Kerr-McGee Ruling Roils Capitol Hill Energy Debate

A federal judge's decision made public this week limiting Interior Department power to demand royalties from offshore oil producers when oil and gas prices are high could intensify Democrats' efforts to raise industry taxes and give Interior the muscle it needs to require industry payments.

Judge Patricia Minaldi of the U.S. District Court for the Western District of Louisiana ruled that Interior cannot impose so-called price thresholds on deepwater Gulf of Mexico leases issued between 1996 and 2000. The price clauses end royalty waivers when oil and gas prices exceed certain limits.

At issue in the case were efforts by Interior's Minerals Management Service to compel payment on production from leases held by Kerr-McGee Oil and Gas Corp., which was purchased by Anadarko Petroleum Corp. last year. But the ruling could jeopardize eventually an estimated $60 billion in payments from scores of other producers. The Interior is weighing an appeal.

Minaldi's ruling comes as House and Senate lawmakers are working to reach compromises on a final energy package. Senate Finance Committee Chairman Max Baucus (D-Mont.) said yesterday the ruling may prompt Congress to levy new taxes on the industry. He said the court decision "may put that back in play."

Even before the ruling, lawmakers were also seeking to address problems with Gulf of Mexico deepwater leases. Leases issued in 1998 and 1999 lack price thresholds, which MMS calls an oversight.

Baucus' committee approved a tax plan in June that would have levied a new excise tax on gulf production, while allowing credits against the tax for royalties paid. This would effectively mean new taxes on producers entitled to "royalty relief." The proposal was the work of Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.).

The Finance Committee tax package was turned back on the Senate floor in June in a close vote. But Baucus and other sources on and off Capitol Hill who track the issue say the new ruling may boost efforts to include the provision or something like it in a final energy package.

House legislation approved in August would bar companies with leases that allow royalty relief -- but lack price thresholds -- from buying new gulf leases unless they rework the contracts or pay other fees. The bill would also "clarify" Interior's authority to impose price thresholds.

Rep. Ed Markey (D-Mass.), a primary author of the House royalty provisions aimed at the 1998 and 1999 leases, renewed calls yesterday for passage of the House language in a final energy package.

Industry's view

But energy companies say changing lease terms retroactively sets a terrible precedent that could stymie investment in U.S. projects. In addition, Bush administration officials say pressuring companies to rework 1990s leases by barring them from future sales could prompt litigation that would slow promising gulf development.

More broadly, industry officials say new taxes and fees on the industry -- which Democrats are pondering to offset expanded renewable energy incentives -- will curb spending on new oil and gas production.

Markey also urged the Justice Department to appeal the royalty ruling. "At a time when oil prices are hovering close to $95 per barrel, it is unconscionable that Anadarko would continue to push forward with this brazen attempt to rob the American people in broad daylight," he said.

Bingaman's office said his recollection of congressional intent when crafting the Deep Water Royalty Relief Act of 1995 is "vivid."

"He knows that the law was not to allow royalty-free oil regardless of price," a statement released by Bingaman's office said. The law, written at a time when oil prices were much lower, was designed to spur costly deepwater projects by waiving royalty payments.

Bingaman issued a statement yesterday calling the court ruling a "sad day for the American public."

"It will not increase supply or lower the price that Americans pay for their energy," he said. "It will simply create a huge hole in our Treasury at a time when royalty revenues are needed to pay for important priorities, including national security."

But Bingaman declined to say how or whether Congress might act, or whether the decision may revive his excise tax plan. "We have not made plans yet," he said when asked in a short interview about a legislative response. "We are trying to get some indication from the administration as to what their plan is first," he said.

Lawmakers could also seek other avenues to address the issue, including stand-alone legislation or the appropriations process.

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