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U.S. Has Royalty Plan to Give Windfall to Oil Companies
By EDMUND L. ANDREWS
02/14/06 "New
York Times" -- -- WASHINGTON, Feb. 13 — The
federal government is on the verge of one of the biggest
giveaways of oil and gas in American history, worth an estimated
$7 billion over five years.
New projections, buried in the Interior Department's
just-published budget plan, anticipate that the government will
let companies pump about $65 billion worth of oil and natural
gas from federal territory over the next five years without
paying any royalties to the government.
Based on the administration figures, the government will give up
more than $7 billion in payments between now and 2011. The
companies are expected to get the largess, known as royalty
relief, even though the administration assumes that oil prices
will remain above $50 a barrel throughout that period.
Administration officials say that the benefits are dictated by
laws and regulations that date back to 1996, when energy prices
were relatively low and Congress wanted to encourage more
exploration and drilling in the high-cost, high-risk deep waters
of the Gulf of Mexico.
"We need to remember the primary reason that incentives are
given," said Johnnie M. Burton, director of the federal Minerals
Management Service. "It's not to make more money, necessarily.
It's to make more oil, more gas, because production of fuel for
our nation is essential to our economy and essential to our
people."
But what seemed like modest incentives 10 years ago have
ballooned to levels that have alarmed even ardent supporters of
the oil and gas industry, partly because of added sweeteners
approved during the Clinton administration but also because of
ambiguities in the law that energy companies have successfully
exploited in court.
Short of imposing new taxes on the industry, there may be little
Congress can do to reverse its earlier giveaways. The new
projections come at a moment when President Bush and Republican
leaders are on the defensive about record-high energy prices,
soaring profits at major oil companies and big cuts in domestic
spending.
Indeed, Mr. Bush and House Republicans are trying to kill a
one-year, $5 billion windfall profits tax for oil companies that
the Senate passed last fall.
Moreover, the projected largess could be just the start. Last
week, Kerr-McGee Exploration and Development, a major industry
player, began a brash but utterly serious court challenge that
could, if it succeeds, cost the government another $28 billion
in royalties over the next five years.
In what administration officials and industry executives alike
view as a major test case, Kerr-McGee told the Interior
Department last week that it planned to challenge one of the
government's biggest limitations on royalty relief if it could
not work out an acceptable deal in its favor. If Kerr-McGee is
successful, administration projections indicate that about 80
percent of all oil and gas from federal waters in the Gulf of
Mexico would be royalty-free.
"It's one of the greatest train robberies in the history of the
world," said Representative George Miller, a California Democrat
who has fought royalty concessions on oil and gas for more than
a decade. "It's the gift that keeps on giving."
Republican lawmakers are also concerned about how the royalty
relief program is working out.
"I don't think there is a single member of Congress who thinks
you should get royalty relief at $70 a barrel" for oil, said
Representative Richard W. Pombo, Republican of California and
chairman of the House Resources Committee.
"It was Congress's intent," Mr. Pombo said in an interview on
Friday, "that if oil was at $10 a barrel, there should be
royalty relief so companies could have some kind of incentive to
invest capital. But at $70 a barrel, don't expect royalty
relief."
Tina Kreisher, a spokeswoman for the Interior Department, said
Monday that the giveaways might turn out to be less than the
basic forecasts indicate because of "certain variables."
The government does not disclose how much individual companies
benefit from the incentives, and most companies refuse to
disclose either how much they pay in royalties or how much they
are allowed to avoid.
But the benefits are almost entirely for gas and oil produced in
the Gulf of Mexico.
The biggest producers include Shell, BP, Chevron and Exxon Mobil
as well as smaller independent companies like Anadarko and Devon
Energy.
Executives at some companies, including Exxon Mobil, said they
had already stopped claiming royalty relief because they knew
market prices had exceeded the government's price triggers.
About one-quarter of all oil and gas produced in the United
States comes from federal lands and federal waters in the Gulf
of Mexico.
As it happens, oil and gas royalties to the government have
climbed much more slowly than market prices over the last five
years.
The New York Times reported last month that one major reason for
the lag appeared to be a widening gap between the average sales
prices that companies are reporting to the government when
paying royalties and average spot market prices on the open
market.
Industry executives and administration officials contend that
the disparity mainly reflects different rules for defining sales
prices. Administration officials also contend that the disparity
is illusory, because the government's annual statistics are
muddled up with big corrections from previous years.
Both House and Senate lawmakers are now investigating the issue,
as is the Government Accountability Office, Congress's watchdog
arm.
But the much bigger issue for the years ahead is royalty relief
for deepwater drilling.
The original law, known as the Deep Water Royalty Relief Act,
had bipartisan support and was intended to promote exploration
and production in deep waters of the outer continental shelf.
At the time, oil and gas prices were comparatively low and few
companies were interested in the high costs and high risks of
drilling in water thousands of feet deep.
The law authorized the Interior Department, which leases out
tens of millions of acres in the Gulf of Mexico, to forgo its
normal 12 percent royalty for much of the oil and gas produced
in very deep waters.
Because it take years to explore and then build the huge
offshore platforms, most of the oil and gas from the new leases
is just beginning to flow.
The Minerals Management Service of the Interior Department,
which oversees the leases and collects the royalties, estimates
that the amount of royalty-free oil will quadruple by 2011, to
112 million barrels. The volume of royalty-free natural gas is
expected to climb by almost half, to about 1.2 trillion cubic
feet.
Based on the government's assumptions about future prices — that
oil will hover at about $50 a barrel and natural gas will
average about $7 per thousand cubic feet — the total value of
the free oil and gas over the next five years would be about $65
billion and the forgone royalties would total more than $7
billion.
Administration officials say the issue is out of their hands,
adding that they opposed provisions in last year's energy bill
that added new royalty relief for deep drilling in shallow
waters.
"We did not think we needed any more legislation, because we
already have incentives, but we obviously did not prevail," said
Ms. Burton, director of the Minerals Management Service.
But the Bush administration did not put up a big fight. It
strongly supported the overall energy bill, and merely noted its
opposition to additional royalty relief in its official
statement on the bill.
By contrast, the White House bluntly promised to veto the
Senate's $60 billion tax cut bill because it contained a
one-year tax of $5 billion on profits of major oil companies.
The House and Senate have yet to agree on a final tax bill.
The big issue going forward is whether companies should be
exempted from paying royalties even when energy prices are at
historic highs.
In general, the Interior Department has always insisted that
companies would not be entitled to royalty relief if market
prices for oil and gas climbed above certain trigger points.
Those trigger points — currently about $35 a barrel for oil and
$4 per thousand cubic feet of natural gas — have been exceeded
for the last several years and are likely to stay that way for
the rest of the decade.
So why is the amount of royalty-free gas and oil expected to
double over the next five years?
The biggest reason is that the Clinton administration,
apparently worried about the continued lack of interest in new
drilling, waived the price triggers for all leases awarded in
1998 and 1999.
At the same time, many oil and gas companies contend that
Congress never authorized the Interior Department to set price
thresholds for any deepwater leases awarded between 1996 and
2000.
The dispute has been simmering for months, with some industry
executives warning the Bush administration that they would sue
the government if it tried to demand royalties.
Last week, the fight broke out into the open. The Interior
Department announced that 41 oil companies had improperly
claimed more than $500 million in royalty relief for 2004.
Most of the companies agreed to pay up in January, but
Kerr-McGee said it would fight the issue in court.
The fight is not simply about one company. Interior officials
said last week that Kerr-McGee presented itself in December as a
"test case" for the entire industry. It also offered a
"compromise," but Interior officials rejected it and issued a
formal order in January demanding that Kerr-McGee pay its back
royalties.
On Feb. 6, according to administration officials, Kerr-McGee
formally notified the Minerals Management Service that it would
challenge its order in court.
Industry lawyers contend they have a strong case, because
Congress never mentioned price thresholds when it authorized
royalty relief for all deepwater leases awarded from 1996
through 2000.
"Congress offered those deepwater leases with royalty relief as
an incentive," said Jonathan Hunter, a lawyer in New Orleans who
represented oil companies in a similar lawsuit two years ago
that knocked out another major federal restriction on royalty
relief.
"The M.M.S. only has the authority that Congress gives it," Mr.
Hunter said. "The legislation said that royalty relief for these
leases is automatic."
If that view prevails, the government said it would lose a total
of nearly $35 billion in royalties to taxpayers by 2011 — about
the same amount that Mr. Bush is proposing to cut from Medicare,
Medicaid and child support enforcement programs over the same
period.
Copyright 2006The New York Times Company
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