

[GRAPHIC] [TIFF OMITTED] T2931.070

[GRAPHIC] [TIFF OMITTED] T2931.071

[GRAPHIC] [TIFF OMITTED] T2931.072

[GRAPHIC] [TIFF OMITTED] T2931.073

[GRAPHIC] [TIFF OMITTED] T2931.074

[GRAPHIC] [TIFF OMITTED] T2931.075

[GRAPHIC] [TIFF OMITTED] T2931.076

[GRAPHIC] [TIFF OMITTED] T2931.077

[GRAPHIC] [TIFF OMITTED] T2931.078

[GRAPHIC] [TIFF OMITTED] T2931.079

[GRAPHIC] [TIFF OMITTED] T2931.080

[GRAPHIC] [TIFF OMITTED] T2931.081

[GRAPHIC] [TIFF OMITTED] T2931.082

[GRAPHIC] [TIFF OMITTED] T2931.083

[GRAPHIC] [TIFF OMITTED] T2931.084

[GRAPHIC] [TIFF OMITTED] T2931.085

[GRAPHIC] [TIFF OMITTED] T2931.086

[GRAPHIC] [TIFF OMITTED] T2931.087

[GRAPHIC] [TIFF OMITTED] T2931.088

[GRAPHIC] [TIFF OMITTED] T2931.089

[GRAPHIC] [TIFF OMITTED] T2931.090

[GRAPHIC] [TIFF OMITTED] T2931.091

[GRAPHIC] [TIFF OMITTED] T2931.092

[GRAPHIC] [TIFF OMITTED] T2931.093

[GRAPHIC] [TIFF OMITTED] T2931.094

[GRAPHIC] [TIFF OMITTED] T2931.095

[GRAPHIC] [TIFF OMITTED] T2931.096

[GRAPHIC] [TIFF OMITTED] T2931.097

    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's-length 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 second-guessing 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.
    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.
    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 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 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.
    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 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 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.
    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 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 producers 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 
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 per-barrel 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. 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 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.
    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.
    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?
    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 second-guessed a bona fide arm-length sale that one of your 
companies engaged 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.
    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:]
    [GRAPHIC] [TIFF OMITTED] T2931.098
    
    [GRAPHIC] [TIFF OMITTED] T2931.099
    
    [GRAPHIC] [TIFF OMITTED] T2931.100
    
    [GRAPHIC] [TIFF OMITTED] T2931.101
    
    [GRAPHIC] [TIFF OMITTED] T2931.102
    
    [GRAPHIC] [TIFF OMITTED] T2931.103
    
    [GRAPHIC] [TIFF OMITTED] T2931.104
    
    [GRAPHIC] [TIFF OMITTED] T2931.105
    
    [GRAPHIC] [TIFF OMITTED] T2931.106
    
    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 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.
    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 3\1/2\ 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.107
    
    [GRAPHIC] [TIFF OMITTED] T2931.108
    
    [GRAPHIC] [TIFF OMITTED] T2931.109
    
    [GRAPHIC] [TIFF OMITTED] T2931.110
    
    [GRAPHIC] [TIFF OMITTED] T2931.111
    
    [GRAPHIC] [TIFF OMITTED] T2931.112
    
    [GRAPHIC] [TIFF OMITTED] T2931.113
    
    [GRAPHIC] [TIFF OMITTED] T2931.114
    
    [GRAPHIC] [TIFF OMITTED] T2931.115
    
    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. 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.
    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 re-engineering 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.116
    
    [GRAPHIC] [TIFF OMITTED] T2931.117
    
    [GRAPHIC] [TIFF OMITTED] T2931.118
    
    [GRAPHIC] [TIFF OMITTED] T2931.119
    
    [GRAPHIC] [TIFF OMITTED] T2931.120
    
    [GRAPHIC] [TIFF OMITTED] T2931.121
    
    [GRAPHIC] [TIFF OMITTED] T2931.122
    
    [GRAPHIC] [TIFF OMITTED] T2931.123
    
    [GRAPHIC] [TIFF OMITTED] T2931.124
    
    [GRAPHIC] [TIFF OMITTED] T2931.125
    
    [GRAPHIC] [TIFF OMITTED] T2931.126
    
    [GRAPHIC] [TIFF OMITTED] T2931.127
    
    [GRAPHIC] [TIFF OMITTED] T2931.128
    
    [GRAPHIC] [TIFF OMITTED] T2931.129
    
    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 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:]
    [GRAPHIC] [TIFF OMITTED] T2931.130
    
    [GRAPHIC] [TIFF OMITTED] T2931.131
    
    [GRAPHIC] [TIFF OMITTED] T2931.132
    
    [GRAPHIC] [TIFF OMITTED] T2931.133
    
    [GRAPHIC] [TIFF OMITTED] T2931.134
    
    [GRAPHIC] [TIFF OMITTED] T2931.135
    
    [GRAPHIC] [TIFF OMITTED] T2931.136
    
    [GRAPHIC] [TIFF OMITTED] T2931.137
    
    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?
    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.
    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 
royalty-in-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----
    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 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.
    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 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.
    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 
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?
    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?
    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:]
    [GRAPHIC] [TIFF OMITTED] T2931.138
    
    [GRAPHIC] [TIFF OMITTED] T2931.139
    
    [GRAPHIC] [TIFF OMITTED] T2931.140
    
    [GRAPHIC] [TIFF OMITTED] T2931.141
    
    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 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.]

                                   - 
