Shell, BP Close on Royalty Deals -- MMS

The Interior Department has developed "proposed terms" for agreements to ensure royalty payments from industry for flawed late 1990s offshore leases that allow "royalty relief" for companies regardless of oil and gas prices, a top Interior official told a House panel today.

Deputy Secretary Lynn Scarlett told the House Government Reform Committee that Interior has met or scheduled meetings with about 10 companies that hold Gulf of Mexico leases from 1998 and 1999.

"As a result of our early discussions and, in preparation for follow-up meetings and further initial meetings with more lessees, we have developed proposed terms," Scarlett said in a statement submitted to the panel.

The testimony states that 55 companies own interests in leases that lack price thresholds. Interior's Minerals Management Service in June sent letters asking them to renegotiate and about 20 responded, Scarlett said.

There were 1,032 deep water leases issued during those two years. About 17 are currently producing and 27 leases have indications of discovery but are not yet producing, Scarlett said. Over 500 leases are active with no indications of discovery, while over 450 have been relinquished or expired.

The omission of price thresholds, which end royalty waivers when prices reach certain limits, may eventually cost the government $10 billion in lost royalties, according to the Government Accountability Office.

Companies including Royal-Dutch Shell Group, ChevronTexaco and BP are negotiating with the MMS on the issue. MMS Director Johnnie Burton indicated there have not been final agreements reached yet with companies based on the "standard" agreement the service has developed. "They are thinking about it," she said.

BP America President Robert Malone told a Senate panel earlier this week the company is close to reaching an agreement with MMS.

"Shell is ready to sign, BP is close behind," Burton said.

In response to committee questions, Scarlett said she could not say when the negotiations could be completed, noting industry is engaging in voluntary talks. The administration opposes efforts to force industry to negotiate, citing concerns about ensuring the reliability of federal contracts.

Negotiations between industry and MMS are occurring under heavy industry congressional pressure. Several bills would pressure companies to renegotiate, although none have yet become law.

House-passed Interior Department spending legislation includes a provision that would bar companies that hold 1998 and 1999 leases from buying new gulf leases unless they renegotiate the old contracts. Senate lawmakers included a similar provision in their Interior spending bill, but the bill has not passed the Senate to date.

Rep. Darrell Issa (R-Calif.) -- chairman of the subcommittee on energy and resources -- blasted the department for failing to take action earlier to address the problem. "They allowed the problem to fester and become a $10 billion plus wound," he said. His panel launched an investigation months ago into the missing thresholds.

Scarlett said MMS did not become aware of the missing price thresholds until 2000. And Burton said she did not become aware of the problem until 2006. She came to the agency in 2002.

Rep. Carolyn Maloney (D-N.Y.) said she hopes to seek a GAO inquiry into whether there is a "revolving door" between the oil and gas industry and MMS.

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

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