Feinstein Eyes Budget Process to Recoup Royalties

Sen. Dianne Feinstein (D-Calif.) wants to attach language to the Interior Departments's fiscal 2008 spending bill that would help the federal government recoup almost $10 billion in oil and natural gas lease royalties.

At issue are leases the Interior Department's Minerals Management Service issued in 1998 and 1999 to companies drilling for oil and gas deep beneath the Gulf of Mexico. The leases granted royalty "relief" to the companies as a way to encourage drilling in hard-to-reach domestic areas, so long as prices for the commodities remained low.

The leases -- 570 of which are still active -- did not include commodity price thresholds. The Interior Department says its inadvertent omission of such thresholds have cost taxpayers about $900 million amid rising oil and gas prices and record petroleum industry profits.

The omission could amount to another $9 billion in lost revenue over the next 25 years, Interior Department Assistant Secretary Stephen Allred told lawmakers yesterday during a hearing in the Senate Interior Appropriations Subcommittee.

The Interior Department has negotiated limited lease amendments with BP PLC, Royal Dutch Shell PLC and four other companies that hold the deepwater leases. But Allred conceded that more than 30 other lease-holders -- including Exxon Mobil Corp., Chevron Corp., Devon Energy Corp. and Anadarko Petroleum Corp. -- have resisted the government's efforts to renegotiate.

The payment tug-of-war crosses some sensitive legal territory, he said. The leases amount to binding contracts between the government and producers, so the Interior Department has limited room to force the firms to pay royalties without risking lawsuits.

"We have continuing discussions with the rest of the companies," Allred said. "I believe we will not make further progress until Congress has decided to define the role that it chooses to play in this issue."

Feinstein and other lawmakers have been trying to define that role for more than a year. The California Democrat and Sen. Judd Gregg (R-N.H.) offered an amendment to the Interior Department's fiscal 2007 appropriations bill that would have required companies that want to bid on new oil and natural gas drilling leases on the nation's outer continental shelf to renegotiate existing contracts in which the companies do not pay royalties.

The amendment went nowhere, as the Senate turned to a continuing resolution to fund the Interior Department rather than a standalone spending bill. But as the Interior subcommittee's new chairwoman, Feinstein yesterday vowed to add language to the agency's fiscal 2008 bill that would provide a "methodology to recover the funds."

Such a provision could offer a "limited extension" of the 1998-1999 leases in exchange for getting the companies to pay the government the backlog of royalties, Feinstein suggested. Yet she stopped short of calling for wording that would bar companies that do not agree to pay royalties from bidding on future offshore leases.

"I want to see a way to get the money and avoid a suit if possible," she said.

Feinstein declined to speculate what she and other lawmakers would do if some companies ultimately decide not to pay royalties on their leases.

"We'll skin that cat when we catch it; let's put it that way," she quipped.

Copyright 2007 E&E Daily. All Rights Reserved. Visit E&E Daily for a free trial.

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