Pombo's Plan Would Pressure Industry to Renegotiate Leases

The House Resources Committee will consider a new offshore-drilling plan this week that aims to pressure industry into renegotiating late 1990s Gulf of Mexico oil and gas leases that allow producers to avoid paying royalties regardless of energy prices.

The plan is included in legislation by Chairman Richard Pombo (R-Calif.) set for a markup tomorrow. The measure, which has brought together a range of lawmakers including Reps. John Peterson (R-Pa.) and Adam Putnam (R-Fla.), seeks to boost offshore production by allowing new oil and gas leasing in areas where it is now banned.

One provision is designed to fix an Interior Department mistake that allowed deep water Gulf of Mexico leases in 1998 and 1999 to be issued without "price thresholds" that end royalty incentives when prices reach certain limits. The omission could eventually cost the government $10 billion, according to congressional auditors.

Pombo's bill requires Interior to accept leaseholders' requests to allow inclusion of price thresholds in the leases. The renegotiation process is voluntary for industry, but the bill provides a reason to come to the table. That is because it also requires Interior to write rules assessing a new "conservation of resources fee" on production from current and new leases in waters greater than 200 meters that do not include price thresholds.

The fee for producing leases is $9 per barrel of oil and $1.25 per million British thermal units of natural gas. The measure also sets a fee for leases where production has not commenced, which is based on the acreage of the lease.

Brian Kennedy, an aide to Pombo, said the provision is aimed at addressing Interior's failure in the 1990s to include thresholds, while also preserving the integrity of the lease contract process because industry is not being forced to revisit old agreements.

"It corrects the Clinton administration's errors in an equitable fashion for the taxpayer and the companies," Kennedy said. He added that payment of the fees would be more costly to industry than agreeing to inclusion of the price thresholds.

A spokesman for the American Petroleum Institute said the plan is under review and added that API members may not be of "one mind" on the issue. The language would set the price thresholds in 2006 dollars of $40.50 per barrel of oil and $6.75 per million Btu of natural gas.

"It further mandates the inclusion of price thresholds in all future leases, so as to avoid this costly mistake from happening again," a committee statement notes.

The so-called royalty relief program stems from 1995 legislation designed to encourage costly deepwater Gulf of Mexico production at a time when energy prices were lower.

A viable drilling deal?

The bill Pombo floated yesterday seeks to unite opposed factions of the offshore drilling debate, but its ability to pass the full House remains unclear. The House leadership hopes to bring new energy measures to the floor in coming weeks.

The plan has Putnam's support, for one. "I am pleased that the process is moving forward, and that under this legislation Florida will have permanent control of its coastline to 100 miles," he said in a prepared statement yesterday afternoon. Drilling advocates are hopeful Putnam can bring a significant bloc of the Florida GOP delegation with him.

Florida lawmakers, including Putnam, almost unanimously oppose offshore leasing. But they are divided over whether to cut a deal with Pombo in the face of increasing pressures to expand domestic energy production.

Florida Rep. Jim Davis (D) quickly attacked the measure, claiming it gives up too much ground.

"Chairman Pombo's proposal is an enormous sacrifice for Floridians. One hundred miles of protection offers nothing more than a false sense of security to the countless Floridians whose livelihoods depend on our beautiful beaches," Davis said in a prepared statement yesterday.

The measure has also won the endorsement of Peterson, who had been pressing a more sweeping plan to lift all bans on natural gas drilling to within 20 miles of state shores. "From the outset of this discussion, we have proceeded with one goal in mind: create circumstances that would allow us to access as much gas as we can get, as quickly as we can get it," said Peterson spokesman Chris Tucker. "This is a bill that appears, at least on a conceptual level, to accomplish that mandate."

The bill creates a hybrid approach between measures backed by Peterson and Reps. Bobby Jindal (R-La.) and Charlie Melancon (D-La.), and others.

It lifts all bans on oil and gas production in federal waters beyond 100 miles from state coasts. It would also allow oil and gas, or gas-only, leasing between 50 and 100 miles from shore unless states petition to keep bans in place. They would have one year to petition to keep gas drilling bans in place and three years to petition to block oil drilling.

Less than 50 miles from shore, drilling is banned unless states seek to "opt-out" of the restrictions. "It seems like a good compromise," said Jeff Eshelman, a spokesman for the Independent Petroleum Association of America.

It also creates an aggressive plan to share large amounts of production revenues from federal waters with coastal states, akin to the aggressive plan Jindal has offered that his office said would steer tens of billions of dollars over decades to Louisiana alone.

The head of the Bush administration's Minerals Management Service told the Resources Committee last week that the administration opposes sharing large amounts of revenues from areas where production is already authorized, such as coastal Louisiana, citing the effects to the deficit.

Rep. Lois Capps (D-Calif.), who opposes coastal leasing, said yesterday that the revenue-sharing provisions will "add tens of billions of dollars to the national deficit."

But Kennedy defended the plan. "It is a direct hit to the Treasury in the beginning," he said, adding that eventually it helps stem the revenue loss with money from areas that would be newly opened to leasing. "The more you get new production, the more revenues you have and it starts to balance itself out," he said.

Current leasing bans cover both coasts, much of the eastern Gulf of Mexico and part of Alaska.

Copyright 2006 E&E Daily. All Rights Reserved. Visit E&E Publishing for a free trial.

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