WASHINGTON – The U.S. Interior Department said on Wednesday it will begin phasing out its royalty-in-kind oil and natural gas program, which has been marred by scandals, and replace it with a more transparent scheme.
Interior Secretary Ken Salazar said it would take at least a year or more to phase out the royalty program, which collects and sells about $4 billion a year in oil and natural gas turned over by energy companies using federal land.
The royalty program came under fire last year after the department's inspector general reported that employees used illegal drugs, had sex and accepted gifts from workers at the oil companies they were hired to oversee.
"The royalty-in-kind program has been a blemish in my view on this department," Salazar said at a House Natural Resources committee hearing. "It is time for us to end the royalty-in-kind program."
The department will replace royalty-in-kind with "a more transparent and accountable" program, Salazar said, but no details were offered.
Natural Resources Committee Chairman Nick Rahall unveiled legislation last week aimed at revamping the way the department handles royalties.
In addition to scrapping the royalty-in-kind program, the legislation would consolidate the department's Minerals Management Service, which handles offshore oil and gas leasing, and the Bureau of Land Management, which oversees onshore energy leasing.
Salazar said the department needs an energy agency that coordinates activities of the two leasing entities, but many questions remain on how to handle the restructuring.
Rahall applauded the department's decision to stop the royalty-in-kind program.
"I do think it will end the opportunity for mischief...and perhaps provide a more decent return to the American taxpayers," Rahall said.
The proposals are a part of the department's plan to overhaul its royalty payment and collection systems.
Salazar said the department is considering charging oil companies "variable" royalty rates that would reflect the difficulty in finding oil and natural gas supplies, but he does not know if the option is "administratively workable."
Companies now pay a royalty rate ranging from 12.5 percent for onshore drilling to 18.75 percent of the value of the oil and gas they drill on leased offshore tracts.
Pointing out that onshore royalty rates have not been updated for some time, Salazar said "we're going to look at what adjustments are appropriate to be made."
The department's announcement comes after the release of several government reports this week exposing accounting weaknesses that may be costing the department millions of dollars in lost revenue.
American Petroleum Institute President Jack Gerard raised concerns about the department's decision.
"Terminating this straight-forward method of handling royalty payments runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production," Gerard said in a statement.