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Panel Calls Royalty Relief 'Failed Experiment,' Recommends Elimination

The federal government's royalty relief program for offshore oil and natural gas drilling has been a "failed experiment" that could cost taxpayers up to $80 billion with "precious little to show for it," according to a new report released by the congressional Joint Economic Committee (JEC) Wednesday. Sen. Charles Schumer (D-NY), committee chairman, said it was time for the government to get rid of the "ill-conceived" program.

"There is scant evidence that royalty relief materially affects the domestic supply of oil and natural gas or our dependence on foreign energy sources," or has helped to significantly reduce consumer energy prices, the five-page JEC report said. The money earmarked for the royalty relief program "is very likely to have a greater impact on energy security if used to encourage conservation or the development of renewable energy alternatives," it noted.

Royalty relief was enacted in 1995, when oil and gas prices were low, to provide producers with incentives to drill in the deepwater Gulf of Mexico. "However, oil and gas companies have successfully exploited inconsistencies in the law and stand to receive tens of billions of dollars of unintended royalty giveaways," the report said.

Of the potential $80 billion cost to taxpayers, the JEC report attributed $10 billion to the apparent failure of the Interior Department's Minerals Management Service (MMS) to include price thresholds in the faulty 1998-1999 deepwater oil and gas leases. Royalty relief is cut off when oil and gas prices exceed the price threshold in a lease. Absent price thresholds, however, producers have been able to forego payment of royalties on certain volumes of production from more than 1,000 offshore leases.

Another $10 billion in royalties could be lost as a result of a successful legal challenge to the way Interior defined the volume of oil subject to royalty relief, the committee said. Producers argued that Interior erred when it defined royalty volume on a field basis rather than for each lease site. The court upheld the challenge, which meant that the royalty-free volumes were much greater than what the agency had intended, the report noted.

And the JEC report estimated that $60 billion in leasing royalties could be lost to the federal government if Kerr-McGee Corp. is successful in its lawsuit challenging Interior's authority to apply royalty-bearing price thresholds to all leases issued between 1996 and 2000. Kerr-McGee in July placed the lawsuit on the back burner while it carries out discussions with Interior to resolve the dispute (see Daily GPI, July 5, 2006).

The JEC report comes a day before a scheduled House vote on a bill to repeal tax breaks for oil and gas producers, force holders of the flawed 1998-1999 leases to renegotiate their contracts to include price ceilings and eliminate royalty relief for shallow and deepwater production in the Gulf (see Daily GPI, Jan. 16). On top of that, Interior Department Inspector General Earl Devaney is expected to deliver a scathing final report Thursday on the results of his nine-month investigation into the missing price thresholds in the 1998-1999 leases.

The report finds that "American taxpayers get no bang for their billions of giveaways to wealthy [energy] companies," Schumer said. "It's important to expose the mismanagement and faulty implementation of this program, but the logical conclusion from this report is that we need to get rid of the royalty relief itself," he noted.

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