U.S. Official Estimates $31B At Stake in Kerr-McGee Case

A U.S. Interior Department official said Tuesday that the government could lose out on as much as $31 billion of royalty payments for leases issued in the late 1990s unless a court decision that rejected the government's right to the payments is reversed.

The warning from Assistant Secretary Stephen Allred came at a hearing aimed at keeping visibility on disputed royalty payments for deepwater drilling. Sen. Dianne Feinstein, D-Calif., has been pressing oil companies to make the payments, and promised to try again with legislation that would ban oil companies from participating in sales of new leases unless they pay royalties on a set of leases issued in 1998 and 1999.

"I intend to persevere," said Feinstein, who the chairwoman of a Senate Appropriations subcommittee. "This is one of the largest sources of revenue for the federal government at a time when all these programs are really stressed for dollars."

But the Interior Department official said that the U.S. is essentially in a holding pattern until the court case is finally resolved.

"We ought to be able to do something about this," Allred said. "As typically happens when we get in a court fight there's not much you can do until the court makes a decision."

Last year, the Minerals Management Service collected some $11.4 billion on 29,000 oil and gas leases. But a dispute over a 1995 law intended to encourage drilling in the Gulf of Mexico is threatening the government's ability to collect on some payments.

Under that law, Congress exempted companies engaged in deepwater drilling from making royalty payments. The Interior Department has said that the exemption only applied when oil prices were low, and has tried to collect royalty payments on leases issued from 1996 through 2000, as prices jumped beyond the $34 price threshold.

But last year, a judge ruled against the U.S., saying that the government overstepped its bounds by trying to collect royalty payments. It marked a victory for Kerr-McGee, now part of by Anadarko Petroleum Corp. (APC), which brought the case, although the Interior Department has called for an appeal of the decision.

The Interior Department estimates that between $23 billion to $31 billion is at stake for leases awarded from 1996 through 2000. That reflects the loss of future royalty payments and past payments made by some companies which they may be entitled to recoup. It also includes some $6.6 billion to $9.1 billion at risk under leases awarded in 1998 and 1999, years when the government, some say accidentally, left price triggers out of contracts.

Six companies - including, BP PLC (BP), Royal Dutch Shell PLC (RDSA), ConocoPhillips (COP) and Marathon Oil Corp. (MRO) - already negotiated to pay royalties on the 1998-through-1999 leases for future production, but not on past output. Allred told Congress that other companies who hadn't agreed to make the payments for 1998 through 1999 leases likely wouldn't.

"While we have had at least preliminary discussions with all companies holding leases issued in 1998 - 1999, I do not believe that any additional lessees will agree to price thresholds until they see the outcome of the Kerr-McGee case," Allred told the committee.

Even so, he warned against hardball congressional tactics, saying that U.S. royalty revenue could be depressed if Congress tries to pressure oil and gas companies to make royalty payments as a condition of participating in lease sales.

Copyright (c) 2008 Dow Jones & Company, Inc.

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