Senate Approves Limited 'Royalty Relief' Amendment

The Senate approved Sen. Jon Kyl's (R-Ariz.) amendment last night to pending fiscal 2007 defense spending legislation aimed at reforming the federal "royalty relief" program for Gulf of Mexico oil and gas producers.

Under the royalty relief program, the Interior Department waives royalties on some offshore production as a way to encourage costly deep water projects. The amendment, passed by voice vote, would require Interior to impose the price thresholds on future leases that allow royalty relief, rather than leaving it up to the department's discretion. Price thresholds suspend royalty waivers when oil and gas prices reach certain limits, as a means to make sure industry does not benefit from the subsidies when energy prices are high.

The amendment would also "reaffirm" Interior's authority to have included price thresholds in leases issued between 1996 and 2000 pursuant to the Deep Water Royalty Relief Act of 1995. The legality of the thresholds has come under challenge by the Kerr-McGee Corp., though Interior and the company recently agreed to mediation in the company's lawsuit against the department.

The amendment approved yesterday did not include a provision aimed at pressuring offshore producers to renegotiate late 1990s leases that do not include price thresholds. Interior did not include thresholds in scores of deep water leases in 1998 and 1999, an omission Interior calls a mistake. The omission could eventually cost the Treasury an estimated $10 billion in lost royalties.

An earlier version of the amendment Kyl had offered with Sen. Ron Wyden (D-Ore.) would have denied future offshore leases to companies that did not agree to inclusion of price thresholds in their 1998 and 1999 leases. The earlier version was turned aside on a point-of-order challenge Wednesday (E&E Daily, Aug. 3).

Some companies have already indicated they are willing to renegotiate the leases as congressional pressure has mounted in recent months.

The defense spending bill is the pending order of business when the Senate returns from its August break on Sept. 5.

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