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Offshore Oil Industry Gets Breaks From Washington

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Offshore Oil Industry Gets Breaks From Washington


Offshore Oil Industry Gets Breaks From Washington

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Robert Siegel.

H: BP may owe the government royalties on the spilled oil. That's because the government charges royalties on every drop of oil that comes out of the ground, even if it is lost or wasted. Its royalty collector is the Minerals Management Service, which is already under attack for failing to enforce safety and environmental rules in the Gulf.

And when it comes to collecting revenue, its record is one of deference to the oil industry, as NPR's Peter Overby reports.

PETER OVERBY: MMS collected about $264 million from offshore oil and gas production in fiscal year 2009. The money came mainly from leases on the underwater three-by-three-mile blocks and from royalties. The Government Accountability Office said in 2007 that America sells its oil and gas too cheaply. The U.S. gets a return of 41 to 49 percent, while, for example, Norway gets 75 percent or more.

The industry says that analysis is defective and the system works. Erik Milito is with the American Petroleum Institute.

BLOCK: It seems like it's a pretty good system for balancing the encouragement of domestic oil and natural gas development with making sure the taxpayer gets the fair value. Anytime you make tweaks, you're going to have changes in investment decisions.

OVERBY: But the past 30 years show a long history of breaks for the offshore oil industry - breaks engineered by Congress, the White House and MMS.

In 1983, Washington upset the laws of supply and demand. The Reagan administration opened most of the Gulf of Mexico for exploration and started auctioning off millions of acres at a time. It became common for leases to draw just a single bidder. As recently as the lease sale last March, 468 tracts were leased, only six got as many as three bidders.

BLOCK: We're leasing nine times as many acres as we were, and we're still getting fewer dollars than we got before.

OVERBY: That's William Freudenburg, a former scientific adviser to MMS. He co- authored a study of the lease prices. It shows that after the 1983 changes, the average price per acre declined by 88 percent. Freudenburg says one problem involves knowing what a lease might be worth. The oil companies have the resources to find out, MMS does not.

BLOCK: The people who represent us, the people, pretty much are flying blind.

OVERBY: And when it comes to royalty payments, MMS for years was flying blind there, too. In the 1990s, investigators found that companies were essentially keeping two sets of books: a real one and one for MMS.

Danielle Brian is director of the Project on Government Oversight, which has examined the offshore oil business.

BLOCK: They would tell the government one thing, in what they owed in royalties. But then when they were talking to each other, within industry, they were acknowledging actually what they owed was much more.

OVERBY: The industry had a fix for that problem: It could pay MMS in oil and gas rather than dollars. Congress liked this idea. MMS asked a consultant who had been an industry advocate and he liked it too. In a few years, most of the royalties were in kind rather than in cash.

Now the Royalties-In-Kind Office is being closed down, thanks to a sex and drug scandal. But it's hard to revert to royalties in dollars because MMS has cut the number of auditors who would monitor those transactions.

There is a government watchdog for MMS. It's the inspector general for the Department of the Interior. In March 2009, Acting Inspector General Mary Kendall told a House committee about her findings.

BLOCK: We found that DOI is at risk of losing millions of dollars in royalties. The existing process is heavily reliant upon companies doing the right thing.

OVERBY: At the American Petroleum Institute, Erik Milito says the companies, too, want MMS to work properly.

BLOCK: The MMS needs to be out there enforcing the regulations and everything has to be transparent. The industry wants certainty, consistency, transparency.

OVERBY: And now congressional leaders intend to split MMS into three independent units. They're hoping that system will work better.

Peter Overby, NPR News, Washington.

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