Interior Pledges 'Fresh Look' at Flawed Leases

A newly installed Interior Department official will take a "fresh look" at negotiations with oil companies over flawed deepwater oil and gas leases that allow royalty waivers even when energy prices are high, Interior Secretary Dirk Kempthorne said yesterday.

Stephen Allred, who was confirmed by the Senate last month as assistant secretary for lands and minerals management, will be reviewing the negotiations. He began work this week.

"I have directed Steve to take a fresh look at the issue and to review these negotiations, to consult with Congress and to reach a fair and equitable solution," Kempthorne told the American Petroleum Institute at its annual meeting in Washington.

The Minerals Management Service has been negotiating with several companies that hold flawed Gulf of Mexico leases issued in 1998 and 1999. The leases allow "royalty relief," but Interior accidentally left out price thresholds that terminate the incentive when oil prices reach $36 per barrel.

MMS Director Johnnie Burton, who had been acting assistant secretary before Allred's confirmation, said last month MMS would seek to ensure payment of royalties only on future production from these flawed leases. She said MMS would not try and recover what she said would have been $1.3 billion in royalties owed on past production (E&ENews PM, Sept. 21).

Potential losses from missing thresholds are estimated by the Government Accountability Office to be $10 billion, largely from production that has not yet occurred, although this depends on energy prices. Burton calls this figure speculative.

Allred did not say whether Interior would review plans only to seek royalties from future production on the flawed leases. Noting it was his first day on the job, Allred spoke only in general terms about his plans to review the lease issue.

The new assistant secretary said he will be speaking with companies that hold the leases as well as Congress to make sure he understands lawmakers' concerns. "I think a solution going forward here will involve both talking with Congress and the companies," Allred said.

'Reliable business partner'

House Government Reform Committee lawmakers investigating the royalty relief problem have criticized plans not to seek back royalties (E&ENews PM, Sept. 26).

In addition, the House-passed Interior Department spending bill would bar companies with leases from 1998 and 1999 from buying future offshore leases unless they agree to negotiate. The Interior spending bill that passed the Senate Appropriations Committee contains similar language, but it has not been considered on the Senate floor.

The Bush administration has opposed the idea of denying future leases unless companies renegotiate, saying it violates the idea of contract sanctity. Kempthorne did not address the issue directly but told the API meeting, "this administration believes the U.S. government should always remain a reliable business partner."

MMS has said that BP and Shell Oil Co. are close to agreements on the royalty issue. John Hofmeister, Shell's president, said yesterday the company is optimistic it will reach a settlement to pay future royalties but opposes paying past royalties, according to Reuters.

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

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