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House Republicans Begin Inquiry into Government's Royalty-Relief Program

House Republican lawmakers have begun an inquiry into the way the Interior Department has implemented the royalty-relief program for deepwater oil and natural gas production that Congress approved in 1995.

In a letter Wednesday to Interior Secretary Gale Norton, House Resources Committee Chairman Richard Pombo (R-CA) and Rep. Jim Gibbons (R-NV), chairman of the Energy and Minerals Subcommittee, questioned why the department did not impose price thresholds for leases to be eligible for royalty relief under the Deep Water Royalty Relief Act of 1995, similar to the price thresholds that lawmakers established for the royalty incentives that were offered under the Energy Policy Act of 2005 [EPAct].

"That is exactly how the incentives in the Energy Policy Act of 2005 are crafted -- with instructions for threshold triggers on price. We are taking steps to determine why the 1995 act was not implemented consistently," said Pombo. Under EPAct, royalty incentives are available to producers only when oil and gas prices fall significantly below their current levels of $59/barrel and $7.13/Mcf, respectively.

In contrast, the royalty relief law of 1995 placed limits on the amount of production that would be eligible for royalty relief, but it did not establish price limits for eligibility, according to Interior's Minerals Management Service (MMS). As a result, producers who purchased leases in 1998 and 1999 still are eligible for royalty relief, even though prices for oil and natural gas have escalated over the past years, the agency said. Leases purchased from the federal government after 2001, however, are subject to price thresholds and are not eligible for royalty relief.

"The incentives Congress passed [in 1995] to increase domestic energy production in the Gulf worked, but oil and gas companies do not need any carrots during periods of record-high prices," Pombo noted.

The Republican inquiry comes in the wake of a report in the New York Times, which said the federal governments 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. Based on figures in Interior's just-released budget proposal for fiscal year 2007, NGI has calculated that royalty-free production in the Gulf of Mexico over the six-year period will be significantly higher -- approximately $9.2 billion. In the same time frame, producers are expected to pay $50 billion in royalties for production in the Gulf.

House Democrats, led by Rep. Edward Markey (D-MA), have introduced legislation that would, at current prices, put an end to much of the royalty relief for oil and gas production on federal lands. The bill directs Interior to suspend royalty relief on crude oil production when the price of crude in the United States is greater than $34.71/bbl 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.

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