CHAPTER 3 THE LINOWES COMMISSION - WHERE ARE WE 25 YEARS LATER?
| Jurisdiction | United States |
(Feb 2007)
THE LINOWES COMMISSION - WHERE ARE WE 25 YEARS LATER?
Associate Solicitor for Mineral Resources
Department of the Interior
Washington, D.C.
JAMES D. HARRIS
James D. Harris is the Associate Solicitor for Mineral Resources at the U.S. Department of the Interior. In the course of his practice, Jim has focused on financial and mineral law matters representing various governmental, tribal, and corporate clients.
He graduated from Southern Methodist University in 1987 with a B.B.A., from the University of Oklahoma in 1992 with a J.D., and from the University of Houston in 2000 with an M.B.A.
He is a member of the State Bar of Texas and the Oklahoma Bar Association.
Table of Contents
I. Introduction
II. The honor system meets the Linowes Commission
A. Before 1925
B. 1925-1980
C. 1981-1982
III. Commission recommendations and MMS successes
A. What did the Linowes Commission recommend in 1982?
B. What was accomplished?
C. What significantly changed since 1982?
IV. How to honor federal contracts in the post Linowes system
A. Trust
B. Contract
C. Where do we go from here?
V. Conclusion
Appendix A
I. Introduction
Twenty-five years ago, the Commission on Fiscal Accountability of the Nation's Energy Resources (Commission) chaired by David F. Linowes issued its report. Today we consider lessons learned about royalty policy and management.
In 1982, the Commission identified five major shortcomings with the federal royalty program. It noted that the United States Geological Survey's Conservation Division (Conservation Division) did not verify data reported by industry, lease account records were unreliable, late payments were common, the lessees' records were rarely audited, and civil penalties for breach of contract did not exist. In short, the Commission found, "the industry is essentially on the honor system."
Much has changed since then. The Department of the Interior (DOI) has employed professional managers with financial accounting and auditing expertise to address 54 of the 60 recommendations made by the Commission. The other six were determined to be impractical or not applicable in light of new legislation. Generally speaking, the recommendations focused on auditing and financial management practices
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that would provide greater public assurances that federal lessees were fulfilling their promises. The audit and penalty authority given to DOI pursuant to the Federal Oil and Gas Royalty Management Act of 19821 (FOGRMA) in response to Commission recommendations, goes a long way to that end. As contracts themselves are a means to create enforceable promises and maintain a workable level of trust in society, the oil and gas bar can help strengthen these important social bonds. Attorney Sol Linowitz once wrote that "society counts on the law, and on lawyers as its servants, to spread such feelings of trust through the community."2
I use a broad perspective to describe where we are after 25 years.3 The federal royalty managers, the mineral and energy attorneys, the federal and Indian mineral lessees, and the citizens and employees of state and tribal governments have a direct stake in developing royalty policy. But, all of us, like corporate shareholders, have a stake in how the nation's mineral resources are managed. Governmental leadership needs a broad perspective to effectively deal with the difficult issues inherent in royalty policy. The American people have called on it to act for this and future generations with wisdom, conscience, and the understanding that whatever America hopes to bring to pass in the world must first come to pass at home. This responsibility surely cannot exclude our expectations regarding the civil right of property and the sanctity of contracts at home and abroad.
To understand where we today, and where we might be going, consider the following two fundamental questions that have long driven our mineral policies.
Why are oil and gas assets valuable to us?
Fundamentally, we want to know how our oil and gas is going to affect our ability to secure the common defense and improve the general welfare of the nation. Some of us see oil and gas principally valuable as a commodity to exchange in the market. We wish to treat them as financial assets and manage them for gain. The policy objectives pursued
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include the predictable income for, maximal revenue to, and minimal cost incurred by the government. The policy actions taken include holding regular lease sales where a market for leasing is established, using the highest possible "value of production" for royalty purposes, and sharing the least amount of post-production costs with lessees. On the other hand, some of us believe that oil and gas are mainly valuable for us to use. We treat them as strategic assets and manage them in accordance with other resource values and priorities of use. The policy objectives pursued include the readiness of supply for priority uses, the availability of preferable alternatives and substitutes, and the increase of consumption efficiencies. The policy actions taken include stockpiling, such as we do with the Strategic Petroleum Reserve (SPR), providing financial incentives to find new and alternative supplies and to reduce consumption, and regulating the rate of development of known reserves.
The public lands and the outer continental shelf (OCS) are clearly important for their yield of energy to the nation. DOI reports that energy projects on federally managed lands and offshore areas supply about 30 percent of the nation's energy production. This includes 39% of natural gas, 35% of oil, 44% of coal, 17% of hydro power, and 50% of geothermal. Since 1982, OCS leasing has increased by 200 percent. Since 1994, OCS oil production has increased 63 percent. While as a nation we produce 39 percent less oil today than we did in 1970, leaving us ever more reliant on foreign suppliers, MMS predicts that within the next five years offshore production alone will account for more than 40 percent of our domestic supply of oil, primarily due to deep water discoveries in the Gulf of Mexico. According to the Energy Information Administration's U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 2005 Annual Report, the largest oil fields in the United States in terms of proved reserves are (1) Prudhoe Bay, Alaska, (2) Wasson, Texas, (3) Kuparuk River, Alaska, (4) Belridge South, California, (5) Mississippi Canyon, OCS Block 778 (Thunder Horse), (6) Mississippi Canyon, OCS Block 807 (Mars-Ursa), (7) Spraberry Trend Area, Texas, (8) Midway-Sunset, California, (9) Green Canyon, OCS Block 699 (Atlantis), and (10) Elk Hills, California. The largest natural gas fields are (1) San Juan Basin Area, Colorado and New Mexico, (2) Pinedale, Wyoming, (3) Newark East, Texas (4) Hugoton Gas Area, Kansas/Oklahoma/Texas, (5) Prudhoe Bay, Alaska, (6) Jonah, Wyoming, (7) Wattenberg, Colorado, (8) Madden, Wyoming, (9) Antrim, Michigan, and (10) Carthage, Texas. These top ten lists are marbled with oil and gas fields on or adjacent to enormous federal mineral holdings.
A reliable supply of affordable energy is obviously important to our nation's economy and security. So it comes as no surprise that rising oil prices have political consequences. Speaking of the dangers that price inflation generally poses to capitalism, the economist John Maynard Keynes noted in 1920 that "those to whom the system brings windfalls, beyond their deserts and even beyond their expectations and desires become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat."4 In addition to a general dislike of rising prices, there are some Americans who for a variety of reasons simply want the U.S. to produce fewer federal minerals, so they generally support government policies that make this activity less profitable. Sudden price rises only provide catalyst for
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their ongoing political initiatives. So, when in 2006 the price of oil jumped to $70 per barrel, proposals for punitive legislation targeting federal lessees quickly surfaced. Again, while each is important individually, it is both price inflation and federal oil in combination that seems to push the political buttons. For example, while the price of Starbucks espresso has exceeded $8,000 per barrel for years, very few have called for a windfall profits tax on the coffee business.5
What is less clear is how important mineral leasing revenues are to the nation. Revenue collection is but one component of the federal mineral leasing program yet it probably captures the most public attention. In FY 2006, about 2,600 companies reported and paid billions in royalties from approximately 27,800 producing Federal and Indian leases. While mineral leasing revenues are large, the program has never brought in more than 1% of annual receipts to the United States Treasury.6 In other words, federal mineral leasing program receipts have never been a relatively material source of federal revenue. In 2005, total federal receipts were $2.15 trillion. The FY2005 total amount of receipts attributable to federal and Indian leases prior to any disbursement to states and tribes was $12.8 billion, an amount that represents only 0.59% of total 2005 federal receipts. That is, at least 99.41% of federal receipts come from sources other than the mineral leasing program. Since 1982, the federal and Indian leasing programs have generated a grand total of $164.9 billion that has been distributed to federal, state and Indian accounts and special funds. Still, if the entire $164.9 billion, which is the total mineral leasing receipts over twenty-five years, had been collected in 2005, it would have represented only 7.66% of overall federal receipts for the year.
Upon analysis it seems...
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