GAO Study Predicts Up to $80B in Lost Royalties

Companies that drill in the Gulf of Mexico will cost the federal government at least $20 billion over the next 25 years, according to the draft of a Government Accountability Office report obtained yesterday.

The draft GAO study found that $80 billion in revenue could be lost over the same period if oil and gas companies win a new lawsuit that seeks a further reduction in their royalty payments.

The draft report, delivered in a private briefing late Monday to House and Senate staff members, is the first attempt by a government agency to calculate the soaring costs of a 10-year-old program that was created to encourage deepwater drilling when energy prices were low.

The Kerr-McGee Corp., which produces oil and gas in the Gulf, has filed a federal lawsuit challenging the Interior Department's right to collect royalty payments on certain deepwater leases. The lawsuit attacks Interior's right to suspend a subsidy called "royalty relief" that was offered to producers under the 1995 Deep Water Royalty Relief Act. The act aims at spurring development of high-risk, high-cost deepwater gulf projects at a time when energy prices were much lower.

The company says Interior does not have the right to suspend the "royalty relief" when energy prices reach certain "price thresholds." The lawsuit alleges that Kerr-McGee has leases purchased in the 1990s and 2000 under the act that contain "price thresholds" that cannot be legally imposed under the 1995 law (Greenwire, March 21).

On the larger question of the overall cost of royalty relief, the GAO noted that the Interior Department, which runs the offshore leasing program, had never carried out a "robust" cost-benefit analysis of the original program or of incentives added in the last five years. In what the GAO said was a preliminary analysis, it estimated that the government would lose about $20 billion as a result of leases already signed. But that loss would quadruple to $80 billion if the suit by energy companies succeeds (Edmund L. Andrews, New York Times, March 29).—LK

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