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Interior Forms Panel to Review Royalty-Collection Practices

Following through on Interior Secretary Dirk Kempthorne's pledge last month to take a "fresh look" at the agency's impaired royalty-collection practices, the department announced Wednesday that it has formed an independent panel to review and offer advice on ways to improve Interior's mineral revenue collection from federal offshore/onshore and Indian lands. A Democratic congressman quickly denounced Interior's action, saying he had "no faith" in the ability of the department to police itself.

Interior's royalty-collection practices have come under attack in recent months for the agency's failure to include price ceilings in 1998 and 1999 deepwater Gulf of Mexico oil and natural gas leases, an oversight that the Government Accountability Office estimated is costing the federal government billions of dollars in lost royalties (see Daily GPI, March 6).

The new panel, called the Royalty Management Subcommittee, will be under the auspices of the Royalty Policy Committee, an independent advisory board appointed by the Interior secretary to advise the Minerals Management Service (MMS) on royalty management issues and other mineral-related policies. MMS gathers more than $5 billion each year in royalties from oil and natural gas production in the federal offshore region and from onshore federal and Indian lands.

The subcommittee will conduct its review over a six-month period and then turn in its findings and recommendations to the full Royalty Policy Committee and Kempthorne. Members of the subcommittee have yet to be announced.

"Recently there has been much interest regarding the accuracy and effectiveness of the Minerals Revenue Management program within the Minerals Management Service," said C. Stephen Allred, Interior's assistant secretary for land and minerals management, in a letter to incoming Royalty Policy Committee Chairman Daniel Riemer. "We have decided that a review of the procedures and processes surrounding the management of mineral revenue at the Department of Interior is in order."

Rep. Edward Markey (D-MA) blasted Interior's decision to rely on an intra-department advisory panel to solve its revenue-collection problems, saying it was like a "baseball pitcher calling his own strikes and balls." He said he had "no faith in the Bush administration's ability to call the pitches fairly after they've spent years playing expensive games with taxpayers' money."

Rather than form a panel, Markey called for the Bush administration to back an amendment authored by himself and Rep. Maurice Hinchey (D-NY) that would bar producers from bidding on future leases if they refuse to renegotiate the flawed 1998 and 1999 lease contracts. The measure was included in the House Interior appropriations bill that was passed in May. The Bush administration opposes the Markey-Hinchey amendment because it believes it would violate the sanctity of the lease contracts.

Interior's Allred has asked the new panel to review:

The new panel is an attempt by Interior to cool the heated controversy over the missing price ceilings in the 1998 and 1999 Gulf leases. The lease price ceilings cut off royalty relief to producers when oil and gas prices are too high. Without this cut-off point in the 1998 and 1999 leases, producers who negotiated leases in those two years escaped paying royalties on production up to a specific volume limit. The price caps that trigger royalties were included in leases that were issued in 1996, 1997 and 2000, but were not in the 1998 and 1999 leases due to a mistake on the part of the MMS. Congress has put pressure on producers to renegotiate these leases with the MMS.

An eight-month investigation by the House Energy and Resources Subcommittee found that the flawed leases were the result of gross mismanagement and a failure of accountability on the part of Interior and the MMS. A review of the matter by Interior Inspector General Earl Devaney confirmed that the omission of the lease price thresholds was first detected in 2000 but then was covered up by Interior employees (see Daily GPI, Sept. 14). The discovery of the mistake and subsequent cover-up occurred before production on the 1998-1999 leases had begun and royalties were owed, according to the subcommittee.

In October, MMS Director Johnnie Burton said up to 20 of the 59 producers with interests in royalty-free deepwater leases in the Gulf had contacted the MMS about potentially renegotiating their 1998 and 1999 leases. But she noted at the time that only 10 lease holders "have come in the building" to talk about correcting the lease oversight that is costing the federal government billions of dollars.

Shell in early October said it had reached a preliminary agreement with the MMS to add price thresholds and pay royalties on oil and natural gas production stemming from the 1998 and 1999 leases when the price ceilings are exceeded (see Daily GPI, Oct. 4).

Shell signaled that its agreement focused solely on recovering royalties on future production from the 1998-1999 leases, rather than on retrieving royalties from past production under the leases. "We believe royalty payments should be made prospectively in order to honor the sanctity of the contracts and are negotiating that with MMS now," the Houston-based producer said.

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