Successful Money-Loser

At the conclusion of the 1995-96 gas royalty-in-kind pilot, Quarterman declared the program an “operational success.” Unfortunately, she added, it lost the taxpayers moneyiii and she could not quantify any savings in administrative costs. But those facts intimidated no one who really liked the idea of royalty in kind.

The “operational success/financial failure” of the first pilot led to a 1997 Minerals Management feasibility study to continue and expand the program, a study undertaken partly in response to a “congressional directive” included in MMS’s Fiscal Year 1997 Appropriations Committee Reports, urging Minerals Management “to consider additional RIK pilot projects for both onshore and offshore Federal oil and gas leases.”

When it came to the on-shore business, Wyoming was front-and-center. The feasibility study had concluded a royalty-in-kind program had the best chance to succeed in Gulf of Mexico natural gas; crude was problematic.

“For crude oil RIK, the information is equivocal and the revenue and administrative implications are uncertain,” the report said.  “However, there is significant interest on the part of producers, marketers, and the State of Wyoming in taking crude oil in kind from Federal leases in Wyoming. Thus, we recommend that a small-scale crude oil RIK pilot— developed in concert with all affected parties – be instituted in Wyoming to test revenue and administrative effects.”

Upon taking office, Wyoming Governor Jim Geringer had pledged that his administration would be “friendlier” to the energy industry than his Democratic predecessor’s. His early actions—naming Rejane “Johnnie” Burton head of the Department of Revenue, signing industry-backed legislation, firing aggressive auditors—certainly looked friendly. When the industry went for royalty-in-kind, Geringer was on board.

The 1997 Minerals Management feasibility study conducted hearings and workshops, including one in Casper on March 25, to solicit public comment on the idea. Minerals Management reported that public statements from “essentially all parties” supported taking royalties in kind. These parties were oil companies and industry associations—Total Minatome, Marathon Oil, Coastal Oil and Gas, Devon Energy, Burlington Resources, Shell, Giant Refining, Vastar, Independent Petroleum Association of Wyoming, Independent Petroleum Association of America, 88 Oil, Nance Petroleum, Enron Oil and Gas, Merrion Oil and Gas—and the State of Wyoming.

“Industry urged MMS to be bold and move forward as fast as possible to implement not pilot programs but actual ‘live’ operations for substantial volumes,” the agency reported.  This echoed Enron’s earlier suggestion to MMS after the first pilot lost money: if the feds wanted Royalty-in-Kind to achieve “higher value or more bang for the buck or whatever you want to call it, […] take some more risk in the marketing efforts.”iv

So in this brave new world, where mammoth industry urges government bureaucracy to boldly take big financial risks as quickly as possible, Wyoming was ready with citizens’ cash. The state distinguished itself by putting forward a novel proposition to let Wyoming take in-kind royalties for “all federal production and pay MMS its 50 percent share.” If such bold action were not authorized (and it wasn’t), Wyoming proposed to take its share of federal production in Campbell County during the life of the pilot project, combine it with its state lease production, and sell the oil via competitive bidding.

In his original version of the Royalty Fairness and Simplification Act, California Republican Ken Calvert had tried to remove the Department of the Interior from nearly all aspects of royalty collection in order to, as he said, “unleash the ‘junkyard dog’ that is the States in search of a royalty bone.”  During the Geringer administration, Wyoming hardly had the look of a dangerous, royalty-hungry dog. Johnnie Burton, Republican Gov. Jim Geringer’s head of the Department of Revenue, a part of the oil and gas business, was more like the industry’s faithful companion.

Geringer himself wrote and testified in favor of instituting royalty-in-kind, and also sent Jim Magagna, Director of the Office of State Lands and Investments, to speak on his behalf before Congress. Magagna appeared at a 1997 House Resources Subcommittee Oversight Hearing on Royalty-in-Kind for Federal Oil and Gas Production, chaired by Wyoming’s own at-large congresswoman, Barbara Cubin.

“The State of Wyoming, under our Governor Jim Geringer, has assumed a leadership role, we believe, in seeking development and implementation of a cost-effective and efficient royalty-in-kind program,” Magagna began, after applauding “the initiative of Chairman Cubin in providing this important dialog for the royalty-in-kind issue.”

He explained that Wyoming had suffered “frustrations” with the value-based federal royalty program. He observed that “many in the oil industry support a royalty-in-kind system.”  Although Minerals Management Service regulations allow the agency to take royalties in-kind, he said, the “agency is reluctant to take all royalties that way, especially in remote regions and from low-yield marginal wells.v

“But Wyoming is driven every bit as much by the opportunities for revenue enhancement that we see in the royalty-in-kind program,” Magagna continued, “and we recognize that with those opportunities comes risk. We as a state are prepared to assume those risks that are associated with the private sector in the marketplace and that are necessary if you are to achieve the rewards that can be associated with that.”

Magagna went on to explain that Wyoming did not feel a mere pilot program would be enough to show how much money could be made in royalty-in-kind. Wyoming wanted to “aggregate large volumes” and this would require a bigger royalty-in-kind program than Minerals Management was suggesting in 1997.

There is something very strange about the taking of royalties in kind, something that makes sober-sided conservatives suddenly eager to jump in! Jump in deep! Politicians who ordinarily would not credit the federal government with enough sense to get in out of the rain suddenly want to partner up with the feds and rush into the oil business together. Why? At this point, royalty-in-kind had been a money-losing proposition. Instead of saying, “Oh, hey, wait a second, this might be a bad bet,” Republicans in Wyoming and Washington, D.C. could hardly wait to put even more money into the pot, take bigger risks, and hope for a giant payout.

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  1. I’ve read the story twice now, and while very well researched and reported, I have to come back to my initial thought on Part I, and not to be rude, but what the heck is the story here? I keep waiting for something cool, unethical or interesting to happen…