Kerr-McGee Considers Lawsuit on Deepwater Royalties

Kerr-McGee Corp. confirmed Tuesday that it will consider legal action against the U.S. Department of the Interior if the agency does not change its position on deep-water Gulf of Mexico royalty payments.

The announcement follows the Interior Department statement last week that Kerr-McGee and 40 other oil and natural gas producers improperly claimed more than $500 million in royalty relief in 2004.

A report in The New York Times on Tuesday said most of the companies agreed in January to make their royalty payments. Kerr-McGee, however, did not.

"We are discussing the matter with the Interior Department," Kerr-McGee spokesman John Christiansen told The Oklahoman on Tuesday. "We don't think the Interior Department has the power to cancel that royalty relief. If we are unable to resolve the situation, we intend to ask the federal courts to determine whether our position is correct."

A spokesman at the Interior Department could not be reached for comment.

The issue centers on the federal Deep Water Royalty Relief Act of 1995. The law allowed producers to drill for oil and natural gas without paying federal royalties in a move aimed at encouraging the costly and expensive drilling practices.

The original act enabled the relief only on commodity prices of less than $35 a barrel of oil and $4 per thousand cubic feet for natural gas. The Clinton Administration, however, waived the price caps for all leases awarded in 1998 and 1999.

Kerr-McGee claims its acreage was included in the exemption.

Industry analyst Fidel Gheit said he understood much of the motivation behind the law.

"The government was doing nothing with this land," said Gheit, an analyst with Fahnestock & Co. in New York. "We might as well have somebody get use of it. The land in itself is not really a free ticket to make profit. The companies will have to invest huge sums of money. Some of the areas have difficult geology. There is tremendous risk involved. Giving somebody the right to drill is like giving somebody the right to go gambling. It certainly doesn't guarantee huge profits."

While Gheit and others have questioned fighting for royalty relief at a time when the energy industry is enjoying record profits, Christiansen said now is precisely the most critical time for the government to encourage deep water drilling.

"The Deep Water Royalty Relief Act was intended to reduce our country's dependence on foreign oil," Christiansen said. "I think that is at the heart of a lot of the debate today."

Copyright (c) 2006, The Daily Oklahoman Distributed by Knight Ridder/Tribune Business News.