Issues » Comments on Rules and Regulations

Appendix B

November 4, 1999
Lucy Querques Denett
Associate Director for Royalty Management
Minerals Management Service
18^th & C Streets, NW
Washington, DC 20240

Dear Ms. Denett:

At the core of the MMS’ rationale for the pending federal oil valuation rulemaking is the State of California’s conviction that the oil industry has underpaid royalties through use of posted prices and that Alaska North Slope prices are a better measure of value for royalty purposes. While California enunciated this view over a decade ago before the original Royalty Management Advisory Committee (RMAC) in the proceedings leading up to the MMS’ 1988 oil valuation rule, RMAC and the MMS then rejected it out of hand.

Although California did not challenge the final MMS rule, it did continue to press for reexamination of its valuation views and this persistence led to the Interagency Study issued in May 1996. With little input beyond California, the Study (wrongfully, we believe) adopted the California view on valuation and extrapolated it to leases outside California. This led directly to the pending MMS rulemaking and the continuing rhetoric that oil companies underpay their royalties.

Given the MMS’ reliance on the California perspective in shaping its rulemaking, the administrative record should now include the August 30, 1999 decision in City of Long Beach v. Exxon, No. C 587 912 (Superior Court of the State of California). Although several companies chose to settle claims early on, Exxon chose not to and, after 25 years of litigation, obtained a jury verdict that upheld their valuation of California oil production for royalty purposes. The decision is significant because the upheld methodology did not involve use of Exxon’s own posted prices but rather an average of other companies’ posted prices, even those that had settled earlier.

The Long Beach decision is even more significant because the now discounted California view still pervades the entire MMS oil valuation rulemaking. For example, in May 19, 1999 testimony before the House Subcommittee on Government Management, Information and Technology (copy enclosed), the acting assistant secretary, Sylvia Baca, made it clear that the alleged royalty underpayments in California were the antecedent for a nationwide enforcement strategy and the pending oil valuation rulemaking.

In sum, the Long Beach decision is the latest and most significant development in a proceeding that is a part of the administrative record and has misshaped the MMS’ approach to the present rulemaking. For this reason alone, the Long Beach decision itself is an important part of the administrative record. Moreover, when coupled with the extensive information the MMS received during its March-April 1999 workshops and subsequent public comment period, the Long Beach decision reinforces the wisdom of publishing a new oil valuation proposal.

If the erroneous core assumptions of the present proposal can be excised, and fresher, more accurate information added, the result can be a rule that is reasonably certain, simpler, fair and in conformance with existing mineral leasing statutes.

Sincerely,

Original Signed By

David T. Deal