White House Attacks House Offshore Royalty Bill

The White House yesterday came out against several tax and royalty provisions in House energy legislation expected to pass today, warning that the measure as written could delay future oil and natural gas lease sales.

The official "Statement of Administration Policy" was released ahead of today's House vote on energy legislation that would repeal several production incentives and funnel the estimated $14 billion in new revenues into alternative energy.

One provision of the bill would make the oil and gas sector ineligible for deductions on manufacturing income that were included in 2004 tax legislation, a provision expected to raise in excess of $7 billion over 10 years.

The White House attacked this section. "Industries should be taxed on a level playing field, and that field should be leveled by lowering rates, not by raising them," the SAP says, calling it "inappropriate to single out this industry from all others for punitive tax treatment."

Also drawing criticism: provisions that would pressure Gulf of Mexico producers to renegotiate flawed 1998 and 1999 leases. Under the bill, companies must either accept "price thresholds" that suspend royalty waivers when prices are high or pay new "conservation of resources" fees on production from these leases. Otherwise they would be unable to buy new gulf leases.

The SAP says this provision "could result in the unforeseen consequence of significantly delaying future lease sales while the provision is litigated and, even if a challenge is ultimately held to be unfounded, a court might enjoin sales resulting in significant revenue decreases to the Treasury and disruption of energy supplies to our Nation."

The Bush administration instead supports voluntary negotiations with companies that hold the 1998 and 1999 Clinton-era leases that were mistakenly drafted without the price triggers, an error that left uncorrected could eventually cost the Treasury an estimated $10 billion in lost revenues.

The Interior Department has reached agreements with five companies to include the thresholds -- including three oil majors -- but leases held by dozens of other firms remain unresolved. The SAP notes the administration is "opposed to statutorily forced renegotiations of contracts [but] is investigating options to address the problem and supports voluntary amendments to the Clinton-era 1998/99 offshore leases."

Supporters of the provisions say Interior has done far too little to address the leases since the problem was uncovered. They believe the reliance on voluntary talks with companies is needlessly weak.

The administration also opposes a section that allows Interior to waive royalties for offshore Alaska production.

The SAP further attacks the creation of a new "strategic energy efficiency and renewables reserve" to spend the revenues the tax and royalty provisions would bring in. The SAP instead touts the administration's "Advanced Energy Initiative" that seeks to bolster cellulosic ethanol and other renewables.

The White House also indicated support for several provisions in the bill. These includes rolling back tax breaks for certain oil exploration costs for major integrated oil companies, and repeal of several new royalty incentives in the Energy Policy Act of 2005.

The bill is expected to pass easily today -- with some Republican support -- despite opposition from a host of industry groups. Oil industry groups, manufacturers and others say the bill risks discouraging domestic energy production.

Oil industry sources also say they are concerned that the bill's provisions to ensure royalties are recouped could create unintended problems in the leasing and development process. They point specifically to a provision that lays out conditions governing sales and transfers of leases among parties, saying it will create confusion.

Study calls royalty relief a rip-off

A report released yesterday by Joint Economic Committee Democrats says there is "scant evidence" that royalty relief has significantly affected domestic supply or reliance on oil imports.

"Moreover, money spent on tax incentives for oil and gas companies to encourage deepwater drilling is very likely to have a greater impact on energy security if used to encourage conservation or the development of renewable energy alternatives," the study states.

It adds that royalty relief "appears to have no net effect" on jobs at the national level or consumers' energy costs.

Royalty relief, which provides royalty waivers on large volumes of deepwater Gulf of Mexico production, stems from mid-1990s legislation that was aimed at encouraging these costly deepwater projects at a time when energy prices were much lower.

Sen. Chuck Schumer (D-N.Y.), in a press conference yesterday, said Congress should go beyond efforts to address the 1998 and 1999 leases and instead target all royalty subsidies. "I would be for getting rid of all of them," he said.

Issa suggests MMS's Burton should go

Rep. Darrell Issa (R-Calif.), a member of the House Oversight and Government Reform Committee, yesterday suggested the MMS director should resign if she learned of problems with the 1998 and 1999 leases earlier than she told Congress in September.

Issa until last year chaired the Energy and Resources Subcommittee that investigated the leases. At a hearing before his panel in September, Burton said she learned of the problem in late 2005 or early 2006.

But a new report by the Interior Department's inspector general reportedly finds she appeared to learn of the issue in early 2004 (Greenwire, Jan. 17). "If it is as it appears to be now, I am calling for her resignation or her termination," Issa told reporters.

In a statement, MMS said, "Director Burton was informed by the IG that an MMS employee had told her earlier about the lack of price thresholds on 98-99 leases. Director Burton responded that if an employee said that to her, it was likely true but she could not remember the event nor the circumstances."

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Company: Minerals Management Service (MMS) more info
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