Panel Asks for AG's Opinion on Royalties


The U.S. House Government Reform Committee said Thursday it was seeking an Attorney General's opinion on whether the government has the authority to recover billions of dollars in lost oil and gas royalties.

The committee wants to recover fees that should have been paid through contracts with oil and gas companies signed in 1998-1999, but royalty thresholds were omitted by the Minerals Management Service from the offshore leases deals.

The MMS has admitted the lease deals were incorrectly drafted, but said there is little that could be done to recover the lost royalties other than try to renegotiate the leases for future production with the companies, which include Chevron Corp. (CVX), Royal Dutch Shell PLC and ConocoPhillips. The MMS said to force the companies to pay for the lost royalties would violate the sanctity of the contracts signed with the government.

Earlier Thursday, House leader-elect Nancy Pelosi, D-Calif., said she was aiming to pass legislation in the first 100 hours of the next Congress that would require the oil and gas companies to pay the lost royalties. Several democrats have been pushing to force the companies to renegotiate or forfeit their ability to sign new leases. Such an amendment only marginally failed to be tacked on to the Offshore Continental Shelf drilling bill that passed Congress last week.

The Government Reform Committee said in its release, however, that according to legal advice from law firm Lowey Dannenberg Bemporad & Selinger, "MMS exceeded its authority in issuing the leases."

The legal analysis "concludes that the Administration has the legal recourse to seek recovery of the lost taxpayer revenues."

The Government Accountability Office estimated that the lost royalties could total more than $10 billion, but that was before a massive new field was discovered on one of the leases by Chevron.

The committee wants the Attorney General to verify the law firm's findings.

In September, MMS Director Johnnie Burton said her agency was near to reaching a deal with several of the largest lease owners on the royalty issue that would count as lost the royalties from past production but allow payments from future production.

Secretary of the Interior Dirk Kempthorne appointed a new deputy who said he would review the royalty cases, and would still consider trying to obtain all of the lost royalties.

Lawyer Stephen Lowey, however, said in his briefing to the committee, "The MMS is wrong. The U.S. Congress and American taxpayers do not have to live with this mistake."

"Solid grounds exist to overturn the decision of the MMS not to take any legal action to set aside or reform these defective contracts," Lowey said.

The law firm believes that because the MMS didn't have a congressional mandate to approve leases that omitted royalty thresholds, "what is clear is that the Attorney General can and should take action."

Lowey added that if the attorney general refused to take action, "then I urge you both to propose remedial legislation so that American taxpayers will not have to pay for this multi-billion-dollar mistake."

The MMS has come under a barrage of scathing criticism, not only from House panels investigating the royalty program, but also from the Department of Interior's Inspector General and several ex-MMS auditors suing several oil companies for underpayment of royalties. The Department of Justice is currently conducting a criminal investigation into the royalty program.

In mid-January, the DoI's inspector general is scheduled to publish a report on the thresholds in the 1998 and 1999 leases. At the end of January, the office is expected to issue a report on ex-auditor, whistleblower cases.

Copyright (c) 2006 Dow Jones & Company, Inc.

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