Anadarko Oil Royalty Case Mediation Fails

WASHINGTON Mar 01, 2007 (Dow Jones Newswires)

Mediation between Anadarko Petroleum Corp (APC) and the U.S. Interior Department in an oil royalty case has failed ahead of Thursday's deadline, according to two people close to the matter, reviving the likelihood of costly litigation.

Government auditors say if the government loses the case, it could set a precedent that costs taxpayers an estimated $60 billion in lost revenues, though the ultimate impact on royalty collection is disputed.

The closely-watched litigation focuses on a royalty relief program started in the mid-1990s that was designed to encourage capital-intense developments in the deepwater Gulf of Mexico. The Interior Department maintains that producers should now pay royalties because today's prices exceed thresholds. Anadarko maintains that between 1996 and 2000, the Administration was required to give royalty relief, and the program did not give it discretion to include price threshold language.

Neither the Department of Justice or Anadarko's lead lawyers in the case would comment on the mediation process, but both said they would be filing reports with the court Thursday. An Anadarko spokesman declined to comment.

One person close to the matter said the mediation was unsuccessful. Another person knowledgeable about the case later confirmed the failed mediation, saying, "A report will be filed indicating the parties met but couldn't reach an agreement."

The two parties agreed to the mediation process last year after Kerr McGee, which Anadarko acquired in June, filed a suit against the Interior Department that challenged the Interior Department's authority to collect royalties. Top DoI officials have told congressional hearings that they are confident in their position; Anadarko says it is also confident in its legal stance.

Anadarko said in a federal filing last year that the actual royalties and interest it was fighting to protect only totaled $157 million. The GAO said in a report on oil and gas royalties submitted to Congress, however, that "depending on the outcome of this litigation, the (Mineral Management Agency) estimates that this could result in up to $60 billion in additional forgone royalty revenue."

While the GAO report estimated the case could have a $60 billion impact on federal royalty revenues, a congressional budget report said the amount could be lower because the asset values and price assumptions are disputable. Regardless, if Anadarko wins the case, it could set a precedent for other oil companies to follow suit.

A congressional budget report, however, said the amount could be lower because the asset values and price assumptions are disputable. Regardless, if Anadarko wins the case, it could set a precedent for other oil companies to follow suit.

Although none of the lawyers would comment directly on the status of the mediation, one said the current court order requires the parties to file a report on March 1 stating "whether we believe that further time or mediation would be fruitful or productive."

"If not, the court's standing order would kick in and we would resume the litigation process," he said.

The second person close to the matter said that rather than seek another extension to mediation, the litigation would move forward and a briefing scheduled with the court.

An Anadarko spokesperson said last year that the mediation process wasn't initiated by the oil company, but by the Interior Department, though the company had "entered into the mediation in good faith."

The company has said it paid higher bonuses to win the leases on the basis that it would not have to pay royalties.

The case has garnered attention under congressional scrutiny of the entire DoI and Minerals Management Service royalty program, including 1998-1999 leases that omitted royalty price thresholds. Lawmakers are trying various means to try and persuade the companies to renegotiate the leases in an effort to recover $1 billion is royalties on past production and around $10 billion on future output. Currently, the DoI is seeking congressional approval to extend the leases by three years in exchange for renegotiation, but lawmakers have said they are also prepared to pass legislation that would prohibit any new lease issues to any company that doesn't renegotiate the old contracts.

Via its acquisition of Kerr McGee, Anadarko has amassed a large collection of Gulf assets and is exploring several deepwater prospects in the potentially rich lower tertiary that lies deep beneath the sea bottom.

Copyright (c) 2007 Dow Jones & Company, Inc.