Wednesday, June 11, 2008

We do not drill for oil. We do not help ourselves when we allow Exxon to Steal From Us. Say No, to ANWR Drilling!

Testimony of Bob Armstrong, Assistant Secretary for Land and Minerals Mgmt
In addressing this matter, it is important to understand the nature of posted prices and the problems posed by using this measure to ascertain market value for federal oil and gas. Posted prices are set by the marketing or refining arms of oil companies as an offer to buy crude oil. Posted prices are not an obligation to buy, but merely a reference point or starting point for negotiating a market price on the open market. Frequently, premiums are paid above posted prices in non-affiliated transactions. Based on our analyses of company transactions, we know that these premiums can range from $0.25 per barrel to $2.00 per barrel. However, when the producing arms of large integrated oil companies (the lessee) transfer oil in-house to their marketing or refining arms, they typically pay royalties on their posted price. In other words, some oil companies have been selling oil at one price and paying royalties on a lower price. This is unfair to the American taxpayer, and it violates the basic principle that royalty must be paid on no less than gross proceeds.

Investigations by an assortment of concerned parties have confirmed the inadequacy of posted prices as a basis for valuing production for royalty purposes. A number of States (e.g., Alaska, California, New Mexico, Texas, and Louisiana) have brought suit against several major oil companies primarily for basing royalties, severance taxes, and other payments on posted prices that are below market value, and have received settlements ranging from tens of millions to billions of dollars. At least seven class actions against the industry have been filed on behalf of private landowners over the past two years. One of these has been settled for several million dollars.

In February, the Department of Justice (DOJ) announced it would intervene in qui tam suits against four major oil companies accused of undervaluing oil production from Federal leases and, in May, DOJ added a fifth company to its investigation. In addition, the Department of the Interior, has issued bills for $257 million as a result of audits for the period 1980 - 1995 on undervaluation of crude oil royalty payments in California alone. We are currently auditing oil royalty payments on all other Federal lands.

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