True Value

On the morning of August 13, 1996, at a ceremony at the Teton Science School in Jackson Hole, President Bill Clinton signed into law the Federal Oil and Gas Simplification and Fairness Act. The bill had had strong bipartisan support, the backing of the Clinton administration, and the agreement of 33 state governors—including Gov. Geringer—as well as wide support in the energy industry.

“I hope that this is an omen of things to come, “ the president said, “because this is the way America moves forward. When we tone our rhetoric down and work together and roll up our sleeves and try to meet our legitimate interests and protect our values, come to grips with these challenges, we can do it.”

The president’s hope that rhetoric would tone down and people would work together with their sleeves rolled up did not come to pass. The Republican victories in the legislative elections of 1994 had meant that the Democratic administration’s policies met stout resistance from a Republican-controlled Congress that was, most definitely, feeling its oats. Implementation proposals from the Clinton administration, attempting to address the touchy issue of mineral value—which the new statute had not resolved—met stout resistance from industry.

Basically, the new law simplified the way royalties were collected by reducing paperwork and accounting obligations associated with the tax collection process. Most of the law’s provisions became effective on September 1, 1996, but the critically important question of developing regulations from the law was, as is usual, assigned to the agency in charge, Minerals Management Service. The agency was then headed by Cynthia L. Quarterman, an engineer and oil-and-gas lawyer whom Clinton had named Management Service deputy director in 1993 and then appointed director in March 1995.^xxvii

Minerals Management was smarting from yet another negative Congressional assessment, this time from the Republican Congress—the House Government Reform and Oversight Committee’s 1996 report, Crude Oil Undervaluation: the Ineffective Response of the Minerals Management Service, which had concluded that undervaluation of federal royalties had seriously shortchanged the United States Treasury, with millions of dollars in royalties undervalued and up to $2 billion unpaid. Responding, Minerals Management in 1998 under Clinton’s appointee Quarterman issued revised rules for valuing oil and gas to reflect “true market value.”

Previously, the Department of the Interior had based royalties on a value defined as “the gross proceeds realized by … lessees under arm’s-length sales.” The enormous changes in the world petroleum market made this method unworkable. Then there was a period of “posted prices” as a value yardstick, but that quickly became a way for the industry to game the system, since the “posted price” in reality was a starting price, which no one in the business paid. In the years following passage of the “Simplification and Fairness Act,” Minerals Management Service proposed several different methods—none were “simple” — to determine “fair valuation.” Finally in 1998 the agency determined that royalty payment would be based on a “price determined between an oil producer and a willing buyer”—in other words, market value.

The oil and gas industry resisted fiercely, and for the next two years a prolonged, acrimonious debate between the industry and Minerals Management Service played out in meetings and hearings in the House and Senate, while implementation of the new valuation rules was delayed at the behest of the oil and gas industry, usually through a legislative bit of budgetary legerdemain.

The focus of the issue became the choice of collection system, whether to take royalties “in kind” or “in value,” and here Wyoming’s Congressional delegation stepped into the national spotlight.

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