B-307767, Department of Interior--Royalty-in-Kind Oil and Gas Preferences, November 13, 2006

B-307767 Nov 13, 2006 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights This responds to a Congressional request for our opinion regarding the Secretary of Interior's authority, under section 342(j) of the Energy Policy Act of 2005, to "grant a preference" in the disposal of royalty oil or gas received by the United States. 42 U.S.C. 15902(j)(1). The purpose of section 342(j) is to provide "additional resources to any Federal low-income energy assistance program." Id. In this regard, Congress asked whether section 342(j) provides sufficient authority for the Secretary to provide such programs with oil and gas at a discount to fair market value. View Decision B-307767, Department of Interior--Royalty-in-Kind Oil and Gas Preferences, November 13, 2006 B-307767 November 13, 2006 The Honorable Wayne Allard United States Senate The Honorable Ken Salazar United States Senate Subject: Department of Interior—Royalty-in-Kind Oil and Gas Preferences This responds to your request for our opinion regarding the Secretary of Interior's authority, under section 342(j) of the Energy Policy Act of 2005, to –grant a preference— in the disposal of royalty oil or gas received by the United States. 42 U.S.C. sect. 15902(j)(1). The purpose of section 342(j) is to provide –additional resources to any Federal low-income energy assistance program.— Id.In this regard, you ask whether section 342(j) provides sufficient authority for the Secretary to provide such programs with oil and gas at a discount to fair market value. The Department of Interior maintains that section 342(j) of the Energy Policy Act does not permit such oil and gas sales at a discount to fair market value. Although not necessarily the only reading of the provision, we agree with Interior that this is the better reading of section 342(j). As we explain below, the issue posed presents a close question of statutory construction. In our, and Interior's view, the phrase –grant a preference— in section 342 does not mean to grant a discount to fair market value where the same section requires sales or transfers to be at not less than market value and there is no indication that Congress intended –preference— to include a discount to fair market value.[1] BACKGROUND The United States leases federal lands containing oil and gas deposits under two specific programs: the Mineral Land Leasing Act of 1920 (MLLA)[2] governs land deposits and the Outer Continental Shelf Lands Act of 1953 (OCSLA)[3] governs lease of oil and gas deposits from offshore or submerged lands. The MLLA authorizes the Secretary of the Interior to lease oil and gas deposits, and certain federal lands containing oil and gas deposits, to U.S. citizens, associations, corporations, or municipalities. 30 U.S.C. sect. 181. Lessees must pay the United States a royalty of at least 12.5 percent of the value of the oil or gas removed or sold from the leased land. 30 U.S.C. sect. 226(b)(1).[4] As an alternative to collecting cash royalty payments, the Secretary may take a percentage of the value of royalties in actual barrels of oil or volumes of natural gas, a so-called –royalty in kind— or –royalty oil and gas.— 30 U.S.C. sect. 192. MLLA authorizes the Secretary to sell to the public royalty oil and gas accruing to the United States under such leases except when, in the Secretary's judgment, it is desirable to retain the oil and gas for the use of the United States, such as filling the nation's Strategic Petroleum Reserve. Id. Under MLLA, the Secretary must –grant preference— to refineries not having their own source of supply for crude oil, but sales to such refineries must be –at not less than the market price.— Id. Similarly, the OCSLA authorizes the Secretary of the Interior to lease oil and gas deposits from offshore or submerged lands on the outer continental shelf off the United States. 43 U.S.C. sections 1335, 1337. Like their onshore counterparts, offshore oil and gas lessees must pay the United States a royalty of not less than 12.5 percent, which the Secretary also may demand in kind. 43 U.S.C. sections 1335, 1337, and 1353(a)(1). [5] OCSLA also authorizes the Secretary to sell royalty oil and gas to the public or to transfer such oil or gas upon request to the Secretaries of Defense or Energy or the Administrator of the General Services Administration for federal use. 43 U.S.C. sect. 1353. Royalty oil or gas sold under OCSLA must not be sold for more than its regulated price or, if no regulated price applies, must not be sold at less than its fair market value. Id. Section 342 of the Energy Policy Act of 2005[6] governs Interior's program on oil and gas royalties in kind. It applies to all royalties accepted in kind under any federal oil or gas lease or permit under section 36 of MLLA (30 U.S.C. sect. 192), section 27 of OCSLA (43 U.S.C. sect. 1353), or any other federal law governing leasing of federal land for oil and gas development. 42 U.S.C.