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Renegotiated Lease Deals Don't Satisfy House Lawmakers

The Bush administration's announcement that it negotiated new deals with five major producers remedying the flawed 1998 and 1999 Gulf of Mexico leases was not enough to allay the concerns of House lawmakers (see Daily GPI, Dec. 15).

Rep. Tom Davis (R-VA), chairman of the Government Reform Committee, and Rep. Darrell Issa, chairman of the Energy and Resources Subcommittee, said they were encouraged by the Interior Department's efforts, but they noted that nearly 50 companies still have not reached agreement or are not even negotiating with the agency to fix the leases. "More importantly, these agreements only address royalties from production beginning Oct. 1, 2006. Therefore, almost $2 billion of money owed to the American taxpayer is left uncollected." Davis and Issa have led an investigation into the defective leases since March.

BP, ConocoPhillips, Marathon Oil, Shell and Walter Oil and Gas on Thursday signed the agreements with C. Stephen Allred, assistant secretary of Land and Minerals Management, who is heading up Interior's effort to renegotiate the 1998-1999 leases that are costing the federal government billions of dollars in lost revenues. The contracts call for the recovery of royalties only on new production (starting Oct. 1 of this year), and do not require payment of royalties on past production from the faulty leases. The five producers owned 131 of the 570 royalty-free leases that were issued in 1998-1999.

Interior estimated that there still are 41 oil and natural companies with faulty leases that have not been renegotiated. Allred currently is talking to other producers, including Chevron, according to Gary Strasburg, a spokesman for Interior's Minerals Management Service (MMS).

Acting on a directive from Congress, Interior's MMS gave producers a break on royalties in the late 1990s, when oil and gas prices were low, to spur exploration and production in the deepwater Gulf. The lease agreements contained language stating that the price relief would come to an end when oil and gas market prices soared above a certain level. However, the MMS left this language out of the 1998 and 1999 leases -- a mistake that is costing the government billions in lost royalties.

In related action Thursday, House Reform Committee lawmakers called on U.S. Attorney General Alberto Gonzales to issue an opinion on whether the federal government has the legal recourse to recover royalties on past production from the 1998-1999 leases.

"While the MMS has stated that these leases were executed in error, they have also stated that there is now nothing that can be done to recover lost taxpayer revenue [on past production from the leases]. It appears that the assertion by MMS that there are no available remedies may be incorrect," wrote Reps. Davis, Issa, Henry Waxman (D-CA) and Diane E. Watson (D-CA) in a letter to Gonzales.

In September, MMS Director Johnnie Burton said it would be too difficult to recover royalties on past production from the faulty 1998-1999 leases. She noted that the Interior agency instead intended to focus on retrieving royalties on future production from the leases (see Daily GPI, Sept. 25). The agreements signed on Thursday are the outcome of that approach.

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