UNITED STATES OF AMERICA et al v. MICROSOFT CORPORATION

Filing 120

UNITED STATES OF AMERICA et al v. MICROSOFT CORPORATION

F

Doc. 120

Memorandum

TO: Ted
ROM: Bob
SUBJECT:
DATE:

Hei ntz
Ber man

Compari son of NYMEX Futures and Refiner Posted Prices

September 9 , 1986

Data are for

tend to e~ceed losses in falling
become more pronounced as the

suggests that futures-based- val

and are, therefore, and below in rising somewhat above futures in fall i ng markets, markets. The particular period e~amined

crude oil and corresponding postings by E~~on, Cities and Conoco. the period June 1985 through August The data tend to support the cl

recent average and closingtabulations of comparisons of NYMEX monthly futures prices for West Te~as Intermediate

Attached are

aim that posted pri ces tend1986. futures, to I ag
uati on gains in

markets; and this is e~pected to

ri si ng markets

recovery continues. Thi s e~pectation is reinforced by the observation that short-term price advances tend to be

ignored.

ti es over some period of time , the posted prices underto royalthey which val ued fell short , on average , of futures and/or spot prices. were
a analysis Ii kel y enhance publsimple monitoring and di ng a system would i c conf i dence by provi
In the near term

I bel i eve the suggestive of a number potential program modifications; data are and, at a minimum that some further more detailed analysis is i ndi cated. tend to contradi frequentl y heard assertion that the government would !!~!~! do better by assessing based on posted prices rather than on spot or It mi ght be desi rabl e, therefore, in future regulfutures ati ons to include a provision applicable to non- arm s length transacand/or program perspecti

From a pol icy

indicate

The data

royalties pri ces.

ct the

ti ons

that woul d requi re an upward adj ustment

if,

agai ns~ relying on the result of a nonarm s length sale. It could also provi the Secretary wi th a strong response to ti cs who may resources are under- val ued for royal cri purposes; ty well as to provide an " ear~y warning of market prices. If regulatory change"weredivergence of posted and deemed desirable in future, the monitoring system would provide the basis.

charge that

de

check

the

following pages I describe the leading to the conclusions supporting the empirical observations above recommendations.
EXHIBIT
J;J

In the

IbEtJvfAN

RB 0283

Dockets.Justia.com

C

omp ar

i son of

X Futures and Ref i ner Post

, Prices

Page 2

Empirical Observations

del ayed unti I the end of the quarter, and margi nal at that.
Al though the

The data show that al though the market val ue of WTI increased fourth quarter of Exxon did to thi s increase, and the response1985, ti es and not respond by Ci Conoco was
during most of the

down-turn that began I ate December 1985 was initially " recognized" by refiners at about the same noted in the market refiners were slower in recognizing the magnitude of the down-turn. The attached graphs showing monthly (day weighted) average posted prices compared with NYMEX

in

time

closing price

from

the

clearly show the lagging nature of posted prices, as well as the strong relationship between futures prices and refiner postings.

prior month (for current deliveries)

the

almost immediately.

duri ng the second quarter of 1986 whi ch was vi rtuall y ignored by Exxon and only marginally recognized by Cities and Conoco in setting posted prices. The subsequent down-turn, at the beginning of the thi rd quarter, however appeared to have been recogni zed
were stabl e (unresponsi ve?)

The short-term price advance during the fourth quarter of 1985 went unnoticed by Ex~on, and received little attention from Cities and Conoco. Similarly, there was a brief price run-

duri ng 1985, several months wi thout change; but were much less stabl
dur i ng a month.

Posted pri ces

responsive?) during

1986

sometimes changing 4 or more

goi ng (more

ti mes

phenomenon is also shown by the comparisons

and corresponding graph of Price Difference. from NYMEX Relative to Market Movement. The graph shows that, for all three of the refiners e~amined differences between (lagged) futures prices tended to be positive in markets and negati ve in bear markets. That the bull ish markets tended to be associ ated wi th wi th greater di fferenti al s is somewhat vi sabl e on quantified on the accompanying This

The

aggi ng behavi or

of spot pri ces is al so

shown by

the tabl e

and posted prices

bull

this graph, and

Changes.

table. of Monthly Price

Anal ysi s and Tentati ve Cone!

usi ons
y to drawi

about general

or from the Ii mi ted exper i ence over the last 15 months. One conclusion however, appears irrefutable. The claim that " we will !!.~!~! do better by basing our valuation for royal ty purposes on posti ngs rather than spot or futures market prices " is most certainly false, as shown by the actual history.
behavi

The usual caveats

must, of course, appl

ng concl usi ons

RB 0284

Compari son of

~ Futures and Refiner Posi j

Prices

Page 3

offered is based on the notion that the NYMEX closing price in month t is the value of the commodity month t+1. Thi s is true because:

The valuation approach

Pri aarreches lassociated with trades prior to the final trade prices in a disequilibrium transactions market (ala M s al ) . The pri ce associ ated wi th the ast trade of the last day has the properties of a Marshallian final
settlement price, and in this sense should be regarded

an equi 1 i bri um pri ce.

settl ement pri ce.

All open post t ions f or the month
The final

are closed at the final

settlement price in month t is for during month t+1.

del i veri es

Two variations on this approach are offered. In the simple case, the differentials are calculated between the NYMEX closing price average price " offered" by refiners existing connot to all suppliers) during the following month. These differentials were then totaled and averaged over the indicated periods. The results show that, whether for the latter half of 1986 (except for Exxon), or the combined market

and tracthe ts,

(on

1985, valuations exceeded

characterized the first half of 1986.
Tentati vel y,

posti ngs tended to be above futures duri ng the sharp decl ine that

the refinery

period, postings examined. Exxon

tion to production (relative to refining or distribution). Ex~on,

thi s may suggest a resi stance on the part of the larger integrated majors Cand mini-majors) to drop postings the face of a market decline. Empirically, this is suggested by the greatest Cposi ti ve) di fferenti al on bal ance, bei ng that of Cities the company with least (of the three) relative orientathe I argest of the
three,

oriented, e~hibited the greatest resistance to the price decline.

and the most reI ati vel y producti on

A resistance to price declines by major , integrated oil companies consi stent wi th the rel ati ve concentrati on of tax advantages upstream in the process , as well as the undesirable bal ance sheet impact of the lower price resulting in a decline in the value

is

the reserves asset.

variation on this approach, I attempted to adjust for arguable timing differential between purchases under postings varyi ng 1 i ves and NYMEX hedg i ng on random days dur i ng month t as compared to the final settlement price in month Specifically,

As

t. NYMEX monthly theval ues over the average and the cl osi ng pri ce, and averaged these
calculated the differentials between
the

from the average

posting differentials to obtain the value less the adjustment. The particular adjustment does not affect any of the overall conclusions , but simply reduces the impact.

indicated periods. The average differential was then subtracted

Compari son of NY;

; Futures and Ref i ner

Pos~

Pri ces

Page 4

The " longer-term " view ascribed to majors, with respect to price
postings appears to be somewhat

seem to ignore upward movements in the market

asymmetrical. That

quickly to market indications of a down-turn. This pattern would seem to be consistent with risk aversion if risk associated wi th earni ngs as opposed to crude avai I ab i lit y.

relatively short-lived (e.g.

3 to 6 months) but respond more

pri ce that may be

is, postings

is

of both spot and futures prices. It has also been reported that refiner postings also were quickly

T i " conclus ohssthedlastiaon , weeks. The recentl y be " tested"OPEC cut-back f ulte in few however, should also announced by the events re rapid run-up

adjusted upwards. Early
a noti on of somewhat
do not seem to be

wi th

as posted pri ces i ncreasi ng rapi dl y as futures pri ces.
asymmetri cal behavi or,

data,

however, tend to be consistent

RB

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Monthly Prices
NYMEX Logged

Close vs
EXXON Averoge

c..

1S

::0

I\)

Jun

Jul
Aug

Sap

Oct

Nov

Dee

Jan

feb
Months: 1985 - 1986

Mar

Apr

May Ju n

Jul

Aug

NYMEX

EXXON

....
.::0,

Monthly Prices
NYMEX Logged
CITGO Average

Close vs

a..

Jun

Jul
Aug

Sap

Oct

Nav

Dee

Jan

reb
Mo Nnths: 1985 - 1986 YMEX

Mar
CITGO

Apr

May

Jun

Jul

Aug

.....

Monthly Prices
NYMEX Lagged

Close vs
CONOCO Average

to-

a..

::0

0::1

Jun

Jul
Aug

Sap

Oct

Nov

Dee

Jan

feb
M Nonths: EX- 1986 YM 1985

Mar
CONOCO

Apr

May Ju

Jul

Aug

Changes in month I y
pr 1

ees
Changes
EOM

NYMEX

Changes
EXXON
EO t1

Changes
CITGO
CONOCO

Changes
EOM

NYMEX

Date

Average

Close Average

Average

Average

Lagged
1 . 34 1 . 97

Close

1985
O. 39
1.

.J u I

-0.
1. 26 1. 25
1 . 44

Rug

Oct
O. 75
18

Sep
O. 75

O. 39

Nov

Dee

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3. 37

1 . 56 1 . 44

1986 J an Feb
O. 14

Mar

Rpr

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-3. -6. -3. -1.

-7. -6. -2. -1. -2.

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-5. -5. -6. -1.
1 . 04
1.17

t1ay

Jun
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1 . 38

-2. -8. -2. -1. 1 . 34 -0.

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4. 19

Rug

-1. -1.

-1. -3.

- O. 1 . 01

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- 3. 62

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NYMEX Logged

Close vs

CITGO Average

II)

a..

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Jut

Aug

Sep

Oct

Nay

Dee

Jal1

feb
Mo Nnths: 1985 - 1986 YMEX

Mar
CITGO

Apr

M ay

Jun

Jut

Aug

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(11

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NYMEX Lagged Close vs CONOCO Average

n..

Jul

Aug

Sep

Oct

Nov

Dee

Jan

feb

Mar

Apr

May

Jun

Jul

Aug

NYMrX

Months: 1985 - 1986 CONOeO

J

EXHIBIT 'li3f~MAN
;J

R. Berman . 10/28/86

Crude Oil Royalty Valuation
Moni tori ng

System

expressed concern about how some of the approaches would be ap l ed and certainty which it faces thpeieamount about the lack of the Federal government. concerning of royal ti es due Moreover som of the existing or proposed methodologies are highly data intensive and involve detailed analyses that i are kel y to resul t in hi gh admi ni strati ve costs.f done properly,
1i

approaches for handl i ng non-arm ' s-l ength contracts.

MMS draft product valuation regulations suggest a number of
Industry has

the Secretary greater
of val

ti ons, a regul atory change coul d be i ndi cated; and procedure would have provided an " early warning

result in

cedure serves as a continuing validation of the Moreover if posted prices do over an extended period of time higher royalties relative to free- market determina-

in the hi ghest royal ti es. An al ternati ve val uati on procedure, particul arl y one that is market-based , would also be beneficial in responding to criticism by Congress and the GAO. I f posted pri ces are, by and large, equal to or above market pri ces, the al ternati ve val uati on pro" to resul t

Oi I Val uati on Panel is recommendi ng that posted pri ces be the basis for royalty valuation , including valuation of affiliate (non- arm s-length) transactions. Representatives of the oil industry have claimed that posted prices are the only reasonable way to proceed ~ and that historically has resulted in the highest royalty valuations. Since the Secretary is authorized to collect royal ti es on the greater of val ue or prudence woul d di ctate the development of a moni tori ng 1 anal ysi s system claim relative to the and to the

The

tocve~ifyconti nues that pro edure "

gross proceeds, past, ensure

not,

program.

the moni tori ng

over some

regulations might

ue or gross proceeds, a potenti al

is authorized to collect royalties based
revi

That is, since

ues. thpeoaehreasons it may be desi rabl e to ex pI ore al ternati ve s c es to product ap r
additional study is needed if there logically and empirically, that posted is reason to believe prices may not reflect
value.
and that

require an upward adjustment to royalties if given period of time the posted prices which they were val ued fell short on average of market val For

on the si on to the

under

val ue for non- arm ' s-l ength si tuati ons. That
posted

market val ue in non- arm ' s-l ength transacti ons;
prices may sometimes understate market

RB0298

Crude Oil Valuation Monitoring System

ae titenstructure, subject to change and tax !D~ r2~!!!~the entity eserally.is transfer s, given the needs of opportuni; and Such g
strategi c goal

parties of opposing economic interests, and may not be unilateraly altered by either party. If parties are affiliated the transfer price will be that which maximizes after-tax profits ~2 ~Q! ~2metQ!~ !Q~t~~; may therefore reflect the corpor-

not obligated

price results from a trade or transaction between willing, but

Economi c theory suggests that pri ces II negoti ated" between affiliated parties are not, ~ 2!:!.2!:!., market prices. . A market

market pri ces.
anal ysi s.

There is ,

prices may or may not coincide with therefore, a I ogi cal basi s for further

futu~es, specifically West Texas are cu~rentl yas any other commodity Mercanti Intermediate traded on the New York Exchange (NYMEX) much the same (e.g., eggs, wheat, pork bellies). Since the NYMEX is an organized commodities marCrude oil
(WT I) ,
1e

ment of Energy (DOE) used NYMEX WT I futures pri ces to establ i sh miDim~m bi d pri ces in its 1985 test sal e of crude from the Strategic Petroleum Reserve (SPR), and has proposed to use spot market prices in determining sale prices from NPR-l. NYMEX
also frequently used as a basis for contracting tween private parties.
Futures prices are generally believed to lead posted

commodity markets most closely conform the classical definition of competitive markets NYMEX prices may be r~garded as a good measure of market In fact, the Depart-

ket

and since

to

value.

prices are

be-

and are ,
peri od
market

markets

below postings; and thus royalty collections based on
prices would be expected to have been lower over this
Thi s

the~efore expected to be above posti ngs si ng and below postings in falling markets. Since the time consi dered was predomi natel y and dramati call y a fall i ng the hypothesis is that NYMEX prices should generally

in ri

prices,

period.

NYMEX

comparisons of NYMEX monthly average and closing futures

paper reports the resul ts of recent tabul ati ons and
and

based on futures pri ces.

Data are for paper

for WTI and corresponding postings by Exxon, Cities Conoco. the peri od June 1985 through August Thi s al so di scusses some possi bl e approaches to crude val uati on

prices

1986.

prices tend to lag futures the data do not support the expectation that thet NYMEX prices would be below postings. Specifically the parti cul ar peri od exami ned suggests that futures-based-val uarising markets tend to e~ceed losses falling and thi s is expected to become more pronounced the

Al though the data tend to support the bel i

ef that posted

markets;

tion gains in

current recovery conti nues. Thi s expectat
be ref ected in posted pr ices.

ion is rei

in if

the observation that short-term market price advances tend not to

nforced

RB 0299

Crude Oi

I

Val uati on Moni

tori ng

System

heard asserti on that

More importantly, the data tend to contradict the frequently the government woul d !!.~!~! assessi ng royal ties based on posted pri ces rather than' on spot or futures prices. On the contrary, for the time period examined --

do ~etter

le gt thnpph rtransactions, could have been higher had valuation been on e basis of futures prices. su o t for further analysis, Thus. in addition to theoretical empirical

period over which posted prices might be expe~ted to futures prices -- royalty collections associated with non-exceed arm
sLlppor t .

there is also definite

The empirical observations and analyses leading to the above

con~l usi ons are

des~ri

bed below.

Empi ri ~al Observati ons

The d~ta show (see Exhi bi ts 1 and 2) that al though the market value of WTI increased during most of the fourth quarter of 1985 thi s increase was not ref ected in postings by Exxon

and anI y marg i naIl y ref I e~ted in post i ngs by
I ate in the quarter.
Al though

Ci ti es and Cono~o,

as it oc~ured in the futures the m!go!~~~! of the price decline was refle~ted in the futures market sooner than in refinery postings. The attached graphs showing monthly (day weighted) average posted prices compared with the NYMEX closing price from the prior month (for current deliveries) clearly show the lagging

the down-turn that began late in December 1985 was initially reflected in refinery postings at about the same time

market,

nature of

posted prices,

between futures prices and refiner

as well as the strong relationship
postings.

marginally refle~ted in those of Cities and Conoco. Similarly, there was a br i ef mar ket pr ice advance duri ng the second quarter of 1986 which was not reflected in Exxon s posting, and had only small impact on the pr ices posted by Ci ti es and Conoco. The subsequent market pri ce decl i ne, at the begi nni ng of the thi rd
quarter ,
however , appeared to have been reflected immediately.

The short~term NYMEX price advance during the fourth quarter of 1985 was not reflected in Exxon s posted prices, and and only

possi bl e spectrum of

strong crude supply position. Cities was selected as the classic independent with weak native crude availability. Conoco is in the middle -- a " mini major " or " major independent"

ref i ners. Exxon was sel ected as the cl assi c integrated major -- strongly oriented towards production, and

The three compani

es

were set ected to represent the broadest

RB

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Monthly Prices
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Jun
Aug

Jul
Sap

Oct

Nev

Dee

Jon

feb
Mo Nnth~: 1985 - 1986 YMEX

Mar
EXXON

Apr

M ay

Jun

Jut

Aug

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LXH IE IT

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hllonthly Prices
t~YMEX Logged Close
Averoge

vs CITGO

Jun
Jul
Aug

Sep

Oct

Nov

Dee

Jan

feb
Mo NnthM1985 - 1986 Ys: EX

Mar
CITGO

Apr

M ay

Jun

Jul

Aug

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Monthly Prices
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Close vs
CONOCO Average

to-

CL.

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Jun
Aug

Jul
Sap
Oct

Nov

Dee

Jon

Fab
Months: 1985 - 1986

Mor

Apr

M ay

Jun

Jut

Aug

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NYMEX

eOHOeO

Crude Oil Valuation Monitoring System

ness to market fluctuations.

Posted prices were stable during 1985, going several months without change; but that stability also indicates lack responsi veness to changi ng short-term market condi ti on5. Posted prices were much less stable during 1986 , sometimes changing 4 or more times during a month; suggesting a much greater responsive-

Relative to Market Movement (see Exhibits 3 and 4). The graph shows that, for all three of the refiners examined, differences between (lagged) futures prices and posted prices tended to positive in rising markets and negative in falling markets. That the ris1ng markets tended to be associated with with greater
d1fferences is somewhat visible on the graph (Exhibit 4), and
Exhi bi ts

T table he lagging behavior ,graph of Price Differences fromby the and corresponding of posted prices is also shown NYMEX

quantified on the accompanying table (Exhibit 3). This phenomenon also shown by the comparisons of Monthly Price Changes (see

is

5 and 6).

Anal ysi s and Tentati ve Concl

usi ons

The usual caveats must of course , appl y to drawi ng conci ugeneral behavi or from 1 i mi ted data appl yi ng to three firms over the last 15 One conclusion , however , appears The claim that " we will !~~!~! do better by basing our valuation, for royalty purposes, on postings rather than spot futures market prices " is most certainly false, as shown by

si ons about

irrefutable.
Prior

months.

the actual hi story.

or

to discussing the analysis it is necessary to first define some terms or posted prices (alone) are used as the measure of val ue there is no confusi on as to whi ch pri ce At any given point in time a particular refiner has

toly one posted price for a particular crude use. on
use.
in

concepts. If

using NYMEX prices as a standard, an initial question to address is which price to That is, since transactions may occur at several di fferent pri ces throughout a day, week, and month, it is necessary to specify which price, or combination of prices, is to be used as the measure of val ue. The suggested val uati on approach on the notion that the NYMEX closing price, nearmonth contracts, month t is the value of the commodity in month t+1. This is true because:

in location. That posted price is the commodity value tions with that refiner during the posting life.

for transac-

particular

However, in

is based

on

definition of market terminology is included in the appendi~ to this paper. The appendix also includes a more detailed discus-

si on of mar

ket

operat ions rel ati ve to crude val uat i on.

RB

0305

-------- ----------LxHInn 5

------

------

Difference bet~een HYMEX closing in prior month and the indicated month ayerage HYMEX yalues are contemporaneous differences~

prices.

price

NYMEX

Close
EXXON

Date
CITGO

CONOCO

1985 Jun

Ju I Rug

Delta -0.

Sep
O. 09 O. 72
1 . 47
1.21

-0. -0.
-0.
3. 72

O. 00
O. 75

1 . 34
1. 12

Oc t

Noy

1 . 93
2. 72

1986 J an Feb
O. 16

Dee

Mar

Rpr

-0. -2. -1. -0.
1. 31
1 . 92 1 . 76

O. 91
O. 31 O. 12
2. 1

May

Ju I Rug

Jun

-0. -0. -1. -1. -0. -1. -2.

-0. -0. -0.

1 . 90

-0.

-1.

Means:

Less Rdj
1 . 35

Less Rdj

Less Adj
1. 35
O. 91

0:1

6-12 /85

1- 8

/86

-0.

-0.
O. 15

-0.

1.
1.14

6/85-8/86

1 . 08

O. 77

O. 71

Specifically, the ~ffiX close delta is the contemporaneous difference (e.g., June close less June

barrels. The

average) lagged (e.g., the June value is shown for July sinse it applies to July NY11EX average difference. adjustment is the refinery average difference less (algebraically) the and - 17 = . 44 -- 26 . For example, . 37 = .

82 - . 44

......

ExHIBIT 4

Price Differences from
NYM EX
Relative to Market Movement

CJ)

QIt

QIt

:;0

tXJ

28. 00
EXXON

27. 20 27. 70 28. 09 28. 72 30. 28

31.72 26. 53 20. 59

14. 17 12. 78

13. Z0 16. 04 14. 69
HYMEX Clos1ng Pr1ce Logged

11.

CJ,)

CITGO

CONOCO

())

-------- ------- -------- ------- -------- ------- -------- ------------------ ------- ------ ---LXHIBIT :"

Changes in

monthly prices
CONOCO

NYMEX

Changes
EXXON
EOM

Changes
CITGO

Changes
EOM

Changes
EOM

NYMEX

Date

Average

Close Average
Average

Average

Lagged
1 . 34 1 . 97

Close

1985
O. 32

JuI

Rug

O. 39 O. 00
1 . 56

-0.
O. 75
O. 75

Sep Oct
1. 26 1. 25
1 . 44
18

Nov

O. 75

1. 56
1 . 44

Dee 1986 J an

Feb
O. 14

Mar

Apr
- 1 . 50

-3. -4. -7. -2.
- 3. 00 - 6. 25 - 3. 75

-5. -5. -6. -1.
-7. -6. -2. -1. -2.
1 . 38

May

-2. -6. -4. -2. -2.
1.17

-2. -3. -2. -1.
1.

-5. -5. -6. -1.

Jun
-1. 80
4. 19

JuI

-1.

Aug

-1. -3.
-1.

-0. -5. -5. -1. -0. -1.19

-2. -8. -2. -1. 1 . 34 -0. -2.

-0.

1 . 01

-1. -3.

:=0

CJo)

.....

LxH IE IT

Monthly Price Changes
NYMEX Lagged Close V$ EXXON Average

to-

;;c

Jun
Aug

Jul
Sep

Oct

Nav

Dee

Jon
Month~: 1985 - 1986

Feb

Mar

Apr

May

Jun

Jul

(jI)

...0

NYMEX

EXXON

(".') -LxH IE IT

Monthly Price Changes
NYMEX Lagged
CITGO Averoge

Close vs

.-.J

n..

;:0

Jut
Sap
Oct

Aug

Nov

Dee

Jan

reb
Mo NnthM1985 - 1986 Ys: EX

Mar
C ITGO

Apr

Moy

Jun

Jut

Aug

u

rj;;
~1

-- Mr. Berman

procedures; i. e.,

paid.

alternate valuat ion futures and/or spot prices. The implication that posted s is, of course, true to the extent that postings ar offers to bu and do not always reflect
ch~nges, and are adj~sted as mar~et conditions requir

s analysis speaks to " market- based"

wfii! e poste ~Il" vary Sllghtly from actual market pnces, they are The MMS would be hard pressed to defend a posit ion that futures prices are better, more accurate, and more current measures of royalty value for cu rrent product ion than are concu rrent posted prices. oR.c~ 4l~(:)AJ -.6

pnces may,

ndo
' were

Posti

ever, driven El. the market

~senSitive to

prices actually marke!./c

on

~#l

-- Posted prices are widely available.
posting relates to oil with the same

They exist for

nparly ill fields and
Further, since a field

areas for which royalty valuation is necessary.

(qua 1 i ty- based pri ce adjustments are simpl e and accurate.
pu rpos es.

general quality characteristics,
The same cannot

I'-'

be said for application of spot or futures prices for royalty valuation

l ength transact ions. Two ent i rely length (We agree that non-arm rent valuation standards would ~he ~ m~:~~~~~~g ~riOrit transa~tions should receive a 111' hi. ;:! m i!nc;a t'o and gener.) l~the However, lnvestlgated more t ro an ards to which each t e of trans ction i held should be as similar as

A real inconsistency would develop if prices received under arm conditions were accepted for royalty valuation purposes while

length

futures

' ed to

non-arm '

't1
~ rj

exist.

ons.

arm s- length prices are acceptable for roya y va ua 10n not length prices is purposes, a reasonable proxy for current non-arm futures price, but , rather, an assessment of at is currently bei ng length conditions. obtained under arm Q1 ctl1~'" ?f'~
In summary, even though Mr. Berman s analysis is a scholarly study which provides insight into the workings of the oil futures market , we must disagree with the application of oil futures or spot prices as a basis for royalty length situations. W~ave iqnored the fact that the valuation in non-arm hort period of timp (15 months) during which X"treme-,pricinq volatility took place, and we have not discussed other, more ore lmportant is the mln or disagreements we have with the stu conclusion that, even if the study results do indicate that oil futures prices

stu~overM-a- relati~lylead" posted prices, this has

ic

~tJJ
'JoTj

at the For royalty valuation purposes, we must apply "(i1arketJ value existing roduction or sale. Whether postings are considered to time of urchase il futures pr ces or not, postings re resent are adjusted as necessary 0 conform to market conal 10ns. Further, oil futures and spot prices are available on such a limited basis as to make price adjustments for quality and/or transportation extremely difficult, if not

r'\p bearing on our v.:l~i!tion rpc;.ponsihilit;pc;.

current

meaningless.

RB 0321

I

"'

length situations to verify that the It has been our policy in non-arm posting or other price to be applied for royalty purposes is consistent with length prices. This policy is, we feel, rightly extended in prevailing arm the proposed oil royalty valuation regulations. The continued acceptance of length posti ngs or contract prices is seen as the most equitable, most arm practical, and most easily administered method of royalty valuation ava i 1 ab 1 e. The wides pread exi stence and acceptance of posted pri ces make them much more applicable to specific cases than oil futures or spot prices, both

in terms of timi ng and necessary adjustments.

try D. Hill

RB 0322

4

,
Oil Pipeline Rights-of- Way And Royalty Valuation of Oil
In California

ureaus: BLM / MMS

States: California.

Issue: Have oil pipelines failed to 9perate as common carriers , contrary to their certification and

requirements of the Mineral Leasing Act of 1920 as amended (MLA)? Has such failure led to under-pricing of crude from Federal lands , thus denying the Government proper royalties?

Recommendation: The Office of Policy Analysis should co-ordinate and substantively participate in a study of the conunon carrier issue and the royalty valuation issue with the BLM and MMS (initial discussions with BLM and MMS staff indicate favorable disposition). facilitate this , additional infonnation should be sought and obtained as soon as possible

Court.
California v.

including information which may be under protective order issued by the California

State

Initial Review: An initial examination of testimony and evidence developed in connection with the litigation (hereafter referred to as the Long Chevron, Mobil, Texaco, et.
al.

Beach II or LB- ll litigation) appears to provide reason to suspect that certain rights-of-way holders may have improperly certified as to their common carrier status as required by Section 28 of the MLA. Moreover , the evidence further appears to provide reason to suspect that. such failure to satisfy MLA common carrier obligations , in conjunction with other practices, has led to a significant under-pricing of crude oil in California. Some of this crude oil was extracted from Federal lands; and some of this was ' subject to Federal royalty payments. Accordingly, any under- pricing would result in valuation below fair market value and subsequent underpayment of royalty obligations. Much of the evidence developed in the LB- ll litigation has not been previously available to the Department.

Congressional Interest: Congressman Philip Sharp has recently learned that some of this evidence , including
evidence that may be the subject of a California Court protective order , was inadvertently provided to the Department of Commerce as part of an environmental assessment they were conducting concerning allowing the export of California heavy crudes. Congressman Sharp has communicated his interest to Secretary Brown , requesting " copies of all records
relating to the operation of oil pipelines in California obtained by the

Department of

Commerce in the past 12 months.

Congressman Sharp has had a long-standing interest and concern in this area , and had inquired about Department knowledge such practices in the past. It is , therefore, reasonable to assume that the Congressman may wish to discuss these matters with the Department of the Interior in the near future.
EXHIBIT gel( MAN
J!I

RBO056

Oil Pipeline Rights-of- Way

And Royalty Valuation of Oil In California

Page 2

Background: Section 28 of the MLA requires that all pipelines granted rights-of-way over
statute

Federal lands be operated as a common carrier. Although no definition of a common carrier is contained in either the statute orin Department regulations implementing the

, a common law defInition (Black' s Law Dictionary) states " Common carriers are those that hold

themselves out to undertake to carry persons or goods indifferently, or of all who choose to

legislative history specifically identifies pipelines owned by Associated Oil and Standard Oil , and voiced the concern that " They were not common carriers; they would not take the oil of anybody . "2 unless that person sold it to them at their own price (Emphasis added. ) Section 28 of the MLA
was intended to solve that problem.
In 1935,

integrated oil companies; and , accordingly, Congress required that any oil pipelines crossing lands subject to the MLA be operated as a common carrier so that " these The (independent) producers reach the market which otherwise they could never reach.
operated by the

employ it. " The legislative history revels that there was concern that the only pipelines were those

Interior Secretary Ickes expressed additional concern, and supported
in addition

an

to requiring common carriage, also included a requirement to " accept, convey, transport , and/or purchase without discrimination... in such ",3 proportionate amounts as the Secretary of the Interior may determine to be reasonable expanding the scope of Section 28. That this 1935 amendment was intended to expand the scope of Section 28 is further demonstrated in Interior Secretary Whitaker s 1973 letter to Senator Jackson: " ... The amendment was enacted not to enforce the common carrier provision , but to prevent harm to the public lands and mineral resources of the United
amendment that
States.... "4

Certain integrated oil companies, by contrast, have long asserted that the effect of the 1935

amendment was to limit the common carrier provision and allow the common carriage requirement to be fulfilled by non-discriminatory purchasing (e. , the price it paid to They have further asserted Department of the Interior others when purchasing).
agreement in this interpretation by quoting the Department as fmding that Arm I S length
s legal

1 The Solicitor s office is currently preparing a memorandum addressing BLM'

questions relative to the common carrier issue.
2 H- 16 at 2. 3 H- ll
at 2.

4 H- 6 5 H- 2

at 10.

at 62. H- 5 at 25- 27.

H- 7

at 7. H-8 at 20. H- 9

at 18.

RBO057

Oil Pipeline Rights-of- Way

And Royalty Valuation of Oil In California

Page 3

purchases and exchanges

satisfy the

MLA requirement

of

purchasing without

discrimination. "6 However, the same correspondence also stated As to pipelines refusing "7 The to transport oil of another owner, no specific occurrence has been identified. written refusals to transport oil of another owner which surfaced in the LB- II litigation
appear to provide basis for reconsideration.

Although the BLM has not received any documented complaints , correspondence between independent producers and integrated . oil companies concerning requests for common carriage through pipelines holding rights-of-way pursuant to the MLA is consistently denied. The pipeline companies conSistently and unequivocally state that the pipelines are 10 Indeed , the companies themselves private facilities which transport only their own oil. have stated that " Getty and Texaco have always operated its line privately and have never "11 carried oil for others for compensation.

Separately, and independently of the common carrier issue, the MMS has unsuccessfully
pursued the under-pricing / royalty valuation issue in California. The basis of prior allegations has peen limited to the inconsistency between (1) posted prices and prices

implied by refmery net-back analyses, and (2) gravity differentials in the California market more relative to the mid-continent market. The LB- II litigation appears to offer a common compelling argument by explaining the under-pricing through linkage to the
6 H- 2

Reference is to a memorandum from Assistant Secretary, Land and Minerals Management, to Secretary of the Interior (February 17, 1987); and letter from James M. Hughes, Deputy Assistant Secretary, Land and Minerals Management , to Representative Philip

at 64. H- 7

at 8.

R. Sharp (April 19 , 1990).

7 Letter from James M. Hughes, Deputy Assistant Secretary, Land and Minerals Management,
to Representative Philip R. Sharp (April 19, 1990).

S H- 12, H-

, and H- 15.

9 Burton J. Stanley in the Office of the Regional Solicitor , Pacific Southwest Region, in
commenting on 1991 IG rIDding of lack of compliance, explained the lack of complaints as

follows: " The problem arises because there is no state or federal agency capable of assuming regulatory jurisdiction over these pipeline companies. An independent oil producer is indeed unlikely to challenge the operation of a pipeline company in a proprietary manner if, in fact, he can obtain no meaningful relief even if he complained. " (Memorandum BLM. PS. 1308 dated January 14 , 1990 , contained in IG audit report no. 91- 503 dated February 1991.)
10 H- 15.

H- 14.

11 H- 2 at 50.

RBO058

Oil Pipeline Rights-of- Way

And Royalty Valuation of Oil In California

Page 4

carrier issue and other price , exchange , and purchasing practices of the integrated fmns in California.
From an economic perspective, a vertically integrated finD possessing strong market or

monopoly power cannot be presumed to behave as a common carrier by acting

as a

common purchaser; even if it stands ready to purchase all oil tendered at its offering price. That is because such a fmn can exercise its market power by offering only very low prices and / or exchanging only with large location differentials. This was precisely the concern that led to section 28 in the fIrst place.

That the effect of continuing to serve only as a common purchaser has resulted in field prices significantly below fair market value is freely admitted by the integrated companies ; and is attested to by the difference in their practices when dealing with each other. That is, records of integrated oil companies show that they believed that the prices paid for heavy crudes, in particular, were " less than true value " Y It is specifically this

12 The legislative history shows that pipeline companies were behaving as common purchasers for many years prior to the MLA. It this practice were acceptable to the Congress , there would have been no reason to include section 28 at all. Indeed, the nature of the problem then , as now, as common purchasers and , by not providing to common only is that pipeline' companies act
carriage, enforce their low field price objective.
13 B- 1
at 13-26.

14 B- 1

at 13- 15.

RBO059

Oil Pipeline Rights-of-Way And Royalty Valuation of Oil In California

Page

15 Court records show, under-pricing that led to the development of the 3- Cut exchange. for example, a Texaco official explained the need for the 3- Cut exchange as:
Generally speaking badger (3-Cut) exchanges are considered to be the most equitable arrangement for both parties and, in many instances, posted price

exchanges are very adverse economically to one of the parties to the exchange.
or gravity barrel

16 .

Similarly, on deposition, ARCO' s Crude Supply Manager characterized the 3Q. The

Cut:

question I am asking you is simply, do you agree that 3-cut

exchanges were utilized in California because crude oils were not priced THE WITNESS: If you are

according to their value in California?..
looking for a simple answer, yesY

a wash" , but produced It is further important to note that the 3-cut exchanges ' were not " The persistence of the very large imbalances, whether measured in barrels or dollars. exchanging parties to large imbalances necessitated periodic settlements between the IS Since such payments were the result of exchange sales, they reduce the imbalances. should be viewed as a part of the payment for the crude , even though such payment may

IS In simple terms , the 3-Cut exchange was a mechanism allowing crude to be exchanged a consistent with the crudes cut at a time, as if it were refmed product. This allowed for pricing This exchange basis (later giving way to gravity actual market value, rather than the posted price.
balancing exchanges) was used by the integrated oil companies when dealing among themselves; and therefore not since valuation at posted prices would severely disadvantage one of the parties, used only for dealing
acceptable. Posted prices (or location discounts from posted prices) were

with independent producers (and valuation of crude for Cut exchanges royalty purposes). Although it is easiest to understand the operation of the 3pipelines), such appear to involve involving pipeline transportation (and the majoritY did exchanges were used even when pipeline transportation was not involved, as when deliveries were s burden by tanker. Although it is claimed that 3-Cut exchanges were used only ease the refmerproviding of adding and subtracting exchanged crudes without protracted negotiations, as well as , it is important to recognize that 3- Cut a means for automatic maintenance of a quality balance exchanges were never used outside the California market.
16 B- 1 17 B- 1
at 14.

at 16.

IS B- 1

at 19.

RBO060

~I

Oil Pipeline Rights-of- Way

And Royalty Valuation of Oil In California

Page 6

have occurred outside the sale contract itself. To the extent that such payments were
related to the sale or exchange of crudes lifted from Federal leases (including those crudes exchanged for similar, non- Federal crudes before reaching their fmal destination), ,they are properly royalty bearing.
crudes, including quantitative analyses indicating that the amount of such under-pricing

There are also reported to be other indicia of significant under- pricing

of California

may have been as high as $2 - $4 per barrel. These include comparison of posted prices
with:

Comparable ANS crudes; Crudes sold at auction, including Federal auction sales; and Prices obtained from traders.

Program Contact:

Bob Berman, Office of Policy Analysis, 208- 3751.

Much of the economic analyses is currently under protective order. Its existence and results are reported based on discussions with the individual who conducted the analysis.
19

RBO061

California Common Carrier and Crude Valuation

Bureaus: BLM , MMS

States: . California

Issue:Should the Department actively pursue the " common carrier " and associated crude

oil product value issues in California?

Recommendation: The Department should establish an internal process and investigate
(1) whether holders of pipeline rights-of-way across Federal lands are operating such pipelines as common carriers; and (2) whether the system of crude oil trading (badger or 3-Cut exchanges), monopolistic common purchasing and/or failure to

Options: (1)

provide pipeline access led to an under-valuing of crude oil resulting in deficient royalty collections. In the event the investigation results in a positive fmding, the Department should (1) revoke rights-of-way of holders not providing common carriage (and not agreeing to provide such carriage); and (2) initiate action to collect royalties due.

Pursue both common carrier and royalty issues. Pro: Recognizes mutual interdependence of the issues. Could provide significant additional. revenues. Could benefit independent producers and refmers
enhancing competition.

in California, thus

Secretary would be perceived as taking positive actipn to resolve a longstanding problem , regardless of outcome. Action would be dispositive of Issue.

High likelihood of Congressional
perceived favorably.

hearings. Action underway would be

Consistent with State government actions. Action would be favored by independent oil prbducers and refmers.
Con:

Department has never challenged right-of-way holder on common carrier requirement of statute. No regulations have ever been promulgated to address the common carrier issue, or to defme a process for reviewing and revoking a right-of-way. Major oil companies could perceive Secretary as being anti-oil.

EXHIB~/
G:R.Mrv

RBO062

(2)

Pursue only the common carrier issue. Pro: Could benefit independent producers and refiners
enhancing competition.

in California, thus

Secretary would be perceived as taking positive action to resolve a 10r1g- , standing problem , regardless of outcome. Some action would be viewed favorably by Congress. Avoids potential embarrassment of second failure on royalty issue. Viewed by the State government as at least " half a loaf" since one objective
is to enhance the position of independents vis-a-vis

integrated firms.

Action would be favored by independent oil producers and refiners.
Con:

Fails to recognize mutual interdependence of the issues. Forgoes significant additional revenues. Action may not be dispositive of the issues.
Viewed by

State government as only " half

a loaf" since they are very

interested in the royalties.

Major oil companies could perceive Secretary as being anti-oil.
(3)

Pursue only the royalty issue. Pro: Could provide significant additional revenues. Some action would be viewed favorably by Congress. Viewed by State government as at least " half a loaf" since they, are very interested in the royalties , and have been requesting Department assistance

for some time.
No benefits to independent
California.
independents vis-a-vis

Con:

Failure to include common carrier issue would weaken royalty claim. Action would not be dispositive of the issue.
producers or refmers , or to competition in

May be viewed by the State government as only " half a loaf" since , one integrated objective is to enhance the position of
firms. Major oil companies could perceive Secretary as being anti-oil.
(4)

Take no action.

Pro:
1. ' Largely consistent

with Department position for last several years.

RBO063

Option would be favored by major oil companies. Avoids any potential embarrassment that might be associated with failure.
Con:

Forgoes significant additional revenue.
Congress would likely be critical of lack of action
provided by the State of California. State government would view non-action unfavorably.
given the materials

No benefits to independent
California.

producers or refmers, or to competition in

Initial
Review: An initial examination of testimony and evidence developed in connection with litigation (hereafter referred to as California v. Chevron, Mobil, the Long Beach II or LB- II litigation) appears to provide rea~on to suspect that certain rights-of-way holders may have improperly certified as to their common
the Texaco, et. al.

carrier status as requireq by Section 28 of the MLA. Moreover , the evidence further appears to provide reason to suspect that such failure to satisfy MLA common carrier obligations, in conjunction with other practices, has led to a significant under- pricing of crude oil in California. Some of this crude oil was extracted from Federal lands; and some of this was subject to Federal royalty payments. Accordingly, any under-pricing would result in valuation below fair market value and subsequent underpayment of royalty obligations. Much of the
evidence developed in the LB- II litigation has not been previously available to the Department.

Congressional

Interest: Congressman Philip Sharp has recently learned that some of this evidence
including evidence that may be the subject of a California Court protective order was inadvertently provided to the Department of Commerce as part of an
environmental assessment they were conducting concerning allowing the export of

California heavy crudes. Congressman Sharp has communicated his interest to Secretary Brown , requesting " copies of all records relating to the operation of oil pipelines in California obtained by the Department of Commerce in the past
months. "

Congressman Sharp has had a long-standing interest and concern in this area , and had inquired about Department know1edge such practices in the past. It is therefore , reasonable to assume that the Congressman may wish to discuss these

RBO064

matters with the Department of the Interior in the near future.

over Federal lands be operated as a common carrier. Although no definition of a common carrier is contained in either the statute or in Department regulations implementing the statute , a common law defmition (Black' s Law Dictionary) states " Common carriers are those that hold themselves out to undertake to carry persons or goods indifferently, or of all who choose to employ it." The legislative history revels that there was concern that the only pipelines were those operated by the integrated oil companies; and , accordingly, Congress required that any oil pipelines crossing lands subject to the MLA be operated as a common
carrier so that "

JJackground: Section 28 of the MLA requires that all pipelines granted rights-of-way

never reach. "

these (independent) producers reach the market which otherwise they could The legislative history specifically identifies pipelines owned by Associated
and voiced the concern that " They were not common carriers; they
anybody

Oil and Standard Oil ,

would not take
price
. "2

the oil of

unless that person sold it to

(Emphasis added. )

Section 28 of the

them at their own MLA was intended to solve that problem.

In 1935, Interior Secretary Ickes expressed additional concern, and supported an
amendment that

ment to "

to requiring common carriage , also included a requireaccept , convey, transport , and/or purchase without discrimination...
in addition

such proportionate amounts as the Secretary of the Interior may determine to be reasonable " , 3 expanding the scope of Section 28. That this 1935 amendment was intended to expand the scope of Section 28 is further demonstrated in Interior Secretary Whitaker s 1973 letter to Senator Jackson: " ... The amendment was enacted not to enforce the common carrier provision , but to prevent harm to the public lands and mineral resources of the United States....
Certain integrated oil companies, by contrast , have long asserted that the effect of

amendment was to limit the common carrier provision and allow the common carriage requirement to be fulfilled by non- discriminatory purchasing
the 1935

1 The Solicitor s office is currently preparing a memorandum addressing BLM' s legal

questions relative to the common carrier issue.
2 H- 16 at 2.
3 H- ll 4 H- 6
at 2.

at 10.

RBO065

(e. g. , the price it paid to others when purchasing).
Department of

5 They have further asserted

the Interior agreement

in this

interpretation by quoting the

Department as rIDding that" Ann I S length purchases and exchanges satisfy the MLA requirement of purchasing without discrimination. "6 However , the same

correspondence also stated As to pipelines refusing to transport oil of another "7 The written refusals to owner , no specific occurrence has been identified.

transport oil of another owner which surfaced in the LB- II

provide basis for reconsideration.
Although the BLM has not received any documented complaints , correspondence between independent producers and integrated oil companies concerning requests for common carriage through pipelines holding rights-of-way pursuant to the MLA is consistently denied. The pipeline companies consistently and unequivocally state 10 Indeed that the pipelines are private facilities which transport only their own oil. the companies themselves have stated that " Getty and Texaco have always operated

litigation

8 appear to

5 H- 2
6 H- 2

at 62. H-5 at 25-27.

H-7

at 7. H-8 at 20. H-9

at 18.

at 64. H- 7 at 8. Reference is to a memorandum from Assistant Secretary, Land and Minerals Management , to Secretary of the Interior (February 17 , 1987); and letter
from James M. Hughes, Deputy Assistant Secretary, Land and Minerals Management, to
Representative Philip R. Sharp (April 19 , 1990).

7 Letter from James M. Hughes, Deputy Assistant Secretary, Land and Minerals Management , to Representative Philip R. Sharp (April 19 , 1990).
8 H-

, H-

, and H- 15.

9 Burton J. Stanley in the Office of the Regional Solicitor , Pacific Southwest Region,

in commenting on 1991 IG rIDding of lack of compliance, explained the lack of complaints

as follows: " The problem arises because there is no state or federal agency capable of assuming regulatory jurisdiction over these pipeline companies. An independent oil

producer is indeed

unlikely to challenge the operation of a

pipeline company in a

proprietary manner if , in fact, he can obtain no meaningful relief even if he complained. (Memorandum BLM. PS. 1308 dated Jarmary 14 , 1990 , contained in IG audit report no. 91503 dated February 1991.)
10 H- 15. H- 14.

RBO066

its line privately and have never carried oil for others for compensation.
Separately, and independently
of the

"11

common carrier issue, the MMS has
/ royalty valuation issue in California.

unsuccessfully pursued the under- pricing

The basis of prior allegations has been limited to the inconsistency betWeen (1) posted prices and prices implied by refinery net- back analyses, and (2) gravity
differentials in the California market relative to the mid-continent market.

The LB-

II litigation appears to offer a more compelling argument by explaining the underpricing through linkage to the common carrier issue and other price , exchange, and purchasing practices of the integrated firms in California.

From an economic perspective, a vertically integrated firm possessing strong market or monopoly power cannot be presumed to behave as a common carrier acting as a common purchaser; even if it stands ready to purchase all oil tendered at its offering price. That is because such a firm can exercise its market power by offering only very low prices and / or exchanging. only with large location section 28 in the first differentials. This was precisely the concern that led to placeY
That the effect of continuing to serve only as a common purchaser has resulted in field prices significantly below fair market value is freely admitted by the integrated companies ; and is attested to by the difference in their practices when dealing with each other. That is , records of integrated oil companies show that they believed that the prices paid for heavy crudes , in particular , were " less than true value development of the 3- Cut It is specifically this under- pricing that led to the

11 H- 2 at 50.

12 The legislative history shows that pipeline companies were behaving as common

purchasers for many years prior to the MLA. It this pract~ce were acceptable to the
, the nature Congress , there would have been no reason to include section 28 at all. Indeed as common purchasers of the problem then , as now and , by not providing to common carriage , enforce their low field price objective.
, is that pipeline companies act only

13 B- 1 at 13- 26.

14 B- 1 at 13- 15.

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T

exchange. 15 Court records show , for example , a Texaco official explained the need for the 3- Cut exchange as:

Generally speaking badger (3- Cut) exchanges are considered to be the most equitable arrangement for both parties and, in many instances posted price or gravity barrel exchanges are very adverse

economically to one of the parties to the exchange.
Similarly, on deposition , ARCa' s Crude Supply Manager characterized the 3Q. The

Cut:

question I am asking you is simply, do you agree that 3-cut exchanges were utilized in California because crude oils were not HE WITNESS: If priced according to their value in California? you are looking for a simple answer , yes. 17
but

It is further important to note that the 3-cut exchanges were not " a wash" ,
produced very large imbalances , whether measured in barrels or dollars.

The

mechanism allowing crude to be allowed for pricing exchanged a cut at a time , as if it were refmed product. This This exchange consistent with the crudes actual market value , rather than the posted price. oil basis (later giving way to gravity balancing exchanges) was used by the integrated companies when dealing among ' themselves; since valuation at posted prices would
exchange was a

15 In simple terms, the 3- Cut

severely disadvantage one of the parties, and therefore not acceptable. Posted prices (or

location discounts from posted prices) were used only for dealing with independent producers (and valuation of crude for Cut royalty purposes). Although it is easiest to understand the operation of the 3to involve exchanges involving pipeline transportation (and the majority did appear
pipelines), such exchanges were used even when pipeline transportation was not involved, as when deliveries were by tanker. Although it is claimed that 3- Cut exchanges were used only ease the refmer s burden of adding and subtracting exchanged crudes without

, quality balance, it is important to recognize that 3- Cut exchanges were never used outside the California market.
16 B- 1 17 B- 1
at 14.

protracted negotiations, as well as providing a means for automatic maintenance of a

at 16.

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18 Since such payments were the result exchanging parties to reduce the imbalances. of exchange sales , they should be viewed as a part of the payment for the crude,

persistence of the large imbalances necessitated periodic settlements between the

even though such payment may have occurred outside the sale contract itself. the extent that such payments were related to the sale or exchange of crudes lifted from Federal leases (including those crudes exchanged for similar ' non- Federal crudes before reaching their fmal destination), they are properly royalty bearing.
There are also reported to be other indicia of significant under-pricing of California crudes, including quantitative analyses indicating that the amount of such underpricing may have been as high as $2 - $4 per barrel. These include comparison of
posted prices with:

Comparable ANS crudes; Crudes sold at auction , including Federal auction sales; and Prices obtained from traders.

18 B- 1
19

at 19.

Much of the economic analyses is currently under protective order. Its existence and

results are reported based on discussions with the individual who conducted the analysis.

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Footnote Codes

Index Description
Standard Oil of California: Appellees ' Reply Brief

City of Long Beach and State of California: Appellants Brief
Decision in Denver Petroleum v. Shell Oil

306 F. Supp 289

(1969) Antitrust action addressing common law notion of a common carrier
B:.4

Legislative history of Mineral Leasing Act

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Index Description
Cover letter dated 3/30/93

Excerpts from the parties ' 10 briefs developing the MLA arguments
(listed in chronological order):
Plaintiffs I submIssion: 6/29/92

Defendants ' consolidated position: 7/29/92

Plaintiff's reply submissIOn: 8/25/92
Plaintiffs ' pretrial brief: 12/15/92
Defendants I pretrial brief:

1/5/93

Plaintiffs ' reply to (H- 5)
Defendant Mobil' s

issues: 1/22/93

explanatory memorandum responding to

Court' s MLA questions: 2/9/93
Defendant Mobil' s

closing argument: 3/10/93

Defendants ' joint closing argument: 3/12/93
Phlintiffs ' reply closing argument: 3/19/93

Research memoranda (w/attachments) detailing the legislative history of the common carrier requirement and the amendment to same
1935

Broad , Schultz , Larson & Winberg Office Memorandum on Legislative history of 1935 Amendment to MLA Section 28.

Broad, Schultz, Larson & Winberg Office Memorandum on MLA legislative history & related refs for use in briefs

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Index Description
Correspondence and BLM records on Texaco s S. 386 right-ofway indicatmg that texaco had" abandoned" the portion of the pipeline which crossed government land as of June 29 1992. This corresponded to Defendants ' claim in (H-2/72)
that Texaco had abandoned the right-of-way. Yet Texaco

paid rental for the right-of-way on 6/2/92 through 1996.

Correspondence between Berry Petroleum and Mobile, and between Par Petroleum and Mobile and Texaco requesting access to their pipelines pursuant to MLA.
Berry request of 7/24/90 , BLM/SOL query of 10/11/90 , and Mobile responses to Berry (8/29/90) and BLM/SOL (10/12/90
and 10/15/90)

Par / Mobil Correspondence
Par / Texaco Correspondence

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