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House Dems Dispute Producers' Claims Related to Royalty-Free Leases

A group of House Democrats led by Rep. Edward Markey of Massachusetts sent a letter to the American Petroleum Institute (API) last Thursday disputing claims by oil and natural gas producers that a proposal restricting royalty relief would lead to the breach of existing leases or would bar so many U.S. producers from purchasing new leases that it would effectively outsource production in the Gulf of Mexico and elsewhere to foreign companies.

Producers have attacked an amendment, which was included in the fiscal year 2007 Interior, Environment and Related Agencies appropriations bill passed by the House in late May, that bars existing leaseholders that aren't paying royalties on their production from bidding on future leases. It was presumed that only producers who refused to renegotiate their royalty-free leases would be denied the right to bid on new leases, but the API contends the amendment is silent on the issue of renegotiation.

"We recommend that the signers of the letter go back and re-read it [the amendment]" because "it says nothing at all about renegotiating" the leases, said Robert Greco, API's group director of upstream and industry operations. Specifically, the amendment prohibits the Interior Department from issuing a new lease to a producer who has an existing lease that "is not subject to limitations on royalty relief based on market price." But "you [don't] see the word 'renegotiation' in there," he noted.

Even if the "renegotiation" language was included, API still would be opposed to this approach because it's "bad energy policy" to restrict new leases to producers, and it sets a "bad contracting precedent" for all industries, not just energy, Greco said.

The API also contends the amendment could open up the U.S. Outer Continental Shelf (OCS) to more foreign competition. The proposal "could open the door to foreign state-owned oil companies possibly gaining a foothold on U.S. OCS energy production and cost American jobs. Quite possibly, giant national oil companies could dominate competition in future leases sales."

The amendment, according to sponsors Markey and Rep. Maurice Hinchey (D-NY), is aimed at reworking a large number of royalty-free leases that were issued by the Interior Department in 1998 and 1999. The agency failed to include in these leases oil and gas price ceilings, which when exceeded make production from leases royalty bearing. The Governmental Accountability Office (GAO) estimates the federal government is losing billions of dollars as a result of the omissions.

There currently are 56 producers holding 576 active leases issued in 1998 and 1999 that provide for no suspension of royalty relief when oil and gas prices reach certain levels, according to Markey.

The allegations by producers "are false and misleading," Markey and four other House Democrats said in a letter to API President Red Cavaney. "Under the terms of our amendment, there is a very simple way for any company that currently holds these leases to continue purchasing new leases from the federal government -- renegotiate these existing leases to include the same market-based suspension of royalty-free drilling that is in all other leases of this nature issued by the federal government," they said.

"Our amendment also does not abrogate any existing contracts," the House Democrats said. In a memorandum issued in May, the Congressional Research Service said that "enactment of this amendment would not constitute a taking of existing leaseholders' rights, but would merely establish a new qualification for potential lessees," they noted.

"Our amendment is...designed to provide oil [and gas] companies with a strong economic incentive to renegotiate these leases that the GAO has estimated will cost the American taxpayers at least $10 billion over the next 25 years and possibly as much as $80 billion depending on industry litigation" over this issue, the lawmakers said.

"We would, therefore, urge your organization [API) to act responsibly and make clear that affected oil companies can escape any impact of our amendment simply by renegotiating with the federal government to ensure that their contracts include the standard and appropriate market-based price caps on royalty-free drilling."

Joining Markey in sending the letter were Reps. Hinchey, Nick J. Rahall of West Virginia, Raul M. Grijalva of Arizona and James Moran of Virginia.

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