Interior Urges DOJ to Appeal Royalties Case

The Interior Department is asking the Justice Department to appeal a recent federal court ruling that could allow Gulf of Mexico oil and gas producers to avoid paying billions in federal royalties, a top official said today.

Stephen Allred, assistant secretary for land and minerals management, told reporters the department has decided the decision should be challenged. "We will urge them to pursue that appeal, but it will ultimately be their decision," Allred said.

Judge Patricia Minaldi of the U.S. District Court for the Western District of Louisiana ruled in favor of Kerr-McGee Oil and Gas Corp., which had challenged Interior's right to impose price thresholds on deepwater leases issued between 1996 and 2000 (Greenwire, Nov. 1).

The price clauses end royalty waivers when oil and gas prices exceed certain limits. Kerr-McGee was purchased by Anadarko Petroleum Corp. last year.

Federal officials have estimated that a successful challenge to Interior's right to impose price limits on royalty waivers under 1995's Deep Water Royalty Relief Act could jeopardize $60 billion in royalty payments from gulf producers in coming decades.

The decision could also affect agreements to collect royalties on deep water leases issued in 1998 and 1999 specifically. Interior's Minerals Management Service failed to include price thresholds in those contracts, which federal officials call an oversight.

Allred said he hoped DOJ would decide quickly on the appeal. Calls to Justice seeking comment were not returned by press time.

Price-theshold agreements

A half-dozen companies -- including BP and Royal-Dutch Shell -- last year reached a voluntary agreement with Interior to apply price thresholds to future production from their 1998-1999 leases.

But Allred told reporters that those agreements contain provisions that would remove the companies' obligation to pay if Interior lost the Kerr-McGee case. Allred said there have been no discussions with industry but emphasized that the district court judge's decision is not definitive.

"The law is currently on the books, and our enforcement of the law will be what it is. A district court decision with a single company does not change the law," Allred said, adding that until there is a more "definitive statement," Interior will continue applying the royalty incentive law as it currently interprets it.

Allred also said earlier an MMS estimate about the costs of a successful challenge to price thresholds rested on assumptions that may no longer hold true. He noted slowed production as a result of Hurricane Katrina and added that some deep water leases may not be coming into production as quickly as believed due to the challenges of projects at deep depths.

The assistant secretary said he suspected the potential amount of royalties at risk would be smaller than $60 billion.

"I suspect the assumptions that were in that $60 billion assumption were too aggressive," he said. Oil and gas royalties are a major source of federal revenue.

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