CHAPTER 4 PANEL DISCUSSION

• Jurisdiction: United States

Federal Onshore Oil and Gas Leasing Reform Act of 1987
(Mar 1988)
CHAPTER 4
PANEL DISCUSSION
Kenneth A. Wonstolen
Independent Petroleum Association of Mountain States
Denver, Colorado

IPAMS has long maintained that legislative reform of the onshore oil and gas leasing system entails two significant risks:

o upsetting the competitive balance between independent producers and the major oil companies;

o providing an opportunity for the installation of new, unnecessary and burdensome environmental restrictions.

Further, it is IPAMS' position that problems with the current system have resulted from failures of administration rather than from defects in the Mineral Leasing Act of 1920.

The "problems" have occurred in two areas. The first is abuse of the simultaneous lottery system (SIMO) by fraudulent filing services, so-called "boiler-rooms". This problem has been largely ameliorated by administrative changes which raised the filing fee to $75 and which required the deposit of first year rentals with SIMO applications. Upon resumption of the SIMO following these changes, the number of applications dropped 60%. IPAMS believes that existing consumer protection, investor fraud and deceptive trade practice laws should be aggressively enforced to eliminate any remaining abuses.

The second area of contention is more problematic — Known Geologic Structure (KGS) designation. Two highly-publicized incidents, referred to as "Amos Draw" and "Fort Chaffee" have highlighted deficiencies in Interior's KGS determination procedures. In both cases, previously-withdrawn lands were made available for non-competitive leasing without adequate analysis of the underlying geology, taking into account surrounding development which had occurred during the period of unavailability.

This breakdown of Interior's KGS procedures is amenable to administrative remedy, as confirmed by a report by the National Academy of Sciences. This report states that "the present KGS provision ... can be successfully implemented... by providing for a professional interpretation of readily available information and the exercise of sound... judgment by qualified earth scientists." For example, KGS determinations could be performed by a central facility,

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staffed by competent USGS personnel. In addition, the American Association of Professional Geologists (AAPG) has offered the assistance of its 35,000 members and 70 year reservoir of scientific experience in reviewing KGS analyses.

Unfortunately, Interior has reacted to KGS criticism through interminable delay in making KGS determinations; failure to issue non-competitive leases to successful applicants while KGS status is reconsidered; and, distortion of the KGS concept to cover entire basins, without geologic basis. This shoddy performance has been characterized as "malfeasance" by a past AAPG President. The situation is intolerable, and an appropriate Congressional response would be to require Interior to revamp and upgrade its KGS process as previously suggested.

Such administrative KGS revision should also incorporate three additional concepts:

o elimination of sealed bids in favor of oral bidding;

o elimination of sliding scale royalties in favor of a flat royalty;

o elimination of tract evaluations which result in the failure to issue leases to high bidders.

Each of these significant improvements to the current leasing system could be accomplished administratively, without incurring the risks inherent in opening the Mineral Leasing Act.

Nevertheless, IPAMS recognizes that it is the prerogative of Congress to consider fundamental revision of previous legislative enactments. Further, as the National Academy of Sciences also concluded: "Some errors in (KGS) classification will always occur.... New legislation may have to be considered." If it is Congress' decision that legislative revision is necessary, considering the risks, then such reform must feature five criteria of paramount importance:

1. Avoidance of new environmental restrictions

2. Retention of meaningful non-competitive leasing

3. Reliance on oral bidding sale procedures

4. Institution of a flat one-eighth royalty rate

5. Elimination of tract evaluations

HR 933 fails to meet a single one of these essential criteria. Therefore, IPAMS sees no point in making comments on specific features of HR 933 and simply indicates its total opposition to the bill.

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