Interior Deals on Flawed Leases Fail to Quell Critics

Deals inked yesterday between the Interior Department and five petroleum companies on payment of royalties from flawed Gulf of Mexico leases won't blunt Democratic plans to address the "royalty relief" issue more aggressively when the new Congress convenes.

"This in no way affects our plans to move forward," a House Democratic leadership aide said today, noting that agreements have been reached with only a fraction of the companies holding the leases.

The department announced agreements with BP, ConocoPhillips, Marathon Oil Company, Shell, and Walter Oil and Gas Corp. The companies hold leases issued in 1998 and 1999 that allow "royalty relief" but do not contain clauses that suspend the incentive when petroleum prices surpass certain limits.

Stephen Allred, Interior's assistant secretary for land and minerals management, issued a statement yesterday hailing the department's "progress ... on resolving this issue."

"While the omitted price thresholds did not occur during this Administration," Allred said, "we are continuing to work to resolve this difficult problem in a manner that ensures the American taxpayer receives a fair rate of return."

The deals set price thresholds, in 2005 dollars, of $34.73 per barrel of oil and $4.34 per thousand cubic feet of natural gas, Interior's Minerals Management Service said. The agreements address production that occurs on or after Oct. 1, 2006. MMS's decision not to seek royalties from past production on these leases has generated heavy criticism from lawmakers.

But Interior said yesterday that "few leases produced oil and gas before that date." And MMS spokesman said today royalties from past production total around $900 million -- lower than the $1.3 billion figure cited by MMS Director Johnnie Burton in September and the $2 billion Government Accountability Office estimate cited by House Government Reform Committee members.

Total potential losses from the missing price thresholds in all these leases, including future production, has been estimated by GAO to be $10 billion.

Over 50 companies hold leases that lack the price thresholds. The five companies that have reached agreements account together for around 131, or 23 percent, of 570 disputed leases that are active, an MMS spokesman said.

The price thresholds were left out of leases signed during the Clinton administration, but the Bush administration has come under fire for allowing the issue to remain under the radar for years before acting.

The administration pledged to work for more deals. "We appreciate and commend these companies for voluntarily signing these lease amendments. We encourage the remaining companies that have not yet agreed to sign to join us in resolving this issue," Interior said.

The Bush administration has said lease negotiations should be strictly voluntary and that requiring companies to change their lease terms would jeopardize the federal government's commitment to the "sanctity" of contracts.

Industry opposes legislation that would effectively force companies to renegotiate the leases, saying it would raise questions about the United States' commitment to stable contracts and could discourage investment.

Red Cavaney, president of the American Petroleum Institute, told reporters today that voluntary talks should continue. "We need to spend time letting the process work," he said, citing the new agreements with five companies. "It is already working."

Pressure from Capitol Hill

But Interior's voluntary negotiating stance came under attack from a bipartisan group of House members yesterday who contend it is needlessly weak. The Democratic and Republican leaders of the House Government Reform Committee yesterday asked Attorney General Alberto Gonzalez to review Interior's legal right to compel payment (E&ENews PM, Dec. 14)

And yesterday's deals did not stop plans for legislative efforts next year. "It is too little, too late. The deals don't go far enough and in the new Congress there will be a renewed effort to fight for what is rightfully taxpayers' revenues from drilling on public lands," said Rep. Ed Markey (D-Mass.) in a statement provided this morning.

Markey and Rep. Maurice Hinchey (D-N.Y.) have offered legislation that would bar companies from being awarded any new gulf leases unless they agree to price thresholds in the 1998-1999 contracts.

The incoming Democratic House leadership has vowed to make repeal of several oil industry incentives a top priority. House Speaker-elect Nancy Pelosi (D-Calif.) described yesterday legislation that would force producers to essentially pay a fee on production for which royalties are not being paid when oil prices exceed about $40 per barrel (E&ENews PM, Dec. 14).

Several major Gulf of Mexico producers have not signed deals with Interior, including Chevron Corp. The company told Bloomberg news service in a statement that it has met several times with the agency and "put a reasonable offer on the table."

"We are committed to continuing to work towards a resolution of this issue," the company said.

MMS criminal referrals

Markey's office also said Interior Inspector General Earl Devaney revealed in a briefing with staff that he has made two criminal referrals to the Justice Department related to MMS employees. Markey said the referrals "tangentially involve royalties" but provided no further details.

Tina Kreisher, an Interior spokesperson, said the referrals stem from personnel issues Interior had asked the IG to investigate. She said one of the referrals addresses the "royalty-in-kind" program, in which producers provide Interior with oil and gas directly as an alternative to making royalty payments.

The other addresses MMS's offshore management but is unrelated to royalties, Kreisher said. "To our knowledge the people we have asked for help from the IG to look into were not involved in royalties," she said today.

A recent inspector general report found problems with MMS's system for ensuring companies are paying the full amount of money in royalties they owe for oil and gas production on public lands and waters. The agency does too little to verify company-reported information, the report said (Greenwire, Dec. 7).

And the IG is also preparing a report on the missing price thresholds in the 1998 and 1999 leases that are allowing companies to avoid royalties entirely. The criminal referrals are unrelated to these two inquiries, Kreisher said.

Markey, in a statement yesterday, nonetheless called the referrals "proof positive that the conflicts of interest between Bush administration regulators and those they regulate in the oil and gas industry are costing the American taxpayers billions in royalty revenues."

Devaney's office did not return a call seeking comment this morning.

Reporter Allison Freeman Winter contributed to this report.

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

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