Biting the Feeding Hand
Category: Local...
Posted Wednesday, September 03, 2003 at 02:59 PM [GMT-6]

Midland County's lawsuit against most of the major oil and gas producers will likely become an emotional and polarizing event before its conclusion.

The lawsuit alleges fraud and conspiracy in the undervaluation of crude oil, which led to reduced asset valuations and ad valorem tax revenue for the county.

The major oil companies don't exactly have stellar reputations in this area. Several years ago, a couple of whistleblowers alerted the US government to the underreporting of market value for oil produced from federal- and Indian-owned lands, and most of the companies settled out-of-court for damages in the hundreds of millions of dollars. One of those whistleblowers happened to be a former co-worker. Last time I checked, he was cashing in to the tune of several million dollars... ample reward, I'm sure, for never being able to work in his chosen industry again. (Just a hunch.)

But this current action is, in my estimation, quite a bit more complicated. The computation of property values for ad valorem tax purposes relies on the estimation of the present value of the asset. For an oil-producing property, that's the future net cash flow of the property over its entire life, discounted back to the present by some predicted interest rate. It's not a complicated computation, but it is an imprecise one, and it relies on many factors in addition to the actual price of the product received in a prior year. So, it will be interesting to see how the plaintiffs make their case that they've lost "millions of dollars" in tax revenue... even if they are able to prove some monkey-business in the reporting of product sales prices by the companies.

That in itself is going to be tough. Sorta makes me wonder if there's a whistleblower involved here, too, someone with some inside local information and insight. Heaven knows that there are plenty of unemployed and underemployed oil and gas accountants around here, thanks to the downsizing and outsourcing strategies of the majors*.

From a macro perspective, this lawsuit smacks of shortsightedness. All but two of the named defendants have either shuttered or downsized their offices in Midland (or Odessa...Ector County is a co-plaintiff), moving hundreds of high-paying jobs and employees to Houston or Dallas or Oklahoma. The two that are left — ChevronTexaco and Oxy Permian — seem committed to Midland and the Permian Basin and have large professional staffs here, but they both also have large Houston offices.

I can't help thinking that it would have been smarter for our county officials to omit those two companies from the lawsuit, at least until they find out how it turns out with the others. If it can be proven that the suit has legitimacy, they could be added (or better yet, engaged in some cost-saving settlement talks); if the court throws out the case, the companies haven't had to waste significant time and money in defending themselves. Why give the remaining majors yet another excuse to cut and run?

[In the interest of full disclosure — while I'm not a journalist, I think it's ethically proper to let you know where my interests reside — my wife is an employee of one of those two companies.]

*If you're not familiar with the term "major" oil company, it's a commonly-used term for those companies whose lines of business are vertically-integrated...that is, they not only explore for, drill for and produce oil and gas, but also transport, refine and/or market the associated products (like gasoline). Oil and gas companies which don't engage in any of the three latter businesses are often referred to as "independents."