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Oil Officials Balk at Proposal

January 18, 2000

HOUSTON (AP) _ The oil industry is considering suing the federal government if the Interior Department proceeds with revised royalty rules for production on public land.

Dave Deal, counsel for the American Petroleum Institute, said Tuesday that the current structure of the proposed rule will overvalue the oil collected on federal leases, resulting in unfairly high royalties.

Interior’s Minerals Management Service, which has wrestled for four years with the industry over a new rule, has said oil producers have not been paying their fair share.

``You cannot claim as lost royalties revenues what you were not entitled to in the first place,″ Deal said. ``It will increase revenues (for the government), but it is unlawful.″

The new rule can take effect only after a March 15 congressional moratorium expires. Deal said he cannot promise the petroleum institute or any other industry organization would sue, but acknowledged it is a strong possibility.

A new round of public workshops began Tuesday in Denver, moving to Houston on Wednesday and then to Washington on Thursday. However, both Deal and Fred Hagemeyer, manager of royalty affairs for Marathon Oil, are pessimistic the Minerals Management Service will see things their way.

The reason the agency isn’t likely to make any changes is because the rule is on target, said Beth Daley, spokeswoman for the government watchdog group Project on Government Oversight.

``The bottom line here is that oil companies are going to be unhappy with the rule because they’ll have to pay the taxpayers,″ she said.

Critics contend the current system allows oil companies to understate the value of oil they pull from public lands by selling it at deflated prices, either to agreeable competitors or subsidiaries.

The industry has countered with alternative methods of compensation, such as allowing the government to take a percentage of the raw material and sell the oil itself. Deal said the current proposed rule is salvageable if the formula is changed to more reflect the value of oil recovered at the wellhead.

``We think the MMS proposal departs from the statute, we think the MMS proposal departs from the lease contracts, we think the MMS proposal will lead to a value greater than the value of production and lead to unlawfully high royalties,″ Deal said. ``That’s the core of it.″

The Minerals Management Service estimates the new formula will generate an extra $66 million annually over the approximately $3.5 billion the government takes in each year on oil and gas leases, mainly in the Gulf of Mexico.

The industry has not determined how much the rule will cost, Deal said, but he believes it would far exceed the agency’s figure.

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