US Supreme Court Declines to Hear O&G Royalty Case

WASHINGTON (Dow Jones), Oct. 5, 2009

The U.S. government will forfeit at least $19 billion in oil royalties after the Supreme Court decided Monday it wouldn't hear a case that has pitted the nation's oil companies against the Interior Department.

The country's top court declined to hear the government's challenge to a lower-court ruling that blocked the Interior Department from collecting oil fees from some leasing contracts signed in the 1990s. The petition was the government's last legal opportunity to claim royalties from those contracts.

The case was one of several oil-royalty issues that gave fodder to Democratic lawmakers seeking to move the country away from fossil-fuel use in favor of renewable energy. Democrats are now considering repealing a raft of petroleum industry tax breaks and incentives that could add $80 billion in new taxes and fees companies would have to pay to the government over the next decade.

In January, a New Orleans-based federal appeals court sided with Anadarko Petroleum Corp. (APC) in a controversial and precedent-setting case, finding the government couldn't collect royalties from eight oil and natural gas production leases in the Gulf of Mexico.

Though the case involved only Kerr-McGee Oil and Gas Corp. leases now owned by Anadarko, the ruling affects dozens of other oil and natural gas companies that had signed leases in the Gulf between 1996 and 2000. Estimates vary, but the government said in its Supreme Court petition that the lower-court ruling could mean at least $19 billion in foregone royalties.

The leases were signed under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 - designed to encourage expensive offshore oil and gas development. Anadarko argued the law specifically prevented the collection of royalties until a minimum volume of oil and gas production had been met, while the Interior Department said the law gave it discretion to collect fees at a price threshold.

"The Department, under the Clinton and Bush administrations, took the position that once the price of oil and gas reaches a certain level, oil and gas royalties should be collected...In my view, they were correct," Interior Secretary Ken Salazar said in a statement.

"We will work with all involved in the days ahead to determine the best way forward," Salazar added, without elaborating.

Outside the court system, Democratic lawmakers have tried to leverage payment of the royalties they believe are owed to the government. Several legislators have drafted bills that would prevent oil companies from winning new leases unless they negotiated a settlement. Such laws, however, are likely to be successfully challenged in court.

While those efforts have largely been dropped, Democrats in Congress are pushing forward with plans to cut tax breaks to the oil industry, and Salazar is restructuring the oil royalty program, including the possibility of raising rates for oil companies.

Jack Gerard, President of the American Petroleum Institute, said in a statement the Deep Water Royalty Relief Act had helped to boost production by 50%. That, he said, was a boon to the economy itself, creating jobs and new government revenues.

"Going forward, we trust Congress will continue to pursue constructive energy policies that benefit the American people, while resisting the urge to take steps that attempt to change the rules of the game midstream and that discourage investment," Gerard said.

The industry says punitive new taxes would likely affect future production of oil and gas.  

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