Oil Companies Await Congressional Action on Royalties

WASHINGTON Feb.13, 2007 (AP)

Renegotiation of offshore oil and gas leases signed in 1998-1999 that omitted royalty price thresholds can't make further progress until the U.S. Congress decides how it will legislate the issue, an assistant interior department secretary told a Senate subcommittee on Tuesday.

Several key lawmakers have introduced legislation that would prohibit new leases to companies that don't renegotiate the '98-'99 leases on both future and past production. But DoI Assistant Secretary Stephen Allred told the Senate Appropriations Subcommittee on Interior and related Agencies that companies were waiting to see whether the government would pass such legislation before moving ahead with negotiations.

Allred also said such legislation could prompt legal challenges that could delay new leases, resulting in an estimated 1.6 billion barrels of oil equivalent in delayed output, costing an estimated $13 billion in delayed royalties.

Subcommittee Chairwoman Dianne Feinstein, D-Calif., one of the lawmakers who has supported the legislation, said, however, that she was prepared to consider different legislation that Allred said might encourage many of the companies that haven't renegotiated the leases to come back to the table. In particular, Congress could give the DoI the authority to extend the leases by three years, which the assistant secretary said "would be an incentive ... that would attract" the other companies.

Six companies, including BP (BP), Royal Dutch Shell (RDSA), ConocoPhillips (COP) and Marathon (MRO), have already negotiated to pay royalties on the leases for future production, but not on past output. The DoI estimates taxpayers have lost around $900 million from past production, while future output could be worth $9 billion in royalties.

ExxonMobil Corp. (XOM), Total (TOT), Chevron Corp. (CVX) and Anadarko Petroleum Corp. (APC) are among the dozens of companies that haven't yet renegotiated the leases, according to DoI data.

Feinstein said she would not drop the legislation that she had co-sponsored, but would be willing to include lease-extension incentives in the Interior Department's budget, should the companies indicate they would renegotiate the leases - including royalties on past production - under extension terms.

Such a resolution has already been proposed by Allred before the Senate Energy and Natural Resources Committee, and has the backing of Republican lawmakers such as Pete Dominici, R-N.M., who have said they are concerned about violation of contract sanctity should Congress try to force the companies to renegotiate.

Under lease-extension legislation, companies would have to forgo litigation rights if they agreed to the terms, Feinstein said.

"I want to see a way for us to get the money and avoid a lawsuit," she told journalists after the subcommittee hearing. "Our job is recovery of the royalties efficiently and effectively."

Asked what leverage the Administration had in the negotiations, Allred suggested that the government's position had been weak, saying: "Up to now, it has been the good will of the companies and public pressure."

He also said that because he believed an Inspector General's investigation of the '98-'99 royalty fiasco found the price-threshold omission was intentional and not a mistake, Congress couldn't legally contend a "mistake argument." Contract law allows that two parties can renegotiate contracts if a genuine mistake has been made. Some lawmakers disagree with Allred's interpretation of the Inspector General's report and believe the omission was a bureaucratic mistake.

The House Government Reform Committee said late last year that it had legal advice that because the DoI's Minerals Management Service may have exceeded its authority in issuing the leases, the Administration may have the legal right to seek recovery of the lost taxpayer revenues.

Separately, the Government Accountability Office has warned that a lawsuit filed by Kerr McGee, now part of Anadarko (APC), that challenges the authority of the government to apply price thresholds to any leases issued between 1996 and 2000 "if successful, would add an estimated $60 billion" in lost revenues" to the federal government.

Allred said that although the government's solicitors were confident in their defense of their right to collect royalties during the period, "we don't know what the court will decide." The two parties are currently negotiating a settlement, but if there is no resolution by March 1, the court will determine how the case proceeds.

Copyright (c) 2007 Dow Jones & Company, Inc.

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