Kerr-McGee Sues Interior Over 'Royalty Relief'

The Kerr-McGee Corp., which produces oil and gas in the Gulf of Mexico, has filed a federal lawsuit challenging the Interior Department's right to collect royalty payments on certain deepwater leases.

The lawsuit attacks Interior's right to suspend a subsidy called "royalty relief" that was offered to producers under the 1995 Deep Water Royalty Relief Act. The act was aimed at spurring development of high-risk, high-cost deepwater gulf projects at a time when energy prices were much lower.

The company says Interior does not have the right to suspend the "royalty relief" when energy prices reach certain "price thresholds." The lawsuit alleges that Kerr-McGee has leases purchased in the 1990s under the act that contain "price thresholds" the company contends cannot be legally imposed under the 1995 law.

Most of these leases have begun producing over the last several years, although production has not begun on several of them. The lawsuit alleges that the Interior early this year directed the company to begin paying royalties "on production from certain mandatory relief leases before Kerr-McGee has produced the minimum volumes from those leases that Congress guaranteed would be royalty free."

The company is opposing the Jan. 6 order from Land and Minerals Management's acting Assistant Secretary Johnnie Burton that claims price thresholds for natural gas were exceeded in 2003 and 2004, and the threshold for oil was exceeded in 2004, the March 17 lawsuit states.

The lawsuit, filed in the U.S. District Court for the Western District of Louisiana, calls the Burton order unlawful and asks for injunction against it, and a declaration that the company is entitled to royalty relief "without regard to the prices of oil or gas."

A spokesman for Interior's Minerals Management Service said it would be "inappropriate" to comment on the lawsuit, citing the Justice Department's purview over the issue.

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