House Dems Want Get-Tough Action with Royalty-Free Leaseholders

A group of House Democrats, led by Reps. Edward Markey of Massachusetts and Maurice Hinchey of New York, has called on Interior Secretary Dirk Kempthorne to support a measure that would foreclose producers from bidding on future oil and natural gas leases if they refuse to renegotiate their royalty-free lease contracts.

The proposal was included in the House version of the Interior appropriations bill for fiscal year 2007, which was passed in May. The Senate has adopted a similar measure as well.

The Bush administration is opposed to the House measure, which was sponsored by Markey and Hinchey, because it believes it would violate the sanctity of the lease contracts, and could throw into question the reliability of the federal government in future contract negotiations.

In their letter to Kempthorne Thursday, Markey and Hinchey said the House-approved measure would give Interior "more leverage" in its effort to renegotiate the approximately 700 royalty-free contracts in the deepwater Gulf of Mexico that still are active. These leases, which were issued in 1998 and 1999, contained no price thresholds that would automatically cut off royalty relief to producers when oil and gas prices rose to high levels. As a result, the holders of these leases have been able to escape paying royalties on their production from these leases up to a specific volume limit.

The House lawmakers stressed the need for an urgent solution in the wake of the potentially large oil and gas discovery announced by Chevron Corp., Devon Energy and Statoil ASA of Norway earlier this month (see Daily GPI, Sept. 6). Two of the mineral leases involved in the discovery were negotiated in 1998, which means a chunk of the production could be royalty-free.

"We offered our amendment to create a solution to a problem that was begging for one. The recent discovery of the Jack Field [Chevron discovery in the Gulf] only underscores the need for our amendment to prevail this year," said Markey and Hinchey. "It is our hope that you will agree with the House and Senate decisions and will support a real solution that will provide a strong incentive for all [producers] holding these leases to renegotiate."

A number of producers with royalty-free leases already have contacted Interior's Minerals Management Service (MMS) about renegotiating their contracts. MMS Director Johnnie Burton said both Shell and BP were close to signing new agreements.

Markey and Hinchey noted that the testimony of Interior Inspector General Earl Devaney, who painted a "very bleak picture of how the Interior Department operates" during a House subcommittee hearing, further underscores the need for the House proposal. "Stopping short of labeling activities at the department as criminal, Devaney made it clear that Interior Department officials have consistently engaged in unethical and inappropriate behavior that has favored the interests of outside oil and gas companies...We realize that you have inherited these problems and we truly hope you take the steps to remedy them quickly."

Other House Democrats signing the letter were Nick Rahall of West Virginia, Carolyn Maloney of New York, George Miller of California, Raul Grijalva of Arizona, Bernard Sanders of Vermont, Jim Morgan of Virginia and Rosa DeLauro of Connecticut.

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