Some Companies Willing to Pay Higher Royalties on Flawed Leases -- MMS

About a dozen Gulf of Mexico petroleum producers are offering to pay higher royalties to address federal officials' failure to include limits on royalty waivers included in late 1990s leases, the head of the Minerals Management Service said yesterday at an industry conference in Houston.

The agency's chief, R.M. "Johnnie" Burton, said the absence of so-called price thresholds in 1998 and 1999 leases has cost the government $1.5 billion to date. The Government Accountability Office has estimated the losses could eventually total $10 billion.

"We haven't signed up anybody yet, but I think we're close," Burton said, in remarks reported by Reuters. "We're working with them."

Officials with Dominion Exploration & Production Inc. and Newfield Exploration, attending the same event, confirmed the discussions, Reuters reported. Burton said that as many as two dozen companies have underpaid royalties, the news service reported.

Burton's comments are a further sign that oil companies are willing to negotiate on the issue in the face of heavy pressure from lawmakers. Major companies including Royal Dutch/Shell Group and ConocoPhillips have said they will work with MMS.

House and Senate lawmakers have in recent months offered several plans to pressure companies into renegotiating the contracts, although none have become law.

House-passed offshore drilling legislation -- the "Deep Ocean Energy Resources Act" -- would include new fees on production from companies who do not renegotiate their contracts, while a separate House-passed appropriations measure would block companies from obtaining new leases if they do not renegotiate.

The Senate is debating a similar approach through the appropriations process. "I am sure it contributed," a House aide who has worked in the issue said this morning, also noting that high oil and gas prices have increased pressure.

Burton said she hopes for a solution before Congress returns from its summer recess next month, calling Capitol Hill efforts punitive.

"I keep hoping that if enough companies come in and agree to the threshold Congress might not put any damaging language in their appropriations bill, which it looks like that's where they're going with it. ... But it needs to happen fast," she said, according to Reuters. The administration also opposes the fees in the DOER act.

But it is not clear if the industry and MMS efforts can mollify congressional critics of the royalty waivers.

One Democratic aide this morning said it will be crucial to ensure that companies who have not yet begun producing from their 1998 and 1999 leases do not receive royalty relief when prices are high.

"The important issue is how many of the companies holding leases that have not begun producing yet are willing to renegotiate," the aide said. Dozens of companies have leases from those two years.

'Very uncertain period' on Hill

Bill Whitsitt, president of the Domestic Petroleum Council, said today that companies want to discuss the issue directly with MMS, in part, because they oppose pending congressional plans. Industry has for months said that efforts to address the missing price thresholds must not violate the notion of "contract sanctity."

"Clearly it is a recognition of the fact that a number of folks in Congress are proposing legislation that is very troublesome," Whitsitt said. "I would surmise that a number of folks are looking at this whole landscape and saying 'let's go in and talk with MMS about what it is they have in mind.'"

Companies, including their senior executives, believe "we are in a very uncertain period in terms of what Congress might do," Whitsitt added.

MMS has called the omission of the price thresholds in 1998 and 1999 leases an accident. Burton said yesterday it was a result of miscommunication between the MMS staff who drafted rules on the issue in Virginia, and the New Orleans office that handled the lease sales, Reuters reported.

Officials in New Orleans thought the price thresholds were contained in regulations and hence did not need to be inserted into leases, but the rule was not implemented because it was deemed to be inflexible, Burton said, according to the Reuters account.

The royalty relief stems from 1995 legislation that created incentives for costly deepwater gulf projects at a time when energy prices were much lower.

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Company: Minerals Management Service (MMS) more info
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