Anardarko Is Winner in U.S. Royalty Case

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jan. 13, 2009

A federal appellate court has sided with Anadarko Petroleum Corp. in a closely watched case on fossil-fuel royalties, blocking the federal government from collecting as much as $10 billion from oil-industry production in the Gulf of Mexico.

On Monday, the Fifth Circuit Court of Appeals in New Orleans sided with a lower-court ruling that the federal government couldn't collect royalties from eight oil and natural-gas production leases held by Anadarko. While the case only involved Anadarko, the decision would affect numerous other companies that obtained offshore leases between 1996 and 2000.

The dispute stems from differing interpretations of a 1995 law intended to provide royalty relief at a time of low oil and natural-gas prices to spur increased drilling in the gulf. Royalties are a percentage of revenue from oil and gas production paid by oil companies to the landowner, in this case the federal government.

A number of leases obtained under this law became controversial several years ago because oil companies were generating large profits as oil prices rose, but were exempt from paying royalties. The Interior Department was criticized by Congress over what some legislators believed was too-lenient oversight of the offshore-leasing program. The department, which administers Gulf of Mexico leasing, tried to collect royalties on the leases as oil prices soared.

But Kerr-McGee Corp., later acquired by Anadarko, sued to avoid paying about $157 million the Interior Department was trying to collect. The company argued that the 1995 law specifically prevented the collection of royalties until a minimum volume of oil and gas production had been met. The government argued the law gave it discretion to collect royalties once a certain price threshold was met.

In 2007, a federal court in Lake Charles, La., sided with Anadarko. The Interior Department appealed, and the appellate court denied that appeal on Monday.

Shane Wolfe, an Interior Department spokesman, said the agency disagreed with the decision and was considering either an appeal or working with Congress to resolve the issue. "If the court's interpretation of Congress's action in 1995 is correct, certain leaseholders will be allowed to produce massive amounts of oil and gas without paying royalties to the United States without regard to the price of oil and gas -- perhaps amounting to one of the biggest giveaways of federal resources by Congress in modern history," he said.

In 2004, the federal Minerals Management Service estimated the amount of lost royalty payments could reach $60 billion. But the agency later adjusted that figure to between $6 billion and $10 billion. The Government Accountability Office agreed with the lower estimate, but noted a degree of uncertainty associated with future production and crude-oil prices.  

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