Shell CEO: Unclear How Much To Be Paid Under Royalty Deal

WASHINGTON Oct 2, 2006 (Dow Jones Newswires)

The head of Royal Dutch Shell PLC (RDSA) US operations John Hofmeister confirmed Monday his company was near to inking a deal with the federal government to re-negotiate 1998-1999 oil lease contracts, but said it was unclear how much Shell would pay in royalties.

Johnnie Burton, the head of the U.S. Minerals and Mining Service, or MMS, said last month her company was close to signing contracts with Shell and BP PLC (BP) to re-negotiate 1998-1999 offshore oil and gas leases, in which the MMS "mistakenly" omitted a clause requiring royalties to be paid to the U.S. government.

Speaking on the sidelines of an energy conference here, Hofmeister said lawyers for Shell and the MMS were in the process of doing a final check on the language of the agreement.

Although lawmakers are pushing for the MMS to get the oil companies to pay for royalties on past production, Burton said her agency was only going to negotiate for future production. She said the lost royalties only account for around $1.3 billion, while a Government Accountability Office report says royalties from future production should be worth around $8 billion.

Hofmeister said, however, that because the amount of future production is unclear, it was also uncertain how much the company would be paying the government under any re-negotiated contracts. "We don't know what will be produced," he said.

Asked if the he feared potential lawsuits that shareholders might bring against the company for renegotiating the contracts - a risk some lawmakers have warned of - Hofmeister said his company "had demonstrated that the royalty relief program has been a good program."

The issue - the subject of House investigations and oversight committee hearings - moved to the forefront again after Chevron Corp. (CVX) recently announced that its large new oil discovery in the Gulf was covered under leases signed at the time. Also, Department of Interior Inspector General Earl Devany last week gave an excoriating review of the department to the House Committee on Government Reform following his probe into how the royalty terms were omitted.

Burton said the lion's share of future production was on leases owned by Chevron.

The MMS director also said previously the contracts would be negotiated at a retroactive threshold price of around $36 to $38 a barrel that would have been set in 1998-99, above which companies would have to pay royalties if they agreed to re-negotiated contracts.

Copyright (c) 2006 Dow Jones & Company, Inc.

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