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MMS Slaps BP America with $32M Royalty Bill

The Interior Department's Minerals Management Service (MMS) Thursday handed a $32.3 million bill to BP America Production Co. for additional royalties and interest stemming from the company's coalbed methane production in New Mexico.

The announcement came less than a day after Interior Inspector General Earl Devaney issued a report criticizing MMS for its reliance on compliance reviews in assessing the royalties owed to the federal government from producing oil and natural gas leases. He said the agency's growing use of compliance reviews has put MMS at risk for under-collecting royalties (see related story).

The BP royalty bill, which covers a period from June 1991 through May 2006, includes a charge of $18.9 million for additional royalties and $13.3 million in interest payments, the MMS said. BP is required to pay the bill by the end of the month.

"This action demonstrates that MMS is vigilant in collecting the royalties due to the federal government from energy production that occurs on federal lands," said MMS Director Johnnie Burton. "And if the payments are not timely, we charge interest on top of the original debt."

The issue in the case involved whether companies could deduct from their required royalty payments the cost of removing carbon dioxide from the methane gas. The MMS maintained that removing carbon dioxide was a production cost, to be paid by the company. The agency issued orders directing several companies to pay the royalties.

The companies filed administrative appeals, and BP appealed the order in federal court. In June 2005, the U.S. Court of Appeals for the District of Columbia Circuit upheld the position of MMS, the agency said. BP then petitioned the Supreme Court for review, but the high court declined the request, letting stand the appellate court's ruling.

The $32 million payment will be split equally between the state of New Mexico and the federal government, according to Interior.

Burton contends that the MMS has a "vigorous" audit and compliance review program, which has generated an annual average of more than $125 million in additional royalties over the past 24 years, for a total in excess of $3 billion.

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