B-156603, Nov 5, 1965

B-156603, Nov 5, 1965

PRECIS-UNAVAILABLE

Honorable Henry M. Jackson, Chairman, Committee on Interior and Insular Affairs, United States Senate:

By letter of April 22, 1965, you referred to us four Executive Communications from the Department of the Interior setting forth determinations that the Union Producing Company, the Gulf Oil Corporation, the Continental Oil Company, and the Phillips Petroleum Company were entitled to refunds in the amounts of $7,124.75, $22,505.95, $59,355.71, and $36,968.67, respectively, on account of excess royalty payments made under oil leaseholds on the outer continental shelf. You have requested that we review and advise you with respect to the findings of fact, the determinations, and the proposals for refund covered in these communications.

The refunds in question relate to royalty payments made by the companies under protest against administrative determinations that no deductions for barging costs from the lessor's royalty interest would be permitted in computing royalty payments due under the companies' leases. The contention of the lessees was that royalty payments should be computed on the basis of the value of production at wellhead or on the lease premises and that the value of such production for royalty computation in the case of offshore operations should therefore be determined by allowing for the cost of moving the crude oil from the lease premises to the onshore point of sale. In a decision dated August 2, 1963, the Department of the Interior determined that reasonable barging costs are a relevant matter to be taken into account in computing royalties due the United States where as with respect to the leases involved there is no bona fide established market at the field or area where the leases are situated. We have reviewed the basis upon which this conclusion was reached and find it to be reasonable and consistent with industrial practices and with long standing practices under leases issued pursuant to the Mineral Leasing Act of February 25, 1920, as amended, 30 U.S.C. 181, et seq., and the Mineral Leasing Act of August 7, 1947, 30 U.S.C. 351, et seq.

There remains for consideration the question of whether the amounts allowed for barging costs are reasonable. In a meeting on May 28, 1965, with Mr. Stewart French of your Committee's staff, representatives of this Office explained that prior to receipt of your letter we had begun a review of oil and gas leasing activities on the outer continental shelf as part of our regular work. And since payment had been made under three of the four Interior Department determinations in question after expiration of the statutory 30-day period provided for in subsection 10(b) of the Outer Continental Shelf Lands Act, 43 U.S.C. 1339(b), we proposed, for the purpose of responding to your request, to limit our review to the one case -- Phillips-- not yet paid leaving the others for review in the course of our planned work in this area. As we pointed our to Mr. French, it is our intention to separately report on significant findings resulting from this review and to furnish you a copy of any such report which we might issue.

An exhaustive analysis of the Phillips Petroleum Company claim disclosed no basis for questioning the reasonableness of the amount being allowed for barging costs. It should be noted, however, that the total amount of Phillips' claim for barging cost deductions was for $49,791.93 rather than the $36,968.67 reported by the Department, the difference being an offset for certain royalty payments due the United States by the company. this connection we would also point out that in addition to the cash refunds of $125,955.08, covered by the four communications which you referred to us, our review disclosed that another $2,587,000 in refunds covering barging costs will be effected through credits against future royalty payments due the Government. The Department is not reporting these credits to the Congress, although under the language of subsection 10(b) of the Outer Continental Shelf Lands Act pursuant to which the instant cases were referred to your Committee, there would not appear to be any distinction between credits against future royalty payments due and cash refunds.

The only other aspect of the Phillips claim which bears further comment is the fact that it was not submitted until January 26, 1965, covering excessive royalty payments during the period October 1956 to April 1960. As you know, subsection 10(a) of the act requires requests for repayment of excessive royalty payments made to be filed within two years after making the payment. While it thus might be suggested that the claim is barred by the statutory two year limitation we would not be inclined to question the refund, since the initial payments to which it relates were paid over a number of years under protest and the claim was, in fact,, filed within two years from the date of the departmental determination under which it became allowable. Moreover, we understand that the royalty payments subject to protest on the barging cost question were held in suspense by the Department and not treated as earned during the lengthy period taken for ultimate resolution of the matter.

The enclosures with your letter are returned as requested.