U.S. Department of Justice Signals Possible Appeal of Royalties Case

The Department of Justice took a step last month toward appealing a court ruling that limits the government's ability to collect billions in royalties from companies pumping oil in the deepwater Gulf of Mexico.

A Louisiana federal district court judge ruled in October that the Interior Department cannot end royalty waivers -- called "royalty relief" -- when oil and gas prices surpass certain levels.

The judge sided with the Kerr-McGee Oil and Gas Corp., which was purchased by Anadarko Petroleum Corp. in 2006. But DOJ last month signaled its interest in challenging the ruling, filing a "notice of appeal" that would allow it to take its case to the 5th U.S. Circuit Court of Appeals.

"The government has filed a notice of appeal as a procedural matter to preserve its right to pursue an appeal," DOJ spokesman Andrew Ames.

The case centers around leases issued to the company in 1996, 1997 and 2000. The company alleges the mid-1990s law that launched the incentive program did not give Interior's Minerals Management Service the right to impose "price thresholds" that limit royalty waivers.

Current price thresholds are roughly $36-$37 per barrel of oil and $4.60 per million British thermal units of natural gas. Both commodities are currently trading well above these levels.

Deepwater gulf leases issued in 1998 and 1999 lack the price clauses due to what federal officials have called a bureaucratic error.

MMS has estimated that losing the Kerr-McGee case could eventually jeopardize as much as $60 billion in royalties from the various gulf producers if price thresholds on gulf leases are nullified. But a top Interior official and a Government Accountability Office report released in April have cautioned that this estimate may be too high.

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