Royalty Language Clears Senate as Part of Defense Bill

The Senate approved a $469.7 billion fiscal 2007 defense spending bill yesterday that includes language meant to reform the controversial "royalty relief" program for deep water Gulf of Mexico oil and gas producers.

Under the royalty relief program, the Interior Department agrees to waive royalties on some offshore production to encourage costly deep water projects. An amendment by Sen. Jon Kyl (R-Ariz.) approved before the August recess would require Interior to impose 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 language in the defense bill 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 legal challenge.

House-passed defense spending legislation does not contain the Kyl provision.

Offshore deep water leases in 1998 and 1999 do not contain price thresholds, and the Kyl amendment does not include language that would pressure companies to renegotiate those contracts. Other congressional efforts in both chambers are aimed at essentially forcing renegotiation, though none have become law. Several companies have begun negotiating with Interior amid heavy pressure from Congress (Greenwire, Aug. 30).

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