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Senate Dems Offer Bill to Scale Back Royalty Relief for Oil, Gas Producers

Key Senate Democrats have introduced legislation that seeks to halt billions of dollars of royalty incentives for crude oil and natural gas development on federal lands.

The bill, sponsored by Sens. Dianne Feinstein of California, Charles Schumer of New York, John Kerry of Massachusetts and Barbara Boxer of California, mirrors certain aspects of a measure offered earlier this month by six House Democrats that would, at current prices, put an end to much of the royalty relief for oil and gas deepwater production (see NGI, Feb. 20).

Both bills direct the Department of Interior to suspend royalty relief on oil production when the price of crude in the United States is greater than $34.71/barrel over the most recent four consecutive weeks, and to end royalty relief for gas production when the price of gas in the United States is greater than $4.34/Mcf over a four-week period.

Moreover, the Senate and House measures would require Interior's Minerals Management Service (MMS) to renegotiate producer contracts to ensure that energy companies are paying the required royalties to the federal government in the event energy prices rise above the threshold established for oil and natural gas prices.

If energy companies do not agree to renegotiate their contracts, the Senate and House bills would prohibit them from leasing another tract of land from the federal government.

The Senate measure, known as the "Royalty Relief Act of 2006," also would repeal three of the provisions of the Energy Policy Act of 2005 (EPAct) that provided royalty relief to energy companies drilling in the Gulf of Mexico and off the coast of Alaska.

"Oil and gas companies that are reaping record windfall profits need no added incentive at taxpayers' expense to explore for oil and gas. With prices over $60 a barrel for oil and over $7 for natural gas, the record prices should be incentive enough," said Schumer.

The Senate and House measures come in the wake of a report earlier this month in the New York Times, which said the federal government plans to give more than $7 billion in royalty relief to producers between now and 2011 even though oil and gas prices have risen to lofty levels.

During the same six-year time frame, producers are expected to pay about $50 billion in royalties for oil and gas production on the Outer Continental Shelf area of the Gulf.

Producers have been receiving the royalty incentives ever since Congress approved the Deep Water Royalty Relief Act a decade ago as a carrot to entice companies to drill in the deep waters of the Gulf, where large reserves of oil and gas were believed to be located but where few producers ventured due to the high costs of drilling there. Producers were given additional royalty relief in EPAct, which was signed into law by President Bush last year.

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