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BP pays state $34 million oil royalty settlement Company also providing Division of Oil and Gas auditors with real-time information on oil transportation Kristen Nelson PNA News Editor
BP and the state have settled royalty issues for North Slope oil and gas produced through 1999 and BP has started to provide Oil and Gas Division auditors with the real-time information on oil transportation costs which the division needs to audit BP’s royalty payments.
BP paid the state an additional $34 million in royalties, an amount the state said represented an additional 2.6 percent of the total royalties paid by BP from 1993 through 1999, concluding several audits of BP’s royalty obligations.
The state said Jan. 2 that the payment was made Dec. 29, with more than $10 million of the amount (almost 30 percent) deposited in the Permanent Fund and the balance to the state’s General Fund.
Kevin Banks, petroleum market analyst with the Division of Oil and Gas, told PNA that this money wasn’t deposited in the constitutional budget reserve fund because the royalty payment discussion with BP “was never elevated to what would be called an administrative proceeding.”
BP also paid the state $1.2 million to resolve outstanding royalty issues between the state and ARCO for the period through Dec. 31, 1999, when BP assumed ARCO’s royalty obligations as a result of the BP/ARCO merger. Issues identified, submitted to BP This payment was the result of audits which the state began several years ago. Banks said BP’s royalty settlement allows the company to deduct their actual shipping cost for crude oil, including marine transportation. That, he said, is what is subject to audit. The state disagreed with BP on several items included in the transportation cost, Banks said, and after discussions about the items, BP agreed with the state’s position.
The state initiated the audit for 1993 and 1994 in late 1996 and by mid-1998 submitted the issues to BP. “BP spends between $300 million and $600 million a year on tankers and we would have exceptions that ranged anywhere from $1,000, $2,000 to maybe $200-$300,000. So in the scheme of things what we were finding were fairly small.”
As the discussion of issues for the audit got started, the merger was announced, and after that was settled, Banks said, “BP suggested that there would be an opportunity to resolve all of our royalty issues through the effective date of the merger, which was Dec. 31 (1999).”
Through last summer, he said, the state sent letters to BP for a series of audits covering the years 1995 through 1999. Because the state had already done more thorough audits for 1993 and 1994, areas where there were problems had been identified, so the state focused on those areas. BP released information to state “BP released a bunch of data to us, including all their general ledger information and lots of details on the accounts” and Division of Oil and Gas auditors worked with Department of Revenue auditors who had completed transportation audits for taxes. So, with BP’s permission, the Division of Oil and Gas had some access to those audits, Banks said.
As a result of the information available and the other audits, the division believed it had a good handle “on the scope of where BP got it wrong.”
That scope, Banks said, was converted into an estimate of what additional royalties BP would owe the state. Just this fall, the state told BP what the state believed was owing, broken out by year, “based on our investigations of tax return audits, our own examination ... of the general ledger accounting and the royalty filings, some assessments that we had made about how the settlement treated numbers. We and the Department of Law examined the strength of those claims... if we went right to the mat, are you going to win or lose?
“And so we handed the piece of paper to BP... and said, we can’t tell you where the numbers come from, but these are settlement numbers. If you’re prepared to give us this kind of money, we’re prepared to close out the audits.
“And basically they came back and said, ‘we’ll do it.’ “ Ledger information going forward There were no radical changes in the formula used to calculate the state’s royalty as a result of this work, Banks said, but BP agreed to give the state more information on a real-time basis, including general ledger information, information about where its ships are going, how long they’re at sea carrying ANS crude and the volumes of crude they’re carrying.
“BP’s royalty filings are pretty detailed anyway,” Banks said, “but we’ll get a good deal more backup information in how their costs are reconciled to their royalty reports.”
Banks said having more information from BP on a real-time basis gives the state two things: “Number one, it will provide us an opportunity to evaluate whether the royalty settlement agreement formulas are working the way they should. And if we don’t think they are, then we will be forearmed to re-open the settlement and see if we can’t change some of the terms.”
The second advantage to the state, he said, is that real-time data provides the audit staff with information so they can start working on a list of questions to be addressed in audits - things that look odd, things where they want to find out what happened.
There is also an advantage to BP. In an audit, “where our auditors are trying to figure out what looks funny, usually BP doesn’t have an opportunity to explain themselves as we go along. And I think BP recognizes there’s value in that, to be able to say, well, things are funny this month because...”
Of course these are things the state will come back and check, Banks said, but at least it will have information in context from BP, “and then the question is, whether or not their context conforms to our sense of reality when the time comes.”
Banks said that with royalty audits, unlike tax audits, “there is the opportunity in DNR to resolve these issues as they arise - or even in audit - to negotiate a resolution without going right to court. There should be a step where we can get this done before it gets that nasty. And so I think, my experience would say that the state will benefit because then we won’t be wasting our time looking down roads that are just cul-de-sacs.”
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